10.	Stock Based Compensation

The Company assumed all of the outstanding options under Catalyst Bio’s 2004 Stock Plan (the “Catalyst Plan”) and all of the standalone options of Catalyst Bio that were not issued under the Catalyst Plan, in each case whether or not vested, outstanding immediately prior to the Merger, with such options henceforth representing the right to purchase that number of shares of the Company’s common stock equal to 0.0382 multiplied by the number of shares of Catalyst Bio common stock previously represented by such options. For accounting purposes, however, the Company is instead deemed to have assumed all of the options under the Targacept, Inc. 2000 Equity Incentive Plan and the 2006 Stock Incentive Plan and all of the standalone options of Targacept that were not issued under such plans outstanding immediately prior to the Merger (such plans and options, together with the Catalyst Plan and the standalone Catalyst options, the “Plans”), in addition to the Company’s 2015 Stock Incentive Plan (as subsequently amended and restated).

Total stock-based compensation recognized was as follows (in thousands):

	Year Ended December 31,
	2016		2015
Research and development	$	185	$	95
General and administrative		450		231
Total stock-based compensation	$	635	$	326

Valuation Assumptions

The Company estimated the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is being amortized ratably over the requisite service periods of the awards, which is generally the vesting period. The fair value of employee stock options was estimated using the following weighted-average assumptions for the years ended December 31, 2016 and 2015:

	Year Ended December 31,
	2016			2015
Expected term	6.14 years			5.56 years
Expected volatility		76.59	%		68.64	%
Risk-free interest rate		1.53	%		1.34	%
Expected dividend yield		0	%		0	%

Expected Term. Under the Company’s stock option plans, the expected term of options granted is determined using the simplified method which calculates expected term as the midpoint between the vesting date and the expiration date for each award.

Expected Volatility. Since the Company was a private entity prior to the merger in August 2015 with no historical data regarding the volatility of its common stock, the expected volatility used is based on the volatility of similar publicly traded entities, referred to as “guideline” companies.

Risk-Free Interest Rate. The risk-free rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the options.

Expected Dividend Yield. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, assumed an expected dividend yield of zero.

The following table summarizes stock option activity under the plans and related information:

	Number of Shares Underlying Outstanding Options			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (thousands)
Outstanding — December 31, 2014		16,683		$	134.40		5.51
Options assumed in merger(1)		94,721		$	227.40		4.01
Options granted		45,039		$	44.70		9.81
Options exercised		(254	)	$	50.70
Options forfeited		(2,436	)	$	127.20
Options canceled		(7,119	)	$	708.00
Outstanding — December 31, 2015		146,634		$	147.45		5.51		15,524.91
Options granted		14,706		$	23.70				—
Fractional shares written off in connection with the merger⁽¹⁾		(4	)	$	—
Options canceled		(13,773	)		259.05
Options forfeited		(6,573	)	$	64.95
Outstanding — December 31, 2016		140,990		$	128.25		3.93		—
Exercisable — December 31, 2016		106,472		$	152.70		2.28		—
Vested and expected to vest — December 31, 2016		68,977		$	74.70		7.09		—
Shares Available to be granted — December 31, 2016		85,849

(1)

In connection with the merger, the Company assumed stock options covering an aggregate of 94,721 shares of common stock. The company also assumed 190 shares of Restricted Stock Awards which vested in two equal annual installments beginning on December 31, 2015 and fully vesting on December 31, 2016 and excludes 4 aggregate fractional shares written off as a result of the conversion ratio applied to options assumed in the merger. Total stock based compensation related to these restricted stock awards was $0.02 million for year ended December 31, 2016.

As of December 31, 2016, 85,849 shares of common stock were available for future grant, 140,990 options to purchase shares of common stock were outstanding under the 2015 Stock Plan, as amended, and the Company had unrecognized employee stock-based compensation expense of $1.0 million, related to unvested stock awards, which is expected to be recognized over an estimated weighted-average period of 2.57 years.

Options Granted to Nonemployees

During the years ended December 31, 2016 and 2015, options to purchase 800 and 1,317 shares, respectively, of common stock were issued to consultants that vest over one to four years with a weighted-average exercise price of $20.40 and $97.80 per share, respectively. During the years ended December 31, 2016, and 2015, the Company recorded stock-based compensation expense attributable to these nonemployee stock awards of $0.05 million and $0.04 million, respectively.

The estimated grant-date fair values of the nonemployee stock options were determined using the Black-Scholes valuation model and the following assumptions:

	Year Ended December 31,
	2016			2015
Non-Employee Stock Options:
Risk-free interest rate		2.39	%		1.30	%
Expected term (in years)		9.74			5.64
Dividend yield		—			—
Volatility		101.12	%		69.98	%