11. COMMON STOCK

[a] Authorized

25,000,000 authorized common voting share, par value of $0.001, and 5,000,000 preferred shares, par value of $0.001.

[b] Issued and outstanding shares

October 2010 Public Offering

On October 22, 2010, the Company completed a public offering of 3,174,602 units, with each unit consisting of one share of the Company’s common stock and one-half (1/2) of one warrant, at a purchase price of $15.75 per unit for an aggregate offering amount of $50 million.

Each whole warrant is exercisable at any time on or after the date of issuance until the fifth anniversary of the date of issuance at an exercise price of $20, and includes a cashless exercise feature. The Company accounts for warrants issued in October 2010 under the authoritative guidance on accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, on the understanding that in compliance with applicable securities laws, the registered warrants require the issuance of registered securities upon exercise and do not sufficiently preclude an implied right to net cash settlement. The Company classifies warrants on the accompanying consolidated balance sheet as a liability which is revalued at each balance sheet date subsequent to the initial issuance. The Company uses the Black-Scholes pricing model to value the warrants. Determining the appropriate fair-value model and calculating the fair value of registered warrants requires considerable judgment. On the date of issuance, the Black-Scholes value of the warrant was based on an assumed risk-free rate of 1.17%, volatility of 75% and an expected life of 5 years. Changes in the fair market value of the warrants are reflected in the consolidated statement of loss as gain (loss) on warrants.

The net proceeds to the Company, after underwriting discounts and commissions and other offering expenses, from the sale of the units were $46.7 million, of which $32.3 million was allocated to common shares and included in additional paid-in capital and $15.4 million was allocated to warrant liability. $1 million of underwriting discounts and commissions and other offering expenses allocated to the value of warrants was expensed in warrant issuance expense on the Company’s consolidated statement of loss.

At December 31, 2012, there were exercisable warrants outstanding to purchase 1,587,301 shares of common stock at an exercise price of $20 per share, expiring in October 2015. No warrants were exercised during the years ended December 31, 2012 or 2011.

March 2012 Public Offering

On March 21, 2012, the Company completed a public offering of 4,165,000 shares of its common stock at a purchase price of $12.00 per share. Pursuant to an overallotment option exercised on March 27, 2012 by the underwriters in the offering, an additional offering of 624,750 shares of the Company’s common stock were issued at a price of $12.00 per share. The total gross offering amount from the public offering and exercise of the overallotment option was approximately $57.5 million. The total net proceeds to the Company from the public offering and exercise of the overallotment option, after deducting underwriting discounts and commissions and other offering expenses from the sale of the shares were approximately $53.8 million.

Stock Option Exercises

During the years ended December 31, 2012, 2011 and 2010 the Company issued 117,347, 56,228 and 194,956 common shares upon exercise of stock options, respectively. The Company issues new shares to satisfy stock option exercises.

[c] Stock options

As at December 31, 2012 the Company has reserved, pursuant to various plans, 1,265,857 common shares for issuance upon exercise of stock options by employees, directors, officers and consultants of the Company, of which 804,781 are reserved for options currently outstanding, and 461,076 are available for future option grants (December 31, 2011 – 799,624).

2010 Performance Incentive Plan

At the 2010 Annual Meeting of Stockholders of the Company held on May 26, 2011, stockholders of the Company approved an amendment to the Company’s 2010 Performance Incentive Plan. As a result of this amendment, the 2010 Plan was amended to provide for an increase in the total shares of common stock available for issuance under the 2010 Plan from 450,000 to 1,050,000. Under the plan, the Company may grant options to purchase common shares or restricted stock units in the Company to employees, directors, officers and consultants of the Company. The exercise price of the options is determined is determined by the Board but generally will be at least equal to the fair value of the common shares at the grant date. The options vest in accordance with terms as determined by the Board, typically over three to four years for options issued to employees and consultants, and over one to three years for members of the Board of Directors. The expiry date for each option is set by the Board with a maximum expiry date of ten years from the date of grant.

Options remain outstanding under a number of share option plans that had been approved by shareholders prior to the approval of the 2010 Performance Incentive Plan: (a) the Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan – 1991 (1991 Plan), (b) the 1999 Nonqualified Stock Incentive Plan (1999 Plan), (c) the 2000 Stock Incentive Plan (2000 Plan), (d) the 2007 Performance Incentive Plan (2007 Plan) and (e) the OncoGenex Technologies Inc. Stock Option Plan (OncoGenex Technologies Plan).

ASC 718 Compensation – Stock Compensation

The Company recognizes expense related to the fair value of its stock-based compensation awards using the provisions of ASC 718. The Company uses the Black-Scholes option pricing model as the most appropriate fair value method for its awards and recognizes compensation expense for stock options on a straight-line basis over the requisite service period. In valuing its options using the Black-Scholes option pricing model, the Company makes assumptions about risk-free interest rates, dividend yields, volatility and weighted average expected lives, including estimated forfeiture rates of the options.

The expected life was calculated based on the simplified method as permitted by the SEC’s Staff Accounting Bulletin 110, Share-Based Payment. The Company considers the use of the simplified method appropriate because of the lack of sufficient historical exercise data following the reverse takeover of Sonus. As the Company has concluded that it now has sufficient historical share price data to estimate the volatility of the Company’s stock options the expected volatility of options granted in 2012 was calculated based on the historical volatility of the shares of the Company’s common stock. The computation of expected volatility of options granted prior to 2012 was based on the historical volatility of comparable companies from a representative peer group selected based on industry and market capitalization. The risk-free interest rate is based on a U.S. Treasury instrument whose term is consistent with the expected life of the stock options. In addition to the assumptions above, as required under ASC 718, management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest. Forfeiture rates are estimated using historical actual forfeiture rate that resulted over the estimated life of the option grant for options granted as of the beginning of the forfeiture measurement period. These rates are adjusted on a quarterly basis and any change in compensation expense is recognized in the period of the change. The Company has never paid or declared dividends on its common stock and does not expect to pay cash dividends in the foreseeable future.

The estimated fair value of stock options granted in the respective periods was determined using the Black-Scholes option pricing model using the following weighted average assumptions:

The weighted average fair value of stock options granted during the year ended December 31, 2012, 2011 and 2010 was $9.86, $10.70 and $11.08 per share, respectively.

Total stock-based compensation expense included in the Company’s statements of loss for the years ended December 31, 2012, 2011 and 2010 was $2.2 million, $1.2 million and $0.6 million respectively.

The results for the periods set forth below included stock-based compensation expense in the following expense categories of the consolidated statements of loss (in thousands):

Options vest in accordance with terms as determined by the Board, typically over three or four years for employee grants and over one or three years for Board of Director option grants. The expiry date for each option is set by the Board with, which is typically seven to ten years. The exercise price of the options is determined by the Board but is at least equal to the fair value of the share at the grant date.

Stock option transactions and the number of stock options outstanding are summarized below:

The following table summarizes information about stock options outstanding at December 31, 2012 regarding the number of ordinary shares issuable upon: (1) outstanding options and (2) vested options.

As at December 31, 2012 the total unrecognized compensation expense related to stock options granted was $2.7 million, which is expected to be recognized into expense over a period of approximately 2.4 years.

The estimated grant date fair value of stock options vested during the years ended December 31, 2012, 2011 and 2010 was $1.6 million, $1.1 million and $0.7 million respectively.

The aggregate intrinsic value of options exercised was calculated as the difference between the exercise price of the stock options and the fair value of the underlying common stock as of the date of exercise. The aggregate intrinsic value of options exercised for the years ended December 31, 2012, 2011 and 2010 was $1.2 million, $0.6 million, and $2.4 million, respectively. At December 31, 2012, the aggregate intrinsic value of the outstanding options was $2.9 million and the aggregate intrinsic value of the exercisable options was $2.9 million.

[d] Restricted Stock Awards

The Company grants restricted stock awards that generally vest and are expensed over a four year period. In 2012, the Company also granted restricted stock awards that vest in conjunction with certain performance conditions to certain executive officers and key employees. At each reporting date, the Company is required to evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon the Company’s assessment of accomplishing each performance provision. For the year ended December 31, 2012, $0.6 million was recognized related to these awards. No restricted stock awards were granted during 2011.

The following table summarizes the Company’s restricted stock award activity during the years ended December 31, 2012 and 2011:

As of December 31, 2012, the Company had approximately $1.4 million in total unrecognized compensation expense related to the Company’s restricted stock awards which is to be recognized over a weighted-average period of approximately 3.0 years

[e] Stock Warrants

At December 31, 2012, there were exercisable warrants outstanding to purchase 1,587,301 shares of common stock at an exercise price of $20 per share, expiring in October 2015. No warrants were exercised during the years ended December 31, 2010 or December 31, 2011.

The estimated fair value of warrants issued is reassessed at each balance sheet date using the Black-Scholes option pricing model. The following assumptions were used to value the warrants on the following year end balance sheet dates:

[f] Shareholder Rights Plan

The Company has a Shareholder Rights Plan which was adopted in July 1996 and subsequently amended in July 2002, October 2005, August 2006, and May 2008 (the “Rights Plan”). Under the Plan the Company’s Board of Directors declared a dividend of one Preferred Stock Purchase Right (Right) for each outstanding common share of the Company. Subject to the Rights Plan, each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $140, subject to adjustment. These Rights provide the holders with the right to purchase, in the event a person or group acquires 15% or more of the Company’s common stock, additional shares of the Company’s common stock having a market value equal to two times the exercise price of the Right. Pursuant to the Rights Plan, the one-for-eighteen reverse stock split caused a proportionate adjustment of the number of Rights associated with each share of common stock. Currently, eighteen (18) Rights are associated with each share of common stock.

[g] 401(k) Plan

The Company maintains a 401(k) plan in which it provided a specified percentage match on employee contributions. Following the Arrangement, the Board of Directors of OncoGenex amended and restated the 401(k) plan whereas securities of the Company are no longer offered as an investment option. This amendment prohibits the inclusion of OncoGenex shares in the 401(k) plan, as well as any match of Company shares to employee contributions. No shares of the Company were issued subsequent to the Arrangement, and as such no related expense was incurred.

[h] Loss per common share

The following table presents the computation of basic and diluted net loss attributable to common shareholders per share:

As of December 31, 2012, 2011 and 2010 a total of 2.6 million, 2.4 million and 2.3 million options, restricted stock units and warrants, respectively, have not been included in the calculation of potential common shares as their effect on diluted per share amounts would have been anti-dilutive.