11. COMMON STOCK

[a] Authorized

50,000,000 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, we completed a public offering of 3,174,602 units, with each unit consisting of one share of our 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. We account 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. We classify warrants on the accompanying consolidated balance sheet as a liability which is revalued at each balance sheet date subsequent to the initial issuance. We use 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 us, 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 our consolidated statement of loss.

At December 31, 2013, there were 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, 2013 or 2012.

March 2012 Public Offering

On March 21, 2012, we completed a public offering of 4,165,000 shares of our 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 our 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 us 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.

At-The-Market Issuance Sales Agreement

In June 2013, we entered into an At-the-Market Issuance Sales Agreement, or Sales Agreement, with MLV & Co. LLC, or MLV, under which we may offer and sell shares of our common stock having aggregate sales proceeds of up to $25 million from time to time through MLV as our sales agent. Sales of our common stock through MLV, if any, will be made by any method permitted that is deemed an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended, including by means of ordinary brokers’ transactions on The NASDAQ Capital Market or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise agreed upon by us and MLV. MLV will use commercially reasonable efforts to sell our common stock from time to time, based upon instructions from us (including any price, time or size limits or other customary parameters or conditions we may impose). We will pay MLV a commission of up to 3.0% of the gross sales proceeds of any shares of common stock sold through MLV under the Sales Agreement. We are not obligated to make any sales of common stock under the Sales Agreement. The offering of our shares of common stock pursuant to the Sales Agreement will terminate upon the earlier of (i) the sale of all common stock subject to the Sales Agreement or (ii) termination of the Sales Agreement in accordance with its terms. As of December 31, 2013, no shares have been sold under the Sales Agreement.

Stock Option Exercises

During the year ended December 31, 2013, we issued 3,475 and 47,495 shares of common stock to satisfy stock option exercises and restricted stock unit settlements, respectively, compared with the issuance of 117,347 and 56,228 shares of common stock to satisfy stock option exercises for the years ended December 31, 2012 and 2011 respectively. There were no restricted stock unit settlements in 2012 and 2011.

 

[c] Stock options

As at December 31, 2013 we had reserved, pursuant to our 2010 Performance Incentive Plan, 2,380,133 common shares for issuance upon exercise of stock options and settlement of restricted stock units by employees, directors, officers and consultants of ours, of which 1,006,991 are reserved for options currently outstanding, 356,589 are reserved for restricted stock units currently outstanding and 1,016,553 are available for future equity award grants under our 2010 Performance Incentive Plan. As of December 31, 2012 1,265,857 shares were available for equity award grants under our 2010 Performance Incentive Plan.

2010 Performance Incentive Plan

At our 2010 Annual Meeting of Stockholders held on May 26, 2011, our stockholders approved an amendment to our 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. At our 2013 Annual Meeting of Stockholders held on May 24, 2013, our stockholders approved an amendment to our 2010 Performance Incentive Plan. As a result of this amendment, the 2010 Plan was further amended to provide for an increase in the total shares of common stock available for issuance under the 2010 Plan from 1,050,000 to 2,050,000.

Under the plan, we may grant options to purchase common shares or restricted stock units to our employees, directors, officers and consultants. The exercise price of the options is determined is determined by our board of directors but 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 our board of directors, typically over three to four years for options issued to employees and consultants, and over one to three years for members of our board of directors. The expiry date for each option is set by our board of directors 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

We recognize expense related to the fair value of our stock-based compensation awards using the provisions of ASC 718. We use the Black-Scholes option pricing model as the most appropriate fair value method for our stock options and recognize compensation expense for stock options on a straight-line basis over the requisite service period. In valuing our stock options using the Black-Scholes option pricing model, we make 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. We consider the use of the simplified method appropriate because we believe our historical stock option exercise activity may not be indicative of future stock option exercise activity because of the SYNERGY and Borealis-1 clinical data results we expect to receive in 2014, the structural changes to our business that may result and the potential impact of that data on our business operations and future stock option exercise activity. We have concluded that we have sufficient historical share price data to estimate the volatility of our stock options. The expected volatility of options granted in 2012 and 2013 was calculated based on the historical volatility of the shares of our 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. We have never paid or declared dividends on our common stock and do 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:

 

		2013				2012				2011
Risk-free interest rates			1.25	%			0.96	%			1.70	%
Expected dividend yield			0	%			0	%			0	%
Expected life			5.8 years				5.9 years				5.9 years
Expected volatility			86	%			95	%			76	%

The weighted average fair value of stock options granted during the year ended December 31, 2013, 2012 and 2011 was $8.07, $9.86 and $10.70 per share, 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):

 

		Years ended December 31,
		2013				2012				2011
Research and development		$	1,296			$	899			$	509
General and administrative			1,538				1,276				679
Total stock-based compensation		$	2,834			$	2,175			$	1,188

Options vest in accordance with terms as determined by our board of directors, typically over three or four years for employee and consultant grants and over one or three years for board of director option grants. The expiry date for each option is set by our board of directors with, which is typically seven to ten years. The exercise price of the options is determined by our board of directors 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:

 

		Number of Optioned Common Shares				Weighted Average Exercise Price
Balance, January 1, 2011			744,913			$	8.74
Option grants			101,600				15.72
Option expired			(22,986	)			13.95
Option exercises			(56,228	)			3.88
Option forfeited			(971	)			41.91
Balance, December 31, 2011			766,328			$	9.82
Option grants			172,650				12.97
Option expired			(12,309	)			9.10
Option exercises			(117,347	)			3.94
Option forfeited			(4,541	)			15.26
Balance, December 31, 2012			804,781			$	11.34
Option grants			239,282				11.32
Option expired			(3,061	)			4.11
Option exercises			(3,475	)			3.00
Option forfeited			(30,536	)			13.87
Balance, December 31, 2013			1,006,991			$	11.39

 

The following table summarizes information about stock options outstanding at December 31, 2013 regarding the number of ordinary shares issuable upon: (1) outstanding options and (2) vested options.

(1) Number of ordinary shares issuable upon exercise of outstanding options:

 

Exercise Prices		Number of Options				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Life (in years)
$2.69—$2.85			34,000			$	2.69				1.82
$2.86—$4.83			229,125				3.00				2.00
$4.84—$11.94			98,879				9.30				7.78
$11.95—$11.99			171,271				11.95				9.19
$12.00—$12.81			37,175				12.42				8.12
$12.82—$13.06			114,400				13.00				8.35
$13.07—$15.74			46,676				14.18				7.58
$15.75—$16.40			120,750				15.97				6.95
$16.41—$21.67			79,115				17.91				5.67
$21.68—$22.28			75,600				22.28				5.92
Total			1,006,991			$	11.39				6.21

(2) Number of ordinary shares issuable upon exercise of vested options:

 

Exercise Prices		Number of Options				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Life (in years)
$2.69—$2.85			34,000			$	2.69				1.82
$2.86—$4.83			229,125				3.00				2.00
$4.84—$11.94			33,600				8.71				4.64
$11.95—$11.99			39,251				11.95				9.19
$12.00—$12.81			30,441				12.43				8.05
$12.82—$13.06			54,819				13.00				8.35
$13.07—$15.74			30,507				14.39				7.08
$15.75—$16.40			90,563				15.97				6.95
$16.41—$21.67			67,835				18.08				5.43
$21.68—$22.28			75,600				22.28				5.92
Total			685,741			$	10.95				5.00

As at December 31, 2013 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, 2013, 2012 and 2011 was $1.8 million, $1.6 million and $1.1 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, 2013, 2012 and 2011 was $34,000, $1.2 million and $0.6 million, respectively. At December 31, 2013, the aggregate intrinsic value of the outstanding options was $1.4 million and the aggregate intrinsic value of the exercisable options was $1.4 million.

 

[d] Restricted Stock Unit Awards

We grant restricted stock unit awards that generally vest and are expensed over a four year period. In 2013 and 2012, we also granted restricted stock unit awards that vest in conjunction with certain performance conditions to certain executive officers and key employees. At each reporting date, we are required to evaluate whether achievement of the performance conditions is probable. Compensation expense is recorded over the appropriate service period based upon our assessment of accomplishing each performance provision. For the years ended December 31, 2013 and 2012, $1.1 million and $0.6 million, respectively, of stock based compensation expense was recognized related to these awards. No restricted stock unit awards were granted during 2011.

The following table summarizes our restricted stock unit award activity during the years ended December 31, 2013, 2012 and 2011:

 

		2013								2012								2011
		Number of Shares				Weighted- Average Grant Date Fair Value				Number of Shares				Weighted- Average Grant Date Fair Value				Number of Shares				Weighted- Average Grant Date Fair Value
Outstanding at January 1			172,085			$	13.01				—			$	—				—			$	—
Granted			255,895				11.64				180,085				13.01				—				—
Vested			(50,773	)			12.95				—				—				—				—
Forfeited or expired			(20,618	)			12.51				(8,000	)			13.00				—				—
Outstanding at December 31			356,589				12.06				172,085				13.01				—				—

As of December 31, 2013, we had approximately $2.2 million in total unrecognized compensation expense related to our restricted stock unit awards which is to be recognized over a weighted-average period of approximately 2.7 years.

[e] Stock Warrants

At December 31, 2013, there were 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, 2013, 2012 or 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:

 

		Years ended December 31,
		2013				2012				2011
Risk-free interest rates			0.33	%			0.34	%			0.55	%
Expected dividend yield			0	%			0	%			0	%
Expected life			1.8 years				2.8 years				3.8 years
Expected volatility			39	%			45	%			76	%

[f] Shareholder Rights Plan

We have 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 our Board of Directors declared a dividend of one Preferred Stock Purchase Right (Right) for each outstanding common share of OncoGenex. Subject to the Rights Plan, each Right entitles the registered holder to purchase from us 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 our common stock, additional shares of our 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 Rights are associated with each share of common stock.

[g] 401(k) Plan

We maintain a 401(k) plan. Following the Arrangement, the Board of Directors of OncoGenex amended and restated the 401(k) plan whereas our securities are no longer offered as an investment option. This amendment prohibits the inclusion of our shares in the 401(k) plan, as well as any match of our shares to employee contributions.

[h] Loss per common share

The following table presents the computation of basic and diluted net loss attributable to common stockholders per share (in thousands, except per share and share amounts):

 

		Years ended December 31,
		2013				2012				2011
Numerator
Net loss		$	(31,849	)		$	(21,098	)		$	(14,673	)
Denominator
Weighted average number of common shares outstanding			14,683,389				13,522,723				9,729,340
Basic and diluted net loss per common share		$	(2.17	)		$	(1.56	)		$	(1.51	)

As of December 31, 2013, 2012 and 2011 a total of 3.0 million, 2.6 million and 2.4 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.