5.	COMMON STOCK

 

[a]	Authorized

50,000,000 authorized common shares, par value of $0.001, and 5,000,000 preferred shares, par value of $0.001.

 

[b]	Issued and outstanding shares

July 2014 Registered Offering

On July 2, 2014, we completed an underwritten registered offering pursuant to which we sold 5,559,866 Series A units at a price per unit of $3.48 and 1,340,538 Series B units at a price per unit of $3.47.

Each Series A unit consisted of one share of common stock and a Series A warrant to purchase up to one-half of one share of common stock at an initial exercise price of $4.00 per share. Each Series A warrant is exercisable at any time on or after the date of issuance until the fifth anniversary of the issuance of the Series A warrants.

Each Series B unit consisted of a Pre-Funded Series B warrant to purchase up to one share of common stock at an initial exercise price of $0.01 per share and a Series B warrant to purchase up to one-half of one share of common stock at an initial exercise price of $4.00 per share. Each Pre-Funded Series B warrant and Series B warrant is exercisable at any time on or after the date of issuance until the fifth anniversary of the issuance of the Pre-Funded Series B warrants and Series B warrants, respectively.

We received net proceeds of approximately $22.4 million, after deducting underwriting discounts and commissions and offering expenses. Gross proceeds of $24.0 million and underwriting discounts and commissions and offering expenses of $1.6 million were allocated as follows:

 

		Common Stock				Series B Pre-funded Common Stock Warrants				Series A Common Stock Warrants				Series B Common Stock Warrants
Units Issued			5,559,866				1,340,538				2,779,933				670,269
Gross Proceeds (in thousands)		$	14,084			$	3,387			$	5,261			$	1,268
Underwriting discount and offering expense (in thousands)		$	885			$	213			$	428			$	103

The Series A and Series B common stock warrants are classified as liabilities. The underwriting discount and offering expenses allocated to the Series A and Series B common stock warrants have been expensed in the Consolidated Statement of Loss.

The common stock and Series B prefunded common stock warrants are classified as equity. The underwriting discount and offering expenses allocated to the common stock and Series B prefunded common stock warrants have been charged against the allocated gross proceeds.

“At the Market” Equity Offering Program

From April 1, 2014 through September 30, 2014, we have offered and sold 809,214 shares of our common stock pursuant to our At-the-Market Issuance Sales Agreement with MLV & Co. LLC. These sales resulted in gross proceeds to us of approximately $3.0 million and offering expenses of $0.1 million. As of September 30, 2014, shares of our common stock having an aggregate value of approximately $22.0 million remained available for sale under this offering program.

Equity Award Issuances and Settlements

During the nine month period ended September 30, 2014, we issued 10,000 and 199,849 common shares to satisfy stock option exercises and restricted stock unit settlements, respectively, compared with the issuance of 3,475 and 45,869 common shares to satisfy stock option exercises and restricted stock unit settlements, respectively, during the nine month period ended September 30, 2013.

 

[c]	Stock options

2010 Performance Incentive Plan

As of September 30, 2014, we had reserved, pursuant to various plans, 2,907,615 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 1,285,862 were reserved for options currently outstanding, 682,808 were reserved for restricted stock units currently outstanding and 938,945 were available for future equity grants.

Stock Option Summary

Options vest in accordance with terms as determined by our Board of Directors, or the Board, which terms are typically four years for employee and consultant grants and one to three years for Board option grants. The expiry date for each option is set by the Board, which is typically seven to ten years. The exercise price of the options is determined by the Board, but will be 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, December 31, 2013			1,007,491				11.39
Option grants			356,097				9.47
Option expired			(12,169	)			18.93
Option exercises			(10,000	)			3.00
Option forfeitures			(55,557	)			11.71
Balance, September 30, 2014			1,285,862				10.77

The fair value of each stock award for employees and directors is estimated on the grant date and for consultants at each reporting period, using the Black-Scholes option-pricing model based on the weighted-average assumptions noted in the following table:

 

		Nine months ended September 30,
		2014				2013
Risk-free interest rates			1.83	%			1.15	%
Expected dividend yield			0	%			0	%
Expected life			5.9 years				5.8 years
Expected volatility			81.51	%			87.02	%

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 Borealis-1 clinical data results we expect to receive by the end of the first quarter 2015, 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. The expected volatility of options granted was calculated based on the historical volatility of the shares of our common stock. 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 rates. 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 cash dividends on our common stock and do not expect to pay cash dividends in the foreseeable future.

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

 

		Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2014				2013				2014				2013
		$				$				$				$
Research and development			513				410				1,454				1,137
General and administrative			439				477				1,514				1,353
Total share-based compensation			952				887				2,968				2,490

 

As of September 30, 2014 and December 31, 2013, the total unrecognized compensation expense related to stock options granted was $3.2 million and $2.7 million respectively, which is expected to be recognized as expense over a period of approximately 2.6 years from September 30, 2014.

For the three and nine months ended September 30, 2014, a total of 8.3 million shares underlying options, restricted stock units and warrants have not been included in the loss per share computation, as their effect on diluted per share amounts would have been anti-dilutive. For the same periods in 2013, a total of 2.9 million shares underlying options, restricted stock units and warrants have not been included in the loss per share computation.

 

[d]	Restricted Stock Unit Awards

We grant restricted stock unit awards that generally vest and are expensed over a four year period. We also grant restricted stock unit awards that vest in conjunction with certain performance conditions to certain executive officers, key employees and consultants. 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 condition. For the three and nine months ended September 30, 2014, $0.6 million and $1.7 million, respectively, of compensation expense was recognized related to these awards, compared to $0.5 million and $1.2 million for the three and nine months ended September 30, 2013, respectively.

The following table summarizes our restricted stock unit award activity during the nine months ended September 30, 2014:

 

		Stock Awards				Weighted- Average Grant Date Fair Value
		#				$
Outstanding January 1			356,589				12.06
Granted			801,800				6.55
Vested			(199,849	)			7.00
Forfeited or expired			(275,732	)			11.22
Outstanding September 30			682,808				7.41

As of September 30, 2014, we had approximately $3.9 million in total unrecognized compensation expense related to our restricted stock unit awards that is to be recognized over a weighted-average period of approximately 3.1 years.

 

[e]	Non-employee options and restricted stock units

We recognize non-employee stock-based compensation expense over the period of expected service by the non-employee. As the service is performed, we are required to update our valuation assumptions, re-measure unvested options and restricted stock units and record the stock-based compensation using the valuation as of the vesting date. This differs from the accounting for employee awards where the fair value is determined at the grant date and is not subsequently adjusted. This re-measurement may result in higher or lower stock-based compensation expense in the Consolidated Statements of Loss and Comprehensive Loss. As such, changes in the market price of our stock could materially change the value of an option or restricted stock unit and the resulting stock-based compensation expense.

 

[f]	Common Stock Warrants

The following is a summary of outstanding warrants to purchase common stock at September 30, 2014:

 

		Total Outstanding and Exercisable				Exercise price per Share				Expiration Date
(1) Warrants issued in October 2010 financing			1,587,301			$	20.00			October 2015
(2) Series A Warrants issued in July 2014 financing			2,779,933			$	4.00			July 2019
(3) Series B Warrants issued in July 2014 financing			670,269			$	4.00			July 2019
(4) Pre-Funded Series B Warrants issued in July 2014 financing			1,340,538			$	0.01			July 2019

No warrants were exercised during the nine month periods ended September 30, 2014 or 2013. The warrants issued in the October 2010 financing and the Series A and Series B warrants issued in the July 2014 financing are classified as liabilities. The estimated fair value of warrants issued and classified as liabilities is reassessed at each reporting date using the Black-Scholes option pricing model. The Pre-Funded Series B warrants are classified as equity and are not reassessed for their fair value at the end of each reporting date. The following assumptions were used to value the warrants that are classified as liabilities on the following reporting dates:

Warrants issued in October 2010 Financing

 

		Nine Months  Ended September 30,
		2014				2013
Risk-free interest rates			0.15	%			0.36	%
Expected dividend yield			0	%			0	%
Expected life			1.06 years				2.06 years
Expected volatility			102.90	%			40.66	%

Series A and Series B Warrants issued in July 2014 Financing

 

		Nine Months Ended September 30,
		2014				2013
Risk-free interest rates			1.68	%			—
Expected dividend yield			0	%			—
Expected life			4.75 years				—
Expected volatility			61.81	%			—