Stockholders' equity

9 Months Ended

Sep. 30, 2019

6. Stockholders’ equity

(a) Share capital

Neoleukin is authorized to issue two classes of stock, common and preferred. The total number of shares Neoleukin is authorized to issue is 55,000,000 shares, comprised of 50,000,000 common stock and 5,000,000 preferred stock both with a par value of $0.000001 per share. As of September 30, 2019 and December 31, 2018, the total number of shares of common stock issued and outstanding was 28,140,243 and 23,537,368, respectively. As of September 30, 2019 and December 31, 2018, the total number of shares of preferred stock issued or outstanding was 101,927 and nil.

On August 8, 2019, the Company issued 4,589,771 shares of common stock and 101,927 shares of

non-voting

convertible preferred stock as consideration in the Merger between Aquinox, Former

Neoleukin

and Apollo Merger Inc. (see Note 3).

Each share of

non-voting

convertible preferred stock is convertible into 100 shares of common stock and is entitled to receive dividends, on an

as-is

converted to common stock basis, when dividends are paid to common stockholders. Upon liquidation preferred stockholders will receive the greater of (i) $1 plus all accrued and unpaid dividends or (ii) the amount the preferred stockholders would have been entitled to if the preferred stock had been converted to common stock before any amounts are distributed to common stockholders. The holders of preferred stock are only entitled to vote when it impacts the rights of the preferred stockholder.

(b) Stock option plan

The Company’s 2014 Equity Incentive Plan (“2014 Plan”) became effective in March 2014. The 2014 Plan is the successor to and continuation of the Joint Canadian Stock Option Plan (the “2006 Plan”). No further grants will be made under the 2006 Plan. The 2014 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of equity awards to employees, directors, and consultants.

As at September 30, 2019, the maximum number of shares of common stock that may be issued under the 2014 Plan was 4,712,447 shares.

Additionally, the number of shares of common stock reserved for issuance under the 2014 Plan will automatically increase on January 1 of each year for a period of up to 10 years, beginning on January 1, 2015 and ending on and including January 1, 2024, by 4% of the total number of shares of capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the board of directors.

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


	NUMBER OF SHARES			WEIGHTED AVERAGE EXERCISE PRICE		WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE (IN YEARS)		AGGREGATE INTRINSIC VALUE (IN THOUSANDS)
Outstanding at December 31, 2018		2,897,294		$	9.04		7.96	$	—
Options granted		298,000			3.54
Options exercised		(13,104	)		3.07
Options forfeited		(278,197	)		11.84

Outstanding at September 30, 2019		2,903,993		$	8.23		3.95	$	3

Exercisable as of September 30, 2019		2,288,581		$	9.41		3.60	$	—

During the three months ended September 30, 2019, the Company granted 298,000 stock options to employees and consultants. The stock options granted to employees have an exercise price per share ranging from $2.80 to $3.76 and vest 25% one year after the beginning of the vesting period and thereafter ratably each month over the following

thirty-six

months. All stock options under the 2014 Plan are subject to a

10-year

expiration period.

During the three months ended September 30, 2019, 13,104 shares of common stock were issued upon exercise of options with an aggregate intrinsic value of nil.

Restricted stock units

During the three months ended September 30, 2019, the Company granted 72,000 restricted stock units to employees and consultants with a weighted average grant date fair value per

of $3.47. The restricted stock units vest 50% on the first anniversary of the grant and 50% on the second anniversary of the grant. All restricted stock units under the 2014 Plan are subject to a

10-year

expiration period.

Inducement grants

During the three months ended September 30, 2019, the Compensation Committee of the Board of Directors of the Company granted 3,300,000 stock options as a material inducement to four employees hired by the Company pursuant to the inducement exception provided under Nasdaq listing rules. The stock options granted have an exercise price per share of $2.80 and vest 25% one year after the beginning of the vesting period and thereafter ratably each month over the following

thirty-six

months. The options have a weighted average grant date fair value per share of $2.08, a weighted average remaining contractual life of 9.92 years and an intrinsic value of $0.2 million.

The fair value of stock options granted is estimated using the Black-Scholes option pricing model with the following weighted average assumptions:


	THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
	2019			2018			2019			2018
Expected volatility		90	%		83	%		90	%		80	%
Expected dividends		0	%		0	%		0	%		0	%
Expected terms (years)		6.00			6.00			6.00			6.00
Risk free rate		1.44	%		2.86	%		1.44	%		2.80	%
Weighted average grant-date fair value of stock options	$	2.63		$	2.20		$	2.63		$	6.25

The Company amortizes the fair value of the stock options on a straight-line basis over the applicable requisite service periods of the awards, which is generally the vesting period. Stock-based compensation expense charged to operating expenses was $5.1 million and $7.0 million for the three and nine months ended September 30, 2019, respectively and $1.5 million and $2.8 million for the three and nine months ended September 30, 2018, respectively. Total unrecognized compensation cost for all stock-based compensation plans was $8.6 million and $15.4 million as of September 30, 2019 and September 30, 2018, respectively, which is expected to be recognized over a weighted-average period of 3.70 years (September 30, 2018 – 3.00 years).