Share capital

(a) Financing

On March 26, 2014, the Company completed an underwritten public offering of 2,125,000 common shares, at a price of $28.50 per share, representing gross proceeds of $60,562,000. The Company also granted the underwriters a 30-day option to purchase an additional 318,750 shares for an additional $9,084,000 to cover any over-allotments. The underwriters did not exercise the option. The cost of financing, including commissions and professional fees, was $4,085,000, resulting in net proceeds of $56,477,000.

On March 25, 2015, the Company announced that it had completed an underwritten public offering of 7,500,000 common shares, at a price of $20.25 per share, representing gross proceeds of $151,875,000. The Company also granted the underwriters a 30-day option to purchase an additional 1,125,000 shares for an additional $22,781,000 to cover any over-allotments. The underwriters did not exercise the option. The cost of financing, including commissions and professional fees, was $9,700,000, resulting in net proceeds of $142,177,000.

(b) Authorized share capital

The Company’s authorized share capital consists of an unlimited number of common and preferred shares without par value.

During the year ended December 31, 2016, there were 170,500 warrants exercised for $445,000 in cash (December 31, 2015 – 18,750 warrants for $42,000) and no warrants were exercised using the cashless exercise provision (December 31, 2015 – 0 warrants for 0 common shares). In June 2016, 8,000 of the Company's warrants expired. The decrease in fair value from the previous balance sheet date relating to the expired warrants has been included in the total decrease in fair value of warrant liability in the Company's statement of comprehensive loss for the year ended December 31, 2016 of $530,000.

The following table summarizes the Company’s warrant activity for the years ended December 31, 2016 and 2015:



	Common shares purchasable upon exercise of warrants		Weighted average exercise price (C$)		Weighted average exercise price (US$)		Range of exercise prices (C$)				Range of exercise prices (US$)					Weighted average remaining contractual life (years)	Aggregate intrinsic value (C$)		Aggregate intrinsic value (US$)
Balance, December 31, 2014	398,250		$	2.95	$	2.67	$2.60	—	$	3.35	$2.35		—	$	3.03	1.8	$	5,902	$	5,343
Exercised	(18,750	)	2.88		2.25		2.60	—	3.35		2.03		—	2.62
Balance, December 31, 2015	379,500		$	2.95	$	2.13	$2.60	—	$	3.35	$2.03		—	$	2.62	0.8	1,217		$	879
Exercised	(170,500	)	3.35		2.53		3.35	—	3.35		2.53		—	2.53
Expired	(8,000	)	3.35		2.53		3.35	—	3.35		2.53		—	2.53
Balance, December 31, 2016	201,000		$	2.60	$	1.94	$2.60	—	$	2.60	$	1.94	—	$	1.94	0.2	$	139	$	104

The aggregate intrinsic value in the table above is calculated based on the difference between the exercise price of the warrants and the quoted price of the Company’s common stock as of the reporting date.

All of the Company’s warrants were exercisable as of December 31, 2016.

The weighted average Black-Scholes option-pricing assumptions and the resultant fair values are as follows for warrants outstanding at December 31, 2016 and 2015 are as follows:



	As at December 31
	2016			2015
Dividend yield	—		%	—		%
Expected volatility	41.95		%	49.07		%
Risk-free interest rate	0.76		%	0.48		%
Expected average term (years)	0.2 years			0.6 years
Fair value of warrants outstanding	$	0.53		$	2.33
Aggregate fair value of warrants outstanding	$	107		$	883
Number of warrants outstanding	201,000			379,500

The value of the Company’s warrants is particularly sensitive to changes in the Company’s share price and the estimated share price volatility.

(d) Stock-based compensation

The Company has seven share-based compensation plans; the “2007 Plan”, the “2011 Plan”, the "2016 Plan", two “Designated Plans” (together, the “Arbutus Plans”), the “Protiva Option Plan”, and the "OnCore Option Plan".

On June 22, 2011, the shareholders of the Company approved an omnibus stock-based compensation plan (the “2011 Plan”). The Company’s pre-existing 2007 Plan was limited to the granting of stock options as equity incentive awards whereas the 2011 Plan also allows for the issuance of tandem stock appreciation rights, restricted stock units and deferred stock units (collectively, and including options, referred to as “Awards”). The 2011 Plan replaces the 2007 Plan. The 2007 Plan will continue to govern the options granted thereunder. No further options will be granted under the Company’s 2007 Plan.

Under the Company’s 2007 Plan the Board of Directors granted options to employees, directors and consultants of the Company. The exercise price of the options was determined by the Company’s Board of Directors but was always at least equal to the closing market price of the common shares on the day preceding the date of grant and the term of options granted did not exceed 10 years. The options granted generally vested over three years for employees and immediately for directors.

Under the Company’s 2011 Plan the Board of Directors may grant options, and other types of Awards, to employees, directors and consultants of the Company. The exercise price of the options is determined by the Company’s Board of Directors but will be at least equal to the closing market price of the common shares on the day preceding the date of grant and the term may not exceed 10 years. Options granted generally vest over three years for employees and immediately for directors.

At the Company’s annual general and special meeting of shareholders on May 8, 2014 and July 9, 2015, the shareholders of the Company approved respectively, a 800,000 and a 3,500,000 increase in the number of stock-based compensation awards that the Company is permitted to issue under the 2011 Plan.

At the Company’s annual general and special meeting of shareholders on May 19, 2016, the shareholders of the Company approved the adoption of the Company's 2016 Omnibus Share and Incentive Plan (the "2016 Plan") and the reserve of 5,000,000 shares of the Company issuable pursuant to awards under the 2016 Plan. These include both equity-classified and liability-classified stock options. The Company's 2011 Omnibus Share Compensation Plan, as amended, also remains in effect.

Additionally, the Company granted a total of 200,000 options in 2013 to two executive officers in conjunction with their new appointments as executive officers. These options were granted in accordance with the policies of the Toronto Stock Exchange and pursuant to newly designated share compensation plans (the “Designated Plans”). The Designated Plans are governed by substantially the same terms as the 2011 Plan. Hereafter, information on options governed by the 2007 Plan, the 2011 Plan, the 2016 Plan and the Designated Plans is presented on a consolidated basis as the terms of the five plans are similar. Information on the Protiva Option Plan and the OnCore Option Plan are presented separately.

Stock option activity for the Arbutus Plans

Equity-classified stock option activity:



	Number of optioned common shares		Weighted average exercise price (C$)		Weighted average exercise price (US$)		Aggregate intrinsic value (C$)		Aggregate intrinsic value (US$)
Balance, December 31, 2013	1,730,765		$	4.45	$	4.32	$	7,030	$	6,826
Options granted	431,125		13.63		12.34
Options exercised	(622,752	)	4.62		4.18		7,650		6,926
Options forfeited, canceled or expired	(9,000	)	8.20		7.42
Balance, December 31, 2014	1,530,138		6.95		6.29		16,573		15,004
Options granted	1,309,625		N/A		16.57
Options exercised	(398,293	)	5.03		3.93		6,887		5,386
Options forfeited, canceled or expired	(151,207	)	19.29		15.09
Balance, December 31, 2015	2,290,263		15.53		11.22		1,376		994
Options reclassified to liability¹	(718,333	)	7.24		5.23		836		604
Options granted	1,789,599		N/A		3.89
Options exercised	(56,125	)	2.88		2.18		160		121
Options forfeited, canceled or expired	(394,200	)	13.49		10.18
Balance, December 31, 2016	2,911,204		$	11.45	$	8.53	$	75	$	56


1.	Due to the change in the Company's functional currency as of January 1, 2016, certain stock option awards with exercise prices denominated in Canadian dollars changed from equity classification to liability classification - see note 2.

Options under the Arbutus Plans expire at various dates from March 21, 2017 to November 28, 2026.

The following table summarizes information pertaining to stock options outstanding at December 31, 2016 under the Arbutus Plans:



			Options outstanding December 31, 2016				Options exercisable December 31, 2016
Range of Exercise prices (US$)			Number of options outstanding	Weighted average remaining contractual life (years)	Weighted average exercise price (US$)		Number of options exercisable	Weighted average exercise price (US$)
$1.12	to	$3.05	121,725	6.4	2.23		75,225	1.78
$3.28	to	$3.84	209,033	8.4	3.64		62,033	3.69
$3.94	to	$3.94	1,369,849	9.2	3.94		—	N/A
$3.98	to	$8.64	81,713	8.1	4.49		71,380	4.38
$9.11	to	$9.73	118,843	7.8	9.44		91,375	9.44
$9.88	to	$13.89	201,000	8.1	13.42		74,271	13.26
$17.57	to	$17.57	809,041	8.2	17.57		324,957	17.57
$1.12	to	$17.57	2,911,204	8.6	$	8.53	699,241	$	11.77

At December 31, 2016, there were 699,241 options exercisable (December 31, 2015 - 938,730; December 31, 2014 – 1,088,908). The weighted average remaining contractual life of exercisable options as at December 31, 2016 was 7.5 years.

The aggregate intrinsic value of in-the-money options exercisable at December 31, 2016 was $56,000.

A summary of the Company’s non-vested stock option activity and related information for the year ended December 31, 2016 is as follows:



	Number of optioned common shares		Weighted average fair value (C$)		Weighted average fair value (US$)
Non-vested at December 31, 2015	1,351,541		$	15.69	$	11.34
Options reclassified to liability-options¹	(134,000	)	10.80		7.80
Options granted	1,789,599		5.15		3.89
Options vested	(472,479	)	14.20		10.72
Non-vested options forfeited	(322,698	)	9.70		7.33
Non-vested at December 31, 2016	2,211,963		$	7.17	$	5.34

1. Non-vested liability-classified stock options as at January 1, 2016

The weighted average remaining contractual life for options expected to vest at December 31, 2016 was 9.0 years and the weighted average exercise price for these options was $7.50 (C$10.07) per share.

The aggregate intrinsic value of options expected to vest as at December 31, 2016 was $0 (December 31, 2015 - $10,000; December 31, 2014 -$2,626,000).

The total fair value of options that vested during the year ended December 31, 2016 was $5,058,000 (December 31, 2015 - $1,718,000; December 31, 2014 -$2,505,000).

Valuation assumptions for the Arbutus Plans

On March 3, 2015, the Company voluntarily de-listed from the Toronto Stock Exchange. All stock options granted after March 3, 2015 were denominated in US dollars based on the Company's stock price on the NASDAQ. The methodology and assumptions used to estimate the fair value of stock options at date of grant under the Black-Scholes option-pricing model remain unchanged. Assumptions on the dividend yield are based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Assumptions about the Company’s expected stock-price volatility are based on the historical volatility of the Company’s publicly traded stock. The risk-free interest rate used for each grant is equal to the zero coupon rate for instruments with a similar expected life. Expected life assumptions are based on the Company’s historical data. The Company recognizes forfeitures as they occur, and the effects of forfeitures are reflected in stock-based compensation expense recorded in the statement of operations and comprehensive loss for the year ended December 31, 2016. The weighted average option pricing assumptions for options granted during the year are as follows:



	Year ended December 31
	2016		2015		2014
Dividend yield	—	%	—	%	—	%
Expected volatility	77.99	%	76.88	%	101.08	%
Risk-free interest rate	0.90	%	1.10	%	2.25	%
Expected average option term	7.3 years		7.5 years		8.8 years

Liability-classified stock option activity:

Valuation assumptions

Liability options are re-measured to their fair values at each reporting date, using the Black-Scholes valuation model. The methodology and assumptions prevailing at the re-measurement date used to estimate the fair values of liability options remain unchanged from the date of grant of equity classified stock option awards. Assumptions about the Company’s expected stock-price volatility are based on the historical volatility of the Company’s publicly traded stock. The risk-free interest rate used for each grant is equal to the zero coupon rate for instruments with a similar expected life. Expected life assumptions are based on the Company’s historical data. The weighted average Black-Scholes option-pricing assumptions and the resultant fair values as at the reclassification date of January 1, 2016, and as at December 31, 2016, are presented in the following table:



	December 31,			January 1,
	2016			2016
Dividend yield	—		%	—		%
Expected volatility	66.18		%	97.78		%
Risk-free interest rate	0.88		%	0.86		%
Expected average term (years)	3.6			5.3
Fair value of options outstanding	$	0.87		$	3.33
Fair value of vested liability-classified options (in thousands)	$	553		$	1,909

Stock option activity for liability options



	Number of optioned common shares		Weighted average exercise price (C$)		Weighted average exercise price (US$)		Aggregate intrinsic value (US$)
Balance, January 1, 2016	718,333		$	7.24	$	5.23	$	604
Options exercised	(30,000	)	3.00		2.30		54
Options forfeited, canceled or expired	(49,833	)	8.29		6.17		—
Balance, December 31, 2016	638,500		$	7.35	$	5.48	$	116

Liability options expire at various dates from August 6, 2017 to May 7, 2024.

The following table summarizes information pertaining to liability options outstanding at December 31, 2016:



			Options outstanding December 31, 2016				Options exercisable December 31, 2016
Range of Exercise prices (US$)			Number of options outstanding	Weighted average remaining contractual life (years)	Weighted average exercise price (US$)		Number of options exercisable	Weighted average exercise price (US$)
$1.27	to	$1.79	120,000	3.7	$	1.48	120,000	$	1.48
$2.87	to	$3.84	120,000	3.6	3.42		120,000	3.42
$3.97	to	$4.28	74,000	1.6	4.22		74,000	4.22
$4.84	to	$6.18	76,250	0.7	5.83		76,250	5.83
$6.79	to	$6.79	150,000	6.8	6.79		150,000	6.79
$9.32	to	$12.21	98,250	6.0	11.53		83,500	11.44
$1.27	to	$12.21	638,500	4.2	$	5.48	623,750	$	5.32

At December 31, 2016, there were 623,750 liability options exercisable with a weighted average exercise price of $5.32 (C$7.14). The weighted average remaining contractual life of exercisable liability options as at December 31, 2016 was 4.1 years.

A summary of the Company's non-vested liability stock option activity and related information at December 31, 2016 is as follows:



	Number of optioned common shares		Weighted average fair value (US$)
Non-vested at January 1, 2016	134,000		$	3.61
Options vested	(93,250	)	0.67
Non-vested options forfeited	(26,000	)	0.04
Non-vested at December 31, 2016	14,750		$	0.92

The weighted average remaining contractual life for liability options expected to vest at December 31, 2016 was 7.1 years and the weighted average exercise price for these options was $12.06 (C$16.19) per share.

The total fair value of liability options that vested during the year ended December 31, 2016 was $62,200.

Protiva Option Plan

On May 30, 2008, as a condition of the acquisition of Protiva Biotherapeutics Inc., a total of 350,457 common shares of the Company were reserved for the exercise of 519,073 Protiva share options (“Protiva Options”). The Protiva Options have an exercise price of C$0.30, were fully vested and exercisable as of May 30, 2008. As at December 31, 2016, the outstanding options expire at various dates from April 3, 2017 to March 1, 2018 and upon exercise each option will be converted into approximately 0.6752 shares of the Company (the same ratio at which Protiva common shares were exchanged for Company common shares at completion of the acquisition of Protiva). The Protiva Options are not part of the Arbutus Plans and the Company is not permitted to grant any further Protiva Options.

The following table sets forth outstanding options under the Protiva Option Plan:



	Number of Protiva Options		Equivalent number of Company common shares		Weighted average exercise price (C$)		Weighted average exercise price (US$)
Balance, December 31, 2013	472,885		319,274		$	0.30	0.29
Options exercised	(38,145	)	(25,754	)	0.30		0.27
Options forfeited, canceled or expired	(1,000	)	(675	)	0.30		0.27
Balance, December 31, 2014	433,740		292,845		0.30		0.27
Options exercised	(358,675	)	(242,164	)	0.30		0.23
Options forfeited, canceled or expired	(8,065	)	(5,445	)	0.30		0.23
Balance, December 31, 2015	67,000		45,236		0.30		0.22
Options exercised	(21,000	)	(14,178	)	0.30		0.23
Options forfeited, canceled or expired	—		—		—		N/A
Balance, December 31, 2016	46,000		31,058		$	0.30	$	0.22

The weighted average remaining contractual life of exercisable Protiva Options as at December 31, 2016 was 1.0 years.

The aggregate intrinsic value of Protiva Options outstanding at December 31, 2016 was $56,000. The intrinsic value of Protiva Options exercised in the year ended December 31, 2016 was $49,000 (2015 - $1,249,000; 2014 -$378,000).

OnCore Option Plan

As at the acquisition date in March 2015, the Company reserved 184,332 shares for the future exercise of OnCore (Arbutus Inc.) stock options. The total fair value of OnCore stock options at the date of acquisition has been determined to be $3,287,000, using the Black-Scholes pricing model with an assumed risk-free interest rate of 0.97%, volatility of 78%, a zero dividend yield and an expected life of 8 years, which are consistent with the assumption inputs used by the Company to determine the fair value of its options. Of the total fair value, $1,127,000 has been attributed as pre-combination service and included as part of the total acquisition consideration. The post-combination attribution of $2,160,000 will be recognized as compensation expense over the vesting period of the stock options through to December 2018.

Following the merger, the Company is not permitted to grant any further options under the OnCore Option Plan. The Company has included $577,000 of compensation expense related to the vesting of Arbutus Inc. stock options for the year ended December 31, 2016.

The following table sets forth outstanding options under the OnCore Option Plan:



	Number of OnCore Options	Equivalent number of Company common shares	Weighted average exercise price (US$)
Balance, December 31, 2015	183,040	184,332	$	0.57
Options exercised	—	—	N/A
Options forfeited, canceled or expired	—	—	N/A
Balance, December 31, 2016	183,040	184,332	$	0.57

At December 31, 2016, there were 119,988 OnCore options (120,835 Arbutus equivalent) exercisable with a weighted average exercise price of $0.57. The weighted average remaining contractual life of exercisable options as at December 31, 2016 was 7.9 years. The aggregate intrinsic value of in-the-money options exercisable at December 31, 2016 was $226,000.

A summary of the OnCore Option Plan's non-vested stock option activity and related information for the year ended December 31, 2016 is as follows:



	Number of OnCore Options		Equivalent number of Company common shares		Weighted average fair value (US$)
Non-vested at December 31, 2015	96,382		97,063		$	16.42
Options vested	(33,331	)	(33,566	)	16.80
Non-vested options forfeited	—		—		N/A
Non-vested at December 31, 2016	63,051		63,497		$	16.80

The weighted average remaining contractual life for options expected to vest at December 31, 2016 was 7.9 years and the weighted average exercise price for these options was $0.57 per share.

The aggregate intrinsic value of options expected to vest as at December 31, 2016 was $119,000.

The total fair value of options that vested during the year ended December 31, 2016 was $560,000.

Stock-based compensation expense

Total stock-based compensation expense is comprised of: (1) the vesting options awarded to employees under the Arbutus and OnCore option plans calculated in accordance with the fair value method as described above; and (2) the expiration of repurchase rights related to the post-combination service portion of the total fair value of shares issued to Arbutus Inc.'s employees.

The total stock-based compensation has been recorded in the consolidated statement of operations and comprehensive income (loss) as follows:



	Year ended December 31
	2016		2015		2014
Research, development, collaborations and contracts expenses	$	11,155	$	7,868	$	2,343
General and administrative expenses	28,004		14,225		940
Total	$	39,159	$	22,093	$	3,283

At December 31, 2016, there remains $8,835,000 of unearned compensation expense related to unvested equity employee stock options to be recognized as expense over a weighted-average period of approximately 12 months, as well as a remaining $7,912,000 unearned compensation expense related to unexpired repurchase rights on shares issued to Arbutus Inc. employees to be recognized as expense over a weighted average period of approximately 5 months.

Awards outstanding and available for issuance

Combining all of the Company’s share-based compensation plans, at December 31, 2016, the Company has 3,765,094 options outstanding and a further 6,790,414 Awards available for issuance.

(e) Replacement awards

Included in the total consideration transferred for the acquisition of Arbutus Inc. in March 2015 are common shares issued as replacement awards, which are subject to repurchase provisions. The total fair value of these common shares attributed to the post acquisition period was approximately $56,934,000 and is being recognized as compensation expense over the expiry period of repurchase provision rights subsequent to the acquisition date.

In July 2015, in conjunction with amendments to the employment contracts of Arbutus Inc.’s founding executives, the Company amended the repurchase provision rights period of expiry from August 2018 to August 2017. This amendment results in an acceleration of compensation expense recognized in each subsequent period by approximately $1,900,000 per quarter, effective in Q3 2015.

In April and May 2016, two of the four shareholders of these common shares subject to repurchase provision departed from the Company, resulting in accelerated expiry of the repurchase provision. These departures triggered the recognition of an incremental compensation expense of $14,008,000 during the year, for a total of $31,986,000 (2015 - $16,687,000) in stock-based compensation expense related to the expiration of repurchase provision rights for the year-ended December 31, 2016. The total unrecognized compensation expense related to the expiry of repurchase provisions was $7,972,000 as at December 31, 2016.