Note 9 — Stock-Based Compensation

 

In May 2011, the Company’s Board of Directors adopted the OncoSec Medical Incorporated 2011 Stock Incentive Plan (the “2011 Plan”).  The 2011 Plan was approved by the Company’s stockholders in March 2012 and originally authorized the Board of Directors to grant equity awards to employees, directors, and consultants for up to 5,200,000 shares of common stock.  On April 15, 2013, the Company’s stockholders approved an amendment to the 2011 Plan to authorize the issuance of an additional 3,800,000 shares of common stock under the 2011 Plan, increasing the total number of shares reserved for issuance under the 2011 Plan to 9,000,000 shares. On July 18, 2014, the Company’s stockholders approved an amendment to the 2011 Plan to authorize the issuance of an additional 16,000,000 shares of common stock under the 2011 Plan, increasing the total number of shares reserved for issuance under the 2011 Plan to 25,000,000 shares. Incentive stock options are to be granted at a price that is no less than 100% of the fair value of the stock at the date of grant.  Options vest over a period specified in individual option agreements entered into with grantees, and are exercisable for a maximum period of ten years after the date of grant.  Options granted to stockholders who own more than 10% of the outstanding stock of the Company at the time of grant must be issued at an exercise price no less than 110% of the fair value of the stock on the date of grant.

 

During the year ended July 31, 2014, the Company granted options to purchase 1,810,000, 750,000 and 760,000 shares of the Company’s common stock to employees, directors and consultants, respectively, under the 2011 Plan.  During the year ended July 31, 2014, the Company granted options to purchase 5,200,000 and 500,000 shares of the Company’s common stock to employees and consultants, respectively, outside of the terms of the 2011 Plan. The options issued to employees both within the 2011 Plan and outside of the terms of the 2011 Plan have a ten-year term, vest over a range of two to three years, and have exercise prices ranging from $0.31 to $0.805.  The options issued to directors have a ten-year term, vest quarterly in equal increments over one year, and have an exercise price of $0.805. The options issued to consultants both within the 2011 Plan and outside of the terms of the 2011 Plan have one- to ten-year terms, vest in accordance with the terms of the applicable consulting agreement, and have exercise prices ranging from $0.26 to $0.805.

 

During the year ended July 31, 2013, the Company granted options to purchase 685,000 and 300,000 shares of the Company’s common stock to employees and directors, respectively, under the 2011 Plan.  The options issued to employees have a ten-year term, vest over a range of two to three years, and have exercise prices ranging from $0.20 to $0.42.  The options issued to directors have a ten-year term, vest quarterly in equal increments over one year and have an exercise price of $0.25.  During the year ended July 31, 2013, the Company also granted options to purchase 2,030,000 shares of the Company’s common stock to consultants under the 2011 Plan. The options issued to consultants have three to ten year terms, vest in accordance with the terms of the applicable consulting agreement, and have exercise prices ranging from $0.18 to $0.35.

 

During the year ended July 31, 2012, the Company granted options to purchase 1,300,000 and 400,000 shares of the Company’s common stock to employees and directors, respectively, under the 2011 Plan.  The options issued to employees have a ten-year term, vest over two years, and have exercise prices ranging from $0.21 to $0.40.  The options issued to directors have a ten-year term, vest quarterly in equal increments over one year, and have exercise prices ranging from $0.21 to $0.40.  During the year ended July 31, 2012, the Company also granted options to purchase 1,560,000 shares of the Company’s common stock to consultants under the 2011 Plan. The options issued to consultants have three- to ten-year terms, vest in accordance with the terms of the applicable consulting agreement, and have exercise prices ranging from $0.18 to $0.39.

 

The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award.  The service period is generally the vesting period, with the exception of options granted subject to a consulting agreement, whereby the option vesting period and the service period are defined pursuant to the terms of the consulting agreement. Share-based compensation expense for awards granted during the years ended July 31, 2014, 2013 and 2012, were based on the grant date fair value estimated using the Black-Scholes Option Pricing Model.

 

The following assumptions were used to calculate the fair value of share-based compensation during the years ended:

 

		July 31, 2014		July 31, 2013		July 31, 2012
Expected volatility		83.62% - 93.27%		80.32 - 97.85%		85.96% - 125.00%
Risk-free interest rate		0.100% - 2.78%		0.31% - 1.97%		0.35% - 2.08%
Expected forfeiture rate		0.00%		0.00%		0.00%
Expected dividend yield		—		—		—
Expected term		1 - 10 years		3 - 10 years		3 - 10 years

 

Expected price volatility is the measure by which the Company’s stock price is expected to fluctuate during the expected term of an option.  The Company exited shell status on March 24, 2011.  In situations where a newly public entity has limited historical data on the price of its publicly traded shares and no other traded financial instruments, authoritative guidance is provided on estimating this assumption by basing its expected volatility on the historical, expected, or implied volatility of similar entities whose share option prices are publicly available.  In making the determination as to similarity, the guidance recommends the consideration of industry, stage of life cycle, size and financial leverage of such other entities.  The Company’s expected volatility is derived from the historical daily change in the market price of its common stock since it exited shell status, as well as the historical daily changes in the market price for the peer group as determined by the Company.

 

The expected term of the options represents the period that stock-based awards are expected to be outstanding based on the simplified method provided in ASC Topic 718, which averages an award’s weighted-average vesting period and contractual term for share options and warrants. The Company will continue to use the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life in accordance with ASC Topic 718, as amended by SAB 110. For the expected term of options issued to employees and directors, the Company used the simplified method.  The Company expects to continually evaluate its historical data as a basis for determining the expected terms of options granted under the 2011 Plan. The Company’s estimation of the expected term for stock options granted to parties other than employees or directors is the contractual term of the option award.

 

For the purposes of estimating the fair value of stock option awards, the risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S. Treasury yield.  The Company has never paid any dividends on its common stock and does not anticipate paying dividends on its common stock in the foreseeable future.

 

Stock-based compensation expense recognized in the Company’s consolidated statements of operations is based on awards ultimately expected to vest, reduced for estimated forfeitures.  Authoritative guidance requires forfeitures to be estimated at the time of grant, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Due to the Company’s minimal stock-based compensation activity, the Company has not had significant forfeitures of stock options granted to employees and directors. Therefore, the Company has estimated the forfeiture rate of its outstanding stock options as zero, but will continually evaluate its historical data as a basis for determining expected forfeitures.

 

Share-based compensation expense recorded in the Company’s consolidated statements of operations for the years ended July 31, 2014, 2013 and 2012 resulting from share-based compensation awarded to the Company’s employees, directors and consultants was approximately $1,816,000, $452,000 and $333,000, respectively.  Of these balances during the years ended July 31, 2014, 2013 and 2012, $666,000, $41,000 and $89,000, respectively, was recorded to research and development, and $1,150,000, $411,000 and $244,000, respectively, was recorded in general and administrative in the Company’s consolidated statements of operations. During the years ended July 31, 2014, 2013 and 2012, the Company recorded $118,000, $11,000 and $25,000 respectively, in research and development expense and $119,000,  $289,000 and $133,000, respectively, in general and administrative expense for stock options granted to non-employees.

 

A summary of the Company’s stock option activity for the years ended July 31, 2014, 2013 and 2012 is as follows:

 

		Option Shares Outstanding		Weighted-Average Exercise Price			Aggregate Intrinsic Value ($000’s)
Balance at July 31, 2011		—		$	—		$	—
Granted		3,260,000		0.24			—
Exercised		—		—			—
Forfeited / Cancelled		(85,000	)	0.40			—
Balance at July 31, 2012		3,175,000		0.24			24
Granted		3,015,000		0.22			232
Exercised		(766,500	)	0.18			52
Forfeited / Cancelled		(273,500	)	0.33			9
Balance at July 31, 2013		5,150,000		0.23			372
Granted		9,020,000		0.66			1
Exercised		(1,799,975	)	0.21			846
Forfeited / Cancelled		(609,125	)	0.26			65
Balance at July 31, 2014		11,760,900		0.56			844
Exercisable at July 31, 2014		6,022,353		$	0.47		$	647

 

Range of Exercise Prices			Number of Shares Outstanding		Weighted Average Contractual Life (in years)		Number Of Shares Exercisable			Weighted Average Remaining Contractual Life (in years)
$	0.18 - 0.805		11,760,900		8.51		$	6,022,353		7.61

 

The weighted-average grant date fair value of stock options granted during the years ended July 31, 2014, 2013 and 2012 were $0.47, $0.14 and $0.18, respectively.  As of July 31, 2014, there was approximately $2.5 million of unrecognized non-cash compensation cost related to unvested options, which will be recognized over a weighted average period of 2.36 years.

 

Common Stock Reserved for Future Issuance

 

The following table summarizes common stock reserved for future issuance at July 31, 2014:

 

Common Stock options outstanding (within the 2011 Plan and outside of the terms of the 2011 Plan)		11,760,900
Common Stock warrants		37,647,790
Common Stock options authorized for future grant under the 2011 Plan		16,372,625
		65,781,315