Note 7—Stock-Based Compensation

Stock Options

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. Stock-based compensation expense for awards granted during the three and six-month periods ended January 31, 2017 and 2016, were based on the grant date fair value estimated using the Black-Scholes Option Pricing Model. Share-based compensation expense related to stock option grants to consultants, in which the grant was not entirely vested at the grant date, are generally re-valued each month. The Company’s expected volatility is derived from the historical daily change in the market price of its common stock, as well as the historical daily changes in the market price for the peer group as determined by the Company. The Company uses the simplified method to calculate the expected term of options issued to employees and directors. 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. The risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S. Treasury yield in effect at the time of grant, commensurate with the expected term. Stock-based compensation expense recognized in the Company’s condensed 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. Because the Company records stock-based compensation monthly and utilizes cliff vesting and/or monthly vesting, the Company has estimated the forfeiture rate of its outstanding stock options as zero since the Company can adjust stock-based compensation due to terminations in the month of termination. 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.

On November 11, 2016, the Company filed a Tender Offer Statement on Schedule TO relating to an offer (the “Exchange Offer”) by the Company to exchange certain stock options to purchase up to an aggregate of 2,479,671 shares of its common stock that had been granted to eligible participants with an exercise price significantly above current market value for a lesser number of new stock options with a lower exercise price. Stock options with an exercise price greater than or equal to $3.00, and held by employees, directors, and consultants in continuous service through the termination of the Exchange Offer, were eligible for exchange in the Exchange Offer. An exchange rate of 2 for 1 applied to options priced from $3.00 to $9.99, and an exchange rate of 3 for 1 applied to options priced at $10 or greater. Each new stock option was granted pursuant to OncoSec’s 2011 Stock Incentive Plan, as amended and restated, on the date the Exchange Offer closed and was priced at the market price on that date. As of the closing of the Exchange Offer on December 14, 2016, 29 eligible participants had exchanged 2,214,500 options for 1,070,536 new options and the Company treated those new options as a modification. After analysis of the modification, the Company determined that there was no incremental expense.

During the three and six months ended January 31, 2017, the Company granted options to purchase 1,124,536 and 1,511,036 shares of the Company’s common stock under the 2011 Plan, respectively (including those granted under the Exchange Offer), of which options to purchase 695,037 and 771,537 shares, respectively, were granted to employees and options to purchase 164,083 and 474,083 shares, respectively, were granted to consultants, and options to purchase 265,416 and 265,416 shares, respectively, were granted to non-employee directors. The options issued to employees have a ten-year term, vest over three years and have exercise prices ranging from $1.29–$1.78. The options issued to consultants have three- to ten-year terms, generally vest in accordance with the terms of the applicable agreement, and have exercise prices ranging from $1.29–$2.00 per share. The options issued to non-employee directors have a ten-year term, vest over one year and have exercise prices of $1.29.

During the three and six months ended January 31, 2016, the Company granted options to purchase 8,750 and 2,052,250 shares, respectively, of the Company’s common stock under the 2011 Plan, of which options to purchase 8,750 and 1,984,250 shares, respectively, were granted to employees and non-employee directors, and options to purchase 0 and 68,000 shares, respectively, were granted to consultants. The options issued to employees have a ten-year term, vest over a range of three years, and have exercise prices ranging from $3.44–$6.21. The options issued to consultants have three-year terms, vest in accordance with the terms of the applicable agreement, and have an exercise price of $5.76 per share.

During the three and six months ended January 31, 2017, the Company granted options to purchase 0 and 270,000 shares, respectively, of the Company’s common stock to employees outside of the 2011 Plan. These options were issued as inducement stock options. They have a term of 10 years, vest over a period of three years, and have an exercise price of $1.71. No options were issued to directors or consultants outside of the 2011 Plan during these periods. No options were issued to employees, directors, or consultants outside of the 2011 Plan during the corresponding periods ended January 31, 2016.

The following assumptions were used to calculate the fair value of stock-based compensation during the three-month periods ended January 31, 2017 and 2016:

The following assumptions were used to calculate the fair value of stock-based compensation during the six-month periods ended January 31, 2017 and 2016:

Stock-based compensation expense recorded in the Company’s condensed consolidated statement of operations for the three- and six-month periods ended January 31, 2017 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately $1.4 million and $2.6 million, respectively. Of this balance, $0.5 million and $0.8 million, respectively, was recorded to research and development and $0.9 million and $1.8 million, respectively, was recorded in general and administrative in the Company’s condensed consolidated statement of operations for the three- and six-month periods ended January 31, 2017.

Stock-based compensation expense recorded in the Company’s condensed statement of operations for the three and six-month periods ended January 31, 2016 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately $1.5 million and $3.0 million, respectively. Of this balance, $0.2 million and $0.5 million, respectively, was recorded to research and development, and $1.3 million and $2.5 million, respectively, was recorded in general and administrative in the Company’s condensed statement of operations for the period ended January 31, 2016.

The weighted-average grant date fair value of stock options granted during the three- and six-month periods ended January 31, 2017 were $1.12 and $1.13, respectively. The weighted-average grant date fair value of stock options granted during the three- and six-month periods ended January 31, 2016 were $2.81 and $4.14, respectively.

Restricted Stock Units

In March 2016, the Company granted 555,000, 100,000 and 25,000 restricted stock unit awards (or, RSUs) to motivate and retain certain employees, directors and consultants, respectively, under the 2011 Plan. All RSUs vest in full three (3) years following the date of grant. The Company’s closing common stock price on the date of issue was $2.02 per share, which is the RSUs fair market value per unit. Stock-based compensation expense related to RSUs for the three and six-month periods ended January 31, 2017 was approximately $110,000 and $184,000, respectively, of which approximately $24,000 and $36,000, respectively, was recorded to research and development and $86,000 and $148,000, respectively, was recorded to general and administrative. During the three-month period ended January 31, 2017, 65,000 RSUs were forfeited, and prior to this period, 25,000 RSUs were forfeited. As of January 31, 2017, 590,000 RSUs were outstanding.

Employee Stock Purchase Program

Under the Company’s 2015 Employee Stock Purchase Plan (“ESPP”), the Company is authorized to issue 500,000 shares of the Company’s common stock. The first offering period ended on July 31, 2016, with 17,789 shares purchased and distributed to employees. The second offering period ended on January 31, 2017, with 18,631 shares purchased and distributed to employees. At January 31, 2017, 463,580 shares are available for issuance under the ESPP.

The ESPP is considered a Type B plan. The fair value of the awards were calculated at the beginning of the offering period as the sum of:

15% of the share price of a unvested share at the beginning of the offering period,

85% of the fair market value of a six (6)-month call on the unvested share aforementioned, and

15% of the fair market value of a six (6)-month put on the unvested share aforementioned.

The fair market value of the 6-month call and 6-month put are based on the Black-Scholes option pricing model, using the following assumptions: six (6) month maturity, 0.40% risk free interest, 96.91% volatility, 0% forfeitures and $0 dividends.

Stock-based compensation expense related to the ESPP and recorded in the Company’s condensed consolidated statement of operations for the three- and six-month periods ended January 31, 2017 was approximately ($6,000) and $18,000, respectively, (with the three-month figure representing an adjustment to the original estimate for withdrawals, terminations, and final purchase price determination), of which ($3,000) and $9,000, respectively, was recorded to research and development and ($3,000) and $9,000, respectively, was recorded to general and administrative.