Note 7 — Stock-Based Compensation

2011 Plan

The OncoSec Medical Incorporated 2011 Stock Incentive Plan (as amended and approved by the Company’s stockholders (the “2011 Plan”), authorizes the Company’s Board of Directors to grant equity awards, including stock options and restricted stock units, to employees, directors and consultants. The 2011 Plan includes an automatic increase of the number of shares of common stock reserved thereunder on the first business day of each calendar year by the lesser of: (i) 3% of the shares of the Company’s common stock outstanding as of the last day of the immediately preceding calendar year; (ii) 500,000 shares; or, (iii) such lesser number of shares as determined by the Company’s Board of Directors. As of July 31, 2017, there were an aggregate of 5,000,000 shares of the Company’s common stock authorized for issuance pursuant to awards granted under the 2011 Plan. The 2011 Plan allows for an annual fiscal year per-individual grant of up to 500,000 shares of its common stock. Under the 2011 Plan, incentive stock options are to be granted at a price that is no less than 100% of the fair value of the Company’s common stock at the date of grant. Stock options vest over a period specified in the individual option agreements entered into with grantees, and are exercisable for a maximum period of 10 years after the date of grant. Stock 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 of no less than 110% of the fair value of the Company’s common stock on the date of grant.

Stock Options

On December 14, 2016, the Company completed an offer (the “Exchange Offer”) to exchange certain stock options to purchase shares of its common stock 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 for the Company through the completion of the Exchange Offer were eligible for exchange. In the Exchange Offer, an exchange rate of 2-for-1 applied to stock options with an exercise price from $3.00 to $9.99, and an exchange rate of 3-for-1 applied to stock options with an exercise price of $10.00 or more. Each new stock option granted in the Exchange Offer was granted pursuant to the 2011 Plan on the date the Exchange Offer closed and has an exercise price equal to the market price of the Company’s common stock on that date. At the closing of the Exchange Offer, 29 eligible participants had exchanged stock options to purchase 2,214,500 shares of the Company’s common stock for new stock options to purchase 1,070,536 shares of the Company’s common stock.

During the fiscal year ended July 31, 2017, the Company granted options to purchase 1,841,037, 355,416 and 832,083 shares of its common stock to employees, directors and consultants under the 2011 Plan, respectively. The stock options issued to employees have a 10-year term, vest over three years, and have exercise prices ranging from $1.11 to $1.94. The stock options issued to directors have a ten-year term, vest monthly in equal increments over one year and have exercise prices ranging from $1.29 to $1.34. The stock options issued to consultants have three-year terms, vest in accordance with the terms of the applicable consulting agreement, and have exercise prices ranging from $1.29 to $2.00.

During the fiscal year ended July 31, 2016, the Company granted options to purchase 1,995,750, 655,500 and 78,000 shares of the Company’s common stock to employees, directors and consultants under the 2011 Plan, respectively. The stock options issued to employees have a 10-year term, vest over three years, and have exercise prices ranging from $1.64 to $6.21. The stock options issued to directors have a 10-year term, vest quarterly in equal increments over one year and have exercise prices ranging from $2.02 to $5.76. The stock options issued to consultants have one- to three-year terms, vest in accordance with the terms of the applicable consulting agreement, and have exercise prices ranging from $2.02 to $5.76.

A summary of the Company’s stock option activity for the years ended July 31, 2017 and 2016 is as follows:

The weighted-average grant date fair value of stock options granted during the years ended July 31, 2017 and 2016 was $0.69 and $3.45, respectively. As of July 31, 2017, there was approximately $1.4 million of unrecognized non-cash compensation cost related to unvested options, which will be recognized over a weighted average period of 2.02 years. The weighted-average fair value of stock options vested during the years ended July 31, 2017 and 2016 was $1.35 and $5.69, respectively.

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 stock options granted pursuant to a consulting agreement, in which case the stock 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 fiscal years ended July 31, 2017 and 2016 were based on the grant date fair value estimated using the Black-Scholes option valuation model. Stock-based compensation expense related to stock options granted to consultants in which the options are not entirely vested at the grant date are generally re-measured each month.

The following assumptions were used for the Black-Scholes calculation of the fair value of stock-based compensation related to stock options granted during the periods presented:

Expected price volatility is the measure by which the Company’s stock price is expected to fluctuate during the expected term of a stock option. The Company’s common stock first became available for trading on April 8, 2011. In situations where a 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 stock 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 its stock became available for trading, as well as the historical daily changes in the market price of its peer group, based on weighting, as determined by the Company.

The expected term of the stock options represents the period that stock-based awards are expected to be outstanding based on the simplified method provided in FASB Accounting Standards Codification (“ASC”) Topic 718, which averages an award’s weighted-average vesting period and contractual term for stock options and warrants. The Company will continue to use the simplified method for the expected term of stock options issued to employees and directors until it has the historical data necessary to provide a reasonable estimate of expected life in accordance with FASB ASC Topic 718, as amended by Staff Accounting Bulletin 110. The Company expects to continually evaluate its historical data as a basis for determining the expected terms of stock 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 accompanying 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 annual vesting and/or monthly vesting, the Company has estimated the forfeiture rate of its outstanding stock options as zero, as the Company can adjust stock-based compensation due to terminations in the month of termination.

Stock-based compensation expense (resulting from stock options awarded) recorded in the accompanying consolidated statements of operations for the years ended July 31, 2017 and 2016 was approximately $3.6 million and $6.1 million, respectively. During the fiscal years ended July 31, 2017 and 2016, approximately $1.1 million and $1.0 million of this amount, respectively, was recorded to research and development expenses, and approximately $2.5 and $5.1 million of this amount, respectively, was recorded in general and administrative expenses.

Restricted Stock Unit Awards

In March 2017, the Company granted 525,000 restricted stock unit awards (“RSUs”) to employees under the 2011 Plan. All RSUs vest in full three years following the date of grant. The closing price of the Company’s common stock on the date of grant was $1.34 per share, which is the fair market value per unit of the RSUs. Stock-based compensation expense related to all RSUs granted in the fiscal year ended July 31, 2017 was $462,000, of which $90,000 was recorded to research and development expenses and $372,000 was recorded in general and administrative expenses. As of July 31, 2017, there were 1,100,000 RSUs outstanding.

In March 2016, the Company granted 555,000, 100,000 and 25,000 RSUs to certain employees, directors and consultants, respectively, under the 2011 Plan. All RSUs vest in full three years following the date of grant. The closing price of the Company’s common stock on the date of grant was $2.02 per share, which is the fair market value per unit for the RSUs. Stock-based compensation expense related to RSUs granted in the fiscal year ended July 31, 2016 was $184,000, of which $41,000 was recorded in research and development expenses and $143,000 was recorded in general and administrative expenses. As of July 31, 2016, there were 655,000 RSUs outstanding.

2015 Employee Stock Purchase Plan

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 under the ESPP ended on July 31, 2016, with 17,789 shares purchased and distributed to employees. The second offering period under the ESPP ended on January 31, 2017, with 18,631 shares purchased and distributed to employees, and the third offering period under the ESPP ended on July 31, 2017, with 21,646 shares purchased and distributed to employees. At July 31, 2017, there were 463,580 shares remaining available for issuance under the ESPP.

The ESPP is considered a Type B plan under FASB ASC Topic 718 because the number of shares a participant is permitted to purchase is not fixed based on the stock price at the beginning of the offering period and the expected withholdings. The ESPP enables the participant to “buy-up” to the plan’s share limit, if the stock price is lower on the purchase date. As a result, the fair value of the awards granted under the ESPP is calculated at the beginning of each offering period as the sum of:

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

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

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

The fair market value of the six-month call and six-month put are based on the Black-Scholes option valuation model. For the six-month offering period ended January 31, 2017, the following assumptions were used: six-month maturity, 0.40% risk free interest, 96.91% volatility, 0% forfeitures and $0 dividends. For the six-month offering period ended July 31, 2017, the following assumptions were used: six-month maturity, 0.65% risk free interest, 132.68% volatility, 0% forfeitures and $0 dividends.

Approximately $23,000 and $16,000 was recorded as stock-based compensation during the years ended July 31, 2017 and 2016, respectively.

Common Stock Reserved for Future Issuance

The following table summarizes all common stock reserved for future issuance at July 31, 2017: