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 October 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

During the three months ended October 31, 2017, the Company granted options to purchase 163,500, 200,000 and 50,000 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 $0.92 and $0.96. The stock options issued to directors have a 10-year term, vest over one year and have exercise prices ranging from $0.979 and $1.08. The stock options issued to consultants have a 10-year term, vest in accordance with the terms of the applicable consulting agreement and have an exercise price of $1.00 per share.

During the three months ended October 31, 2016, the Company granted options to purchase 346,500 and 310,000 shares of its common stock to employees 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 $1.71 and $1.94. The stock options issued to consultants have a 10-year term, vest in accordance with the terms of the applicable consulting agreement and have exercise prices ranging from $1.74 and $2.00 per share.

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 three months ended October 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:

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 Company uses the simplified method to calculate the expected term of options issued to employees and directors, and 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. For the expected dividend yield used in the Black-Scholes calculation, 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 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 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 recorded in the accompanying condensed consolidated statements of operations for the three months ended October 31, 2017 and 2016 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately $0.6 million and $1.0 million, respectively. Of this amount, $0.2 million and $0.3 million, respectively, was recorded to research and development and $0.4 million and $0.7 million, respectively, was recorded in general and administrative in the accompanying condensed consolidated statements of operations for the three months ended October 31, 2017 and 2016.

The weighted-average grant date fair value of stock options granted during the three months ended October 31, 2017 and 2016 was $0.67 and $1.16, respectively.

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 three offering periods completed under the ESPP as of October 31, 2017 have resulted in an aggregate of 58,066 shares purchased and distributed to employees. The fourth offering period commenced on August 1, 2017 and will end on January 31, 2018, and the Company estimates 18,862 shares will be purchased in this fourth offering period (assuming an $0.88 purchase price per share, based on a 15% discount from the closing price of the Company’s common stock on August 1, 2017). At October 31, 2017, taking into account the anticipated purchases in the fourth offering period, there were 423,072 shares remaining available for issuance under the ESPP.

The ESPP is considered a Type B plan under the Financial Accounting Standards Board Accounting Standards Codification 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 fourth offering period, the following assumptions were used: six-month maturity, 0.40% risk free interest, 96.91% volatility, 0% forfeitures and $0 dividends.

Stock-based compensation expense recorded in the accompanying condensed consolidated statements of operations for the three months ended October 31, 2017 and 2016 resulting from purchases under the ESPP was approximately $7,000 and $24,000, respectively, after adjusting for withdrawals and terminations.