Note 7—Stock-Based Compensation

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 authorizes a total of 7,500,000 for issuance thereunder, and 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) 1,000,000 shares; or (iii) such lesser number of shares as determined by the Company’s Board of Directors. As of October 31, 2018, there were an aggregate of 8,500,000 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.

Modification of Award

On August 22, 2018, the Company entered into a stock option cancellation agreement with an individual. As per the terms of the agreement, 300,000 fully vested stock options were cancelled. On August 22, 2018, the Company issued 175,000 shares of restricted common stock. Upon modification, it is required under ASC 718 to analyze the fair value of the instruments, before and after the modification, recognizing the increase as a charge to the statement of operations. The Company computed the fair value of the cancelled award and compared the fair value to that of the restricted stock award. The Company recorded the excess of the fair value of the restricted stock award over the fair value of the cancelled award, or $135,425, to compensation costs with an offsetting entry to common stock and additional paid in capital on the date of the modification.

Cancellation of Award

On October 23, 2018, the Company entered into stock option cancellation agreements with two consultants. As per the terms of the agreements, an aggregate of 535,000 stock options were cancelled. The consultants were not issued replacement awards under the cancellation agreements. Under ASC 718, a cancellation of an award that is not accompanied by the concurrent grant of (or offer to grant) a replacement award or other valuable consideration shall be accounted for as a repurchase for no consideration. Accordingly, any previously unrecognized compensation cost shall be recognized at the cancellation date. The Company recorded unrecognized compensation of the cancelled awards, or $377,278, to compensation costs with an offsetting entry to additional paid in capital on the date of the cancellation.

Stock Options

During the three months ended October 31, 2018, the Company granted options to purchase 111,000 shares of its common stock to employees under the 2011 Plan. The stock options issued to employees have a ten-year term, vest over three years, and have exercise prices ranging from $1.32 to $1.58.

During the three months ended October 31, 2018, the Company granted options to purchase 200,000 and 250,000 shares of its common stock to employees and consultants outside the 2011 Plan. The stock options issued to employees have a ten-year term, vest over three years, and have an exercise price of $1.64. The stock options issued to consultants have ten-year terms, vest in accordance with the terms of the applicable consulting agreement, and have an exercise price of $1.43.

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.

Stock-based compensation expense recognized in the accompanying consolidated statements of operations is based on awards ultimately expected to vest, reduced for estimated forfeitures. 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 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, non-employees and directors. Prior to the adoption of ASU 2018-07, the Company’s estimation of the expected term for stock options granted to parties other than employees or directors was 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.

The following is a summary of the Company’s 2011 Plan and non-Plan stock option activity for the three months ended October 31, 2018:

As of October 31, 2018, the total intrinsic value of options outstanding and exercisable was approximately $2.4 million and $1.6 million, respectively. As of October 31, 2018, the Company has approximately $2.8 million in unrecognized stock-based compensation expense attributable to the outstanding options, which will be amortized over a period of approximately 1.45 years.

Stock-based compensation expense recorded in the Company’s condensed consolidated statements of operations for the three months ended October 31, 2018 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately $1.3 million. Of this balance, $738,000 was recorded to research and development and $527,000 million was recorded in general and administrative in the Company’s condensed consolidated statements of operations for the three months ended October 31, 2018.

Stock-based compensation expense recorded in the Company’s condensed consolidated statements of operations for the three months ended October 31, 2017 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately $0.6 million. Of this balance, $0.2 million was recorded to research and development and $0.4 million was recorded in general and administrative in the Company’s condensed consolidated statement of operations for the three months ended October 31, 2017.

The weighted-average grant date fair value of stock options granted during the three months ended October 31, 2018 was $0.99. The weighted-average grant date fair value of stock options granted during the three months ended October 31, 2017 was $0.67.

Restricted Stock Units

In October 2018, the Company granted 50,000 restricted stock unit awards (“RSUs”) to an employee. The units vest as follows: 12,500 units vested on October 29, 2018, and the remaining 37,500 units vest according to the following vesting schedule: 12,500 units on October 29, 2019, 12,500 units on October 29, 2020 and 12,500 units on October 29, 2021. The closing price of the Company’s common stock on the date of grant was $1.64 per share, which is the fair market value per unit of the RSUs.

On October 26, 2018, in accordance with a severance agreement with an employee, the Company’s Board of Directors approved the accelerated vesting of 25% of the outstanding restricted stock units (RSUs) held by the employee. The RSUs, which originally vest on the third anniversary of the grant date, or March 29, 2020, were accelerated to vest on October 26, 2018. As per ASC 718, on the date of the modification the Company reversed the previously accrued expense on the unvested RSUs of $63,278 and recognized the fair value of the modified grant of $44,250 on the date of the modification.

For the three months ended October 31, 2018, the Company recorded $0.15 million in stock-based compensation related to RSUs, which is reflected in the condensed consolidated statement of operations.

As of October 31, 2018, there were 518,020 RSUs outstanding.

For the three months ended October 31, 2017, the Company recorded $0.1 million in stock-based compensation related to RSUs, which is reflected in the condensed consolidated statement of operations.

Shares issued to Consultants

During the three months ended October 31, 2018, 184,000 shares of Common Stock valued at $251,560 were issued to consultants for services. The common stock share values were based on the dates the shares were granted. The Company recorded compensation expense relating to the share issuances of $239,824 during the three months October 31, 2018.

During the three months ended October 31, 2017, 100,000 shares of Common Stock valued at $109,000 were issued to consultants for services. The common stock share values were based on the dates the shares vested. The Company recorded compensation expense relating to the share issuances of $109,000 during the three months October 31, 2017.

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. The fourth offering period under the ESPP ended on January 31, 2018, with 18,960 shares purchased and distributed to employees, and the fifth offering period under the ESPP ended on July 31, 2018, with 12,071 shares purchased and distributed to employees. At October 31, 2018, there were 410,903 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:

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, 2019, the following assumptions were used: six-month maturity, 2.22% risk free interest, 61.83% volatility, 0% forfeitures and $0 dividends.

For the six-month offering period ended January 31, 2018, the following assumptions were used: six-month maturity, 1.15% risk free interest, 62.6% volatility, 0% forfeitures and $0 dividends.

Approximately $6,600 and $7,000 was recorded as stock-based compensation during the three months ended October 31, 2018 and 2017, respectively.

Common Stock Reserved for Future Issuance

The following table summarizes all common stock reserved for future issuance at October 31, 2018: