Annual report pursuant to Section 13 and 15(d)

Stock-Based Compensation

v3.20.2
Stock-Based Compensation
12 Months Ended
Jul. 31, 2020
Share-based Payment Arrangement [Abstract]  
Stock-Based Compensation

Note 8—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 750,000 shares 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) 100,000 shares; or (iii) such lesser number of shares as determined by the Company’s Board of Directors. As of July 31, 2020, there were an aggregate of 3,350,000 shares of the Company’s common stock authorized for issuance under the 2011 Plan. 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.

 

On April 14, 2020, the Board approved, subject to and contingent on stockholder approval at the Company’s Annual Meeting, amendments to the 2011 Plan to (i) increase the number of shares authorized under the 2011 Plan by 2,300,000 shares, and (ii) delete the provision in the 2011 Plan that provides for certain annual and automatic increases in the shares of our common stock reserved for issuance thereunder. On May 29, 2020, the Company’s shareholders approved the amendments to the 2011 Plan.

 

Modification of Stock Option Awards

 

During the year ended July 31, 2020, the Company cancelled 878,534 outstanding common stock option awards under the following terms:

 

  The Company entered into Stock Option Cancellation Agreements (the “Cancellation Agreements”) with certain executive officers, directors and other senior level employees of the Company, pursuant to which such individuals (the “Senior Level Option holder”) agreed to the voluntary surrender and cancellation of certain previously granted stock options (the “Cancelled Options”) to purchase in the aggregate 699,140 shares of the Company’s common stock. Under the terms of the Cancellation Agreements, each Senior Level Option holder and the Company acknowledged and agreed that the surrender and cancellation of the Cancelled Options was without any expectation on the part of the Senior Level Option holder to receive, and without any obligation on the Company to pay or grant, any cash, equity awards or other consideration presently or in the future with respect to the Cancelled Options.
     
  The Company cancelled outstanding common stock options held by employees and consultants other than Senior Level Option holders of the Company, pursuant to which such individuals previously granted stock options to purchase in the aggregate 179,394 shares of the Company’s common stock were cancelled for cash consideration of approximately $26,000.

 

The Company accounted for the effects of the stock option modifications described above under the guidance of ASC 718 as follows:

 

  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 expense is recognized at the cancellation date.
     
  The amount of cash paid to settle an equity-classified award is charged directly to equity as long as that amount is equal to or less than the fair-value-based measure of the award on the settlement date. To the extent that the settlement consideration exceeds the fair-value-based measure of the equity-classified award on the settlement date, that difference is recognized as additional compensation cost. The cash paid to settle employee and consultant equity-classified awards, other than Senior Level Option holders, was less than the fair-value-based measure of the award on the settlement date. The approximately $26,000 in cash paid to settle the equity-classified awards was charged directly to additional paid in capital.

 

Following the cancellation of the outstanding option awards described above, there were 15,000 stock option awards outstanding under the 2011 Plan. The Company recorded the previously unrecognized compensation cost related to the cancelled outstanding stock option awards of approximately $1.2 million on the date of cancellation.

 

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 53,500 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.

 

On August 22, 2018, the Company entered into a stock option cancellation agreement with an individual. As per the terms of the agreement, 30,000 fully vested stock options were cancelled. On August 22, 2018, the Company issued 17,500 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.

 

Modification of Award

 

On October 2, 2019, the Company entered into an amendment to a consulting agreement with a consulting firm. Prior to the amendment the Company was required to issue 3,000 restricted common shares monthly for services through July 2, 2020. As per the terms of the amended agreement, starting October 2, 2019, the Company will be required to issue 15,000 shares of restricted common stock monthly for services through July 2, 2020. Upon modification, it is required under ASC 718 to analyze the fair value of the instruments, before and after the modification, recognizing additional compensation cost for any incremental value. The Company computed the fair value of the award prior to the amendment and compared the fair value to that of the modified award. The incremental compensation cost of approximately $0.2 million resulting from the modification will be recognized ratably over the remaining term of the consulting agreement.

 

Bonuses Paid in Common Stock

 

On March 11, 2020, the Compensation Committee of the Board of Directors approved the payment of discretionary bonuses to our Chief Executive Officer and seven other officers in an aggregate amount equal to $836,250 (the “2019 Incentive Bonuses”), in recognition of the Company’s achievement of certain operational and strategic objectives in 2019 and each individual’s ongoing contributions to the success of the Company.

 

In order to conserve cash and improve cash flow, the Compensation Committee determined that it would be in the Company’s best interests to pay one-half of the 2019 Incentive Bonuses, or $418,125, in cash, and one-half of the 2019 Incentive Bonuses in shares of our common stock (“Contingent Bonus Shares”), subject to approval by the Board of Directors and contingent on stockholder approval of the issuance of the Contingent Bonus Shares at the Company’s annual shareholder meeting (the “Annual Meeting”). On April 14, 2020, the Board of Directors approved the issuance of the Contingent Bonus Shares to the officers, contingent on stockholder approval at the Annual Meeting, and determined that the aggregate number of Contingent Bonus Shares would be 302,989 shares (the “Bonus Share Pool”), which was determined by dividing $418,125 by $1.38, the closing price of our common stock on March 11, 2020.

 

On May 29, 2020, the Company’s stockholders approved the Bonus Share Pool and the Contingent Bonus Shares were granted to the officers following the Annual Meeting. The Contingent Bonus Shares are subject to a six-month holding period requirement. The Company, using the net shares method, issued an aggregate of 185,003 shares of Company common stock to pay one-half of the discretionary bonuses. 117,986 shares of Company common stock were withheld at vesting to cover individual tax withholding obligations. The Company recorded compensation expense related to the Contingent Bonus Shares of $0.7 million during the year ended July 31, 2020, which was determined by multiplying the Bonus Share Pool, or 302,989, by $2.23, the closing price of our common stock on May 29, 2020.

 

Stock Options

 

During the year ended July 31, 2020, the Company granted options to purchase 1,158,982, 225,000 and 80,000 shares of its common stock to employees, directors and consultants under the 2011 Plan, respectively. The stock options issued to employees have a ten-year term, vest over a period ranging from two to three years and have exercise prices ranging from $1.56 to $3.30. The stock options issued to directors have a 10-year term, vest over three years and have an exercise price of $1.56. 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 $1.56. 5,050 options granted during the year ended July 31, 2020 were cancelled during the second quarter of fiscal year 2020 as part of the stock option cancellation transaction discussed previously.

 

During the year ended July 31, 2019, the Company granted options to purchase 154,249, 77,500 and 1,000 shares of its common stock to employees, directors and consultants under the 2011 Plan, respectively. The stock options issued to employees have a ten-year term, vest over three years, and have exercise prices ranging from $2.57 to $15.80. The stock options issued to directors have a 10-year term, vest over a period ranging from one to three years and have exercise prices ranging from $5.80 and $8.41. 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 $6.25.

 

During the year ended July 31, 2019, the Company granted options to purchase 20,000 and 50,000 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 $16.40. The stock options issued to consultants have ten-year terms, vest in accordance with the terms of the applicable consulting agreement and have exercise prices ranging from $8.46 and $14.30.

 

The Company accounts for stock-based compensation based on the fair value of the stock-based awards granted and records forfeitures as they occur. As such, the Company recognizes stock-based compensation cost only for those stock-based awards that vest over their requisite service period, based on the vesting provisions of the individual grants. 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.

 

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:

 

   

Year Ended

July 31, 2020

   

Year Ended

July 31, 2019

 
Expected term (years)     5.00–6.50 years       5.00–6.50 years  
Risk-free interest rate     0.30 -1.70 %     1.74 – 3.09 %
Volatility     80.93 – 87.95 %     72.88 –83.87 %
Dividend yield     0 %     0 %

 

The Company’s expected volatility is derived from the historical daily change in the market price of its common stock. The Company uses the simplified method to calculate the expected term of options issued to employees, non-employees and directors. 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 years ended July 31, 2020 and 2019:

 

          Weighted  
          Average  
          Exercise  
    Options     Price  
Outstanding - July 31, 2018     891,252     $ 15.00  
Granted     302,749     $ 7.88  
Exercised     (43,029 )   $ 13.16  
Forfeited/Cancelled     (228,700 )   $ 15.32  
Expired     (700 )   $ 57.60  
Outstanding - July 31, 2019     921,572     $ 12.63  
Granted     1,463,982     $ 1.60  
Exercised     -     $ -  
Forfeited/Cancelled     (942,698 )   $ 12.31  
Outstanding and expected to vest – July 31, 2020     1,442,856     $ 1.65  
Exercisable – July 31, 2020     474,933     $ 1.72  

 

As of July 31, 2020, the total intrinsic value of options outstanding and exercisable was $3.7 million and $1.2 million, respectively. As of July 31, 2020, the Company has approximately $1.6 million in unrecognized stock-based compensation expense attributable to the outstanding options, which will be amortized over a period of approximately 2.61 years.

 

Stock-based compensation expense recorded in the Company’s consolidated statements of operations for the year ended July 31, 2020 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately $2.6 million, which included approximately $1.2 million related to the cancellation of certain stock option awards. Of the total expense, $1.3 million was recorded to research and development and $1.3 million was recorded in general and administrative in the Company’s consolidated statements of operations for the year ended July 31, 2020.

 

Stock-based compensation expense recorded in the Company’s consolidated statements of operations for year ended July 31, 2019 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately $2.9 million, respectively. Of this balance, $1.2 million was recorded to research and development and $1.7 million was recorded in general and administrative in the Company’s consolidated statements of operations for year ended July 31, 2019.

 

The weighted-average grant date fair value of stock options granted during the year ended July 31, 2020 was $1.67. The weighted-average grant date fair value of stock options granted during the year ended July 31, 2019 was $5.29.

 

Restricted Stock Units (“RSUs”)

 

For the year ended July 31, 2020, the Company recorded $0.3 million, in stock-based compensation related to RSUs, which is reflected in the consolidated statements of operations.

 

As of July 31, 2020, there were 34,914 restricted stock units (“RSUs”) outstanding. During the year ended July 31, 2020, 35,230 RSU’s vested.

 

In December 2018, the Company granted its President and Chief Executive Officer 75,000 restricted stock unit awards (“RSUs”). The units vest as follows: 6,250 units vested on January 31, 2019, and the remaining 68,750 units vest in equal quarterly installments of 6,250 units beginning on April 30, 2019 and ending on October 31, 2021. The closing price of the Company’s common stock on the date of grant was $6.00 per share, which is the fair market value per unit of the RSUs.

 

In October 2018, the Company granted 5,000 RSUs to an employee. The units vest as follows: 1,250 units vested on October 29, 2018, and the remaining 3,750 units vest according to the following vesting schedule: 1,250 units on October 29, 2019, 1,250 units on October 29, 2020 and 1,250 units on October 29, 2021. The closing price of the Company’s common stock on the date of grant was $16.40 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 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 year ended July 31, 2019, the Company recorded approximately $0.4 million in stock-based compensation related to RSUs, which is reflected in the consolidated statements of operations. As of July 31, 2019, there were 77,956 RSU’s outstanding.

 

Shares Issued to Directors

 

In April 2020, the Company granted a director 12,500 shares of common stock under the 2011 Plan for services rendered. The shares vested immediately and the closing price of the Company’s common stock on the date of grant was $1.55 per share. The Company recorded compensation expense relating to the share issuance of approximately $19,000 during the year ended July 31, 2020.

 

Shares Issued to Consultants

 

During the year ended July 31, 2020, 184,499 shares of common stock valued at approximately $0.9 million, 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 approximately $0.9 million, during the year ended July 31, 2020.

 

During the year ended July 31, 2019, 60,300 shares of common stock valued at approximately $0.9 million 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 approximately $0.9 million during the year ended July 31, 2019.

 

2015 Employee Stock Purchase Plan

 

Under the Company’s 2015 Employee Stock Purchase Plan (“ESPP”), the Company is authorized to issue 50,000 shares of the Company’s common stock. The sixth offering period under the ESPP ended on January 31, 2019, with 1,428 shares purchased and distributed to employees, the seventh offering period under the ESPP ended on July 31, 2019, with 2,053 shares purchased and distributed to employees, the eighth offering period under the ESPP ended on January 31, 2020, with 2,841 shares purchased and distributed to employees, and the ninth offering period under the ESPP ended on July 31, 2020, with 1,358 shares purchased and distributed to employees. At July 31, 2020, there were 33,409 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, 2020, the following assumptions were used: six-month maturity, 2.04% risk free interest, 90.64% volatility, 0% forfeitures and $0 dividends. For the six-month offering period ended July 31, 2020, the following assumptions were used: six-month maturity, 1.54% risk free interest, 76.59% volatility, 0% forfeitures and $0 dividends.

 

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 July 31, 2019, the following assumptions were used: six-month maturity, 2.46% risk free interest, 126.35% volatility, 0% forfeitures and $0 dividends.

 

Approximately $3,800 and $12,000 was recorded as stock-based compensation during the years ended July 31, 2020 and 2019, respectively.

 

Common Stock Reserved for Future Issuance

 

The following table summarizes all common stock reserved for future issuance at July 31, 2020:

 

Common Stock options outstanding (within the 2011 Plan and outside of the terms of the 2011 Plan)     1,442,856  
Common Stock reserved for restricted stock unit release     34,914  
Common Stock authorized for future grant under the 2011 Plan     1,616,901  
Common Stock reserved for warrant exercise     3,114,288  
Commons Stock reserved for future ESPP issuance     33,409  
Total common stock reserved for future issuance     6,242,368