NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
NOTE 1 – BUSINESS
Tonix Pharmaceuticals
Holding Corp., through its wholly owned subsidiary Tonix Pharmaceuticals, Inc. (“Tonix Sub”), is a clinical-stage biopharmaceutical
company focused on discovering, licensing, acquiring and developing therapeutics and vaccines to treat and prevent human disease
and alleviate suffering. The therapeutics include both small molecules and biologics. All drug product and vaccine candidates are
still in development and none are approved or marketed.
The condensed consolidated
financial statements include the accounts of Tonix Pharmaceuticals Holding Corp. and its wholly owned subsidiaries, Tonix Sub,
Krele LLC, Tonix Pharmaceuticals (Canada), Inc., Tonix Medicines, Inc., Jenner LLC, Tonix R&D Center LLC, Tonix Pharma Holdings
Limited and Tonix Pharma Limited (collectively hereafter referred to as the “Company” or “Tonix”). All
intercompany balances and transactions have been eliminated in consolidation.
Going Concern
The accompanying financial
statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates
the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has suffered
recurring losses from operations and negative cash flows from operating activities. At September 30, 2022, the Company had working
capital of approximately $137.8 million. At September 30, 2022, the Company had an accumulated deficit of approximately $438.4 million.
The Company held cash and cash equivalents of approximately $140.0 million as of September 30, 2022.
The Company
believes that its cash resources at September 30, 2022, and the gross proceeds of approximately $2.1 million, that it raised from equity offerings subsequent to the end of the third quarter of 2022 (See Note 19), will
allow the Company to meet its operating and capital expenditure requirements into the third quarter of 2023, but not
beyond.
These
factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company continues to
face significant challenges and uncertainties and, as a result, its available capital resources may be consumed more rapidly
than currently expected due to changes it may make in its research and development spending plans. The Company believes that
it has the ability to obtain additional funding through public and private financing and collaborative arrangements with
strategic partners to increase the funds available to fund operations. However, the Company may not be able to raise capital
on terms acceptable to the Company. Without additional funds, it may be forced to delay, scale back or eliminate some of its
research and development activities, or other operations and potentially delay product development in an effort to provide
sufficient funds to continue operations. If any of these events occurs, the Company’s ability to achieve its
development and commercialization goals would be adversely affected. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
Reverse Stock Split
On May 16, 2022, the
Company filed a Certificate of Change with the Nevada Secretary of State, effective May 17, 2022. Pursuant to the Certificate of
Change, the Company effected a 1-for-32 reverse stock split of its issued and outstanding shares of common stock. The Company accounted
for the reverse stock split on a retrospective basis pursuant to ASC 260, Earnings Per Share. All authorized, issued and outstanding
common stock, common stock warrants, stock option awards, exercise prices and per share data have been adjusted in these condensed
consolidated financial statements, on a retroactive basis, to reflect the reverse stock split for all periods presented. Authorized
preferred stock was not adjusted because of the reverse stock split.
Interim financial statements
The unaudited condensed
consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article
8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
The condensed consolidated
balance sheet as of December 31, 2021 contained herein has been derived from audited financial statements.
Operating results for
the three and nine months ended September 30, 2022 are not necessarily indicative of results that may be expected for the year
ending December 31, 2022. These condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31, 2021 included in the Company’s Annual Report on Form
10-K, filed with the Securities and Exchange Commission (“SEC”) on March 14, 2022.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
Risks and uncertainties
The Company’s
primary efforts are devoted to conducting research and development of innovative pharmaceutical and biological products to address
public health challenges. The Company has experienced net losses and negative cash flows from operations since inception and expects
these conditions to continue for the foreseeable future. Further, the Company does not have any commercial products available for
sale and has not generated revenues, and there is no assurance that if its products are approved for sale, that the Company will
be able to generate cash flow to fund operations. In addition, there can be no assurance that the Company’s research and
development will be successfully completed or that any product will be approved or commercially viable. Moreover, the extent to
which COVID-19 impacts the Company’s operations will depend on future developments, which are highly uncertain and cannot
be predicted with confidence at this time.
Use of estimates
The preparation of
financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates include the assumptions used in the fair value of stock-based compensation and
other equity instruments, and the percent of completion of research and development contracts.
Cash, Cash Equivalents and Restricted Cash
The Company considers
cash equivalents to be those investments which are highly liquid, readily convertible to cash and have an original maturity of
three months or less when purchased. At September 30, 2022 and December 31, 2021, cash equivalents, which consisted of money market
funds, amounted to $121.2 million and $120.4 million, respectively. Restricted cash, which is included in Other non-current assets
on the condensed consolidated balance sheet, at both September 30, 2022, and December 31, 2021 of approximately $240,000 collateralizes
a letter of credit issued in connection with the lease of office space in Chatham, New Jersey and New York, New York (see Note
17).
The following table
provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets
that sum to the total of the same amounts shown in the condensed consolidated statement of cash flows:
| |
September 30, 2022 | | |
September 30, 2021 | |
| |
(in thousands) | |
Cash and cash equivalents | |
$ | 139,978 | | |
$ | 182,970 | |
Restricted cash | |
| 240 | | |
| 240 | |
Total | |
$ | 140,218 | | |
$ | 183,210 | |
Property and equipment
Property and equipment
are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the asset’s
estimated useful life, which ranges from 20 to 30 years for buildings, 15 years for land improvements, and laboratory equipment,
three years for computer assets, five years for furniture and all other equipment and term of lease for leasehold improvements.
Depreciation on assets begin when the asset is available for its intended use. Depreciation and amortization expense for the three and nine
months ended September 30, 2022 was $252,000 and $417,000, respectively, and $10,000 and $23,000, respectively, for the
three and nine months ended September 30, 2021. All property and equipment is located in the United States.
Intangible assets with indefinite lives
During the year ended
December 31, 2015, the Company purchased certain internet domain rights, which were determined to have an indefinite life. Identifiable
intangibles with indefinite lives are not amortized but are tested for impairment annually or whenever events or changes in circumstances
indicate that their carrying amount may be less than fair value. As of September 30, 2022, the Company believed that no impairment
existed.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
Leases
The Company determines
if an arrangement is, or contains, a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets, operating lease liabilities, current and operating lease liabilities, noncurrent in the Company’s condensed consolidated
balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities
represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized
at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide
an implicit rate, the Company uses an incremental borrowing rate based on the information available at the transition date and
subsequent lease commencement dates in determining the present value of lease payments. This is the rate the Company would have
to pay if borrowing on a collateralized basis over a similar term to each lease. The operating lease ROU asset excludes lease incentives.
The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company
will exercise that option. Lease expense for lease payments made under operating leases is recognized on a straight-line basis
over the lease term.
Convertible Preferred Stock
Preferred shares subject
to mandatory redemption are classified as liability instruments and are measured at fair value. The Company classifies conditionally
redeemable preferred shares, which includes preferred shares that feature redemption rights that are either within the control
of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as
temporary equity (“mezzanine”) until such time as the conditions are removed or lapse.
Research and Development Costs
The Company outsources
certain of its research and development efforts and expenses these costs as incurred, including the cost of manufacturing products
for testing, as well as licensing fees and costs associated with planning and conducting clinical trials. The value ascribed to
patents and other intellectual property acquired has been expensed as research and development costs, as such property is related
to particular research and development projects and had no alternative future uses.
The Company estimates
its expenses resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under
clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations,
which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services
are provided under such contracts. The Company accounts for trial expenses according to the timing of various aspects of the trial.
The Company determines accrual estimates taking into account discussion with applicable personnel and outside service providers
as to the progress or state of consummation of trials, or the services completed.
During the course of
a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company
makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that
time. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations
and other third-party vendors.
Government Grants
From time to time, the Company may enter into arrangements with governmental
entities for the purpose of obtaining funding for research and development activities. The Company is reimbursed for costs incurred that
are associated with specified research and development activities included in the grant application approved by the government authority.
The Company classifies government grants received under these arrangements as a reduction to the related research and development
expense in the same period as the relevant expenses are incurred. In August 2022, the Company announced that it received a Cooperative
Agreement grant from the National Institute on Drug Abuse (“NIDA”), part of the National Institutes of Health, to support
the development of its TNX-1300 product candidate for the treatment of cocaine intoxication. No funding was received as of September 30,
2022.
Stock-based compensation
All stock-based payments
to employees and to nonemployees for their services, including grants of restricted stock units (“RSUs”), and stock
options, are measured at fair value on the grant date and recognized in the condensed consolidated statements of operations as
compensation or other expense over the requisite service period. The Company accounts for share-based awards in accordance with
the provisions of the Accounting Standards Codification (“ASC”) 718, Compensation – Stock Compensation.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
Foreign Currency Translation
Operations of the Company’s
Canadian subsidiary, Tonix Pharmaceuticals (Canada), Inc., are conducted in local currency, which represents its functional currency.
The U.S. dollar is the functional currency of the other foreign subsidiaries. Balance sheet accounts of the Canadian subsidiary
were translated from foreign currency into U.S. dollars at the exchange rate in effect at the balance sheet date and income statement
accounts were translated at the average rate of exchange prevailing during the period. Translation adjustments resulting from this
process were included in accumulated other comprehensive loss on the condensed consolidated balance sheets.
Comprehensive Income (Loss)
Comprehensive income
(loss) is defined as the change in equity of a business during a period from transactions and other events and circumstances from
non-owners sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions
to owners. Other comprehensive income (loss) represents foreign currency translation adjustments.
Income Taxes
Deferred income tax
assets and liabilities are determined based on the estimated future tax effects of net operating loss and credit carryforwards
and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured
at the current enacted tax rates. The Company records a valuation allowance on its deferred income tax assets if it is not more
likely than not that these deferred income tax assets will be realized.
The Company recognizes
a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination
by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the condensed consolidated
financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement. As of September 30, 2022, the Company has not recorded any unrecognized tax benefits. The Company’s
policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
Per Share Data
The computation of
basic and diluted loss per share for the quarters ended September 30, 2022 and 2021 excludes potentially dilutive securities when
their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the common stock
during the period.
All warrants issued participate on a one-for-one basis with common stock in the distribution of dividends, if and when declared by the
Board of Directors, on the Company’s common stock. For purposes of computing EPS, these warrants are
considered to participate with common stock in earnings of the Company. Therefore, the Company calculates basic and diluted EPS
using the two-class method. Under the two-class method, net income for the period is allocated between common stockholders and
participating securities according to dividends declared and participation rights in undistributed earnings. No income was allocated
to the warrants for the three and nine months ended September 30, 2022, and 2021, as results of operations
were a loss for the periods.
Potentially dilutive
securities excluded from the computation of basic and diluted net loss per share, as of September 30, 2022 and 2021, are as follows:
| |
2022 | | |
2021 | |
Warrants to purchase common stock | |
| 19,970 | | |
| 20,156 | |
Options to purchase common stock | |
| 2,455,280 | | |
| 805,742 | |
Totals | |
| 2,475,250 | | |
| 825,898 | |
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
NOTE 3 – PROPERTY AND EQUIPMENT,
NET
Property and equipment,
net consisted of the following (in thousands):
| |
September 30 | | |
December 31 | |
| |
2022 | | |
2021 | |
| |
(in thousands) | |
Land | |
$ | 8,011 | | |
$ | 7,911 | |
Land improvements | |
| 43 | | |
| — | |
Buildings | |
| 15,030 | | |
| — | |
Construction in progress | |
| 58,723 | | |
| 41,921 | |
Office furniture and equipment | |
| 970 | | |
| 756 | |
Laboratory equipment | |
| 8,313 | | |
| 347 | |
Leasehold improvements | |
| 34 | | |
| 23 | |
| |
| 91,124 | | |
| 50,958 | |
Less: Accumulated depreciation and amortization | |
| (817 | ) | |
| (400 | ) |
| |
$ | 90,307 | | |
$ | 50,558 | |
On October
1, 2021, the Company completed the acquisition of its approximately 45,000
square foot research and development facility in Frederick, Maryland totaling $17.5
million, to process development activities. Of the total purchase price, $2.1
million was allocated to the value of land acquired, and $13.9
million has been allocated to buildings, and approximately $1.5
million was allocated to Office furniture and equipment and Laboratory equipment.
During the quarter ended September 30, 2022, the assets became ready for the intended use and were placed in service.
On September 28, 2020,
the Company completed the purchase of its approximately 45,000 square foot facility in Dartmouth, Massachusetts for $4.0 million,
to house its new Advanced Development Center for the development and manufacturing of vaccines. Of the total purchase price, $1.2
million was allocated to the value of land acquired, and $2.8 million was allocated to buildings. Additionally, the Company incurred
approximately $32.6 million of costs during the nine months ended September 30, 2022, bringing total costs incurred-to-date to
$55.4 million, of which the majority relates to the build-out of the facility. Subsequent to the quarter ended September 30, 2022, the
assets were ready for the intended use and were placed in service.
On December 23, 2020,
the Company completed the purchase of its approximately 44-acre site in Hamilton, Montana for $4.5 million, for the construction
of a vaccine development and commercial scale manufacturing facility. As of September 30, 2022, the asset was not ready for its
intended use.
NOTE 4 – FAIR VALUE MEASUREMENTS
Fair value measurements
affect the Company’s accounting for certain of its financial assets. Fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
and is measured according to a hierarchy that includes:
|
Level 1: |
Observable inputs, such as quoted prices in active markets. |
|
Level 2: |
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly. Level 2 assets and liabilities include debt securities with quoted market prices that are traded less frequently than exchange-traded instruments. This category includes U.S. government agency-backed debt securities and corporate-debt securities. |
|
Level 3: |
Unobservable inputs in which there is little or no market data. |
As of September 30,
2022, and December 31, 2021, the Company used Level 1 quoted prices in active markets to value cash equivalents of $121.2 million
and $120.4 million, respectively. The Company did not have any Level 2 or Level 3 assets or liabilities as of both September 30,
2022 and December 31, 2021.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
NOTE 5 – STOCKHOLDERS’ EQUITY
On May 16, 2022, the
Company filed a Certificate of Change with the Nevada Secretary of State, effective May 17, 2022. Pursuant to the Certificate of
Change, the Company effected a 1-for-32 reverse stock split of its issued and outstanding shares of common stock, whereby 599,679,596
outstanding shares of the Company’s common stock were exchanged for 18,740,141 shares of the Company’s common stock.
In connection with the reverse stock split, the Company issued an additional 130,462 shares of the Company’s common stock
due to fractional shares. Furthermore, pursuant to the Certificate of Change, the number of authorized shares of common stock was
reduced from 800 million to 50 million. All per share amounts and number of shares in the condensed consolidated financial statements
and related notes have been retroactively restated to reflect the reverse stock split. As a result of the reverse-stock-split, on June 1, 2022, the Company’s stock regained compliance
with the minimum bid price requirement of $1.00 per share for continued listing on the NASDAQ Capital Market, as set forth in NASDAQ
Listing Rule 5550(a)(2). On August 5, 2022, the Company filed an
amendment to its articles of incorporation, as amended, to increase the number of shares of common stock authorized from 50,000,000
to 150,000,000.
NOTE 6 – TEMPORARY EQUITY
On June 24, 2022, the
Company closed on an offering (“the Offering”) with certain institutional investors (the “Investors”),
pursuant to which the Company issued and sold, in a private placement, 2,500,000 shares of the Company’s Series A Convertible
Redeemable Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”), and 500,000 shares of the
Company’s Series B Convertible Redeemable Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock,”
and together with the Series A Preferred Stock, the “Preferred Stock”), at an offering price of $9.50 per share, representing
a 5% original issue discount (“OID) to the stated value of $10.00 per share, for gross proceeds of $28.5 million in the aggregate
for the Offering, before the deduction of fees and offering expenses. The shares of Preferred Stock were convertible, at a conversion
price of $4.00 per share (subject in certain circumstances to adjustments), into shares of the Company’s common stock, at
the option of the holders and, in certain circumstances, by the Company.
On August 5, 2022,
an amendment (the “Amendment”) to the Company’s Articles of Incorporation, as amended, to increase the Company’s
authorized shares of common stock from 50,000,000 to 150,000,000, was approved at a special meeting of shareholders. The Series
A Preferred Stock had the right to vote on such Amendment on an as-converted to common stock basis. The shares of the Series B
Preferred Stock were automatically voted in a manner that “mirrored” the proportions on which the shares of Common
Stock (excluding any shares of Common Stock that were not voted) and Series A Preferred Stock were voted to increase the Authorized
Shares. The Amendment required the approval of the majority of the votes associated with the Company’s outstanding stock
entitled to vote on the proposal. Because the Series B Preferred Stock were automatically and without further action of the purchaser
voted in a manner that “mirrored” the proportions on which the shares of Common Stock (excluding any shares of Common
Stock that were not voted) and Series A Preferred Stock were voted on the Amendment, abstentions by common stockholders did not
have any effect on the votes cast by the holders of the Series B Preferred Stock. The Certificates of Designation for the Preferred
Stock provides that the Preferred Stock have no voting rights other than the right to vote on the Amendment and as a class on certain
other specified matters, and, with respect to the Series B Certificate of Designation, the right to cast 2,500 votes per share
of Series B Preferred Stock on the Amendment.
The holders of Preferred
Stock were entitled to dividends, on an as-if converted basis, equal to dividends actually paid, if any, on shares of Common Stock.
The Preferred Stock was convertible, at the option of the holders and, in certain circumstances, by the Company, into shares of
Common Stock at a conversion price of $4.00 per share. The holders of the Preferred Stock had the right to require
the Company to redeem their shares of preferred stock for cash at 105% of the stated value of such shares through September 22,
2022. The Company had the option to redeem the Preferred Stock for cash at 105% of the stated value, subject to the holders’
rights to convert the shares prior to such redemption.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
The $28.5 million in
gross proceeds of the Offering was held in an escrow account, along with an additional $3.0 million deposited by the Company to
cover the aggregate OID as well as the additional amount that would be necessary to fund the 105% redemption price until the expiration
of the redemption period for the Preferred Stock, as applicable, subject to the earlier payment to redeeming holders. Upon expiration
of the redemption period, any proceeds remaining in the escrow account would be disbursed to the Company.
Since
the Preferred Stock had a redemption feature at the option of the holder, it was classified as temporary equity. The Series A Preferred Stock and Series B Preferred Stock was recorded on the balance sheet at redemption value of approximately
$26.3 million and $5.2 million, respectively, as calculated in the following table (in thousands):
| |
Series A
Preferred Stock | | |
Series B
Preferred Stock | |
Gross Proceeds | |
$ | 23,750 | | |
$ | 4,750 | |
Less: | |
| | | |
| | |
Preferred stock issuance costs | |
| (1,046 | ) | |
| (209 | ) |
Plus: | |
| | | |
| | |
Accretion of carrying value to redemption value | |
| 3,546 | | |
| 709 | |
Preferred stock subject to possible redemption | |
$ | 26,250 | | |
$ | 5,250 | |
During August
2022, the Company received redemption notices for all outstanding shares of Preferred Stock. The Preferred Stock was redeemed during August 2022 at 105%
of the $10.00
stated value of the Preferred Stock, or $31.5
million in the aggregate.
NOTE 7 – ASSET PURCHASE AGREEMENT WITH KATANA
On December 22, 2020,
the Company entered into an asset purchase agreement (the “Katana Asset Purchase Agreement”) with Katana Pharmaceuticals,
Inc. (“Katana”) pursuant to which Tonix acquired Katana assets related to insulin resistance and related syndromes,
including obesity (the “Katana Assets”). In connection with the acquisition of the Katana Assets, Tonix assumed Katana’s
rights and obligations under that certain Exclusive License Agreement by and between Katana and The University of Geneva (“Geneva”)
(the “Geneva License “Agreement”) pursuant to an Assignment and Assumption Agreement with Geneva (“Geneva
Assignment and Assumption Agreement”), dated December 22, 2020. As consideration for entering into the Katana Asset Purchase
Agreement, Tonix paid $0.7 million to Katana. The costs associated with the cash payments were recorded to research and development
expenses in the statement of operations for the year ended December 31, 2020. Because the Katana intellectual property was acquired
prior to U.S. Food and Drug Administration (FDA) approval, the cash consideration totaling $0.7 million, was expensed as research
and development costs since there is no alternative future use and the acquired intellectual property does not constitute a business.
Pursuant to the terms
of the Geneva Assignment and Assumption Agreement, Geneva has granted to Tonix an exclusive license, with the right to sublicense,
certain patents related to the Katana Assets. Tonix is obligated to use commercially reasonable efforts to diligently develop,
manufacture, and sell products claimed or covered by the patent and will use commercially reasonable efforts to diligently develop
markets for such products. The Geneva License Agreement specifies developmental milestones and the period of time during which
such milestones must be completed and provides for an annual maintenance fee payable to Geneva.
As of September 30,
2022, no milestone payments have been accrued or paid in relation to this agreement.
NOTE 8 – ASSET PURCHASE AGREEMENT WITH TRIGEMINA
On June 11, 2020, the
Company entered into an asset purchase agreement (the “Trigemina Asset Purchase Agreement”) with Trigemina, Inc. (“Trigemina”)
and certain shareholders named therein (the “Executive Shareholders”) pursuant to which Tonix acquired Trigemina assets
related to migraine and pain treatment technologies (the “Trigemina Assets”). In connection with the acquisition of
the Trigemina Assets, Tonix assumed Trigemina’s rights and obligations under that certain Amended and Restated Exclusive
License Agreement, dated November 30, 2007, as amended, by and between Trigemina and The Board of Trustees of the Leland Stanford
Junior University (“Stanford”) (the “Stanford License “Agreement”) pursuant to an Assignment and
Assumption Agreement with Stanford (“Assignment and Assumption Agreement”), dated June 11, 2020. As consideration for
entering into the Asset Purchase Agreement, Tonix paid $824,759 to Trigemina and issued to Trigemina 62,500 shares of the Company’s
common stock, valued at $21.76 per share, based on the closing stock price on June 11, 2020, and paid Stanford $250,241 pursuant
to the terms of the Assignment and Assumption Agreement. The common stock is unregistered and subject to a 12-month lock-up and
a Shareholder Voting Agreement, dated June 11, 2020, pursuant to which Trigemina and the Executive Shareholders have agreed to
vote the common stock on any matter put to a vote of the shareholders of the Company in accordance with management’s recommendations.
Both the costs associated with the cash payments and share issuance, totaling $2.4 million, were recorded to research and development
expenses in the statement of operations for the year ended December 31, 2020. Because the Trigemina intellectual property was acquired
prior to FDA approval, the cash and stock consideration, was expensed as research and development costs since there is no alternative
future use and the acquired intellectual property does not constitute a business.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
Pursuant to the terms
of the Assignment and Assumption Agreement, Stanford has granted to Tonix an exclusive license, with the right to sublicense, certain
patents related to the Trigemina Assets. Stanford has reserved for itself the right to practice under the patents for academic
research and educational purposes. Tonix is obligated to use commercially reasonable efforts to diligently develop, manufacture,
and sell products claimed or covered by the patent and will use commercially reasonable efforts to diligently develop markets for
such products. The Trigemina License Agreement specifies developmental milestones and the period of time during which such milestones
must be completed and provides for an annual maintenance fee payable to Stanford.
As of September 30,
2022, other than the annual maintenance fee, no milestone payments have been accrued or paid in relation to this agreement.
NOTE 9 – ASSET PURCHASE AGREEMENT WITH TRIMARAN
On August 19, 2019,
the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) with TRImaran Pharma, Inc. (“TRImaran”)
and the selling shareholders named therein (the “Selling Shareholders”) pursuant to which Tonix acquired TRImaran’s
assets related to certain pyran-based compounds (the “Assets”). In connection with the acquisition of the Assets, Tonix
entered into a First Amended and Restated Exclusive License Agreement (the “WSU License Agreement”) with Wayne State
University (“WSU”) on August 19, 2019. As consideration for entering into the Asset Purchase Agreement, Tonix paid
$100,000 to TRImaran and has assumed certain liabilities of TRImaran totaling $68,500. The $168,500 was previously recorded to
research and development expenses in the statement of operations. Upon the achievement of specified development, regulatory and
sales milestones, Tonix also agreed to pay TRImaran and the Selling Shareholders, in restricted stock or cash, at Tonix’s
option, a total of approximately $3.4 million. Pursuant to the terms of the Asset Purchase Agreement, TRImaran and the Selling
Shareholders are prohibited from disclosing confidential information related to the Assets and are restricted from engaging, for
a period of three years, in the development or commercialization of any therapeutic containing any pyran-based drug compound for
the treatment of post-traumatic stress disorder, attention deficit hyperactivity disorder or major depressive disorder. Also for
a period of three years, if TRImaran or any Selling Shareholder engage in the research or development of any potential therapeutic
compound for the treatment of any central nervous system disorder, TRImaran or such Selling Shareholder is obliged to provide notice
and opportunity to Tonix to make an offer to acquire or license rights with respect to such product candidate.
Pursuant to the terms
of the WSU License Agreement, WSU has granted to Tonix an exclusive license, with the right to sublicense, certain patents, technical
information and material (collectively, the “Technology”) related to the Assets. WSU has reserved for itself the right
to practice the Technology for academic research and educational purposes. Tonix is obligated to use commercially reasonable efforts
to obtain regulatory approval for one or more products utilizing the Technology (“WSU Products”) and to use commercially
reasonable marketing efforts throughout the term of the WSU License Agreement. The WSU License Agreement specifies developmental
milestones and the period of time during which such milestones must be completed and provides for an annual maintenance fee payable
to WSU. Tonix is obligated to substantially manufacture WSU Products in the United States if WSU Products will be sold in the United
States.
Pursuant to the WSU
License Agreement, Tonix paid $75,000 to WSU as reimbursement of certain patent expenses, and, upon the achievement of specified
development, regulatory and sales milestones, the Company also agreed to pay WSU, milestone payments totaling approximately $3.4
million. Tonix has also agreed to pay WSU single-digit royalties on net sales of WSU Products sold by Tonix or a sublicensee on
a tiered basis based on net sales, and additional sublicense fees on certain consideration received from sublicensees. Royalties
on each particular WSU Product are payable on a country-by-country and Product-by-Product basis until the date of expiration of
the last valid claim in the last to expire of the issued patents covered by the WSU License Agreement. Royalties payable on net
sales of WSU Products may be reduced by 50% of the royalties payable by Tonix to any third party for intellectual property rights
which are necessary for the practice of the rights licensed to Tonix under the WSU License Agreement, provided that the royalty
payable on a WSU Product may not be reduced by more than 50%. Each party also has the right to terminate the agreement for customary
reasons such as material breach and bankruptcy. The WSU License Agreement contains provisions relating to termination, indemnification,
confidentiality and other customary matters for an agreement of this kind. As of September 30, 2022, no milestone payments have
been accrued or paid in relation to this agreement.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
NOTE 10 – LICENSE AGREEMENT WITH UNIVERSITY OF ALBERTA
On May 18, 2022, the
Company entered into an exclusive License Agreement with the University of Alberta focused on identifying and testing broad-spectrum
antiviral drugs against future variants of SARS-CoV-2 and other emerging viruses. As consideration for entering into the License
Agreement, Tonix paid a low-five digit license fee to University of Alberta. The License Agreement also provides for single-digit
royalties and contingent milestone payments.
As of September 30,
2022, other than the upfront fee, no milestone payments have been accrued or paid in relation to this agreement.
NOTE 11 – LICENSE AGREEMENT WITH OYAGEN
On April 14, 2021,
the Company and OyaGen, Inc. (“OyaGen”) entered into an exclusive License Agreement (the “OyaGen License Agreement”)
pursuant to which OyaGen granted to Tonix an exclusive license to certain patents and technical information related to an antiviral
inhibitor of SARS-CoV-2, sangivamycin, and to develop and commercialize products thereunder, and to acquire rights to any technology
based thereon for the prevention or treatment of COVID-19 developed by OyaGen during the term of the License Agreement.
As consideration for
entering into the License Agreement, Tonix paid a low-seven digit license fee to OyaGen, and issued to OyaGen and an affiliated
entity an aggregate of 86,010 shares of the Company’s common stock, which are unregistered and subject to a six-month lock-up
and a voting agreement, pursuant to which OyaGen and the affiliated entity have agreed to vote the common stock on any matter put
to a vote of the shareholders of the Company in accordance with management’s recommendations. The shares were valued at $3.0
million, which was recorded as research and development expense. The OyaGen License also provides for single-digit royalties and
contingent milestone payments.
As of September 30,
2022, no milestone payments have been accrued or paid in relation to this agreement.
In July 2022, the
Company notified OyaGen of its intent to terminate the OyaGen License Agreement, and the agreement was terminated effective
September 20, 2022.
NOTE 12 – LICENSE AGREEMENT WITH INSERM
On February 11, 2021,
the Company entered into a license agreement (the “Inserm License Agreement”) pursuant to which it licensed technology
using oxytocin-based therapeutics for the treatment of Prader-Willi syndrome and non-organic failure to thrive disease from Inserm
(the French National Institute of Health and Medical Research), Aix-Marseille Université and Centre Hospitalier Universitaire
of Toulouse. The Inserm License Agreement provides for the payment of annual fees and milestone payments upon the occurrence of
specified sales milestones totaling approximately $0.4 million, as well royalties on net sales of products based on the licensed
technology, and assignment/transfer and sublicense royalties.
As of September 30,
2022, no milestone payments have been accrued or paid in relation to this agreement
NOTE 13 – LICENSE AGREEMENTS WITH COLUMBIA UNIVERSITY
On September 16, 2019,
the Company entered into an exclusive License Agreement (the “Columbia License Agreement”) with the Trustees of Columbia
University in the City of New York (“Columbia”) pursuant to which Columbia granted to Tonix an exclusive license, with
the right to sublicense, certain patents and technical information (collectively, the “TFF2 Technology”) related to
a recombinant Trefoil Family Factor 2 (TFF2), and to develop and commercialize products thereunder (each, a “TFF2 Product”).
Pursuant to the terms of the Columbia License Agreement, Columbia reserved for itself the right to practice the TFF2 Technology
for academic research and educational purposes.
The Company paid a
five-digit license fee to Columbia as consideration for entering into the Columbia License Agreement, which was recorded to research
and development expenses in the statement of operations for the year ended December 31, 2019. The Company is obligated to use Commercially
Reasonable Efforts, as defined in the Columbia License Agreement, to develop and commercialize the TFF2 Product, and to achieve
specified developmental milestones.
The Company is obligated to pay Columbia
single-digit royalties on net sales of (i) TFF2 Products sold by Tonix or a sublicensee and (ii) any other products that involve
material or technical information related to the TFF2 Product and transferred to Tonix pursuant to the Columbia License Agreement
(“Other Products”) sold by Tonix or a sublicensee. Royalties on each particular TFF2 Product are payable on a country-by-country
and Product-by-Product basis until the latest of (i) the date of expiration of the last valid claim in the last to expire of the
issued patents covered by the Columbia License Agreement, and (ii) a specified period of time after the first commercial sale of
a TFF2 Product in the country in question. Royalties on each particular Other Product are payable on a country-by-country and product-by-product
basis until a specified period of time after the first commercial sale of such particular Other Product in such country. Royalties
payable on net sales of the TFF2 Product and Other Products may be reduced by 50% of the royalties payable by Tonix to any third
party for intellectual property rights which are necessary for the practice of the rights licensed to Tonix under the Columbia
License Agreement, provided that the royalty payable on a Product or Other Product may not be reduced by more than 50%.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
The Company is also
obligated to make contingent milestone payments to Columbia totaling $4.1 million on a Product-by-Product basis upon the achievement
of certain development, approval and sales milestones related to a TFF2 Product. In addition, the Company shall pay Columbia 5%
of consideration, other than royalty payments and certain other categories of consideration, payable to the Company by a sublicensee.
As of September 30,
2022, no milestone payments have been accrued or paid in relation to this agreement.
On May 20, 2019, the
Company entered into an exclusive License Agreement (the “License Agreement”) with Columbia pursuant to which Columbia,
for itself and on behalf of the University of Kentucky and the University of Michigan (collectively, the “Institutions”)
granted to the Company an exclusive license, with the right to sublicense, certain patents, technical information and material
(collectively, the “Technology”) related to a double-mutant cocaine esterase, and to develop and commercialize products
thereunder (each, a “Product”). Pursuant to the terms of the License Agreement, Columbia has reserved for itself and
the Institutions the right to practice the Technology for academic research and educational purposes.
The Company paid a
six-digit license fee to Columbia as consideration for entering into the License Agreement. The Company is obligated to use Commercially
Reasonable Efforts, as defined in the License Agreement, to develop and commercialize the Product, and to achieve specified developmental
milestones.
The Company agreed
to pay Columbia single-digit royalties on net sales of (i) Products sold by the Company or a sublicensee and (ii) any other products
that involve material or technical information related to the Product and transferred to the Company pursuant to the License Agreement
(“Other Products”) sold by the Company or a sublicensee. Royalties on each particular Product are payable on a country-by-country
and Product-by-Product basis until the latest of (i) the date of expiration of the last valid claim in the last to expire of the
issued patents covered by the License Agreement, (ii) a specified period of time after the first commercial sale of a Product in
the country in question, or (iii) expiration of any market exclusivity period granted by a regulatory agency. Royalties on each
particular Other Product are payable on a country-by-country and product-by-product basis until the later of (i) a specified period
of time after the first commercial sale of such particular Other Product in such country or (ii) expiration of any market exclusivity
period granted by a regulatory agency. Royalties payable on net sales of the Product and Other Products may be reduced by 50% of
the royalties payable by the Company to any third party for intellectual property rights which are necessary for the practice of
the rights licensed to the Company under the License Agreement, provided that the royalty payable on a Product or Other Product
may not be reduced by more than 50%.
The Company is also
obligated to make contingent milestone payments to Columbia totaling $3 million on a Product-by-Product basis upon the achievement
of certain development, approval and sales milestones related to a Product. In addition, the Company shall pay Columbia 5% of consideration,
other than royalty payments and certain other categories of consideration, payable to the Company by a sublicensee.
As of September 30,
2022, no milestone payments have been accrued or paid in relation to this agreement.
NOTE 14 – SALE OF COMMON STOCK
2022 Lincoln Park Transaction
On August 16, 2022,
the Company entered into a purchase agreement (the “2022 Purchase Agreement”) and a registration rights agreement (the
“2022 Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”). Pursuant to
the terms of the 2022 Purchase Agreement, Lincoln Park has agreed to purchase from the Company up to $50,000,000 of the Company’s
common stock (subject to certain limitations) from time to time during the term of the 2022 Purchase Agreement. Pursuant to the
terms of the 2022 Registration Rights Agreement, the Company filed with the SEC a registration statement to register for resale
under the Securities Act the shares that have been or may be issued to Lincoln Park under the 2022 Purchase Agreement.
Pursuant to the terms
of the 2022 Purchase Agreement, at the time the Company signed the 2022 Purchase Agreement and the 2022 Registration Rights Agreement,
the Company issued 625,000 shares of common stock to Lincoln Park as consideration for its commitment to purchase shares of the
Company’s common stock under the 2022 Purchase Agreement. The commitment shares were valued at $1,000,000 and recorded as
an addition to equity for the issuance of the common stock and treated as a reduction to equity as a cost of capital to be raised
under the 2022 Purchase Agreement.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
During the nine months
ended September 30, 2022, no shares of common stock were sold under the 2022 Purchase Agreement. Subsequent to September 30, 2022,
the Company sold 1.0 million shares of common stock under the 2022 Purchase Agreement, for net proceeds of approximately $0.5 million.
Purchase Agreement with Lincoln Park
On December 3, 2021,
the Company entered into a purchase agreement (the “Purchase Agreement with Lincoln Park”) and a registration rights
agreement (the “Lincoln Park Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”).
Pursuant to the terms of the Purchase Agreement with Lincoln Park, Lincoln Park agreed to purchase from the Company up to $80,000,000
of the Company’s common stock (subject to certain limitations) from time to time during the term of the Purchase Agreement
with Lincoln Park. Pursuant to the terms of the Lincoln Park Registration Rights Agreement, the Company filed with the SEC a registration
statement to register for resale under the Securities Act the shares that have been or may be issued to Lincoln Park under the
Purchase Agreement with Lincoln Park.
Pursuant to the terms
of the Purchase Agreement with Lincoln Park, at the time the Company signed the Purchase Agreement with Lincoln Park and the Lincoln
Park Registration Rights Agreement, the Company issued 90,910 shares of common stock to Lincoln Park as consideration for its commitment
to purchase shares of our common stock under the Purchase Agreement with Lincoln Park. The commitment shares were valued at $1.6
million and recorded as an addition to equity for the issuance of the common stock and treated as a reduction to equity as a cost
of capital to be raised under the Purchase Agreement with Lincoln Park.
During the nine months
ended September 30, 2022, the Company sold 2.9 million shares of common stock under the Purchase Agreement with Lincoln Park, for
net proceeds of approximately $8.7 million.
Under applicable rules
of the NASDAQ Global Market, the Company could not issue or sell more than 19.99% of the shares of its common stock outstanding
immediately prior to the execution of the Purchase Agreement with Lincoln Park (approximately 2.9 million shares) to Lincoln Park
under the Purchase Agreement with Lincoln Park without stockholder approval, unless the average price of all applicable sales of
its common stock to Lincoln Park under the Purchase Agreement with Lincoln Park equals or exceeds a threshold amount. As the Company
has issued approximately 2.9 million shares to Lincoln Park, by September 30, 2022, under the Purchase Agreement with Lincoln Park
at less than the threshold amount, the Company will not sell any additional shares under the Purchase Agreement with Lincoln Park
without shareholder approval.
2021 Lincoln Park Transaction
On May 14, 2021, the
Company entered into a purchase agreement (the “2021 Purchase Agreement”) and a registration rights agreement (the
“2021 Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”). Pursuant to
the terms of the 2021 Purchase Agreement, Lincoln Park agreed to purchase from the Company up to $80,000,000 of the Company’s
common stock (subject to certain limitations) from time to time during the term of the 2021 Purchase Agreement. Pursuant to the
terms of the 2021 Registration Rights Agreement, the Company filed with the SEC a registration statement to register for resale
under the Securities Act the shares that have been or may be issued to Lincoln Park under the 2021 Purchase Agreement.
Pursuant to the terms
of the 2021 Purchase Agreement, at the time the Company signed the 2021 Purchase Agreement and the 2021 Registration Rights Agreement,
the Company issued 40,000 shares of common stock to Lincoln Park as consideration for its commitment to purchase shares of our
common stock under the 2021 Purchase Agreement. The commitment shares were valued at $1.6 million and recorded as an addition to
equity for the issuance of the common stock and treated as a reduction to equity as a cost of capital to be raised under the 2021
Purchase Agreement.
During the nine months
ended September 30, 2021, the Company sold an aggregate of approximately 1.3 million shares of common stock under the 2021 Purchase
Agreement, for gross proceeds of approximately $29.5 million.
Under applicable rules
of the NASDAQ Global Market, the Company could not issue or sell more than 19.99% of the shares of its common stock outstanding
immediately prior to the execution of the 2021 Purchase Agreement (approximately 2.0 million shares) to Lincoln Park under the
2021 Purchase Agreement without stockholder approval, unless the average price of all applicable sales of its common stock to Lincoln
Park under the 20121 Purchase Agreement equals or exceeds a threshold amount. As the Company has issued approximately 2.0 million
shares to Lincoln Park under the 2021 Purchase Agreement, at less than the threshold amount, the Company will not sell any additional
shares under the 2021 Purchase Agreement without shareholder approval.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
February 2021 Financing
On February 8, 2021,
the Company entered into a securities purchase agreement with certain institutional investors relating to the issuance and sale
of 1.8 million shares of its common stock, in a registered direct public offering (the “February 2021 Financing”),
with A.G.P/Alliance Global Partners (“AGP”), acting as placement agent. The public offering price for each share of
common stock was $38.40. The February 2021 Financing closed on February 9, 2021. AGP received a cash fee of 7% of the gross proceeds,
for an aggregate amount of $4.9 million. The Company incurred other offering expenses of approximately $0.1 million. The Company
received net proceeds of approximately $65.0 million, after deducting the fees and other offering expenses.
January 2021 Financing
On January 11, 2021,
the Company entered into a securities purchase agreement with certain institutional investors relating to the issuance and sale
of 1.6 million shares of its common stock in a registered direct public offering (the “January 2021 Financing”), with
AGP as placement agent. The public offering price for each share of common stock was $25.60. The January 2021 Financing closed
on January 13, 2021. AGP received a cash fee of 7% of the gross proceeds, for an aggregate of $2.8 million. The Company incurred
other offering expenses of approximately $0.3 million. The Company received net proceeds of approximately $36.9 million, after
deducting the fees and other offering expenses.
At-the-Market Offerings
On April 8, 2020,
the Company entered into a sales agreement (the “Sales Agreement”) with AGP pursuant to which the Company may issue
and sell, from time to time, shares of the Company’s common stock having an aggregate offering price of up to $320.0 million
in at-the-market offerings (“ATM”) sales. AGP will act as sales agent and will be paid a 3% commission on each sale
under the Sales Agreement. The Company’s common stock will be sold at prevailing market prices at the time of the sale, and,
as a result, prices will vary. During the nine months ended September 30, 2022, the Company sold approximately 34.2 million shares
of common stock under the Sales Agreement, for net proceeds of approximately $76.2 million. During the nine months ended September
30, 2021, the Company sold approximately 1.3 million shares of common stock under the Sales Agreement, for net proceeds of approximately
$37.2 million. Subsequent to September 30, 2022, the Company has sold 3.2 million shares of common stock under the Sales Agreement,
for net proceeds of approximately $1.6 million.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
NOTE 15 – STOCK-BASED COMPENSATION
Stock Incentive Plans
On May 3, 2019, the
Company’s stockholders approved the Tonix Pharmaceuticals Holding Corp. 2019 Stock Incentive Plan (the “2019 Plan”).
The 2019 Plan provided for the issuance of up to 4,375 shares of common stock. With the adoption of the 2020 Plan (as defined below),
no further grants may be made under the 2019 Plan. On January 16, 2020, the Company’s stockholders approved the Tonix Pharmaceuticals
Holding Corp. 2020 Stock Incentive Plan (the “2020 Plan”). The 2020 Plan provided for the issuance of up to 18,750
shares of common stock. With the adoption of the Amended and Restated 2020 Plan (as defined below), no further grants may be made
under the 2020 Plan.
On May 1, 2020, the
Company’s stockholders approved the Tonix Pharmaceuticals Holding Corp. Amended and Restated 2020 Stock Incentive Plan (“Amended
and Restated 2020 Plan”), and together with the 2020 Plan and the 2019 Plan, the “Plans”).
Under the terms of
the Amended and Restated 2020 Plan, the Company may issue (1) stock options (incentive and nonstatutory), (2) restricted stock,
(3) stock appreciation rights (“SARs”), (4) RSUs, (5) other stock-based awards, and (6) cash-based awards. The Amended
and Restated 2020 Plan initially provided for the issuance of up to 312,500 shares of common stock, which amount will be increased
to the extent that awards granted under the Plans are forfeited, expire or are settled for cash (except as otherwise provided in
the Amended and Restated 2020 Plan). In addition, the Amended and Restated 2020 Plan contains an “evergreen provision”
providing for an annual increase in the number of shares of our common stock available for issuance under the Amended and Restated
2020 Plan on January 1 of each year for a period of ten years, commencing on January 1, 2021 and ending on (and including) January
1, 2030, in an amount equal to the difference between (x) twenty percent (20%) of the total number of shares of common stock outstanding
on December 31st of the preceding calendar year, and (y) the total number of shares of common stock reserved under the Amended
and Restated 2020 Plan on December 31st of such preceding calendar year (including shares subject to outstanding awards, issued
pursuant to awards or available for future awards). The Board of Directors determines the exercise price, vesting and expiration
period of the grants under the Amended and Restated 2020 Plan. However, the exercise price of an incentive stock option may not
be less than 110% of fair value of the common stock at the date of the grant for a 10% or more shareholder and 100% of fair value
for a grantee who is not a 10% shareholder. The fair value of the common stock is determined based on quoted market price or in
absence of such quoted market price, by the Board of Directors in good faith. Additionally, the expiration period of grants under
the Amended and Restated 2020 Plan may not be more than ten years. As of September 30, 2022, 625,496 shares were available for
future grants under the Amended and Restated 2020 Plan.
General
A summary of the stock option activity and
related information for the Plans for the nine months ended September 30, 2022 is as follows:
| |
Shares | | |
Weighted-Average Exercise Price | | |
Weighted-Average Remaining Contractual Term | | |
Aggregate Intrinsic Value | |
Outstanding at December 31, 2021 | |
| 805,762 | | |
$ | 78.02 | | |
| 8.83 | | |
$ | — | |
Grants | |
| 1,695,608 | | |
$ | 12.06 | | |
| | | |
| | |
Exercised | |
| — | | |
| — | | |
| | | |
| | |
Forfeitures or expirations | |
| (46,090 | ) | |
| 267.12 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at September 30, 2022 | |
| 2,455,280 | | |
$ | 28.92 | | |
| 8.95 | | |
$ | — | |
Exercisable at September 30, 2022 | |
| 532,615 | | |
$ | 74.66 | | |
| 7.78 | | |
$ | — | |
The aggregate intrinsic
value in the preceding table represents the total pretax intrinsic value, based on options with an exercise price less than the
Company’s closing stock price at the respective dates.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
The weighted average
fair value of options granted during the three and nine months ended September 2022 was $0 per share and $5.25 per share, respectively.
The weighted average fair value of options granted during the three and nine months ended September 2021 was $21.46 per share and
$33.78 per share, respectively.
The Company measures
the fair value of stock options on the date of grant, based on the Black Scholes option pricing model using certain assumptions
discussed below, and the closing market price of the Company’s common stock on the date of the grant. The fair value of the
award is measured on the grant date. One-third of most stock options granted pursuant to the Plans vest 12 months from the date
of grant and 1/36th each month thereafter for 24 months and expire ten years from the date of grant. In addition, the Company issues
options to directors which vest over a one-year period. The Company also issues premium options to executive officers which have
an exercise price greater than the grant date fair value and has issued performance-based options which vest when target parameters
are met or probable of being met, subject in each case to a one year minimum service period prior to vesting. Stock-based compensation
expense related to awards is amortized over the applicable service period using the straight-line method.
The assumptions used
in the valuation of stock options granted during the nine months ended September 30, 2022 and 2021 were as follows:
|
|
Nine Months Ended
September 30, 2022 |
|
|
Nine Months Ended
September 30, 2021 |
|
Risk-free interest rate |
|
|
1.67% to 3.05 |
% |
|
|
0.79% to 1.63 |
% |
Expected term of option |
|
|
5.5 to 10 years |
|
|
|
5.5 to 6 years |
|
Expected stock price volatility |
|
|
120.32% - 133.22 |
% |
|
|
124.37% -137.73 |
% |
Expected dividend yield |
|
|
0.0 |
|
|
|
0.0 |
|
The risk-free interest
rate is based on the yield of Daily U.S. Treasury Yield Curve Rates with terms equal to the expected term of the options as of
the grant date. The expected term of options is determined using the simplified method, as provided in an SEC Staff Accounting
Bulletin, and the expected stock price volatility is based on the Company’ historical stock price volatility.
Stock-based compensation
expense relating to options granted of $2.7 million, of which $2.0 million and $0.7 million, related to General and Administration
and Research and Development, respectively was recognized for the quarter ended September 30, 2022. Stock-based compensation
expense relating to options granted of $2.3 million, of which $1.6 million and $0.7 million, related to General and Administration
and Research and Development, respectively was recognized for the quarter ended September 30, 2021.
Stock-based compensation
expense relating to options granted of $8.1 million, of which $5.9 million and $2.2 million, related to General and Administration
and Research and Development, respectively was recognized for the nine-month period ended September 30, 2022. Stock-based compensation
expense relating to options granted of $5.6 million, of which $3.9 million and $1.7 million, related to General and Administration
and Research and Development, respectively was recognized for the nine-month period ended September 30, 2021.
As of September 30,
2022, the Company had approximately $14.3 million of total unrecognized compensation cost related to non-vested awards granted
under the Plans, which the Company expects to recognize over a weighted average period of 1.9 years.
Employee Stock Purchase Plans
On May 3, 2019, the
Company’s stockholders approved the Tonix Pharmaceuticals Holdings Corp. 2019 Employee Stock Purchase Plan (the “2019
ESPP”). As a result of adoption of the 2020 ESPP, as defined below, by the stockholders, no further grants may be made under
the 2019 ESPP Plan. On May 1, 2020, the Company’s stockholders approved the Tonix Pharmaceuticals Holdings Corp. 2020 Employee
Stock Purchase Plan (the “2020 ESPP”). As a result of the adoption of the 2022 ESPP, as defined below, by the stockholders,
no further grants may be made under the 2020 ESPP Plan. On May 6, 2022, the Company’s stockholders approved the Tonix Pharmaceuticals
Holdings Corp. 2022 Employee Stock Purchase Plan (the “2022 ESPP”, and together with the 2019 ESPP and the 2020 ESPP,
the “ESPP Plans”)).
The 2022 ESPP allows
eligible employees to purchase up to an aggregate of 93,750 shares of the Company’s common stock. Under the 2022
ESPP, on the first day of each offering period, each eligible employee for that offering period has the option to enroll for that
offering period, which allows the eligible employees to purchase shares of the Company’s common stock at the end of the offering
period. Each offering period under the 2022 ESPP is for six months, which can be modified from time-to-time. Subject to limitations,
each participant will be permitted to purchase a number of shares determined by dividing the employee’s accumulated payroll
deductions for the offering period by the applicable purchase price, which is equal to 85 percent of the fair market
value of our common stock at the beginning or end of each offering period, whichever is less. A participant must designate in his
or her enrollment package the percentage (if any) of compensation to be deducted during that offering period for the purchase of
stock under the 2022 ESPP, subject to the statutory limit under the Code. As of September 30, 2022, 1 share was available for future
sales under the 2020 ESPP and 93,750 shares were available for future sales under the 2022 ESPP.
The 2022 and
2020 ESPP are considered compensatory plans with the related compensation cost expensed over the six-month offering period. For
the three months ended September 30, 2022 and 2021, $46,000 and $42,000, respectively, was expensed. For the nine months ended
September 30, 2022 and 2021, $46,000 and $89,000, respectively were expensed. In January 2021, 1,703 shares that were purchased
as of December 31, 2020, under the 2020 ESPP, were issued. Accordingly, during the first quarter of 2021, approximately $28,000
of employee payroll deductions accumulated at December 31, 2020, related to acquiring such shares, was transferred from accrued
expenses to additional paid in capital. The remaining $4,000 was returned to the employees. In January 2022, 4,033 shares that
were purchased as of December 31, 2021, under the 2020 ESPP, were issued. Accordingly, during the first quarter of 2022, approximately
$40,000 of employee payroll deductions accumulated at December 31, 2021, related to acquiring such shares, was transferred from
accrued expenses to additional paid in capital. The remaining $30,000 was returned to the employees. As of September 30, 2022,
approximately $40,000 of employee payroll deductions have accumulated and have been recorded in accrued expenses.
TONIX PHARMACEUTICALS HOLDING
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
NOTE 16 – STOCK WARRANTS
The following table
summarizes information with respect to outstanding warrants to purchase common stock of the Company at September 30, 2022:
Exercise | | |
Number | | |
Expiration | |
Price | | |
Outstanding | | |
Date | |
$ | 16.00 | | |
| 779 | | |
| November 2024 | |
$ | 18.24 | | |
| 3,860 | | |
| February 2025 | |
$ | 1,120.00 | | |
| 15,331 | | |
| December 2023 | |
| | | |
| 19,970 | | |
| | |
No warrants were exercised
during the nine months ended September 30, 2022.
During the nine months
September 30, 2021, 107 warrants from the February 2020 Financing, with an exercise price of $18.24, were exercised for proceeds
of approximately $2,000.
NOTE 17 – LEASES
The Company has various
operating lease agreements, which are primarily for office space. These agreements frequently include one or more renewal options
and require the Company to pay for utilities, taxes, insurance and maintenance expense. No lease agreement imposes a restriction
on the Company’s ability to engage in financing transactions or enter into further lease agreements. At September 30, 2022,
the Company has right-of-use assets of $0.8 million and a total lease liability for operating leases of $0.9 million of which $0.4
million is included in long-term lease liabilities and $0.5 million is included in current lease liabilities.
At September 30, 2022,
future minimum lease payments for operating leases with non-cancelable terms of more than one year were as follows (in thousands):
Year Ending December 31, | | |
| |
2022 | | |
| 135 | |
2023 | | |
| 438 | |
2024 | | |
| 163 | |
2025 | | |
| 159 | |
2026 and beyond | | |
| 11 | |
| | |
| 906 | |
Included interest | | |
| (20 | ) |
| | |
$ | 886 | |
During the nine months
ended September 30, 2022, the Company entered into new operating leases and lease amendments, resulting in the Company recognizing
an additional operating lease liability of approximately $386,000 based on the present value of the minimum rental payments. The
Company also recognized a corresponding increase to ROU assets of approximately $386,000, which represents a non-cash investing
and financing activity.
During the nine months
ended September 30, 2021, the Company entered into lease amendments, resulting in the Company recognizing an operating lease liability
of approximately $467,000 based on the present value of the future minimum rental payments. The Company also recognized corresponding
ROU assets of approximately $467,000, which represents a non-cash investing and financing activity.
Other information related to leases is as follows:
Operating lease expense
was $0.1 million and $0.2 million for the three months ended September 30, 2022 and 2021, respectively.
Operating lease expense
was $0.4 and $0.5 million for the nine-months ended September 30, 2022 and 2021, respectively.
TONIX PHARMACEUTICALS HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2022 AND 2021 (UNAUDITED)
Other information related to leases is as follows:
Cash paid for amounts included in the measurement of lease liabilities: | |
Nine Months Ended September 30, 2022 | | |
Nine Months Ended September 30, 2021 | |
Operating cash flow from operating leases (in thousands) | |
$ | 447 | | |
$ | 479 | |
| |
| | | |
| | |
Weighted Average Remaining Lease Term | |
| | | |
| | |
Operating leases | |
| 2.33 years | | |
| 2.79 years | |
| |
| | | |
| | |
Weighted Average Discount Rate | |
| | | |
| | |
Operating leases | |
| 2.26 | % | |
| 1.34 | % |
NOTE 18 – COMMITMENTS
Contractual agreements
The Company has entered
into contracts with various contract research organizations with outstanding commitments aggregating approximately $61.4 million
at September 30, 2022 for future work to be performed.
The Company entered
into a construction contract with outstanding commitments aggregating approximately $3.3 million at September 30, 2022 for future
work to be performed.
Defined contribution plan
The Company has a qualified
defined contribution plan (the “401(k) Plan”) pursuant to Section 401(k) of the Code, whereby all eligible employees
may participate. Participants may elect to defer a percentage of their annual pretax compensation to the 401(k) Plan, subject
to defined limitations. The Company is required to make contributions to the 401(k) Plan equal to 100 percent of each participant’s
pretax contributions of up to six percent of his or her eligible compensation, and the Company is also required to make a contribution
equal to three percent of each participant’s salary, on an annual basis, subject to limitations under the Code. The Company
charged operations $122,000 and $428,000 for the three and nine months ended September 30, 2022, respectively, and $38,000 and
$149,000 for the three and nine months ended September 30, 2021, respectively, for contributions under the 401(k) Plan.
NOTE 19 – SUBSEQUENT EVENTS
Subsequent to September
30, 2022, the Company sold 3.2 million shares of common stock under the ATM Sales Agreement, for net proceeds of approximately
$1.6 million.
Subsequent to September
30, 2022, the Company sold 1.0 million shares of common stock under the 2022 Purchase Agreement, for net proceeds of approximately
$0.5 million.
On October 25, 2022,
the Company entered into a Securities Purchase Agreement with certain institutional investors, pursuant to which the Company agreed
to issue and sell, in a private placement, 1,400,000 shares of the Company’s Series A Convertible Redeemable Preferred Stock,
par value $0.01 per share, and 100,000 shares of the Company’s Series B Convertible Redeemable Preferred Stock, par value
$0.001 per share, at an offering price of $9.50 per share, representing a 5% original issue discount to the stated value of $10.00
per share, for gross proceeds of $14.3 million in the aggregate for the Offering, before the deduction of fees and offering
expenses. The shares of Preferred Stock will be convertible, at a conversion price of $1.00 per share, into shares of the Company’s
common stock, par value $0.001 per share (the “Common Stock”), at the option of the holders and, in certain circumstances,
by the Company. The Offering closed on October 26, 2022. The $14.3 million in gross proceeds from the sale of the Preferred Stock is being held in escrow and is
expected to be used to fund the redemption of the Preferred Stock, which is expected to occur in 2022.
On October 25, 2022,
the Company received a letter (the “Notice”) from the Listing Qualifications staff of The Nasdaq Stock Market LLC (“Nasdaq”)
indicating that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days,
the Company no longer meets the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule
55450(a)(1) (the “Minimum Bid Price Requirement”).
In accordance with
Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided a period of 180 calendar days, or until April 24, 2023, in which
to regain compliance. In order to regain compliance with the Minimum Bid Price Requirement, the closing bid price of the Company’s
common stock must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. In the event
that the Company does not regain compliance within this 180-day period, the Company may be eligible to seek an additional compliance
period of 180 calendar days if it meets the continued listing requirement for market value of publicly held shares and all other
initial listing standards for the Nasdaq Global Market, with the exception of the Minimum Bid Price Requirement, and provides written
notice to Nasdaq of its intent to cure the deficiency during this second compliance period, by effecting a reverse stock split,
if necessary. However, if it appears to the Nasdaq Staff that the Company will not be able to cure the deficiency, or if the Company
is otherwise not eligible, Nasdaq will provide notice to the Company that its common stock will be subject to delisting.