Tonix Pharmaceuticals Holding Corp. 10-Q

ITEM 1. FINANCIAL STATEMENTS TONIX PHARMACEUTICALS HOLDING CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Par Value and Share Amounts) September 30, 2023 December 31, 2022 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 6,914 $ 120,229 Inventory 13,317 — Receivables, net 1,562 — Prepaid expenses and other 9,544 10,548 Total current assets 31,337 130,777 Property and equipment, net 94,866 93,814 Intangible assets, net 9,982 120 Goodwill 965 — Operating lease right-to-use assets 1,081 715 Other non-current assets 1,051 264 Total assets $ 139,282 $ 225,690 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 7,799 $ 8,068 Accrued expenses and other current liabilities 9,500 9,680 Lease liability, short term 434 432 Total current liabilities 17,733 18,180 Lease liability, long term 716 328 Total liabilities 18,449 18,508 Commitments (See Note 19) Stockholders’ equity: Preferred stock, $ 0.001 par value; 5,000,000 shares authorized Series B Convertible Preferred stock, 0 shares designated as of both September 30, 2023 and December 31, 2022; issued and outstanding - none — — Series A Convertible Preferred stock, 0 shares designated as of both September 30, 2023 and December 31, 2022; issued and outstanding - none — — Common stock, $ 0.001 par value; 160,000,000 shares authorized; 17,762,341 and 12,368,620 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively and 14,999 shares to be issued as of December 31, 2022 18 12 Additional paid in capital 694,371 677,375 Accumulated deficit ( 573,336 ) ( 470,038 ) Accumulated other comprehensive loss ( 220 ) ( 167 ) Total stockholders’ equity 120,833 207,182 Total liabilities and stockholders’ equity $ 139,282 $ 225,690 See the accompanying notes to the condensed consolidated financial statements 3 TONIX PHARMACEUTICALS HOLDING CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Share and Per Share Amounts) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 REVENUE: Product revenue, net $ 3,989 $ — $ 3,989 $ — COSTS AND EXPENSES: Cost of revenue $ 2,374 $ — $ 2,374 $ — Research and development 21,050 22,201 69,535 57,202 Selling, general and administrative 8,712 7,390 23,131 22,161 Costs and Expenses 32,136 29,591 95,040 79,363 Operating loss ( 28,147 ) ( 29,591 ) ( 91,051 ) ( 79,363 ) Interest income, net 172 610 1,715 825 Net loss ( 27,975 ) ( 28,981 ) ( 89,336 ) ( 78,538 ) Preferred stock deemed dividend — — — 4,255 Net loss available to common stockholders $ ( 27,975 ) $ ( 28,981 ) $ ( 89,336 ) $ ( 82,793 ) Net loss per common share, basic and diluted $ ( 1.83 ) $ ( 4.24 ) $ ( 7.40 ) $ ( 18.58 ) Weighted average common shares outstanding, basic and diluted 15,327,558 6,843,099 12,079,583 4,455,943 See the accompanying notes to the condensed consolidated financial statements 4 TONIX PHARMACEUTICALS HOLDING CORP. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In Thousands) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net loss $ ( 27,975 ) $ ( 28,981 ) $ ( 89,336 ) $ ( 78,538 ) Other comprehensive loss: Foreign currency translation loss ( 8 ) ( 17 ) ( 53 ) ( 68 ) Comprehensive loss $ ( 27,983 ) $ ( 28,998 ) $ ( 89,389 ) $ ( 78,606 ) See the accompanying notes to the condensed consolidated financial statements 5 TONIX PHARMACEUTICALS HOLDING CORP. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2023 (In Thousands, Except Share and Per Share Amounts) (unaudited) Accumulated Additional Other Common stock Paid in Comprehensive Accumulated Shares Amount Capital Gain (loss) Deficit Total Balance, December 31, 2022 12,368,620 $ 12 $ 677,375 $ ( 167 ) $ ( 470,038 ) $ 207,182 Repurchase of common stock under Share Repurchase Program ( 2,672,044 ) ( 3 ) — — ( 13,962 ) ( 13,965 ) Issuance of common stock under 2022 Purchase agreement 96,000 — 441 — — 441 Issuance of common stock under At-the-market offering, net of transactional expenses of $ 101 514,502 1 1,994 — — 1,995 Employee stock purchase plan 14,999 — 29 — — 29 Stock-based compensation — — 2,794 — — 2,794 Foreign currency transaction gain — — — ( 44 ) — ( 44 ) Net loss — — — — ( 33,005 ) ( 33,005 ) Balance, March 31, 2023 10,322,077 $ 10 $ 682,633 $ ( 211 ) $ ( 517,005 ) $ 165,427 Issuance of common stock under At-the-market offering, net of transactional expenses of $ 36 440,264 1 1,028 — — 1,029 Stock-based compensation — — 2,364 — — 2,364 Foreign currency transaction gain — — — ( 1 ) — ( 1 ) Net loss — — — — ( 28,356 ) ( 28,356 ) Balance, June 30, 2023 10,762,341 $ 11 $ 686,025 $ ( 212 ) $ ( 545,361 ) $ 140,463 Issuance of common stock under AGP Financing, net of transactional expenses of $ 726 2,530,000 3 6,271 — — 6,274 Issuance of common stock upon exercise of prefunded warrants under AGP Financing 4,470,000 4 ( 4 ) — — — Stock-based compensation — — 2,079 — — 2,079 Foreign currency transaction gain — — — ( 8 ) — ( 8 ) Net loss — — — — ( 27,975 ) ( 27,975 ) Balance, September 30, 2023 17,762,341 $ 18 $ 694,371 $ ( 220 ) $ ( 573,336 ) $ 120,833 See the accompanying notes to the condensed consolidated financial statements 6 TONIX PHARMACEUTICALS HOLDING CORP. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2022 (In Thousands, Except Share and Per Share Amounts) (unaudited) Accumulated Additional Other Common stock Paid in Comprehensive Accumulated Shares Amount Capital Gain (loss) Deficit Total Balance, December 31, 2021 2,634,110 $ 3 $ 578,626 $ ( 92 ) $ ( 359,820 ) $ 218,717 Issuance of common stock in January and March 2022 under At-the-market offering, net of transactional expenses of $ 507 172,276 — 8,488 — — 8,488 Issuance of common stock under 2021 Purchase agreement 110,000 — 4,535 — — 4,535 Employee stock purchase plan 646 — 40 — — 40 Stock-based compensation — — 2,620 — — 2,620 Foreign currency transaction gain — — — ( 26 ) — ( 26 ) Net loss — — — — ( 26,417 ) ( 26,417 ) Balance, March 31, 2022 2,917,032 3 594,309 ( 118 ) ( 386,237 ) 207,957 Issuance of common stock in April, May and June 2022 under At-the-market offering, net of transaction expenses of $ 1,426 2,220,699 2 42,966 — — 42,968 Issuance of common stock under 2021 Purchase agreement 65,000 — 1,964 — — 1,964 Preferred stock dividend — — ( 4,255 ) — — ( 4,255 ) Stock-based compensation — — 2,813 — — 2,813 Foreign currency transaction gain — — — ( 25 ) — ( 25 ) Net loss — — — — ( 23,140 ) ( 23,140 ) Balance, June 30, 2022 5,202,731 5 637,797 ( 143 ) ( 409,377 ) 228,282 Issuance of common stock in July, August and September 2022 under At-the-market offering, net of transactional expenses of $ 805 3,079,176 3 24,689 — — 24,692 Issuance of common stock under the 2021 Purchase agreement 281,557 1 2,182 — — 2,183 Issuance of commitment shares under 2022 Purchase Agreement 100,000 — — — — — Stock-based compensation — — 2,765 — — 2,765 Foreign currency transaction gain — — — ( 17 ) — ( 17 ) Net loss — — — — ( 28,981 ) ( 28,981 ) Balance, September 30, 2022 8,663,464 $ 9 $ 667,433 $ ( 160 ) $ ( 438,358 ) $ 228,924 See the accompanying notes to the condensed consolidated financial statements 7 TONIX PHARMACEUTICALS HOLDING CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (unaudited) Nine Months Ended September 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 89,336 ) $ ( 78,538 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,030 417 Gain on disposal of property and equipment ( 196 ) — Stock-based compensation 7,237 8,198 Changes in operating assets and liabilities: Receivables, net ( 1,562 ) — Prepaid expenses and other 3,334 ( 753 ) Accounts payable 446 ( 4,079 ) Operating lease liabilities and ROU asset, net 24 5 Accrued expenses and other current liabilities ( 2,640 ) ( 1,002 ) Net cash used in operating activities ( 79,663 ) ( 75,752 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of a business ( 22,174 ) — Disposal of property and equipment 992 — Purchase of property and equipment ( 7,457 ) ( 43,476 ) Net cash used in investing activities ( 28,639 ) ( 43,476 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from ESPP 29 40 Proceeds, net of $ 0 and $ 4,255 expenses, from sale of convertible redeemable preferred stock — 27,245 Redemption of convertible redeemable preferred stock — ( 31,500 ) Repurchase of common stock ( 13,965 ) — Proceeds, net of $ 863 and $ 2,738 expenses, from sale of common stock 9,739 84,830 Net cash (used in) provided by financing activities ( 4,197 ) 80,615 Effect of currency rate change on cash ( 55 ) ( 69 ) Net decrease in cash, cash equivalents and restricted cash ( 112,554 ) ( 38,682 ) Cash, cash equivalents and restricted cash beginning of the period 120,470 178,900 Cash, cash equivalents and restricted cash end of period $ 7,916 $ 140,218 Supplemental disclosures of cash flow information: Non-cash financing and investing activities: Purchases of property and equipment included in accounts payable and accrued liabilities $ 275 $ ( 3,310 ) Preferred stock deemed dividend $ — $ 4,255 See the accompanying notes to the condensed consolidated financial statements 8 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) NOTE 1 – BUSINESS Tonix Pharmaceuticals Holding Corp., through its wholly owned subsidiary Tonix Pharmaceuticals, Inc. (“Tonix Sub”), is a biopharmaceutical company focused on commercializing, developing, discovering and licensing therapeutics to treat and prevent human disease and alleviate suffering. The therapeutics under development include both small molecules and biologics. Tonix, through its recent acquisition, markets Zembrace® SymTouch® (sumatriptan injection) 3 mg and Tosymra® (sumatriptan nasal spray) 10 mg. Zembrace® SymTouch® and Tosymra®, which were acquired as of June 30, 2023 (See Note 10), are each indicated for the treatment of acute migraine with or without aura in adults. All other drug product and vaccine candidates are still in development, and are not 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, 2023, the Company had working capital of approximately $ 13.6 million. At September 30, 2023, the Company had an accumulated deficit of approximately $ 573.3 million. The Company held cash and cash equivalents of approximately $ 6.9 million as of September 30, 2023. The Company believes that its cash resources at September 30, 2023 and the proceeds that it raised from equity offerings in the fourth quarter of 2023 (See Note 20), will not meet its operating and capital expenditure requirements through the fourth quarter of 2023. 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 must 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, or at all. 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, its ability to achieve our development and commercialization goals would be adversely affected and the Company may be forced to cease operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES 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, 2022 contained herein has been derived from audited financial statements. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of results that may be expected for the year ending December 31, 2023. 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, 2022 included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 13, 2023. Reverse Stock Split On May 9, 2023, the Company filed a Certificate of Change with the Nevada Secretary of State, effective May 10, 2023. Pursuant to the Certificate of Change, the Company effected a 1-for-6.25 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 retrospective basis, to reflect the reverse stock split for all periods presented. Authorized preferred stock was not adjusted because of the reverse stock split. 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 now has commercial products available for sale, and generates revenue from the sale of its Zembrace® SymTouch® and Tosymra® products, with no assurance that the Company will be able to generate sufficient cash flow to fund operations from its commercial products or products in development if and when approved. 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. 9 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) 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, but are not limited to, provisions for product returns, coupons, rebates, chargebacks, discounts, allowances, inventory realization, the assumptions used in the fair value of stock-based compensation and other equity instruments, the percent of completion of research and development contracts, fair value estimates for assets acquired in business combinations, and assessment of useful lives of acquired intangible assets. Business Combinations The Company accounts for business combinations in accordance with the provisions of ASC 805, Business Combinations and ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. Business combinations are accounted for using the acquisition method, whereby the consideration transferred is allocated to the net assets acquired based on their respective fair values measured on the acquisition date. The difference between the fair value of these assets and the purchase price is recorded as goodwill. Transaction costs other than those associated with the issue of debt or equity securities, and other direct costs of a business combination are not considered part of the business acquisition transaction and are expensed as incurred. Segment Information and Concentrations Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one segment. The Company has two products that each accounted for more than 10 % of total revenues during the three and nine months ended September 30, 2023. These products collectively accounted for 100 % of revenues during the three and nine months ended September 30, 2023. As of September 30, 2023, accounts receivable from four customers accounted for 25 % , 23 % , 19 % and 15 % of total accounts receivable. For the three and nine months ended September 30, 2023, revenues from four customers accounted for 25 % , 21 % , 18 % and 14 % of net product revenues, respectively. As of September 30, 2022, and for the three and nine months ended September 30, 2022, the Company had no commercialized products and therefore had no accounts receivables or revenues. 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, 2023 and December 31, 2022, cash equivalents, which consisted of money market funds, amounted to $ 3.7 million and $ 116.3 million, respectively. Restricted cash, which is included in Other non-current assets on the condensed consolidated balance sheet, at both September 30, 2023, and December 31, 2022, of approximately $ 244,000 and $ 241,000 , respectively, 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 18). In addition, the Company has $ 758,000 of restricted cash held by vendors in escrow accounts for patient support services as of September 30, 2023. 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, 2023 September 30, 2022 (in thousands) Cash and cash equivalents $ 6,914 $ 139,978 Restricted cash 1,002 240 Total $ 7,916 $ 140,218 Accounts Receivable, net Accounts receivable consists of amounts due from our wholesale and other third-party distributors and pharmacies and have standard payment terms that generally require payment within 30 to 90 days. For certain customers, the accounts receivable for the customer is net of prompt payment or specialty pharmacy discounts. We do not adjust our receivables for the effects of a significant financing component at contract inception if we expect to collect the receivables in one year or less from the time of sale. We provide reserves against accounts receivable for estimated losses that may result from a customer’s inability to pay. Amounts determined to be uncollectible are charged or written-off against the reserve. However, during the period covered by the Transition Services Agreement, the Seller has agreed to collect the accounts receivable on behalf of the Company and net settle within 45 days from each month-end. See note 10 for further details. The Company had no accounts receivable as of any prior period presented other than as of September 30, 2023. As of September 30, 2023 , the Company did not have an allowance for doubtful accounts. An allowance for doubtful accounts is determined based on the financial condition and creditworthiness of customers and the Company considers economic factors and events or trends expected to affect future collections experience. Any allowance would reduce the net receivables to the amount that is expected to be collected. The payment history of the Company’s customers will be considered in future assessments of collectability as these patterns are established over a longer period . Concentration of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk include cash and cash equivalents, and accounts receivable. We attempt to minimize the risks related to cash and cash equivalents by investing in a broad and diverse range of financial instruments, and we have established guidelines related to credit ratings and maturities intended to safeguard principal balances and maintain liquidity. Concentrations of credit risk with respect to receivables, which are typically unsecured, are somewhat mitigated due to the wide variety of customers using our products, as well as their dispersion across different geographic areas. 10 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) We monitor the financial performance and creditworthiness of our customers so that we can properly assess and respond to changes in their credit profile. We continue to monitor these conditions and assess their possible impact on our business. Inventories Inventories are recorded at the lower of cost or net realizable value, with cost determined by the weighted average cost method. The Company periodically reviews the composition of inventory in order to identify excess, obsolete, slow-moving or otherwise non-saleable items taking into account anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand. If non-saleable items are observed and there are no alternate uses for the inventory, the Company records a write-down to net realizable value in the period that the decline in value is first recognized. Although the Company makes every effort to ensure the accuracy of forecasts of future product demand, any significant unanticipated decreases in demand could have a material impact on the carrying value of inventories and reported operating results. The Company’s reserves were approximately $ 21,000 as of September 30, 2023. The Company did not have inventory on hand prior to the acquisition of Zembrace and Tosymra on June 30, 2023. 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 40 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 the shorter of the useful life or term of lease for leasehold improvements. Depreciation on assets begins when the asset is placed in service. Depreciation and amortization expense for the three and nine months ended September 30, 2023, was $ 978,000 and $ 2.8 million, respectively, and $ 252,000 and $ 417,000 , respectively, for the three and nine months ended September 30, 2022. All property and equipment are located in the United States. Intangible assets, net Intangible assets deemed to have finite lives are carried at acquisition-date fair value less accumulated amortization and impairment, if any. Finite-lived intangible assets consist of developed technology intangible assets acquired in connection with the acquisition of certain products from Upsher Smith Laboratories, LLS (“USL Acquisition”) consummated on June 30, 2023 (See Note 8). The acquired intangible assets are amortized using the straight-line method over the estimated useful lives of the respective assets. Amortization expense for the three months ended September 30, 2023, was $ 238,000 . The annual impairment assessment date will be June 30. No triggering events were identified during the nine months ended September 30, 2023. 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, which are included in Intangible assets, net on the condensed consolidated balance sheet, 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, 2023, the Company believed that no impairment existed. Goodwill Goodwill represents the excess of the aggregate purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is reviewed for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. As of September 30, 2023, the Company has recognized goodwill in connection with the USL Acquisition consummated on June 30, 2023 (See Note 8). 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. Revenue Recognition The Company records and recognizes revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company’s revenues primarily result from contracts with customers, which are generally short-term and have a single performance obligation - the delivery of product. The Company’s performance obligation to deliver products is satisfied at the point in time that the goods are received by the customer, which is when the customer obtains title to and has the risks and rewards of ownership of the products, which is generally upon shipment or delivery to the customer as stipulated by the terms of the sale agreements. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Our contractual payment terms are typically 30 to 90 days . 11 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) Revenues from product sales, net of gross-to-net deductions, are recorded only to the extent a significant reversal in the amount of cumulative revenue recognized is not probable of occurring and when the uncertainty associated with gross-to-net deductions is subsequently resolved. Taxes assessed by governmental authorities and collected from customers are excluded from product sales. Shipping and handling activities are considered to be fulfillment activities and not a separate performance obligation. Many of the Company’s products sold are subject to a variety of deductions. Revenues are recognized net of estimated rebates and chargebacks, cash discounts, distributor fees, sales return provisions and other related deductions. Deductions to product sales are referred to as gross-to-net deductions and are estimated and recorded in the period in which the related product sales occur. Accruals for these provisions are presented in the consolidated financial statements as reductions to gross sales in determining net sales, and as a contra asset within accounts receivable, net (if settled via credit) and other current liabilities (if paid in cash). Amounts recorded for revenue deductions can result from a complex series of judgements about future events and uncertainties and can rely heavily on estimates and assumptions. The following section briefly describes the nature of the Company’s provisions for variable consideration and how such provisions are estimated: Chargebacks - The Company sells a portion of its products indirectly through wholesaler distributors, and enters into specific agreements with these indirect customers to establish pricing for the Company’s products, and in-turn, the indirect customers and entities independently purchase these products. Because the price paid by the indirect customers and/or entities is lower than the price paid by the wholesaler, the Company provides a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and the wholesale customer’s purchase price. The Company’s provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers and estimated wholesaler inventory levels as well as historical chargeback rates. The Company continually monitors its reserve for chargebacks and adjusts the reserve accordingly when expected chargebacks differ from actual experience. Rebates - The Company participates in certain government and specific sales rebate programs which provides discounted prescription drugs to qualified recipients, and primarily relate to Medicaid and managed care rebates in the U.S., pharmacy rebates, Tri-Care rebates and discounts, specialty pharmacy program fees and other governmental rebates or applicable allowances. ● Managed Care Rebates are processed in the quarter following the quarter in which they are earned. The managed care reporting entity submits utilization data after the end of the quarter and the Company processes the payment in accordance with contract terms. All rebates earned but not paid are estimated by the Company according to historical payments trended for market growth assumptions. ● Medicaid and State Agency rebates are based upon historical experience of claims submitted by various states. The Company monitors Medicaid legislative changes to determine what impact such legislation may have on the provision for Medicaid rebates. The accrual of State Agency reserves is based on historical payment rates. There is an approximate three-month lag from the time of product sale until the rebate is paid. ● Tri-Care represents a regionally managed health care program for active duty and retired members, dependents and survivors of the US military. The Tri-Care program supplements health care resources of the US military with civilian health care professionals for greater access and quality healthcare coverage. Through the Tri-Care program, the Company provides pharmaceuticals on a direct customer basis. Prices of pharmaceuticals sold under the Tri-Care program are pre-negotiated and a reserve amount is established to represent the proportionate rebate amount associated with product sales. ● Coverage Gap refers to the Medicare prescription drug program and represents specifically the period between the initial Medicare Part D prescription drug program coverage limit and the catastrophic coverage threshold. Applicable pharmaceutical products sold during this coverage gap timeframe are discounted by the Company. Since the nature of the program is that coverage limits are reset at the beginning of the calendar year; the payments escalate each quarter as the participants reach the coverage limit before reaching the catastrophic coverage threshold. The Company has determined that the cost of this reserve will be viewed as an annual cost. Therefore, the accrual will be incurred evenly during the year with quarterly review of the liability based on payment trends and any revision to the projected annual cost. Prompt-Pay and other Sales Discounts - The Company provides for prompt pay discounts, which early payments are recorded as a reduction of revenue and as a reduction in the accounts receivable at the time of sale based on the customer’s contracted discount rate. Consumer sales discounts represent programs the Company has in place to reduce costs to the patient. This includes copay buy down and eVoucher programs. Product Returns - Consistent with industry practice, the Company offers customers a right to return any unused product. The customer’s right of return commences typically six months prior to product expiration date and ends one year after product expiration date. Products returned for expiration are reimbursed at current wholesale acquisition cost or indirect contract price. The Company estimates the amount of its product sales that may be returned by the Company’s customers and accrues this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company estimates products returns as a percentage of sales to its customers. The rate is estimated by using historical sales information, including its visibility and estimates into the inventory remaining in the distribution channel. Adjustments are made to the current provision for returns when data suggests product returns may differ from original estimates. 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. 12 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) 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. During the three and nine months ended September 30, 2023, we received $ 0.4 and $ 2.3 million, respectively, for the three and nine months ended September 30, 2023, in funding as a reduction of related research and development expense. 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. 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 consolidated condensed 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, 2023, 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, 2023 and 2022 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 and preferred stock 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 and preferred stock 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 and preferred stock for the three and nine months ended September 30, 2023, and 2022, 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, 2023 and 2022, are as follows: 2023 2022 Warrants to purchase common stock 7,003,196 3,196 Options to purchase common stock 1,384,264 392,643 Totals 8,387,460 395,839 13 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) Recently Adopted Accounting Pronouncements In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it also simplifies the diluted earnings per share calculation in certain areas. The Company adopted ASU 2020-06 on January 1, 2023, under the modified retrospective method of transition. The adoption of ASU 2020-06 did not impact the Company’s financial position, results of operations or cash flows. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about an entity’s expected credit losses on financial instruments and other commitments to extend credit at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology currently used today with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to develop credit loss estimates. ASU 2016-13 will be effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, using a modified retrospective approach. Early adoption is permitted. The Company adopted ASU 2016-13 and related updates as of January 1, 2023. The adoption of ASU 2016-13 did not impact the Company’s financial position, results of operations or cash flows. NOTE 3 – INVENTORY The components of inventory consisted of the following as of September 30, 2023: September 30, 2023 December 31, 2022 (in thousands) Raw Materials $ 3,064 $ — Work-in-process 1,565 — Finished Goods 8,709 — 13,338 $ — Less: Inventory reserves ( 21 ) — Total Inventory $ 13,317 $ — NOTE 4 – PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted of the following (in thousands): September 30, 2023 December 31, 2022 (in thousands) Property and equipment, net: Land $ 8,011 $ 8,011 Land improvements 326 79 Buildings 65,825 65,644 Office furniture and equipment 2,355 1,893 Laboratory equipment 21,506 18,440 Leasehold improvements 34 34 Construction in progress 1,204 1,366 99,261 95,467 Less: Accumulated depreciation and amortization ( 4,395 ) ( 1,653 ) $ 94,866 $ 93,814 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 was allocated to buildings, and approximately $ 1.5 million was allocated to office furniture and equipment and laboratory equipment. During 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 $ 38.8 million of costs during the year ended December 31, 2022, bringing total costs incurred-to-date to $ 61.6 million, of which the majority related to the build-out of the facility. During 2022, the assets became 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, 2023, the asset was not ready for its intended use. During the quarter ended September 30, 2023, property and equipment with a net book value of approximately $ 0.8 million were sold for net proceeds of approximately $ 1 .0 million. 14 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) NOTE 5 – GOODWILL AND INTANGIBLE ASSETS The following table provides the gross carrying value of goodwill as follows: Amounts (in thousands) Balance at December 31, 2022 $ — Acquired during the period (see Note 8) 965 Balance at September 30, 2023 $ 965 The following table provides the gross carrying amount and accumulated amortization for each major class of intangible asset: September 30, 2023 December 31, 2022 (in thousands) Intangible assets subject to amortization Developed technology $ 10,100 $ — Less: Accumulated amortization 238 — Total $ 9,862 $ — Intangible assets not subject to amortization Internet domain rights $ 120 $ 120 Total intangible assets, net $ 9,982 $ 120 During the three months ended September 30, 2023, the Company recorded amortization of $ 238,000 . At September 30, 2023, the related amortization for each of the next five years ended December 31 is as follows (in thousands): Year Ending December 31, Remainder of 2023 $ 238 2024 953 2025 953 2026 953 2027 and beyond 6,765 $ 9,862 NOTE 6 – 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, 2023, and December 31, 2022, the Company used Level 1 quoted prices in active markets to value cash equivalents of $ 3.7 million and $ 116.3 million, respectively. The Company did not have any Level 2 or Level 3 assets or liabilities as of both September 30, 2023 and December 31, 2022. NOTE 7 – STOCKHOLDERS’ EQUITY On May 9, 2023, the Company filed a Certificate of Change with the Nevada Secretary of State, effective May 10, 2023. Pursuant to the Certificate of Change, the Company effected a 1-for-6.25 reverse stock split of its issued and outstanding shares of common stock, whereby 64,627,246 outstanding shares of the Company’s common stock were exchanged for 10,340,506 shares of the Company’s common stock. In connection with the reverse stock split, the Company issued an additional 131,902 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 1,000,000,000 to 160,000,000 . 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. On October 17, 2023, the Company received a letter 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”). 15 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) The Company was initially provided with a 180 calendar day period, or until April 15, 2024, in which to regain compliance. In the event that the Company does not regain compliance within this 180 -day period, the Company may be eligible to seek an additional 180 day compliance period if it meets the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital 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. NOTE 8 – TEMPORARY EQUITY On October 26, 2022, the Company closed on an offering (“the October offering”) with certain institutional investors (the “Investors”), pursuant to which the Company issued and sold, in a private placement, 1,400,000 shares of the Company’s Series A Convertible Redeemable Preferred Stock, par value $ 0.001 per share (the “Series A Preferred Stock”), and 100,000 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 $ 14.3 million in the aggregate for the October offering, before the deduction of fees and offering expenses. The shares of Preferred Stock were convertible, at a conversion price of $ 6.25 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 December 13, 2022, an amendment (the “December Amendment”) to the Company’s Articles of Incorporation, as amended, to increase the Company’s authorized shares of common stock from 24,000,000 to 160,000,000 , as adjusted for the reverse split, was approved at a special meeting of shareholders. The Series A Preferred Stock had the right to vote on such December 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 December 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 December 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 December 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 December 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 $ 6.25 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 January 23, 2023. 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. The $ 14.3 million in gross proceeds of the October offering was held in an escrow account, along with an additional $ 1.5 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 at redemption value of approximately $ 14.7 million and $1.1 million, respectively, as calculated in the following table (in thousands): Series A Preferred Stock Series B Preferred Stock Gross Proceeds $ 13,300 $ 950 Less: Preferred stock issuance costs ( 844 ) ( 60 ) Plus: Accretion of carrying value to redemption value 2,244 160 Preferred stock subject to possible redemption $ 14,700 $ 1,050 During December 2022, the Company received redemption notices for all outstanding shares of Preferred Stock. The Preferred Stock was redeemed during December 2022 at 105 % of the $ 10.00 stated value of the Preferred Stock, or $ 15.8 million in the aggregate. 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 % 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 $ 25.00 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. 16 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 8,000,000 to 24,000,000 , as adjusted for the reverse split, 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 $ 25.00 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. 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 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 9 – REVENUES Disaggregation of Net Revenues The Company’s net product revenues are summarized below: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Zembrace® Symtouch® $ 3,292 $ — $ 3,292 $ — Tosymra® 697 $ — $ 697 $ — Total product revenues $ 3,989 $ — $ 3,989 $ — Gross-to-Net Sales Accruals We record gross-to-net sales accruals for chargebacks, rebates, sales and other discounts, and product returns, which are all customary to the pharmaceutical industry. Our provision for gross-to-net allowances was $ 2.5 million at September 30, 2023, $ 0.7 million of which was recorded as a reduction to accounts receivable and $ 1.8 million recorded as a component of accrued expenses. NOTE 10 – ASSET PURCHASE AGREEMENT WITH UPSHER-SMITH On June 30, 2023, the Company completed the acquisition of certain assets from Upsher-Smith Laboratories LLC ("USL") related to Zembrace® SymTouch® (sumatriptan injection) 3 mg (“Zembrace”) and Tosymra® (sumatriptan nasal spray) 10 mg (“Tosymra”) products (such businesses collectively, the “Business”) and certain inventory related to the Business for an aggregate purchase price of approximately $26.5 million, including certain deferred payments and subject to customary adjustments (such transaction, the “USL Acquisition”). On June 30, 2023, in connection with the USL Acquisition, the Company and USL entered into a Transition Services Agreement (the “Transition Services Agreement”), pursuant to which USL will provide certain transition services to the Company for base fees equal to $ 100,000 per month for the first six months, and $ 150,000 per months for the seventh through ninth months, plus additional monthly fees for each service category totaling up to $ 150,000 per month. The Company has assumed certain obligations of Seller, including the payment of quarterly earn-out payments on annual net sales from the Business in the U.S. as follows: for Tosymra, 4 % for net sales of $ 0 to $ 30 million, 7 % of net sales of $ 30 to $ 75 million; 9 % for net sales of $ 75 to $ 100 million; 12 % for net sales of $ 100 to $ 150 million; and 15 % for net sales greater than $ 150 million. Earn-out payments with respect to Tosymra are payable until the expiration or termination of the product’s Orange Book listed patent(s) with respect to the United States or, outside the United States, the expiration of the last valid claim covering the product in the relevant country of the territory. For Zembrace, earn-out payments on annual net sales in the U.S. are 3 % for net sales of $ 0 to $ 30 million, 6 % of net sales of $ 30 to $ 75 million; 12 % for net sales of $ 75 to $ 100 million; 16 % for net sales of greater than $ 100 million. Such earn-out payments are payable until July 19, 2025. Upon the entry of a generic version of the relevant product, the applicable earn-out rates shall be reduced by 90 % percent with respect to Zembrace, and by 66.7 % percent for Tosymra. Prior to Purchaser or a licensee filing an application for marketing authorization for either of the products in a permitted country outside the U.S., the parties will negotiate in good faith the earn-out payment rates annual net sales tiers that will apply for such country, based on the market opportunity for the product in such country. If the parties fail to agree, then the earn-out payment rates and annual net sales tiers described above will apply. 17 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) In addition, the Company has assumed the obligation to pay an additional 3 % royalty on net sales of Tosymra, plus an additional 3 % if a patent containing certain claims related to Tosymra issues in the U.S., for 15 years from the first commercial sale of Tosymra in the applicable country or for as long as the manufacture, use or sale of Tosymra in such country is covered by a valid claim of a licensed patent, and up to $ 15 million per Tosymra product on the achievement of sales milestones. As consideration for acquisition of the Business and certain product-related inventories, the Company paid approximately $23.5 million in cash upfront. On the earlier of March 2024 and the completion of the transition services to be provided by USL, as described above, the Company agreed to pay an additional deferred payment of $ 3 .0 million in cash, which is included in Accrued expenses and other current liabilities on the accompanying balance sheet. The following table summarizes the components of the purchase consideration (in thousands): Preliminary purchase consideration Amount Closing cash consideration $ 22,174 Inventory adjustment payment liability 1,348 Deferred payment liability 3,000 Purchase price to be allocated $ 26,522 The USL Acquisition was accounted for as a business combination using the acquisition method, in accordance with the provisions of ASC 805, Business Combinations and ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The tangible and intangible assets acquired were recorded at their estimated fair values on the acquisition date, and the difference between the fair value of these assets and the purchase price has been recorded as goodwill. The purchase price allocation is based upon preliminary valuations and estimates and assumptions which are subject to change. As the Company receives additional information about facts and circumstances that existed at the acquisition date, the fair values of the acquired inventory and intangible assets may be adjusted, with the offset recorded to goodwill. The acquisition-date fair value analyses will be finalized as soon as practicable, but in no event later than one year after the acquisition date. The following table represents the preliminary allocation of the purchase price to the assets acquired by the Company in the USL Acquisition recognized in the Company’s consolidated balance sheets (in thousands): Preliminary purchase price allocation Amount Inventory $ 13,700 Prepaid expenses and other 1,757 Intangible assets, net 10,100 Goodwill 965 Fair value of assets acquired $ 26,522 The acquired inventory consists of USL’s raw materials, semi-finished goods, and finished goods inventory as of the Closing date. The fair value was determined based on the estimated selling price of the inventory, less the estimated total costs to complete, disposal effort and holding costs. The $ 1 .0 million of goodwill arising from the USL Acquisition represents expected synergies from combining operations, intangible assets that do not qualify for separate recognition, and other factors, of which all is expected to be deductible for tax purposes, subject to any limitations. Intangible assets eligible for recognition separate from goodwill were those that satisfied either the contractual or legal criterion or the separability criterion in the accounting guidance. The identifiable intangible assets acquired and their estimated useful lives for amortization are as follows (in thousands): Fair Value Useful Life (years) Developed technology - Tosymra $ 3,400 9 Developed technology - Zembrace 6,700 14 Total $ 10,100 The developed technology intangible assets related to Zembrace and Tosymra includes the value associated with the acquired patents, customer relationships, and trademarks and trade names associated with the technology. The developed technology intangible assets were valued as composite assets under the premise that each asset is reliant on one another to generate cash flow, is not considered separable from the technology, and are assumed to have similar useful lives. The composite intangible assets were valued using a multi-period excess earnings method and are being amortized over their estimated useful lives using the straight-line method of amortization. The key assumptions used in estimating the fair values of intangible assets include forecasted financial information, the weighted average cost of capital, customer retention rates, and certain other assumptions. The fair values assigned to the assets acquired are based on reasonable assumptions and estimates that market participants would use. Actual results may differ from these estimates and assumptions. Supplemental Pro Forma Information The following unaudited pro forma consolidated financial information reflects the results of operations of the Company for the three and nine months ended September 30, 2023 and 2022 as if the USL Acquisition had occurred as of January 1, 2022 and gives effect to transactions that are directly attributable to the acquisition. These amounts are based on financial information of the acquired business and are not necessarily indicative of what the Company’s operating results would have been had the acquisition taken place on the date presented, nor is it indicative of the Company’s future operating results. Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net Product Sales $ 3,989 $ 3,635 $ 11,610 $ 7,612 Net Loss $ ( 27,072 ) $ ( 33,698 ) $ ( 91,252 ) $ ( 95,073 ) 18 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) The pro forma information for all periods presented include additional amortization expense related to the fair value of the acquired intangible assets as if such assets were acquired on January 1, 2022. The pro forma financial information for the three and nine months ended September 30, 2022 also reflects an increase in Cost of Sales related to the preliminary acquisition-date fair value adjustment to inventory. This adjustment is not reflected in the three and nine months ended September 30, 2023 as the acquired inventory is expected to be sold within one year from the acquisition date. As described above, in connection with the USL Acquisition, the Company and USL entered into a Transition Services Agreement with the Seller related to providing ongoing services associated with the assets acquired, such as procuring and selling migraine therapy products, providing accounting and billing services and collecting accounts receivable and paying trade payables. The Seller collected and will continue to collect cash on behalf of Tonix for revenue generated by sales of the assets acquired from June 30, 2023 through the transition period and the Seller is obligated to transfer cash generated by such sales to the Buyer. The amount due to USL for reimbursement of services performed under the transition services agreement was $ 498,000 as of September 30, 2023. The transition service fees were netted against the receivables collected of $ 4,784,000 and liabilities paid of $ 2,724,000 on behalf of the Company with the net amount due to the Company of $ 1,562,000 recorded within receivables, net on the condensed consolidated balance sheet as of September 30, 2023. NOTE 11 – ASSET PURCHASE AGREEMENT WITH HEALION On February 2, 2023, the Company entered into an asset purchase agreement (the “Healion Asset Purchase Agreement”) with Healion Bio Inc., (“Healion”) pursuant to which the Company acquired all the pre-clinical infectious disease assets of Healion, including its portfolio of next-generation antiviral technology assets. Healion’s drug portfolio includes a class of broad-spectrum small molecule oral antiviral drug candidates with a novel host-directed mechanism of action, including TNX-3900, formerly known as HB-121. As consideration for entering into the Healion Asset Purchase Agreement, the Company paid $ 1.2 million to Healion. Because the Healion intellectual property was acquired prior to U.S. Food and Drug Administration (FDA) approval, the cash consideration totaling $ 1.2 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. NOTE 12 – LICENSE AGREEMENT WITH CURIA On December 12, 2022, the Company entered into an exclusive license agreement with Curia for the development of three humanized murine mAbs for the treatment or prophylaxis of SARS-CoV-2 infection. We believe that the licensing of these mAbs strengthens our pipeline of next-generation therapeutics to treat COVID-19, which is caused by SARS-CoV-2. As consideration for entering into the License Agreement, we paid a license fee of approximately $ 0.4 million to Curia. The License Agreement also provides for single-digit royalties and contingent milestone payments. As of September 30, 2023, other than the upfront fee, no payments have been accrued or paid in relation to this agreement. NOTE 13 – 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, 2023, other than the upfront fee, no milestone payments have been accrued or paid in relation to this agreement. NOTE 14 – LICENSE AGREEMENTS WITH COLUMBIA UNIVERSITY On February 13, 2023, Tonix exercised an option to obtain an exclusive license from Columbia for the development of a portfolio of both fully human and murine mAbs for the treatment or prophylaxis of SARS-CoV-2 infection, including our TNX-3600 and TNX-4100 product candidates, respectively. The licensed mAbs were developed as part of a research collaboration and option agreement between Tonix and Columbia. 19 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) NOTE 15 – SALE OF COMMON STOCK July 2023 Financing On July 27, 2023, the Company sold 2,530,000 shares of common stock; pre-funded warrants to purchase up to 4,470,000 shares of common stock, and accompanying common warrants to purchase up to 7,000,000 shares of common stock with an exercise price of $ 1.00 per share in a public offering that closed on August 1, 2023. The offering price per share of common stock and accompanying common warrant was $ 1.00 , and the offering price per share of pre-funded warrant and accompanying common warrant was $ 0.9999 . The Company incurred offering expenses of approximately $ 0.7 million, including placement agent fees of approximately $ 0.5 million. The Company received net proceeds of approximately $ 6.3 million, after deducting the underwriting discount and other offering expenses. 2022 Lincoln Park Transaction On August 16, 2022, the Company entered into an equity line of credit with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park agreed to purchase up to $ 50,000,000 of the Company’s common stock (subject to certain limitations) from time to time. 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. The Company issued 100,000 shares of common stock to Lincoln Park as consideration for its commitment to purchase shares of the Company’s common stock. 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 equity line of credit. During the three and nine months ended September 30, 2023, the Company sold 0 and 0.1 million shares, respectively, of common stock under the equity line of credit with Lincoln Park, for net proceeds of approximately $ 0 and $ 0.4 million, respectively. During the nine months ended September 30, 2022, no shares of common stock were sold under the equity line of credit. 20 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) 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 14,546 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 0.5 million shares of common stock under the Purchase Agreement with Lincoln Park, for net proceeds of approximately $ 8.7 million. No sales occurred in 2023. 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 0.5 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 0.4 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. At-the-Market Offerings On April 8, 2020, the Company entered into a sales agreement with AGP pursuant to which the Company may issue and sell shares of its common stock having an aggregate offering price of up to $ 320 .0 million in at-the-market offerings (“ATM”) sales at prevailing market prices at the time of the sale, and, as a result, prices will vary. AGP receives a 3 % commission on each ATM sale under the Sales Agreement. During the three and nine months ended September 30, 2023, the Company sold approximately 0 and 1 .0 million shares, respectively, of common stock under the Sales Agreement, for net proceeds of approximately $ 0 million and $ 3 .0 million, respectively. During the nine months ended September 30, 2022, the Company sold approximately 5.5 million shares of common stock under the Sales Agreement, for net proceeds of approximately $ 76.2 million. Stock Repurchases During the first quarter of 2023, the Company has repurchased 2,512,044 of its shares of common stock outstanding under the 2022 share repurchase program for up to $ 12.5 million at prices ranging from $ 2.75 to $ 8.61 per share for a gross aggregate cost of approximately $ 12.5 million. In addition, the Company incurred expenses of $ 0.3 million. In January 2023, the Board of Directors approved a new 2023 share repurchase program pursuant to which the Company may repurchase up to an additional $ 12.5 million in value of its outstanding common stock from time to time on the open market and in privately negotiated transactions subject to market conditions, share price and other factors. During the first quarter of 2023, the Company has repurchased 160,000 of our shares of common stock outstanding under the new 2023 share repurchase program at $ 7.12 per share for a gross aggregate cost of $ 1.1 million. No additional repurchases have occurred since the first quarter of 2023. The timing and amount of any shares repurchased will be determined based on the Company’s evaluation of market conditions and other factors and the New Share Repurchase Program may be discontinued or suspended at any time. Repurchases will be made in accordance with the rules and regulations promulgated by the Securities and Exchange Commission and certain other legal requirements to which the Company may be subject. Repurchases may be made, in part, under a Rule 10b5-1 plan, which allows stock repurchases when the Company might otherwise be precluded from doing so. NOTE 16 – STOCK-BASED COMPENSATION 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”). 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 50,000 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 31 st 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, 2023, 1,062,874 options were available for future grants under the Amended and Restated 2020 Plan. 21 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) General A summary of the stock option activity and related information for the Plans for the nine months ended September 30, 2023 is as follows: Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at December 31, 2022 392,643 $ 334.08 8.70 $ — Grants 1,019,130 4.64 Exercised — — Forfeitures or expirations ( 27,509 ) 453.81 Outstanding at September 30, 2023 1,384,264 $ 89.09 9.01 $ — Exercisable at September 30, 2023 248,656 $ 392.48 7.78 $ The weighted average fair value of options granted during the three and nine months ended September 2023 was $ 0.84 per share and $ 3.99 per share, respectively. The weighted average fair value of options granted during the three and nine months ended September 2022 was $ 0 per share and $ 32.81 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, 2023 and 2022 were as follows: Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 Risk-free interest rate 3.42 % to 4.35 % 1.67 % to 3.05 % Expected term of option 5.0 to 10 years 5.5 to 10 years Expected stock price volatility 122.19 % - 142.72 % 120.32 % - 133.22 % 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 $ 2.1 million, of which $ 1.4 million and $ 0.7 million, related to General and Administration and Research and Development, respectively was recognized for the quarter ended September 30, 2023. 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 $ 7.2 million, of which $ 5 .0 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, 2023. 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. As of September 30, 2023, the Company had approximately $ 8.2 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 1.74 years. Employee Stock Purchase Plans On May 6, 2022, the Company’s stockholders approved the Tonix Pharmaceuticals Holdings Corp. 2022 Employee Stock Purchase Plan. (the "2022 ESPP"), which was replaced by the Tonix Pharmaceuticals Holdings Corp. 2023 Employee Stock Purchase Plan (the “2023 ESPP”, and together with the 2022 ESPP, the “ESPP Plans”), which was approved by the Company's stockholders on May 5, 2023. The 2023 ESPP allows eligible employees to purchase up to an aggregate of 800,000 shares of the Company’s common stock. Under the 2023 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 2023 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 2023 ESPP, subject to the statutory limit under the Code. As of September 30, 2023, 800,000 shares were available for future sales under the 2023 ESPP. 22 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) The ESPP Plans are considered compensatory plans with the related compensation cost expensed over the six-month offering period. For the three months ended September 30, 2023 and 2022, $ 34,000 and $ 46,000 , respectively, was expensed. For the nine months ended September 30, 2023 and 2022, $ 34,000 and $ 46,000 , respectively were expensed. In January 2022, 646 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. In January 2023, 14,999 shares that were purchased as of December 31, 2022, under the 2022 ESPP, were issued. Accordingly, during the first quarter of 2023, approximately $ 29,000 of employee payroll deductions accumulated at December 31, 2022, related to acquiring such shares, was transferred from accrued expenses to additional paid in capital. The remaining $ 14,000 was returned to the employees. As of September 30, 2023, approximately $ 32,000 of employee payroll deductions have accumulated and have been recorded in accrued expenses. NOTE 17 – STOCK WARRANTS The following table summarizes information with respect to outstanding warrants to purchase common stock of the Company at September 30, 2023: Exercise Number Expiration Price Outstanding Date $ 1.00 7,000,000 August 2028 $ 100.00 125 November 2024 $ 114.00 618 February 2025 $ 7,000.00 2,453 December 2023 7,003,196 In connection with the July 2023 Financing, the Company issued 4,470,000 prefunded warrants with an exercise price of $ 0.0001 . All prefunded warrants were exercised during the quarter ended September 30, 2023. Additionally, the Company issued warrants to purchase up to an aggregate of 7,000,000 shares of the Company's common stock. The warrants are exercisable at $ 1.00 per share, expire five years from the date of issuance. No warrants were exercised during either of the nine months ended September 30, 2023, and 2022. NOTE 18 – 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, 2023, the Company has right-of-use assets of $ 1.1 million and a total lease liability for operating leases of $ 1.1 million of which $ 0.7 million is included in long-term lease liabilities and $ 0.4 million is included in current lease liabilities. At September 30, 2023, 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, 2023 $ 107 2024 460 2025 299 2026 142 2027 and beyond 246 1,254 Included interest ( 104 ) $ 1,150 During the nine months ended September 30, 2023, the Company entered into new operating leases and lease amendments, resulting in the Company recognizing an additional operating lease liability of approximately $ 898,000 based on the present value of the minimum rental payments. The Company also recognized a corresponding increase to ROU assets of approximately $ 898,000 , which represents a non-cash operating activity. 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 operating activity. Other information related to leases is as follows: Operating lease expense was $ 0.1 million for both three months ended September 30, 2023 and 2022. Operating lease expense was $ 0.4 million for both the nine-months ended September 30, 2023 and 2022. Other information related to leases is as follows: Cash paid for amounts included in the measurement of lease liabilities: Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 Operating cash flow from operating leases (in thousands) $ 434 $ 447 Weighted Average Remaining Lease Term Operating leases 3.50 years 2.33 years Weighted Average Discount Rate Operating leases 4.63 % 2.26 % 23 TONIX PHARMACEUTICALS HOLDING CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023 AND 2022 (UNAUDITED) NOTE 19 – COMMITMENTS Contractual agreements The Company has entered into contracts with various contract research organizations with outstanding commitments aggregating approximately $ 33.4 million at September 30, 2023 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 $ 200,000 and $ 700,000 for the three and nine months ended September 30, 2023, respectively, and $ 122,000 and $ 428,000 for the three and nine months ended September 30, 2022, respectively, for contributions under the 401(k) Plan. NOTE 20 – SUBSEQUENT EVENTS On September 28, 2023, the Company sold 4,050,000 shares of common stock; pre-funded warrants to purchase up to 4,950,000 shares of common stock, and accompanying Series A warrants to purchase up to 9,000,000 shares of common stock with an exercise price of $ 0.50 per share and expiring five years from date of issuance, and Series B warrants to purchase up to 9,000,000 shares of common stock with an exercise price of $ 0.50 per share and expiring one year from date of issuance in a public offering, which closed on October 3, 2023. The offering price per share of common stock and accompanying warrants was $ 0.50 , and the offering price per share of pre-funded warrant and accompanying warrants was $ 0.4999 . The Company incurred offering expenses of approximately $ 0.5 million, including placement agent fees of approximately $ 0.3 million. The Company received net proceeds of approximately $ 4.0 million, after deducting the underwriting discount and other offering expenses. On October 17, 2023, the Company received a letter from the Listing Qualifications staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, the Company no longer met the requirement to maintain a minimum bid price of $ 1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (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 14, 2024, in which to regain compliance with the Minimum Bid Price Requirement. 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. 24