Tonix Pharmaceuticals Holding Corp. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management’s current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may” “will,” “expect,” “anticipate,” “believe,” “estimate” “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors known to us could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that its assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions. Factors that could cause differences include, but are not limited to: risks related to our ability to successfully commercialize our products, failure to obtain clearances or approvals from the United States Food and Drug Administration, or FDA, and noncompliance with FDA regulations; our need for additional financing; substantial competition; uncertainties of patent protection and litigation; uncertainties of government or third party payor reimbursement; limited research and development efforts and dependence upon third parties and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and in our other SEC filings, as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. Business Overview Tonix is a biopharmaceutical company focused on commercializing, developing, discovering and licensing therapeutics to treat and prevent human disease and alleviate suffering. Tonix Medicines, our commercial subsidiary, markets Zembrace® SymTouch® (sumatriptan injection) 3 mg and Tosymra® (sumatriptan nasal spray) 10 mg under a transition services agreement with Upsher-Smith Laboratories, LLC from whom the products were acquired on June 30, 2023. Zembrace SymTouch and Tosymra are each indicated for the treatment of acute migraine with or without aura in adults. Tonix’s development portfolio is composed of central nervous system (CNS), rare disease, immunology and infectious disease product candidates. Tonix’s CNS development portfolio includes both small molecules and biologics to treat pain, neurologic, psychiatric and addiction conditions. Tonix’s lead development CNS candidate, TNX-102 SL (cyclobenzaprine HCl sublingual tablet), is in mid-Phase 3 development for the management of fibromyalgia, having completed enrollment of a potentially confirmatory Phase 3 study in the third quarter of 2023, with topline data expected in late December 2023. TNX-102 SL is also being developed to treat fibromyalgia-type Long COVID, a chronic post-acute COVID-19 condition, and topline results were reported in the third quarter of 2023. TNX-1900 (intranasal potentiated oxytocin), is in development as a preventive treatment in chronic migraine, and the clinical phase of a Phase 2 proof-of-concept study is now completed with topline data expected in early December 2023. TNX-1900 is also being studied in binge eating disorder, pediatric obesity and social anxiety disorder by academic collaborators under investigator-initiated INDs. TNX-1300 (cocaine esterase) is a biologic designed to treat cocaine intoxication and has been granted Breakthrough Therapy designation by the FDA. A Phase 2 study of TNX-1300 is expected to be initiated in the fourth quarter of 2023. Tonix’s rare disease development portfolio includes TNX-2900 (intranasal potentiated oxytocin) for the treatment of Prader-Willi syndrome. TNX-2900 has been granted Orphan Drug designation by the FDA. Tonix’s immunology development portfolio includes biologics to address organ transplant rejection, autoimmunity and cancer, including TNX-1500, which is a humanized monoclonal antibody targeting CD40-ligand (CD40L or CD154) being developed for the prevention of allograft rejection and for the treatment of autoimmune diseases. A Phase 1 study of TNX-1500 was initiated in the third quarter of 2023. Tonix’s infectious disease pipeline includes TNX-801, a vaccine in development to prevent smallpox and mpox. TNX-801 also serves as the live virus vaccine platform or recombinant pox vaccine platform for other infectious diseases, including TNX-1800, in development as a vaccine to protect against COVID-19. In the fourth quarter of 2023, TNX-1800 was selected by the U.S. National Institutes of Health (NIH), National Institute of Allergy and Infectious Diseases (NIAID) Project NextGen for inclusion in Phase 1 clinical trials. The infectious disease development portfolio also includes TNX-3900 and TNX-4000, which are classes of broad-spectrum small molecule oral antivirals. *Tonix’s product development candidates are investigational new drugs or biologics and have not been approved for any indication. 25 Results of Operations We anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, such as the progress of our research and development efforts and the timing and outcome of regulatory submissions. Due to these uncertainties, accurate predictions of future operations are difficult or impossible to make. Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 Revenues . The Company recognized revenue from customers beginning in the three months period ended September 30, 2023 as a result of the Upsher Smith acquisition. See discussion at Note 10 to our interim condensed financial statements appearing in this Quarterly Report on Form 10-Q. Revenue recognized for the three months ended September 30, 2023 was $4.0 million. The Company’s net product revenues are summarized below: Three Months Ended September 30, 2023 2022 Zembrace® Symtouch® $ 3,292 $ — Tosymra® 697 $ — Total product revenues $ 3,989 $ — Cost of Sales . The Company recognized cost of sales beginning in the three months period ended September 30, 2023 as a result of the Upsher Smith acquisition. See discussion at Note 10 to our interim condensed financial statements appearing in this Quarterly Report on Form 10-Q. Cost of sales recognized for the three months ended September 30, 2023 was $2.4 million. Research and Development Expenses . Research and development expenses for the three months ended September 30, 2023 were $21.1 million, a decrease of $1.1 million, or 5%, from $22.2 million for the three months ended September 30, 2022. This decrease is predominately due to decreased non-clinical expenses of $1.6 million, manufacturing expenses of $2.9 million, offset by an increase in clinical expenses of $1.5 million, an increase in employee-related expenses and professional fees of $1.0 million, office-related expenses of $0.7 million and lab supplies of $0.2 million. The table below summarizes our direct research and development expenses for our product candidates and development platform for the three months ended September 30, 2023, and 2022. Three months ended September 30, (in thousands) 2023 2022 Change Research and development expenses: Direct expenses – TNX - 102 SL $ 3,365 $ 4,258 $ (893 ) Direct expenses – TNX - 601 ER 2,901 207 2,694 Direct expenses – TNX - 801 551 1,281 (730 ) Direct expenses – TNX - 1500 2,420 4,219 (1,799 ) Direct expenses – TNX - 1900 627 1,116 (489 ) Direct expenses – Other programs 6,127 3,279 2,848 Internal staffing, overhead and other 5,059 7,841 (2,782 ) Total research & development $ 21,050 $ 22,201 $ (1,151 ) Our direct research and development expenses consist principally of external costs for clinical, nonclinical and manufacturing, such as fees paid to contractors, consultants and contract research organizations in connection with our development work. Included in “Internal Staffing, Overhead and Other” is overhead, supplies, research and development employee costs (including stock option expenses), travel, regulatory and legal. General and Administrative Expenses . General and administrative expenses for the three months ended September 30, 2023 were $8.7 million, an increase of $1.3 million, or 18%, from $7.4 million incurred in the three months ended September 30, 2022. The increase is primarily due to sales and marketing of $1.3 million, transition services agreement fees payable to Upsher-Smith Laboratories, LLC (“USL”) of $0.7 million, an increase in amortization expenses of $0.2 million, offset by a decrease in financial reporting expenses of $0.6 million and payroll-related expenses of $0.4 million. Net Loss . As a result of the foregoing, the net loss for the three months ended September 30, 2023 was $28.0 million, compared to a net loss of $29.0 million for the three months ended September 30, 2022. 26 Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 Revenues . The Company recognized revenue from Customers beginning in the nine months period ended September 30, 2023 as a result of the Upsher Smith acquisition. See discussion at Note 10 to our interim condensed financial statements appearing in this Quarterly Report on Form 10-Q. Revenue recognized for the nine months ended September 30, 2023 was $4.0 million. The Company’s net product revenues are summarized below: Nine Months Ended September 30, 2023 2022 Zembrace® Symtouch® $ 3,292 $ — Tosymra® 697 $ — Total product revenues $ 3,989 $ — Cost of Sales . The Company recognized cost of sales beginning in the nine months period ended September 30, 2023 as a result of the Upsher Smith acquisition. See discussion at Note 10 to our interim condensed financial statements appearing in this Quarterly Report on Form 10-Q. Cost of sales recognized for the nine months ended September 30, 2023 was $2.4 million Research and Development Expenses . Research and development expenses for the nine months ended September 30, 2023 were $69.5 million, an increase of $12.3 million, or 22%, from $57.2 million for the nine months ended September 30, 2022. This increase is predominately due to increased clinical expenses of $6.9 million, employee-related expenses of $3.7 million, office-related expenses of $3.5 million and lab supplies of $2.7 million, offset by a decrease in manufacturing costs of $6.1 million and non-clinical expenses of $0.2 million. 27 The table below summarizes our direct research and development expenses for our product candidates and development platform for the nine months ended September 30, 2023, and 2022. Nine months ended September 30, (in thousands) 2023 2022 Change Research and development expenses: Direct expenses – TNX - 102 SL $ 10,342 $ 10,388 $ (46 ) Direct expenses – TNX - 601 ER 7,431 854 6,577 Direct expenses – TNX - 801 2,261 1,478 783 Direct expenses – TNX - 1800 1,576 3,503 (1,927 ) Direct expenses – TNX - 1500 6,010 7,731 (1,721 ) Direct expenses – TNX - 1900 4,168 2,669 1,499 Direct expenses – Other programs 10,696 10,650 46 Internal staffing, overhead and other 27,051 19,929 7,122 Total research & development $ 69,535 $ 57,202 $ 12,333 Our direct research and development expenses consist principally of external costs for clinical, nonclinical and manufacturing, such as fees paid to contractors, consultants and CROs in connection with our development work. Included in “Internal Staffing, Overhead and Other” is overhead, supplies, research and development employee costs (including stock option expenses), travel, regulatory and legal. General and Administrative Expenses . General and administrative expenses for the nine months ended September 30, 2023 were $23.1 million, an increase of $0.9 million, or 4%, from $22.2 million incurred in the nine months ended September 30, 2022. The increase is primarily due to sales and marketing of $1.3 million, and transition services agreement fees payable to USL of $0.7 million, depreciation expenses of $0.3 million and accounting-related expenses of $0.3 million, offset by a decrease in financial reporting expenses of $1.8 million and compensation-related expenses of $0.2 million. Net Loss . As a result of the foregoing, the net loss for the nine months ended September 30, 2023 was $89.3 million, compared to a net loss of $78.5 million for the nine months ended September 30, 2022. License Agreements On February 13, 2023, we exercised an option to obtain an exclusive license from Columbia for the development of a portfolio of 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 us and Columbia. On December 12, 2022, we 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. 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. On May 18, 2022, we 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, we 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 payments have been accrued or paid in relation to this agreement. Asset Purchase Agreements On June 23, 2023, we entered into an asset purchase agreement with USL for the acquisition of certain assets 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 (such transaction, the “USL Acquisition”). The transaction closed on June 30, 2023. 28 Additionally, in connection with the USL Acquisition, we and USL entered into a transition services agreement pursuant to which USL will provide certain transition services to us for base fees equal to $100,000 per month for the first six months, and $150,000 per month for the seventh through ninth months, plus additional monthly fees for each service category totaling up to $150,000 per month. As the assets acquired met the definition of a business under the current accounting guidance, the total purchase price was allocated to the acquired inventory and other tangible assets, and the developed technology intangible assets related to Zembrace and Tosymra based on their estimated fair values on the acquisition date. The excess of the purchase price over the fair value of the acquired assets was recorded as goodwill. We have assumed certain obligations of USL, 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. In addition, we have 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. On February 2, 2023, we entered into an asset purchase agreement (the “Healion Purchase Agreement”) with Healion Bio Inc., pursuant to which we acquired all the pre-clinical infectious disease assets of Healion. As consideration for entering into the Healion Purchase Agreement, we paid $1.2 million to Healion. Because the Healion intellectual property was acquired prior to 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. 29 Liquidity and Capital Resources As of September 30, 2023, we had working capital of $13.6 million, comprised primarily of cash and cash equivalents of $6.9 million, inventory of $13.3 million, receivables, net of $1.6 million and prepaid expenses and other of $9.5 million, offset by $7.8 million of accounts payable, $9.5 million of accrued expenses and current lease liabilities of $0.4 million. A significant portion of the accounts payable and accrued expenses are due to work performed in relation to our clinical programs, and the USL Acquisition. The following table provides a summary of operating, investing and financing cash flows for the nine months ended September 30, 2023, and 2022, respectively (in thousands): September 30, 2023 2022 Net cash used in operating activities $ (79,663 ) $ (75,752 ) Net cash used in investing activities (28,639 ) (43,476 ) Net cash (used in) provided by financing activities (4,198 ) 80,615 For the nine months ended September 2023 and 2022, we used approximately $79.7 million and $75.8 million of cash in operating activities, respectively, which represents cash outlays for research and development and general and administrative expenses in such periods. The increase in cash outlays principally resulted from an increase in both research and development and general and administrative activities. For the nine months ended September 30, 2023, net cash used from financing activities was $4.2 million predominately from the repurchase of common stock. For the nine months ended September 30, 2022, net proceeds in financing activities was $80.6 million, predominately from the sale of our common and preferred stock. Cash used in investing activities for the nine months ended September 30, 2023 was $28.6 related to the purchase of the USL assets and property and equipment, and $43.5 million for the nine months ended September 30, 2022 related to the purchase of property and equipment. We believe that our cash resources at September 30, 2023, and the proceeds that we raised from equity offerings subsequent to the end of the third quarter of 2023 will not meet our operating and capital expenditure requirements through the fourth quarter of 2023. We continue to face significant challenges and uncertainties and, as a result, our available capital resources may be consumed more rapidly than currently expected due to changes we may make in our research and development spending plans. These factors raise substantial doubt about our ability to continue as a going concern for the one year period from the date of filing of this Form 10-Q. We must obtain additional funding through public or private financing or collaborative arrangements with strategic partners to increase the funds available to fund operations. Without additional funds, we may be forced to delay, scale back or eliminate some of our research and development activities, or other operations and potentially delay product development in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve our development and commercialization goals would be adversely affected and we may be forced to cease operations. Future Liquidity Requirements We expect to incur losses from operations for the near future. We expect to incur increasing research and development expenses, including expenses related to additional clinical trials and the buildout of our research and development operations and manufacturing. We will not have enough resources to meet our operating requirements for the one-year period from filing date of this report. Our future capital requirements will depend on a number of factors, including the progress of our research and development of product candidates, the timing and outcome of regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, the status of competitive products, the availability of financing and our success in developing markets for our product candidates. We will need to obtain additional capital in order to fund future research and development activities and future capital expenditures. Future financing may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, shareholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our commercialization efforts or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently. 30 Share Repurchase Program During the first quarter of 2023, we repurchased 2,512,044 of our 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, we incurred expenses of $0.3 million. In January 2023, the Board of Directors approved a new 2023 share repurchase program pursuant to which we may repurchase up to an additional $12.5 million in value of our 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, we 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 share repurchases occurred in the third quarter of 2023. Convertible Redeemable Preferred stock On October 26, 2022, we issued 1,400,000 shares of Series A Preferred Stock and 100,000 shares of Series B Preferred Stock to certain institutional investors in a private placement. The Preferred Stock had an aggregate stated value of $15,000,000. Each share of the Preferred Stock had a purchase price of $9.50, representing an OID of 5% of the stated value. The shares of the preferred stock were convertible into shares of our common stock, upon the occurrence of certain events, at a conversion price of $6.25 per share. All outstanding shares of the Series A Convertible Redeemable Preferred Stock and Series B Convertible Redeemable Preferred Stock were redeemed in 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, we issued 2,500,000 shares of Series A Preferred Stock and 500,000 shares of Series B Preferred Stock to certain institutional investors in a private placement. The Preferred Stock had an aggregate stated value of $30,000,000. Each share of the Preferred Stock had a purchase price of $9.50, representing an OID of 5% of the stated value. The shares of the preferred stock were convertible into shares of our common stock, upon the occurrence of certain events, at a conversion price of $25.00 per share. All outstanding shares of the Series A Convertible Redeemable Preferred Stock and Series B Convertible Redeemable Preferred Stock were redeemed in August 2022 at 105% of the $10.00 stated value of the Preferred Stock, or $31.5 million in the aggregate. September 2023 Financing On September 28, 2023, we sold 4,050,000 shares of common stock; pre-funded warrants to purchase up to 4,950,000 shares of common stock, and accompanying common 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, and common 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 in a public offering which closed on October 3, 2023. The offering price per share of common stock and accompanying common warrant was $0.50, and the offering price per share of pre-funded warrant and accompanying common warrant was $0.4999. We incurred other offering expenses of approximately $0.5 million, which included a placement agent discount. We received net proceeds of approximately $4.0 million, after deducting the underwriting discount and other offering expenses. July 2023 Financing On July 27, 2023, we sold securities consisting of 2,530,000 shares of common stock; pre-funded warrants to purchase up to 4,470,000 shares of common stock and common warrants to purchase up to 7,000,000 shares of common stock in a public offering that closed on August 1, 2023. The offering price per Share and accompanying Common Warrant is $1.00, and the offering price per Pre-Funded Warrant and accompanying Common Warrant is $0.9999. 31 We incurred other offering expenses of approximately $0.7 million, which included a placement agent discount. We 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, we entered into a purchase agreement (the “2022 Purchase Agreement”) and a registration rights agreement with Lincoln Park, pursuant to which Lincoln Park agreed to purchase from us up to $50,000,000 of our common stock (subject to certain limitations) from time to time. We filed a registration statement to register for resale the shares that have been or may be issued to Lincoln Park under the 2022 Purchase Agreement. We issued 100,000 shares of common stock to Lincoln Park as consideration for its commitment to purchase shares of our common stock under the 2022 Purchase Agreement. The commitment shares were valued at $1,000,000 and recorded as an addition to equity for the issuance of the common stock and treated as a reduction to equity as a cost of capital to be raised under the 2022 Purchase Agreement. During the three and nine months ended September 30, 2023, we sold 0 and 0.1 million shares, respectively, of common stock under the 2022 Purchase Agreement, 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 2022 Purchase Agreement. 2021 Lincoln Park Transaction On December 3, 2021, we entered into a purchase agreement (the “2021 Purchase Agreement”) and a registration rights agreement with Lincoln Park, pursuant to which Lincoln Park has agreed to purchase from us up to $80,000,000 of our common stock (subject to certain limitations) from time to time. We filed a registration statement to register for resale the shares that have been or may be issued to Lincoln Park under the 2021 Purchase Agreement. We issued 14,546 shares of common stock to Lincoln Park as consideration for its commitment to purchase shares of our common stock under the 2021 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, we sold 0.5 million shares of common stock under the 2021 Purchase Agreement with Lincoln Park, for net proceeds of approximately $8.7 million. No sales occurred in 2023, and we may not sell any additional shares under the 2021 Purchase Agreement. At-the-Market Offerings On April 8, 2020, we entered into a sales agreement (the “Sales Agreement”) with AGP pursuant to which we may issue and sell, from time to time, shares of our common stock having an aggregate offering price of up to $320.0 million in at-the-market offerings (“ATM”) sales. AGP will act as sales agent and will be paid a 3% commission on each sale under the Sales Agreement. Our common stock will be sold at prevailing market prices at the time of the sale, and, as a result, prices will vary. During the three and nine months ended September 30, 2023, we sold approximately 0 million 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 three and nine months ended September 30, 2022, we sold approximately 3.1 million and 5.5 million shares, respectively, of common stock under the Sales Agreement, for net proceeds of approximately $43.0 million and $76.2 million, respectively. 32 Stock Compensation On May 1, 2020, our 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, we may issue (1) stock options (incentive and nonstatutory), (2) restricted stock, (3) stock appreciation rights (“SARs”), (4) restricted stock units, (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 31 st 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. We measure 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 1/36 th 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 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. The weighted average fair value of options granted during the three and nine months ended September 30, 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 30, 2022 was $0 per share and $32.81 per share, respectively. 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. 33 Employee Stock Purchase Plan On May 6, 2022, our 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. 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. Commitments Research and Development Contracts We have 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. Operating leases As of September 30, 2023, future minimum lease payments are as follows (in thousands): Year Ending December 31, 2023 $ 107 2024 460 2025 299 2026 142 2027 and beyond 246 Included interest (104 ) $ 1,150 Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. 34 We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. Business Combinations. We apply the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity recognizes all of the identifiable assets acquired and liabilities assumed at their acquisition date fair values. We use our best estimates and assumptions to estimate the fair values of these tangible and intangible assets. Any excess of the purchase price over amounts allocated to the assets acquired is recorded as goodwill. The acquired intangible assets are amortized using the straight-line method over the estimated useful lives of the respective assets. 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. Revenue Recognition. Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration represents chargebacks, rebates, prompt pay and other sales discounts, and product returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on gross sales for a reporting period. We began recognizing revenue following the completion of the USL Acquisition, beginning in the period ended September 30, 2023, and required variable consideration estimates are currently primarily based on the acquired products historical results. Adjustments to these estimates to reflect actual results or updated expectations will be assessed each period. If any of our ratios, factors, assessments, experiences, or judgments are not indicative or accurate estimates of our future experience, our results could be materially affected. The potential of our estimates to vary differs by program, product, type of customer and geographic location. In addition, estimates associated with U.S. Medicare and Medicaid governmental rebate programs are at risk for material adjustment because of the extensive time delay. Research and Development. We outsource certain of our research and development efforts and expense the related costs as incurred, including the cost of manufacturing product for testing, licensing fees and costs associated with planning and conducting clinical trials. The value ascribed to patents and other intellectual property acquired was expensed as research and development costs, as it related to particular research and development projects and had no alternative future uses. We estimate our accrued expenses. Our clinical trial accrual process is designed to account for expenses resulting from our obligations under contracts with vendors, consultants and clinical research organizations and 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 to us under such contracts. We account for trial expenses according to the progress of the trial as measured by participant progression and the timing of various aspects of the trial. We determine accrual estimates that take into account discussions with applicable personnel and outside service providers as to the progress or state of completion of trials, or the services completed. During the course of a clinical trial, we adjust our clinical expense recognition if actual results differ from our estimates. We make estimates of our accrued expenses as of each balance sheet date based on the facts and circumstances known to us at that time. Our clinical trial accruals and prepaid assets are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors. Stock-Based Compensation. All stock-based payments to employees and to nonemployee directors for their services as directors consisted of grants of restricted stock and stock options, which are measured at fair value on the grant date and recognized in the consolidated statements of operations as compensation expense over the relevant vesting period. In addition, for awards that vest immediately and are nonforfeitable, the measurement date is the date the award is issued. Redeemable 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. Other than contractual obligations incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retain or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity. 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. We 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. 35 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 us for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, using a modified retrospective approach. Early adoption is permitted. We 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. 36 ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.