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” and “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: our need for additional financing; risks related to the failure to obtain FDA clearances or approvals and noncompliance with FDA regulations; risks related to the failure to successfully market any of our products; risks related to the timing and progress of clinical development of our product candidates; 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 substantial competition. Business Overview We are a fully-integrated biopharmaceutical company focused on developing, licensing and commercializing therapeutics to treat and prevent human disease and alleviate suffering. Tonix’s development portfolio is focused on central nervous system (CNS) disorders. Tonix’s priority is to submit a New Drug Application (NDA) to the FDA in the second half of 2024 for Tonmya™, a product candidate for which two pivotal Phase 3 studies have been completed for the management of fibromyalgia. Tonix has a pre-NDA meeting scheduled with the FDA in the second quarter of 2024. TNX-102 SL is also being developed to treat acute stress reaction as well as fibromyalgia-type Long COVID. Tonix’s CNS portfolio includes TNX-1300 (cocaine esterase), a biologic designed to treat cocaine intoxication that has Breakthrough Therapy designation. Tonix’s immunology development portfolio consists of 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. Tonix also has product candidates in development in the areas of rare disease and infectious disease. Tonix Medicines, our commercial subsidiary, markets Zembrace® SymTouch® (sumatriptan injection) 3 mg and Tosymra® (sumatriptan nasal spray) 10 mg for the treatment of acute migraine with or without aura in adults. All of our product candidates are investigational new drugs or biologics and have not been approved for any indication. Tonmya has been conditionally accepted by the U.S. Food and Drug Administration (FDA) as the tradename for TNX-102 SL for the management of fibromyalgia. Tonmya has not been approved for any indication. Zembrace SymTouch and Tosymra are registered trademarks of Tonix Medicines. All other marks are the property of their respective owners. Results of Operations We anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, such as the sale of our commercialized assets, 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. Since the acquisition of Zembrace and Tosymra on June 30, 2023, we are now reporting product revenue and related costs. Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 The following table sets forth our operating expenses for the quarter ended March 31, 2024 and 2023 (in thousands): Quarter Ended March 31, 2024 2023 REVENUE Product revenue, net $ 2,482 $ — COSTS AND EXPENSES: Cost of sales $ 1,660 $ — Research and development 12,863 26,511 General and administrative 9,310 7,391 Total operating expenses 23,833 33,902 Operating loss (21,351 ) (33,902 ) Other income, net 6,412 897 Net loss $ (14,939 ) $ (33,005 ) 31 Revenues . The Company recognized revenue beginning in July 2023, as a result of the acquisition of two marketed products. Revenue recognized for the quarter ended March 31, 2024, was $2.5 million. The Company’s net product revenues are summarized below: Quarter Ended March 31, 2024 2023 Zembrace Symtouch $ 1,847 $ — Tosymra 635 — Total product revenues $ 2,482 $ — Cost of Sales . The Company recognized cost of sales beginning in July 2023 as a result of the acquisition of Zembrace and Tosymra from Upsher Smith. Cost of sales recognized for the quarter ended March 31, 2024, was $1.7 million. Research and Development Expenses . Research and development expenses for the three months ended March 31, 2024, were $12.9 million, a decrease of $13.6 million, or 51%, from $26.5 million for the three months ended March 31, 2023. The decrease is predominately due to decreased clinical expenses of $5.0 million, non-clinical expenses of $4.2 million, and manufacturing expenses of $0.9 million as a result of fewer trials in the clinic and pipeline prioritization period over period, employee-related expenses of $0.8 million and lab supplies of $1.8 million, due to a reduction in expenditures. The table below summarizes our direct research and development expenses for our product candidates and development platform for the quarters ended March 31, 2024, and 2023. March 31, (in thousands) 2024 2023 Change Research and development expenses: Direct expenses – TNX - 102 SL $ 1,716 $ 3,614 $ (1,898 ) Direct expenses – TNX - 601 ER 528 2,597 (2,069 ) Direct expenses – TNX - 801 555 782 (227 ) Direct expenses – TNX - 1300 556 56 500 Direct expenses – TNX - 1500 790 2,164 (1,374 ) Direct expenses – TNX - 1800 266 703 (437 ) Direct expenses – TNX - 1900 491 2,219 (1,728 ) Direct expenses – TNX - 3900 — 1,329 (1,329 ) Direct expenses – Other programs 360 1,905 (1,545 ) Internal staffing, overhead and other 7,601 11,142 (3,541 ) Total research & development $ 12,863 $ 26,511 $ (13,648 ) 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 March 31, 2024, were $9.3 million, an increase of $1.9 million, or 26%, from $7.4 million incurred in the three months ended March 31, 2023. The increase is primarily due to an increase in financial reporting expenses of $0.6 million, related to the special shareholder meetings in Q1 2024, an increase in sales and marketing of $0.4 million, and transition services agreement fees payable to Upsher Smith of $0.7 million. Net Loss . As a result of the forgoing, the net loss for the three months ended March 31, 2024, was $14.9 million, compared to a net loss of $33.0 million for the three months ended March 31, 2023, a decrease of $18.1 million or 55%. 32 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. As of March 31, 2024, 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 Upsher Smith for the acquisition of certain assets related to Zembrace and Tosymra (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. Additionally, in connection with the acquisition from Upsher Smith, we and Upsher Smith entered into a transition services agreement pursuant to which Upsher Smith agreed to 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. We have signed an amendment to the transitional services agreement with Upsher Smith so that Upsher Smith will continue to manage certain government rebates, and Upsher Smith will be reimbursed by us at cost for any rebates they pay on our behalf. As the assets acquired from Upsher Smith 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 Upsher Smith, including the payment of quarterly royalty 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. Royalty 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, royalty 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 royalty payments are payable until July 19, 2025. Upon the entry of a generic version of the relevant product, the applicable royalty rates will be reduced by 90% percent for 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 with Healion Bio Inc., pursuant to which we acquired all the pre-clinical infectious disease assets of Healion for $1.2 million. Because the Healion intellectual property was acquired prior to FDA approval, the $1.2 million cash consideration was expensed as research and development costs since there is no alternative future use and the acquired intellectual property does not constitute a business. 33 Liquidity and Capital Resources As of March 31, 2024, we had working capital of $9.6 million, comprised primarily of cash and cash equivalents of $7.0 million, inventory of $12.4 million, and prepaid expenses and other of $10.7 million, offset by $6.6 million of accounts payable, $10.7 million of accrued expenses and other current liabilities, $2.8 million of term loan payable, short term and $0.3 million of lease liabilities, short term. A significant portion of the accounts payable and accrued expenses are due to work performed in relation to our clinical programs, and the acquisition of Zembrace and Tosymra. During the fourth quarter of 2023, we engaged CBRE, an international real estate brokerage firm, to potentially find a strategic partner for, or buyer of, our Advanced Development Center in North Dartmouth, Massachusetts (“ADC”), to align with our current business objectives and priorities. Currently, we do not have a commitment in place to sell the building. The following table provides a summary of operating, investing and financing cash flows for the quarters ended March 31, 2024, and 2023, respectively (in thousands): March 31, 2024 2023 Net cash used in operating activities $ (17,575 ) $ (32,911 ) Net cash used in investing activities (108 ) (3,799 ) Net cash used in financing activities (212 ) (11,500) For the three months ended March 31, 2024, and 2023, we used approximately $17.6 million and $32.9 million of cash in operating activities, respectively, which represents cash outlays for research and development and general and administrative expenses in such periods. The decrease in cash outlays principally resulted from a decrease in research and development activities. For the three months ended March 31, 2024, net cash used by financing activities were $0.2 million, predominately from the repayment of the term loan. For the three months ended March 31, 2023, net cash used by financing activities were $11.5 million, predominately from the repurchase of our common stock. Cash used by investing activities for the three months ended March 31, 2024, and 2023, was $0.1 million and $3.8 million respectively, related to the purchase of property and equipment. The decrease is predominately due to less property and equipment purchases as the ADC and RDC were placed in service during 2022. We believe that our cash resources at March 31, 2024, and the proceeds that we raised from equity offerings subsequent to the end of the first quarter of 2024, will not meet our operating and capital expenditure requirements through the second quarter of 2024. 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 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 build out 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 availability of financing, the timing and outcome of regulatory approvals, the progress of our research and development of product candidates, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, the status of competitive products, 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. 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. 34 April 2024 Financing On March 28, 2024, we entered into an agreement to sell 10,766,666 shares of common stock, pre-funded warrants to purchase up to 3,900,000 shares of common stock, and accompanying Series E warrants to purchase up to 14,666,666 shares of common stock with an exercise price of $0.33 per share and expiring five and a half years from date of issuance in a public offering, which closed on April 1, 2024. The offering price per share of common stock was $0.30, accompanying warrants was $0.33, and the offering price per share of pre-funded warrants was $0.2999. We incurred offering expenses of approximately $0.5 million, including placement agent fees of approximately $0.3 million. We received net proceeds of approximately $3.9 million, after deducting the underwriting discount and other offering expenses. Additionally, with the closing of the financing on April 1, 2024, we entered into warrant amendments with certain holders of our Common Warrants. The exercise price of each Existing Warrant will be amended to $0.33 upon approval by the Company’s stockholders of a proposal to allow the Existing Warrants to become exercisable in accordance with Nasdaq Listing Rule 5635, or as otherwise provided in the Amendment if stockholder approval is not obtained by October 1, 2024. Stockholders will vote on this proposal on May 22, 2024. Upon stockholder approval, the termination date for Common Warrants to purchase up to an aggregate of 6,950,000 shares will be amended to April 1, 2029; the termination date for Series A Warrants to purchase up to an aggregate of approximately 8,900,000 shares will be April 1, 2029; the termination date for Series B Warrants to purchase up to an aggregate of approximately 8,900,000 shares will be April 1, 2029; the termination date for Series C Warrants to purchase up to an aggregate of approximately 34,823,928 shares will be the earlier of (i) April 1, 2026 and (ii) 10 trading days following notice by the Company to the Series C Warrant holder of the Company’s public announcement of the FDA’s acknowledgement and acceptance of our NDA relating to TNX-102 SL in patients with Fibromyalgia; the termination date for Series D Warrants to purchase up to an aggregate of approximately 34,823,928 shares will be April 1, 2029. The other terms of the Existing Warrants will remain unchanged. If stockholder approval is not obtained on or by October 1, 2024, then the Company has agreed to automatically amend the exercise price of the Existing Warrants to the Minimum Price (as defined in Nasdaq Listing Rule 5635(d)) of the Common Stock on October 1, 2024 if and only if the Minimum Price is below the then current exercise price. December 2023 Financing On December 20, 2023, we issued (i) 25,343,242 shares of our common stock, (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 28,710,812 shares of common stock and (iii) Series C warrants to purchase up to 81,081,081 shares of common stock (the “Series C Warrants”), and (iv) Series D warrants to purchase up to 81,081,081 shares of common stock (the “Series D Warrants” and, together with the Series C Warrants, the “Common Warrants”) in a registered direct offering. The securities were sold in fixed combinations as units. The offering price per share of common stock and accompanying Common Warrants was $0.555, and the offering price per Pre-Funded Warrant and accompanying Common Warrants was $0.5549. The offering closed on December 22, 2023, generating gross proceeds of approximately $30.0 million, before deducting offering expenses of $2.3 million payable by us. The Pre-Funded Warrants have an exercise price of $0.0001 per share, are immediately exercisable subject to certain ownership limitations, and can be exercised at any time until exercised in full. The Series C Warrants have an exercise price of $0.555 per share, and are exercisable on the later of approval by the Company’s stockholders of (i) a proposal to approve the filing of an amendment to the Company’s Articles of Incorporation, increasing the number of authorized shares of common stock from 160,000,000 to 1,000,000,000 and (ii) a proposal to allow the Warrants to become exercisable in accordance with Nasdaq Listing Rule 5635 (the later of such events, the “Approval Date”) and will expire on the later of (a) 10 trading days following the Approval Date and (b) the earlier of (x) the two year anniversary of the Approval Date and (y) 10 trading days following the public announcement of the FDA’s acknowledgement and acceptance of the NDA relating to TNX-102 SL in patients with fibromyalgia. The Series D Warrants have an exercise price of $0.85 per share and are exercisable beginning on the Approval Date through the five-year anniversary of the Approval Date. 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, including 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 of common stock and accompanying common warrant was $1.00, and the offering price per pre-funded warrant and accompanying common warrant was $0.9999. We incurred offering expenses of approximately $0.7 million, including placement agent fees of approximately $0.5 million. 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 (the “2022 Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”). Pursuant to the terms of the 2022 Purchase Agreement, Lincoln Park has agreed to purchase from us up to $50,000,000 of our common stock (subject to certain limitations) from time to time during the term of the 2022 Purchase Agreement. Pursuant to the terms of the 2022 Registration Rights Agreement, we filed with the SEC a registration statement to register for resale under the Securities Act the shares that have been or may be issued to Lincoln Park under the 2022 Purchase Agreement. Pursuant to the terms of the 2022 Purchase Agreement, at the time we signed the 2022 Purchase Agreement and the 2022 Registration Rights 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. 35 No sales under the 2022 Purchase Agreement occurred during the quarter ended March 31, 2024. During the quarter ended March 31, 2023, we sold 0.1 million shares of common stock under the 2022 Purchase Agreement, for net proceeds of approximately $0.4 million. At-the-Market Offering 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. No shares of common stock under the Sales Agreement were sold during the quarter ended March 31, 2024. During the quarter ended March 31, 2023, we sold approximately 0.5 million shares of common stock under the Sales Agreement, for net proceeds of approximately $2.0 million. During the quarter ended March 31, 2024, no shares of common stock under the Sales Agreement were sold. Share Repurchase Program During the quarter ended March 31, 2023 , we repurchased 2,512,044 of our shares of common stock outstanding under a $12.5 million share purchase program 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 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 quarter ended March 31, 2023, we repurchased 160,000 of our shares of common stock outstanding under the new share repurchase program at $7.12 per share for a gross aggregate cost of $1.1 million. Debt Financing On December 8, 2023, we executed a Loan and Guaranty Agreement (the “Loan Agreement”) to issue a 36-month term loan (the “Term Loan”) in the principal amount of $11.0 million with a maturity date of December 8, 2026 (the “Maturity Date”). The Term Loan was funded with an original issue discount of 9% of the principal amount of the Term Loan, or $1.0 million, which is being amortized over the term of the debt as an adjustment to the effective interest rate on the outstanding borrowings. Borrowings under the Term Loan bear interest at a fluctuating rate equal to the greater of (i) the prime rate as defined in the Loan Agreement plus 3.5% and (ii) 12%. Interest is payable monthly in arrears commencing in December 2023. In connection with the Term Loan, we deposited into a reserve account $1.8 million to be used exclusively to fund interest payments related to the Term Loan. The deposit is reflected as prepaid and other current assets on the consolidated balance sheet. Commencing on March 8, 2024 and continuing monthly through the Maturity Date, the outstanding principal will be due and payable in monthly installments of $0.2 million, with the final remaining balance of unpaid principal and interest due and payable on the Maturity Date. In addition, we must pay a monthly collateral monitoring charge equal to 0.23% of the outstanding principal amount of the term loan as of the date of payment. We incurred $1.1 million in issuance costs, which is being amortized over the term of the debt as an adjustment to the effective interest rate on the outstanding borrowings. The Loan Agreement provides for voluntary prepayments of the Term Loan, in whole or in part, subject to a prepayment premium. The Loan Agreement contains customary affirmative and negative covenants by us, which among other things, will require us to provide certain financial reports to the lenders, to maintain a deposit account to fund interest payments, and limit the ability of us to incur or guarantee additional indebtedness, pay dividends or make other equity distributions, sell assets, engage in certain transactions, and effect a consolidation or merger. Our obligations under the Loan Agreement may be accelerated upon customary events of default, including non-payment of principal, interest, fees and other amounts, covenant default, insolvency, material judgements, inaccuracy of representations and warranties, invalidity of guarantees. The Term Loan is secured by first priority security interests in our R&D Center in Frederick, Maryland, the Advanced Development Center in North Dartmouth, Massachusetts, and substantially all of the relevant deposit accounts. As of March 31, 2024, the carrying amount of the Term Loan approximated its fair value as the contractual interest rate for the Term Loan was representative of the then market interest rate. 36 Stock Compensation Stock Incentive Plans 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 March 31, 2024, 1,973,136 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 for the three-month periods ended March 31, 2024 and 2023 was $0.33 and $4.13 per share, respectively. Stock-based compensation expense relating to options granted of $1.7 million, of which $1.2 million and $0.5 million, related to General and Administration and Research and Development, respectively was recognized for the quarter ended March 31, 2024. Stock-based compensation expense relating to options granted of $2.8 million, of which $2.0 million and $0.8 million, related to General and Administration and Research and Development, respectively was recognized for the quarter ended March 31, 2023. As of March 31, 2024, we had approximately $6.9 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 2.05 years. 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 March 31, 2024, 733,641 shares were available for future sales under the 2023 ESPP. 37 The ESPP Plans are considered compensatory plans with the related compensation cost expensed over the six-month offering period. For the quarter ended March 31, 2024, and 2023, $27,000 and $0, respectively, was expensed. 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 December 31, 2023, approximately $44,000 of employee payroll deductions had accumulated and had been recorded in accrued expenses. In January 2024, 66,359 shares that were purchased as of December 31, 2023, under the 2022 ESPP, were issued. Accordingly, during the first quarter of 2024, approximately $24,000 of employee payroll deductions accumulated at December 31, 2023, related to acquiring such shares, was transferred from accrued expenses to additional paid in capital. The remaining $20,000 was returned to the employees. Commitments Research and Development Contracts We have entered into contracts with various contract research organizations with outstanding commitments aggregating approximately $20.8 million at March 31, 2024 for future work to be performed. Operating leases As of March 31, 2024, future minimum lease payments are as follows (in thousands): Year Ending December 31, Remainder of 2024 $ 232 2025 299 2026 142 2027 139 2028 and beyond 108 920 Included interest (80 ) $ 840 Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our 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. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our 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 July 1, 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. 38 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. Deferred financing costs. Deferred financing costs represent the cost of obtaining financing arrangements and are amortized over the term of the related debt agreement using the effective interest method. Deferred financing costs related to term debt arrangements are reflected as a direct reduction of the related debt liability on the consolidated balance sheet. Amortization of deferred financing costs is included in interest expense on the consolidated statements of operations. Original issue discount. Certain term debt issued by the Company provides the debt holder with an original issue discount. Original issue discounts are reflected as a direct reduction of the related debt liability on the consolidated balance sheets and are amortized over the term of the related debt agreement using the effective interest method. Amortization of original issue discounts are included in interest expense on the consolidated statements of operations. Derivative Instruments and Warrant Liabilities. The Company evaluates all of its financial instruments, including issued warrants to purchase common stock under ASC 815 – Derivatives and Hedging, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The Company uses the Black-Scholes option pricing model to value the derivative instruments at inception and subsequent valuation dates, which is adjusted for instrument-specific terms as applicable. From time to time, certain equity-linked instruments may be classified as derivative liabilities due to the Company having insufficient authorized shares to fully settle the equity-linked financial instruments in shares. In such a case, the Company has adopted a sequencing approach under ASC 815-40, Derivatives and Hedging - Contracts in Entity’s Own Equity to determine the classification of its contracts at issuance and at each subsequent reporting date. If reclassification of contracts between equity and assets or liabilities is necessary, the Company first allocates remaining authorized shares to equity on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest issuance date receiving the first allocation of shares. In the event of identical issuance dates, shares are then allocated to equity beginning with instruments with the latest maturity date first. 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. 39 Recent Accounting Pronouncements Not Yet Adopted In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting--Improvements to Reportable Segment Disclosures , which requires incremental disclosures about a public entity’s reportable segments but does not change the definition of a segment or the guidance for determining reportable segments. The new guidance requires disclosure of significant segment expenses that are (1) regularly provided to (or easily computed from information regularly provided to) the chief operating decision maker and (2) included in the reported measure of segment profit or loss. The new standard also allows companies to disclose multiple measures of segment profit or loss if those measures are used to assess performance and allocate resources. The guidance will first be effective in our annual disclosures for the year ending December 31, 2024, and will be adopted retrospectively unless impracticable. Early adoption is permitted. The Company is in the process of assessing the impact of ASU 2023-07 on our disclosures. In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which requires disaggregated information about our effective tax rate reconciliation as well as information on income taxes paid. The guidance will first be effective in our annual disclosures for the year ending December 31, 2025, and should be applied on a prospective basis with the option to apply retrospectively. Early adoption is permitted. The Company is in the process of assessing the impact of ASU 2023-09 on our disclosures. In March 2024, the SEC adopted new rules relating to the disclosure of a range of climate-change-related physical and transition risks, data, and opportunities. The adopted rule contains several new disclosure obligations, including, (i) disclosure on how the board of directors and management oversee climate-related risks and certain climate-related governance items, (ii) disclosure of information related to a registrant’s climate-related targets, goals, and/or transition plans, and (iii) disclosure on whether and how climate-related events and transition activities impact line items above a threshold amount on a registrant’s consolidate financial statements, including the impact of the financial estimates and the assumptions used. This new rule will first be effective in the Company’s disclosures for the year ending December 31, 2027. The Company is in the process of assessing the impact on our consolidated financial statements and disclosures. ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.