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: substantial competition; our possible need for additional financing; 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 risks related to failure to obtain clearances or approvals from the United States Food and Drug Administration, or FDA, and noncompliance with FDA regulations. Business Overview We are a fully integrated biopharmaceutical company focused on transforming therapies for pain management and vaccines for public health challenges. Our priority is to advance our TNX-102 SL product candidate for the management of fibromyalgia, for which a New Drug Application (“NDA”) was submitted to the U.S. Food and Drug Administration (“FDA”) in October 2024, based on two statistically significant Phase 3 studies. The FDA granted Fast Track designation to TNX-102 SL for the management of fibromyalgia in the third quarter. We expect an FDA decision on the acceptance of the NDA for review and PDUFA date in December and if accepted, a decision on NDA approval in 2025. Fibromyalgia is a common chronic pain condition that affects mostly women. Fibromyalgia is now recognized as the prototypic nociplastic pain syndrome. TNX-102 SL is a non-opioid, centrally acting analgesic developed for long-term use in fibromyalgia. If approved, TNX-102 SL would be the first new drug therapy for fibromyalgia in more than 15 years. TNX-102 SL is also being developed to treat acute stress reaction and acute stress disorder under a Physician-Initiated Investigational New Drug application (“IND”) at the University of North Carolina in the OASIS study funded by the U.S. Department of Defense (DoD). We expect to initiate enrollment in the OASIS study in the fourth quarter. Tonix’s CNS portfolio includes TNX-1300 (cocaine esterase), a biologic drug candidate in Phase 2 development designed to treat cocaine intoxication that has FDA Breakthrough Therapy designation, and its development is supported by a grant from the U.S. National Institute of Drug Abuse. Our immunology development portfolio includes TNX-1500, which is an Fc-modified humanized monoclonal antibody targeting CD40-ligand (CD40L or CD154) in Phase 1 development for the prevention of allograft rejection and for the treatment of autoimmune diseases. TNX-1700 is a fusion protein of TFF2 and albumin and is in the pre-IND stage of development to treat gastric and pancreatic cancer. We also have pre-clinical product candidates in development in the areas of rare disease, including TNX-2900 for Prader-Willi syndrome, and infectious disease, including TNX-801 a potential vaccine to prevent mpox and smallpox. We recently announced a contract with the U.S. DoD’s Defense Threat Reduction Agency (“DTRA”) for up to $34 million over five years to develop TNX-4200, small molecule broad-spectrum antiviral agents targeting CD45 for the prevention or treatment of infections to improve the medical readiness of military personnel in biological threat environments. We own and operate a state-of-the art infectious disease research facility in Frederick, MD. 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. Our product development candidates are investigational new drugs or biologics and have 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. 39 Results of Operations We anticipate that our results of operations will fluctuate for the foreseeable future due to several factors, such as the sales of Zembrace ® and Tosymra ® , 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, 2024 Compared to Three Months Ended September 30, 2023 The following table sets forth our operating expenses for the quarter ended September 30, 2024 and 2023 (in thousands): Three months ended September 30, 2024 2023 REVENUE Product revenue, net $ 2,822 $ 3,989 COSTS AND EXPENSES: Cost of sales $ 1,555 $ 2,374 Research and development 9,114 21,050 Selling, general and administrative 7,707 8,712 Total operating expenses 18,376 32,136 Operating loss (15,554 ) (28,147 ) Grant income 1,668 — Other (expense) income, net (327 ) 172 Net loss $ (14,213 ) $ (27,975 ) Revenues . We recognized revenue beginning in July 2023, as a result of the acquisition of two marketed products. Revenue recognized for the quarter ended September 30, 2024 and 2023, was $2.8 million and $4.0 million, respectively. The Company’s net product revenues are summarized below: Three months ended September 30, 2024 2023 Zembrace Symtouch $ 2,485 $ 3,292 Tosymra 337 697 Total product revenues $ 2,822 $ 3,989 Cost of Sales . We 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 September 30, 2024, was $1.6 million, including write-downs related to Tosymra finished goods inventory of approximately $0.3 million based on an assessment of inventory on hand and projected sales prior to the respective expiration dates. Cost of sales recognized for the quarter ended September 30, 2023, was $2.4 million. Research and Development Expenses . Research and development expenses for the three months ended September 30, 2024 were $9.1 million, a decrease of $11.9 million, or 57%, from $21.0 million for the three months ended September 30, 2023. This decrease is predominately due to decreased clinical expenses of $5.3 million, non-clinal expenses of $2.8 million, manufacturing expenses of $0.5 million as a result of fewer trials in the clinic and pipeline prioritization period over period, employee-related expenses of $2.0 and lab supplies of $0.7 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 three months ended September 30, 2024, and 2023. Three months ended September 30, (in thousands) 2024 2023 Change Research and development expenses: Direct expenses – TNX - 102 SL $ 525 $ 3,365 $ (2,840 ) Direct expenses – TNX - 601 ER 36 2,901 (2,865 ) Direct expenses – TNX - 801 104 551 (447 ) Direct expenses – TNX - 1500 743 2,420 (1,677 ) Direct expenses – TNX - 1900 667 627 40 Direct expenses – Other programs 801 6,127 (5,326 ) Internal staffing, overhead and other 6,238 5,059 1,179 Total research & development $ 9,114 $ 21,050 $ (11,936 ) 40 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. Selling, general and Administrative Expenses . General and administrative expenses for the three months ended September 30, 2024, were $7.7 million, a decrease of $1.0 million, or 11%, from $8.7 million incurred in the three months ended September 30, 2023. The decrease is primarily due to a decrease in employee-related expenses of $0.3 million, a decrease in the transactional services provided by Upsher Smith of $0.7 million and a decrease in sales and marketing of $0.4 million, offset by an increase in professional fees of $0.4 million. Net Loss . As a result of the foregoing, the net loss for the three months ended September 30, 2024 was $14.2 million, a decrease of $13.8 million, or 49%, compared to a net loss of $28.0 million for the three months ended September 30, 2023. Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023 The following table sets forth our operating expenses for the nine months ended September 30, 2024 and 2023 (in thousands): Nine months ended September 30, 2024 2023 REVENUE Product revenue, net $ 7,512 $ 3,989 COSTS AND EXPENSES: Cost of sales $ 6,582 $ 2,374 Research and development 31,675 69,535 Selling, general and administrative 24,519 23,131 Asset impairment charges 58,957 — Total operating expenses 121,733 95,040 Operating loss (114,221 ) (91,051 ) Grant income 1,668 — Gain on change in fair value of warrant liabilities 6,150 — Other (expense) income, net (1,525 ) 1,715 Net loss $ (107,928 ) $ (89,336 ) Revenues . We recognized revenue beginning in July 2023, as a result of the acquisition of two marketed products. Revenue recognized for the nine months ended September 30, 2024 and 2023, was $7.5 million and $4.0 million, respectively. 41 The Company’s net product revenues are summarized below: Nine months ended September 30, 2024 2023 Zembrace Symtouch $ 6,059 $ 3,292 Tosymra 1,453 697 Total product revenues $ 7,512 $ 3,989 Cost of Sales . We 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 nine months ended September 30, 2024, was $6.6 million, including write-downs related to Tosymra and Zembrace finished goods inventory of approximately $2.0 million based on an assessment of inventory on hand and projected sales prior to the respective expiration dates. 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, 2024 were $31.7 million, a decrease of $37.8 million, or 54%, from $69.5 million for the nine months ended September 30, 2023. This decrease is predominately due to decreased clinical expenses of $14.1 million, non-clinal expenses of $10.9 million, manufacturing expenses of $2.9 million as a result of fewer trials in the clinic and pipeline prioritization period over period, employee-related expenses of $4.4 and lab supplies of $3.8 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 nine months ended September 30, 2024, and 2023. Nine months ended September 30, (in thousands) 2024 2023 Change Research and development expenses: Direct expenses – TNX - 102 SL $ 3,513 $ 10,342 $ (6,829 ) Direct expenses – TNX - 601 ER 709 7,431 (6,722 ) Direct expenses – TNX - 801 723 2,261 (1,538 ) Direct expenses – TNX - 1800 301 1,576 (1,275 ) Direct expenses – TNX - 1500 1,966 6,010 (4,044 ) Direct expenses – TNX - 1900 1,326 4,168 (2,842 ) Direct expenses – Other programs 1,461 10,696 (9,235 ) Internal staffing, overhead and other 21,676 27,051 (5,375 ) Total research & development $ 31,675 $ 69,535 $ 37,860 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 nine months ended September 30, 2024 were $24.5 million, an increase of $1.4 million, or 6%, from $23.1 million incurred in the nine months ended September 30, 2023. The increase is primarily due to an increase in financial reporting expenses of $1.1 million, related to the special shareholder meetings in 2024, an increase in sales and marketing of $0.5 million, an increase in depreciation of property and equipment of $0.3 million and an increase in fees and permits of $0.4 million, related to licenses obtained to sell the migraine products, offset by a decrease in employee-related costs of $1.0 million, due to less employees. Asset impairment charges . We recognized a non-cash impairment charge of $48.8 million related to property and equipment, a non-cash impairment of $1.0 million related to goodwill, and a non-cash impairment charge of $9.2 million related to intangible assets, which is reflected in asset impairment charges in the consolidated statements of operations for the nine months ended September 30, 2024. The impairment of the Tosymra and Zembrace inventory, intangibles and goodwill was driven by our delayed investment in the sales personnel required to drive growth in the business as we are focusing our cash resources to further our efforts to bring TNX-102 SL through the approval process and to market. However, we believe that the benefits and long-term value proposition of the 2023 acquisition of Tosymra and Zembrace remain, in that we now have the infrastructure to be ready to manufacture and sell TNX-102 SL under an expedited timeline pending FDA approval for which we expect an FDA decision in 2025. Net Loss . As a result of the foregoing, the net loss for the nine months ended September 30, 2024 was $107.9 million, an increase of $18.6 million, or 21%, compared to a net loss of $89.3 million for the nine months ended September 30, 2023. 42 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 September 30, 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. 43 Liquidity and Capital Resources As of September 30, 2024, we had working capital of $35.4 million, comprised primarily of cash and cash equivalents of $28.2 million, Accounts receivable, net of $4.0 million, Inventory of $7.9 million and prepaid expenses and other of $10.4 million, offset by $3.9 million of accounts payable, $8.1 million of accrued expenses, short-term loan payable of $2.8 million, and current lease liabilities of $0.3 million. A significant portion of the accounts payable and accrued expenses are due to work performed in relation to our clinical programs, and the operations related to 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 ADC. The following table provides a summary of operating, investing and financing cash flows for the nine months ended September 30, 2024, and 2023, respectively (in thousands): Nine Months ended September 30, 2024 2023 Net cash used in operating activities $ (46,295 ) $ (79,663 ) Net cash used in investing activities (117 ) (28,639 ) Net cash provided by (used in) financing activities 49,718 (4,198 ) For the nine months ended September 30, 2024 and 2023, we used approximately $46.3 million and $79.7 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 nine months ended September 30, 2024, net cash provided by financing activities was $49.7 million predominately from the issuance of common stock offset by the deferred payment to USL. For the nine months ended September 30, 2023, net cash used in financing activities was $4.2 million, predominately from the repurchase of our common stock. Cash used in investing activities for the nine months ended September 30, 2024 was $0.1 million related to the purchase of property and equipment, and $28.6 million for the nine months ended September 30, 2023 related to the purchase of the USL assets and property and equipment. We believe that our cash resources at September 30, 2024, and the proceeds that we raised from equity offerings subsequent to the end of the third quarter of 2024 will meet our operating and capital expenditure requirements into the first quarter of 2025, but not beyond. 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 have the ability to 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 or all 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 will be adversely affected. Future Liquidity Requirements We expect to incur losses from operations for the near future. We expect to decrease our operating costs to align the Company’s capital and human resources with its previously announced strategic prioritization of TNX-102 SL product candidate for the management of fibromyalgia. 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. 44 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. 2024 At-the-Market Offering On July 30, 2024, we entered into a 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 $150.0 million in the ATM. 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 months ended September 30, 2024, we sold approximately 134.5 million shares of common stock under the Sales Agreement, for net proceeds of approximately $41.8 million. Subsequent to September 30, 2024, we sold 31.3 million shares of common stock under the Sales Agreement, for net proceeds of approximately $5.1 million. July 2024 Financing On July 9, 2024, we entered into a securities purchase agreement with certain institutional and retail investors, pursuant to which we sold 3,393,600 shares of common stock and pre-funded warrants to purchase up to 3,703,140 shares of common stock. The offering price per share of common stock was $0.57, and the offering price per share of pre-funded warrant was $0.5699. The offering closed on July 10, 2024. We incurred offering expenses of approximately $0.5 million, including placement agent fees of approximately $0.3 million. We received net proceeds of approximately $3.5 million, after deducting the underwriting discount and other offering expenses. June 2024 Financings On June 12, 2024, we entered into a securities purchase agreement with certain investors, pursuant to which we sold 1,199,448 shares of common stock and pre-funded warrants to purchase up to 2,568,110 shares of common stock. The offering price per share of common stock was $1.065, and the offering price per share of pre-funded warrant was $1.064. The offering closed on June 13, 2024. We incurred offering expenses of approximately $0.5 million, including placement agent fees of approximately $0.3 million. We received net proceeds of approximately $3.5 million, after deducting the underwriting discount and other offering expenses. On June 27, 2024, we entered into a securities purchase agreement with certain institutional and retail investors, pursuant to which we sold 2,833,900 shares of common stock and pre-funded warrants to purchase up to 4,228,158 shares of common stock. The offering price per share of common stock was $0.57, and the offering price per share of pre-funded warrant was $0.5699. The offering closed on June 28, 2024. We incurred offering expenses of approximately $0.5 million, including placement agent fees of approximately $0.3 million. We received net proceeds of approximately $3.5 million, after deducting the underwriting discount and other offering expenses. March 2024 Financing On March 28, 2024, we entered into an agreement to sell 336,459 shares of common stock, pre-funded warrants to purchase up to 121,875 shares of common stock, and accompanying Series E warrants to purchase up to 458,334 shares of common stock with an exercise price of $10,56 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 $9.60 and the offering price per share of pre-funded warrants was $9.5968. 45 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 (collectively, the “Warrant Amendments”) with certain holders of our common warrants (referred to herein as the “Existing Warrants”). We agreed to amend the exercise price of each Existing Warrant to $10.56 upon approval by our stockholders of a proposal to allow the Existing Warrants to become exercisable in accordance with Nasdaq Listing Rule 5635 or, if stockholder approval is not obtained by October 1, 2024, we agreed to automatically amend the exercise price of the Existing Warrants to the Minimum Price (as defined in Nasdaq Listing Rule 5635(d)) of our common stock on October 1, 2024 if and only if the Minimum Price is below the then current exercise price. Upon stockholder approval on May 22, 2024, the termination date for the warrants issued August 2023 (the “August Warrants”) to purchase up to an aggregate of 217,188 shares was amended to April 1, 2029; the termination date for Series A Warrants to purchase up to an aggregate of approximately 278,125 shares is April 1, 2029; the termination date for Series B Warrants to purchase up to an aggregate of approximately 278,125 shares is April 1, 2025; the termination date for Series C Warrants to purchase up to an aggregate of approximately 1,088,248 shares is the earlier of (i) April 1, 2026 and (ii) 10 trading days following notice by we to the Series C Warrant holder of our 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 1,088,248 shares is April 1, 2029. The other terms of the Existing Warrants will remain unchanged. On May 22, 2024, at the annual meeting of stockholders, our stockholders approved the proposal to amend the exercise prices of the Existing Warrants to $10.56 per share and extend the expiration dates. December 2023 Financing On December 20, 2023, we entered into a securities purchase agreement (the “Purchase Agreement”) with certain institutional investors, pursuant to which we sold and issued (i) 791,977 shares of our common stock, (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 897,213 shares of common stock and (iii) Series C warrants to purchase up to 2,533,784 shares of common stock (the “Series C Warrants”), and (iv) Series D warrants to purchase up to 2,533,784 shares of common stock (the “Series D Warrants” and, together with the Series C Warrants, the “Common Warrants”). The securities sold in the offering were sold in fixed combinations as units. The offering price per share of common stock and accompanying Common Warrants was $17.76, and the offering price per Pre-Funded Warrant and accompanying Common Warrants was $17.7568. 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. At the closing of the offering, 203,407 Pre-Funded Warrants were immediately exercised into shares of common stock for nominal proceeds. 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 $17.76 per share, and are exercisable on the later of approval by our stockholders of (i) a proposal to approve the filing of an amendment to our 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 U.S. Food and Drug Administration’s (“FDA”) acknowledgement and acceptance of the New Drug Application (“NDA”) relating to our TNX-102 SL product candidate in patients with fibromyalgia. The Series D Warrants have an exercise price of $27.20 per share and are exercisable beginning on the Approval Date through the five-year anniversary of the Approval Date. Upon the closing of the offering, we determined that certain of the Common Warrants did not meet the criteria for equity classification due to the lack of sufficient authorized and unissued shares to settle the instruments. We have 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, whereby shares are allocated based on 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 beginning with instruments with the latest maturity date first. Pursuant to this sequencing approach, our authorized and unissued shares were applied to the Pre-Funded Warrants and the Common Warrants in the following order: (i) the Pre-Funded Warrants, (ii) the Series D Warrants, and (iii) the Series C Warrants. Based on this analysis, we determined that the authorized shares are sufficient to settle the remaining Pre-Funded Warrants and 1,591,665 Series D Warrants and were therefore classified in equity. The remaining 942,120 Series D Warrants and the Series C Warrants associated with the deficit shares were classified as liabilities and are accounted for at fair value. 46 The $30.0 million in gross proceeds received by us was first allocated to the Series C Warrants and the liability-classified Series D Warrants at their respective fair values of approximately $14.4 million and $8.1 million, respectively. The residual proceeds of approximately $7.5 million were allocated to the shares of common stock, the Pre-Funded Warrants, and the equity-classified Series D Warrants on a relative fair value basis. The issuance costs totaling $2.3 million were allocated between the equity and liability-classified instruments on a relative fair value basis. Issuance costs of $1.4 million allocated to the shares, the Pre-Funded Warrants, and the equity-classified Series D Warrants were recognized as a discount to the proceeds allocated to the equity-classified instruments. Issuance costs of $0.9 million were allocated to the liability-classified Series D Warrants and the Series C Warrants and expensed within Selling, general and administrative expense on the consolidated statements of operations. On January 25, 2024, our stockholders approved the proposal to file an amendment to our Articles of Incorporation to increase the number of authorized shares of common stock from 160,000,000 to 1,000,000,000. The liability-classified Series D Warrants and all of the Series C Warrants were presented within non-current liabilities on the consolidated balance sheets as of December 31, 2023, and were adjusted to fair value through January 25, 2024, when the warrants were reclassified to equity. Changes in the fair value of the liability-classified warrants were recognized as a separate component in the consolidated statement of operations. September 2023 Financing On September 28, 2023, we sold 126,563 shares of common stock; pre-funded warrants to purchase up to 154,687 shares of common stock, and accompanying Series A warrants to purchase up to 281,250 shares of common stock with an exercise price of $16.00 per share and expiring five years from date of issuance, and Series B warrants to purchase up to 281,250 shares of common stock with an exercise price of $16.00 per share and expiring one year from date of issuance in a public offering, which closed on October 3, 2023. The offering price per share of common stock and accompanying warrants was $16.00, and the offering price per share of pre-funded warrant and accompanying warrants was $15.99. We incurred offering expenses of approximately $0.5 million, including placement agent fees of approximately $0.3 million. 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 79,062 shares of common stock; pre-funded warrants to purchase up to 139,688 shares of common stock and accompanying common warrants to purchase up to 218,750 shares of common stock with an exercise price of $32.00 per share in a public offering that closed on August 1, 2023. The offering price per share of common stock and accompanying common warrant was $32.00, and the offering price per share of pre-funded warrant and accompanying common warrant was $31.99. 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. 47 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 3,125 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 3,000 shares, respectively, of common stock under the 2022 Purchase Agreement, for net proceeds of approximately $0 and $0.4 million, respectively. No shares were sold during 2024 under the 2022 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. There were no sales under the Sales Agreement during the three and nine months ended September 30, 2024. During the three and nine months ended September 30, 2023, we sold approximately 0 shares and 29,855 shares, respectively, of common stock under the Sales Agreement, for net proceeds of approximately $0 million and $3.0 million, respectively. There will be no more sales under the 2020 ATM. Share Repurchase Program In September 2024, the Board of Directors approved a 2024 share repurchase program pursuant to which we may repurchase up to $10.0 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. No repurchases occurred during the three and nine months ended September 30, 2024. During the first quarter of 2023, we repurchased 78,502 of our shares of common stock outstanding under the 2022 share repurchase program for $12.5 million at prices ranging from $88.00 to $275.52 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 5,000 of our shares of common stock outstanding under the new 2023 share repurchase program at $227.84 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. 48 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. 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) RSUs, (5) other stock-based awards, and (6) cash-based awards. The Amended and Restated 2020 Plan initially provided for the issuance of up to 1,563 shares of common stock, which amount will be increased to the extent that awards granted under the Plans are forfeited, expire or are settled for cash (except as otherwise provided in the Amended and Restated 2020 Plan). In addition, the Amended and Restated 2020 Plan contains an “evergreen provision” providing for an annual increase in the number of shares of our common stock available for issuance under the Amended and Restated 2020 Plan on January 1 of each year for a period of ten years, commencing on January 1, 2021 and ending on (and including) January 1, 2030, in an amount equal to the difference between (x) twenty percent (20%) of the total number of shares of common stock outstanding on December 31st of the preceding calendar year, and (y) the total number of shares of common stock reserved under the Amended and Restated 2020 Plan on December 31 st of such preceding calendar year (including shares subject to outstanding awards, issued pursuant to awards or available for future awards). The Board of Directors determines the exercise price, vesting and expiration period of the grants under the Amended and Restated 2020 Plan. However, the exercise price of an incentive stock option may not be less than 110% of fair value of the common stock at the date of the grant for a 10% or more shareholder and 100% of fair value for a grantee who is not a 10% shareholder. The fair value of the common stock is determined based on quoted market price or in absence of such quoted market price, by the Board of Directors in good faith. Additionally, the expiration period of grants under the Amended and Restated 2020 Plan may not be more than ten years. As of September 30, 2024, 10,168 options were available for future grants under the Amended and Restated 2020 Plan. The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on options with an exercise price less than our closing stock price at the respective dates. The weighted average fair value of options granted during the three and nine months ended September 2024 was $0.15 per share and $8.68 per share, respectively. The weighted average fair value of options granted during the three and nine months ended September 2023 was $26.88 per share and $127.68 per share, respectively. 49 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 our common stock on the date of the grant. The fair value of the award is measured on the grant date. One-third of most stock options granted pursuant to the Plans vest 12 months from the date of grant and 1/36th each month thereafter for 24 months and expire ten years from the date of grant. In addition, we issue options to directors which vest over a one-year period. We also issue 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 our historical stock price volatility. Stock-based compensation expense relating to options granted of $1.0 million, of which $0.7 million and $0.3 million, related to General and Administration and Research and Development, respectively, was recognized for the quarter ended September 30, 2024. 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 $3.9 million, of which $2.8 million and $1.1 million, related to General and Administration and Research and Development, respectively was recognized for the nine-month period ended September 30, 2024. 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. As of September 30, 2024, we had approximately $4.3 million of total unrecognized compensation cost related to non-vested awards granted under the Plans, which we expect to recognize over a weighted average period of 1.73 years. Employee Stock Purchase Plans 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 our stockholders on May 5, 2023. The 2023 ESPP allows eligible employees to purchase up to an aggregate of 25,000 shares of our 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 our 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, 2024, 22,926 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 nine months ended September 30, 2024 and 2023, $27,000 and $34,000, respectively, was expensed. In January 2023, 469 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, 2,074 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. As of June 30, 2024, approximately $33,000 of employee payroll deductions had accumulated and had been recorded in accrued expenses. In July 2024, 6,927 shares that were purchased as of June 30, 2024, under the 2022 ESPP, were issued. Accordingly, during the third quarter of 2024, approximately $4,000 of employee payroll deductions accumulated at June 30, 2024, related to acquiring such shares, was transferred from accrued expenses to additional paid in capital. The remaining $29,000 was returned to the employees. 50 Commitments Research and Development Contracts We have entered into contracts with various contract research organizations with outstanding commitments aggregating approximately $15.1 million at September 30, 2024 for future work to be performed. At September 30, 2024, future minimum lease payments for operating leases with non-cancelable terms of more than one year were as follows (in thousands): Year Ending December 31, Remainder of 2024 $ 75 2025 299 2026 142 2027 139 2028 and beyond 108 763 Included interest (63 ) $ 700 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. Asset impairment charges. We test certain assets for impairment, including goodwill, indefinite-lived intangibles, long-lived assets and amortizing intangibles. Goodwill is reviewed for impairment by comparing the carrying value of a reporting unit to its fair value on an annual basis as of June 30, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. We evaluate long-lived assets for impairment, including property and equipment and finite-lived intangibles assets whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. 51 We completed the required annual impairment test for goodwill as of June 30, 2024, primarily using an income approach or discounted cash flow analysis. Additionally, due to a sustained decline in revenues and continued delays in building out the sales team for our commercialized products, we also tested the commercialized products asset group for recoverability as of June 30, 2024, and determined that the carrying value was not recoverable and therefore estimated the fair value of the asset group using a discounted cash flow analysis. The significant assumptions used in the discounted cash flow model included revenue growth, long-term growth rate, and discounts rate. The impairment assessments resulted in full non-cash impairment of $965,000 of goodwill and $9.2 million, consisting of $6.2 million and $3.0 million for the Zembrace and Tosymra developed technology, intangible assets, which are reflected in asset impairment charges in the consolidated statements of operations for the nine months ended September 30, 2024. During the second quarter of 2024, we identified certain triggering events related to the ADC and the decommissioning of the ADC. The Company determined that the carrying value of the ADC was not recoverable and that the carrying value exceeded its fair value. We engaged independent appraisers to value the building and land, using sales comparison and income capitalization approaches, and the related fixed assets using a indirect cost approach and market approach. The assessments resulted in a non-cash impairment charge of $48.8 million, which is reflected in asset impairment charges in the consolidated statements of operations for the nine months ended September 30, 2024. 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. 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. 52 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. The classification of derivative instruments is reassessed at each reporting date. If the classification changes as a result of events during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified. 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. 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. 53 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. In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures, to improve transparency in financial reporting by requiring entities to present more detailed information about the nature of expenses included within the Income Statement. The guidance will first be effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The Company is in the process of assessing the impact of ASU 2024-03 on our disclosures. ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.