NOTE 5 – STOCK-BASED COMPENSATION 

2012 incentive stock option plan

In April 2012, the Company’s stockholders approved the 2012 Incentive Stock Option Plan (the “2012 Plan”). The 2012 Plan provides for the issuance of options to purchase up to 200,000 shares of the Company’s common stock to officers, directors, employees and consultants of the Company. Under the terms of the 2012 Plan, the Company may issue incentive stock options as defined by the Internal Revenue Code of 1986, as amended (the “Code”) to employees of the Company and may also issue nonstatutory options to employees and others. The Company’s board of directors (“Board of Directors”) determines the exercise price, vesting and expiration period of the grants under the 2012 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 vesting period of the grants under the 2012 Plan may not be more than five years and expiration period not more than ten years. The Company reserved 200,000 shares of its common stock for future issuance under the terms of the 2012 Plan. On February 12, 2013, the 2012 Plan was amended and restated to increase the number of shares reserved under the plan to 550,000. At September 30, 2016, all reserved shares under the 2012 Plan were subject to granted awards outstanding. With the adoption of the 2016 Plan (as defined below), no further grants may be made under the 2012 Plan, and the only current activity relates to the administration of existing options under the 2012 Plan.

2014 incentive stock plan

On June 9, 2014, the Company’s stockholders approved the Tonix Pharmaceuticals Holding Corp. 2014 Stock Incentive Plan (the “2014 Plan” and together with the 2012 Plan, the “Prior Plans”).

Under the terms of the 2014 Plan, the Company may issue (1) stock options (incentive and nonstatutory), (2) restricted stock, (3) stock appreciation rights (“SARs”), (4) RSUs, (5) other stock-based awards, and (6) cash-based awards. The 2014 Plan provides for the issuance of up to 1,800,000 shares of common stock, provided, however, that, of the aggregate number of 2014 Plan shares authorized, no more than 200,000 of such shares may be issued pursuant to stock-settled awards other than options (that is, restricted stock, RSUs, SARs, performance awards, other stock-based awards and dividend equivalent awards, in each case to the extent settled in shares of common stock). The Board of Directors determines the exercise price, vesting and expiration period of the grants under the 2014 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 vesting period of the grants under the 2014 Plan may not be more than five years and expiration period not more than ten years. The Company reserved 1,800,000 shares of its common stock for future issuance under the terms of the 2014 Plan. With the adoption of the 2016 Plan, no further grants may be made under the 2014 Plan, and the only current activity relates to the administration of existing options under the 2014 Plan.

2016 incentive stock plan

On May 11, 2016, the Company’s stockholders approved the Tonix Pharmaceuticals Holding Corp. 2016 Stock Incentive Plan (the “2016 Plan” and together with the Prior Plans, the “Plans”). As a result of adoption of the 2016 Plan by the stockholders, no further grants may be made under the Prior Plans.

Under the terms of the 2016 Plan, the Company may issue (1) stock options (incentive and nonstatutory), (2) restricted stock, (3)SARs, (4) RSUs, (5) other stock-based awards, and (6) cash-based awards. The 2016 Plan provides for the issuance of up to 2,785,000 shares of common stock, which amount will be (a) reduced by awards granted under the 2014 Plan after December 31, 2015, and (b) increased to the extent that awards granted under the Plans are forfeited, expire or are settled for cash (except as otherwise provided in the 2016 Plan). In terms of calculating how many shares are reduced or increased based on activity under the Prior Plans after December 31, 2015, the calculation shall be based on one share for every one share that was subject to an option or SAR and 1.25 shares for every one share that was subject to an award other than an option or SAR. Of the aggregate number of 2016 Plan shares authorized, no more than 750,000 of such shares may be issued pursuant to stock-settled awards other than options (that is, restricted stock, RSUs, SARs, performance awards, other stock-based awards and dividend equivalent awards, in each case to the extent settled in shares of common stock). The Board of Directors determines the exercise price, vesting and expiration period of the grants under the 2016 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 vesting period of the grants under the 2016 Plan may not be more than five years and expiration period not more than ten years. The Company reserved 2,785,000 shares of its common stock for future issuance under the terms of the 2016 Plan. As of September 30, 2016, 1,968,096 shares were available for future grants under the 2016 Plan.

Restricted stock units

On February 9, 2016, the Company granted an aggregate of 56,250 RSU’s to its non-employee directors for board services in 2016, in lieu of cash, which vest one year from the grant date with a fair value of $3.81.

On May 27, 2016, the Company granted an aggregate of 56,250 RSU’s to its non-employee directors for board services through the first half of 2017, in lieu of cash, which vest one year from the grant date with a fair value of $2.29.

In February 2016, 42,000 RSUs that were granted to our non-employee directors for board services in 2015, in lieu of cash, with a one year vesting from the grant date and a fair value of $6.24 at the date of grant, vested and 42,000 shares of the Company’s common stock were issued in settlement of those RSUs during the first quarter of 2016.

The following table summarizes the RSU activity for the nine months ended September 30, 2016:

Stock-based compensation expense related to RSU grants was $86,000 and $66,000 for the three months ended September 30, 2016 and 2015, respectively, and $230,000 and $153,000 for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, the stock-based compensation relating to RSU’s of $0.2 million remains unamortized and is expected to be amortized over a weighted average period of seven months.       

General

A summary of the stock option activity and related information for the Plans for the nine months ended September 30, 2016 is as follows:

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s closing stock price at the respective dates.

The Company measures the fair value of stock options on the date of grant, based on a Binomial option pricing model using certain assumptions discussed in the following paragraph, and the closing market price of the Company's common stock on the date of the grant. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. Stock options granted pursuant to the Plans generally vest 1/3rd 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. Stock-based compensation expense related to awards is amortized over the applicable vesting period using the straight-line method.

On May 27, 2016, 35,000 options were granted to employees with an exercise price of $2.42, a 10 year life and fair value of $1.47 per share. Additionally, the Company granted options to purchase 60,000 shares of the Company’s common stock to an employee with an exercise price of $2.42, exercisable for a period of ten years, at an average fair value of $0.08 per share and vesting 1/3 each upon the Company’s common stock having an average closing sale price equal to or exceeding each of $6.00, $7.00 and $8.00 per share for 20 consecutive trading days, subject to a one year minimum service period prior to vesting.

On February 9, 2016, 403,000 options were granted to employees with an exercise price of $5.03, a 10 year life and fair value of $2.49 per share. Additionally, the Company granted options to purchase 200,000 shares of the Company’s common stock to employees with an exercise price of $5.03, exercisable for a period of ten years, at an average fair value of $0.17 per share and vesting 1/3 each upon the Company’s common stock having an average closing sale price equal to or exceeding each of $6.00, $7.00 and $8.00 per share for 20 consecutive trading days, subject to a one year minimum service period prior to vesting.

During the nine months ended September 30, 2016, 1,600, 6,613, 14,309 and 42,500 unvested options with exercise prices of $9.87, $6.68, $5.95 and $5.03, respectively, were forfeited.

On February 25, 2015, 419,500 and 30,000 options were granted to employees/directors and consultants, respectively, under the 2014 Plan (of which 408,533 employee/director options and 30,000 consultant options were outstanding at September 30, 2016) with an exercise price of $5.95, a 10 year life and fair value of $4.69. Additionally, the Company granted options to purchase 7,143 shares of the Company’s common stock to Seth Lederman, the Company’s Chief Executive Officer, as a non-cash bonus, with an exercise price of $5.95, a 10 year life and fair value of $4.43. As of September 30, 2016, the fair value related to consultant grants was $0.29.

During the nine months ended September 30, 2015, 3,800, 39,800 and 39,800 unvested options with exercise prices of $5.95, $9.87 and $6.68, respectively, were forfeited.

The assumptions used in the valuation of stock options granted during the nine months ended September 30, 2016 and 2015 were as follows:

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 comparable companies’ historical stock price volatility since the Company does not have sufficient historical exercise or volatility data because its equity shares have been publicly traded for only a limited period of time.

Stock-based compensation expense relating to options granted of $0.7 million and $2.1 million was recognized for the three and nine month periods ended September 30, 2016, respectively, and $0.8 million and $3.1 million was recognized for the three and nine month periods ended September 30, 2015, respectively.

As of September 30, 2016, the Company had approximately $2.9 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 1.46 years.

2014 employee stock purchase plan

On June 9, 2014, the Company’s stockholders approved the Tonix Pharmaceuticals Holdings Corp. 2014 Employee Stock Purchase Plan (the “2014 ESPP”). The 2014 ESPP allows eligible employees to purchase up to an aggregate of 300,000 shares of the Company’s common stock. Under the 2014 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 2014 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 2014 ESPP, subject to the statutory limit under the Code. As of September 30, 2016, there were 219,450 shares available for future issuance under the 2014 ESPP.

The compensation expense related to the 2014 ESPP for the nine months ended September 30, 2016 and 2015, was $69,000 and $98,000, respectively. As of September 30, 2016, approximately $11,000 of employee payroll deductions, which had been withheld since July 1, 2016, the commencement of the offering period ending December 31, 2016, are included in accrued expenses in the accompanying balance sheet. In July 2016, 30,956 shares that were purchased as of June 30, 2016 were issued under the 2014 ESPP, and the employee payroll deductions accumulated at June 30, 2016, related to acquiring such shares, were transferred from accrued expenses to additional paid in capital. In January 2016, 17,595 shares that were purchased as of December 31, 2015, were issued under the 2014 ESPP, and the employee payroll deductions accumulated at December 31, 2015, related to acquiring such shares, were transferred from accrued expenses to additional paid in capital.