NOTE 7 – STOCK-BASED COMPENSATION

2017 Stock Incentive Plan

On June 16, 2017, the Company’s stockholders approved the Tonix Pharmaceuticals Holding Corp. 2017 Stock Incentive Plan (the “2017 Plan” and together with the 2012 Incentive Stock Option Plan, 2014 Incentive Stock Option Plan and the 2016 Stock Incentive Plan, the “Prior Plans”). Under the terms of the 2017 Plan, the Company could have issued (1) stock options (incentive and nonstatutory), (2) restricted stock, (3) SARs, (4) RSUs, (5) other stock-based awards, and (6) cash-based awards. The 2017 Plan provided for the issuance of up to 128,000 shares of common stock. With the adoption of the 2018 Plan (as defined below), no further grants may be made under the Prior Plans.

2018 Stock Incentive Plan

On June 8, 2018, the Company’s stockholders approved the Tonix Pharmaceuticals Holding Corp. 2018 Stock Incentive Plan (the “2018 Plan” and together with the Prior Plans, the “Plans”). As a result of adoption of the 2018 Plan by the stockholders, no further grants may be made under the Prior Plans.

Under the terms of the 2018 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 2018 Plan provides for the issuance of up to 132,000 shares of common stock, which amount was (a) reduced by awards granted under the Prior Plans after March 1, 2018, and (b) 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 2018 Plan). In terms of calculating how many shares are reduced or increased based on activity under the Prior Plans after March 1, 2018, the calculation shall be based on one share for every one share that was subject to an option or SAR and 1.23 shares for every one share that was subject to an award other than an option or SAR. The Board of Directors determines the exercise price, vesting and expiration period of the grants under the 2018 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 2018 Plan may not more than ten years. The Company reserved 132,000 shares of its common stock for future issuance under the terms of the 2018 Plan. As of December 31, 2018, 118,496 shares were available for future grants under the 2018 Plan.

General

A summary of the stock option activity and related information for the Plans for the years ended December 31, 2018, and 2017 is as follows:

General

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 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. 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. Most stock options granted pursuant to the Plans typically 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. In addition, the Company issues options to directors which vest over a one-year period. In addition, the Company also issues performance-based options to executive officers, which options vest when the target parameters are met, and premium options which have an exercise price greater than the grant date fair value, 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 vesting period using the straight-line method.

The assumptions used in the valuation of stock options granted during the years ended December 31, 2018 and 2017 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 the companies’ historical stock price volatility.

The weighted-average grant-date fair value of stock options granted was $27.78 in 2018 and $29.20 in 2017.

Stock-based compensation expense relating to options granted of $1.6 million and $1.7 million was recognized for the years ended December 31, 2018 and 2017, respectively.

As of December 31, 2018, the Company had approximately $1.8 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 1.87 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”). As a result of adoption of the 2018 Plan by the stockholders, no further grants may be made under the 2014 ESPP.

2018 Employee Stock Purchase Plan

On June 8, 2018, the Company’s stockholders approved the Tonix Pharmaceuticals Holdings Corp. 2018 Employee Stock Purchase Plan (the “2018 ESPP”). As a result of adoption of the 2018 Plan by the stockholders, no further grants may be made under the Prior Plan.

The 2018 ESPP allows eligible employees to purchase up to an aggregate of 30,000 shares of the Company’s common stock. Under the 2018 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 2018 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 2018 ESPP, subject to the statutory limit under the Code. As of December 31, 2018, there were 28,242 shares available for future issuance under the 2018 ESPP, after taking into account the shares issued below.

The 2018 ESPP and 2014 ESPP are considered compensatory plans with the related compensation cost written off over the six-month offering period. The compensation expense related to the 2018 ESPP for the year ended December 31, 2018 was $32,000.  The compensation expense related to the 2014 ESPP for the year ended December 31, 2017 was $36,000. As of December 31, 2018, approximately $38,000 of employee payroll deductions, which have been withheld since July 1, 2018, the commencement of the offering period ending December 31, 2018, are included in accrued expenses in the accompanying balance sheet. In January 2019, 1,758 shares that were purchased as of December 31, 2018, were issued under the 2018 ESPP, and approximately $3,000 of employee payroll deductions accumulated at December 31, 2018, related to acquiring such shares, was transferred from accrued expenses to additional paid in capital. The remaining $35,000 was returned to the employees. In July 2017, 1,776 shares that were purchased as of June 30, 2017, were issued under the 2014 ESPP, and approximately $64,000 of employee payroll deductions accumulated at June 30, 2017, related to acquiring such shares, was transferred from accrued expenses to additional paid in capital. In January 2017, 250 shares that were purchased as of December 31, 2016, were issued under the 2014 ESPP, and approximately $10,000 of employee payroll deductions accumulated at December 31, 2016, related to acquiring such shares, was transferred from accrued expenses to additional paid in capital. No employee deductions were withheld during 2017.

Restricted Stock Units

In February 2017, a total of 563 RSUs vested that were granted to the Company’s non-employee directors for board services in 2016, in lieu of cash, with a one-year vesting from the grant date and a fair value of $381.00 at the date of grant. 563 shares of the Company’s common stock were issued upon the vesting of such RSUs during the year ended December 31, 2017.

In May 2017, a total of 563 RSUs vested that were granted to the Company’s non-employee directors for board services in 2016, in lieu of cash, with a one-year vesting from the grant date and a fair value of $229.00 at the date of grant. 488 shares of the Company’s common stock were issued upon the vesting of such RSU’s during the year ended December 31, 2017. The remaining 75 shares of common stock were issued during the year ended December 31, 2018.

The following table summarizes the RSU activity for the years ended December 31, 2018 and 2017:

Stock-based compensation expense related to RSU grants was $0 and $0.1 million for the year ended December 31, 2018 and 2017, respectively.