NOTE 6- JANUARY AND MARCH 2012 FINANCING

On January 20, 2012, the Company issued an aggregate of 172.118 units (“Units”) to certain investors (the “Purchasers”) for aggregate cash proceeds of $2,377,950 and $1,925,000 in previously issued Convertible Debentures of the Company that were exchanged for Units ( “January 2012 Financing”). On March 1, 2012, the Company issued an aggregate of 92.5926 units to certain investors for aggregate cash proceeds of $2,314,815 ( “March 2012 Financing”).

Each Unit had a purchase price of $25,000 per Unit and consisted of twenty five thousand (25,000) shares of the Company’s common stock, a Class A Warrant to purchase twenty five thousand (25,000) shares of Common Stock (the “Class A Warrants”), and a Class B Warrant to purchase up to twenty five thousand (25,000) shares of Common Stock (the “Class B Warrants” and together with the Class A Warrants, the “Warrants”).

The Class A Warrants have an exercise price of $1.25 per share of common stock and will be exercisable for a period of five years from the date of issuance. The warrants have certain anti-dilutive provisions that expire the earlier of i) one year or ii) upon effectiveness of a registration of all shares covered by Class A Warrants. The Class B Warrants are exercisable automatically on their expiration date by cashless exercise or expire without exercise. In the event that the average of the Company’s daily volume weighted average price is below $0.75 during the 10 trading days after the Announcement Date (as hereinafter defined) (the “Measuring Period”), then the holder will be entitled to receive additional shares of the Company’s Common Stock upon the exercise of the Class B Warrants on the expiration date, which is the 12^th trading day after the Announcement Date. In the event that the Company’s average daily volume weighted average price is at or above $0.75 during the Measuring Period, the Class B Warrants will expire unexercised. The Announcement Date was the earlier of (1) the date on which the Company announces via press release the results of the pharmacokinetic study of its TNX-102 drug formulation; or (2) June 1, 2012. On April 5, 2012 the Company issued a press release announcing the results of the pharmacokinetic study of its TNX-102 drug formulation, which is defined as an Announcement Date for the purpose of the Class B Warrants. Based on the Company’s average daily volume weighted average price, which was $1.73 per share, during the Measuring Period, the Class B Warrants expired unexercised.

The Company determined that the Class A Warrants and the Agent Warrants described below should be classified as a liability due to transactions which cause an adjustment to the conversion rate (down round provisions) contained in the warrant agreements and remeasured at each reporting date at their fair value with the changes reported in earnings. Liability classification will end upon expiration of down round provisions as described above, at which time the warrants will be reclassified to equity based on their then fair value. The Company determined the fair value of the Class A Warrants and the Agent Warrants to be $2,549,684 and $212,235 on the issuance dates using, as a result of the down round provisions, the Binomial Lattice model using the following assumptions: fair value of the Company’s common stock $0.62 per share determined based on January and March 2012 Financings; dividend yield 0%; expected terms 5 to 7 years; risk free interest rate 0.89% to 1.47%; expected volatility of: 96.68% and 96.69%; and the expected price at which holders are likely to exercise their warrants of $1.25.

At March 31, 2012, the Company determined the fair value of the Cass A Warrants and Agent Warrants to be $2,714,897 using the Binomial Lattice model with the following assumptions: fair value of the Company’s common stock $0.62 per share determined based on January and March 2012 Financings; dividend yield 0%; expected terms 4.81 to 6.92 years; risk free interest rate 1.04% to 1.61%; expected volatility of: 96.38%; and the expected price at which holders are likely to exercise their warrants of $1.25. The reduction of $47,023 in fair value of warrants liability was included in results of operations for the three months ended March 31, 2012.

In connection with the January and March 2012 Financing, the Company paid a placement agent (the “Agent”) an aggregate cash payment of $466,777, which represented an 8% commission and a 2% non-accountable expense allowance of the gross proceeds delivered by Purchasers in the January and March 2012 Financing. In addition, the Agent earned an aggregate of 466,777 warrants to purchase shares of common stock equal to 10% of the gross proceeds delivered by Purchasers in the January and March 2012 Financing (the “Agent Warrants”), which have an exercise price of $1.25 per share of common stock, exercisable for a period of seven years, contain anti-dilution protection and are entitled to piggy-back registration rights. Total expenses related to the financing, including cash and the fair value of warrants given to the Agent, amounted to $706,511, of which $435,713 was charged to additional paid-in capital and $270,798, deemed allocable to the warrant liability, was charged to current and other financing costs.

The Company believes an event under the contract that would create an obligation to settle in cash or other current assets is remote and therefore has classified the obligation as a long term liability.

In connection with the financings, the Company entered into a Registration Rights Agreement with Purchasers.  The Company is required to file a registration statement registering for resale the common stock included in the Units and the common stock underlying the Class A Warrants and the Agent Warrants to be filed no later than 60 days from the date of termination of the financings on March 1, 2012 and must be declared effective no later than 120 days from the date of termination of the Financing (June 29, 2012).  On April 26, 2012, the Company filed the registration statement. The Company is required to maintain the effectiveness of the registration statement from its effective date unless all securities registered under the registration statement have been sold or are otherwise able to be sold.  If the Company fails to comply with the registration statement filing or effective date requirements, the Company is required to pay the investors a fee equal to 1.0% of the Purchaser’s investment, for each 30-day period of delay, subject to a maximum payment of 10% to each Purchaser.