NOTE 6 – STOCK-BASED COMPENSATION

2016 stock incentive 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 2012 Incentive Stock Option Plan and the 2014 Stock Incentive Plan, the “Prior Plans”).

Under the terms of the 2016 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 2016 Plan provided for the issuance of up to 278,500 shares of common stock. With the adoption of the 2017 Plan (as defined below), no further grants may be made under the 2016 Plan.

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 Prior Plans, the “Plans”). As a result of adoption of the 2017 Plan by the stockholders, no further grants may be made under the Prior Plans.

Under the terms of the 2017 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 2017 Plan provides for the issuance of up to 1,280,000 shares of common stock, which amount will be (a) reduced by awards granted under the Prior Plans after March 31, 2017, 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 2017 Plan). In terms of calculating how many shares are reduced or increased based on activity under the Prior Plans after March 31, 2017, the calculation shall be based on one share for every one share that was subject to an option or SAR and 1.15 shares for every one share that was subject to an award other than an option or SAR. With respect to awards intended to qualify as performance-based compensation under Section 162(m) of the Code, the 2017 Plan provides that, subject to adjustment as provided in the plan, no participant may, in any 12-month period (i) be granted options or SARs with respect to more than 750,000 shares of the Company’s common stock, (ii) earn more than 500,000 shares of the Company’s common stock under restricted stock awards, restricted stock unit awards, performance awards and/or other stock-based awards, or (iii) earn more than $5,000,000 under an award; provided, however, that each of these limitations shall be multiplied by two (2) with respect to awards granted to a participant during the first calendar year in which the participant commences employment with the Company or any of its subsidiaries. The Board of Directors determines the exercise price, vesting and expiration period of the grants under the 2017 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 2017 Plan may not be more than five years and expiration period not more than ten years. The Company reserved 1,280,000 shares of its common stock for future issuance under the terms of the 2017 Plan. As of September 30, 2017, 1,135,518 shares were available for future grants under the 2017 Plan.

General

A summary of the stock option activity and related information for the Plans for the nine months ended September 30, 2017 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 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 also issues performance-based options to executive officers, which options vest when the target parameters are met, subject 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.

On September 12, 2017, the Company granted options to purchase an aggregate of 20,000 shares of the Company’s common stock to its new non-employee director for board services for the one-year term of the director’s board appointment, in lieu of cash, exercisable for a period of ten years with a one-year vesting from the grant date and a fair value of $2.78 at the date of grant.

On June 20, 2017, the Company granted options to purchase an aggregate of 150,000 shares of the Company’s common stock to its non-employee directors for board services for the one-year term of the director’s board appointment, in lieu of cash, exercisable for a period of ten years with a one-year vesting from the grant date and a fair value of $2.73 at the date of grant.

On March 1, 2017, the Company granted options to purchase an aggregate of 61,750 shares of the Company’s common stock to employees with an exercise price of $5.50, exercisable for a period of ten years and a grant date fair value of $3.36, vesting 1/3 on the first anniversary and 1/36th each month thereafter for 24 months. Additionally, the Company granted options to purchase 28,250 shares of the Company’s common stock to employees with an exercise price of $5.50, exercisable for a period of ten years, and vesting 50% upon achieving enrollment of 250 participants in the ongoing HONOR study by December 31, 2017, and the remaining 50% vesting 1% for each participant that is enrolled in the HONOR study by December 31, 2017 in excess of 250, subject to a one-year minimum service period prior to vesting.

On May 27, 2016, the Company granted options to purchase an aggregate of 3,500 shares of the Company’s common stock to employees with an exercise price of $24.20 and exercisable for a period of ten years. Additionally, the Company granted options to purchase 6,000 shares of the Company’s common stock to an employee with an exercise price of $24.20, exercisable for a period of ten years, and vesting 1/3 each upon the Company’s common stock having an average closing sale price equal to or exceeding each of $60.00, $70.00 and $80.00 per share for 20 consecutive trading days, subject to a one-year minimum service period prior to vesting.

On February 9, 2016, the Company granted options to purchase an aggregate of 40,300 shares of the Company’s common stock to employees with an exercise price of $50.30 and exercisable for a period of ten years. Additionally, the Company granted options to purchase 20,000 shares of the Company’s common stock to employees with an exercise price of $50.30, exercisable for a period of ten years, and vesting 1/3 each upon the Company’s common stock having an average closing sale price equal to or exceeding each of $60.00, $70.00 and $80.00 per share for 20 consecutive trading days, subject to a one-year minimum service period prior to vesting.

The assumptions used in the valuation of stock options granted during the nine months ended September 30, 2017 and 2016 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 $0.4 million and $1.4 million was recognized for the three and nine month periods ended September 30, 2017, respectively, and $0.7 million and $2.1 million was recognized for the three and nine month periods ended September 30, 2016, respectively.

As of September 30, 2017, the Company had approximately $1.2 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 1.09 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 30,000 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, 2017, there were 1,689 shares available for future issuance under the 2014 ESPP.

The 2014 ESPP is considered a compensatory plan with the related compensation cost written off over the six-month offering period. The compensation expense related to the 2014 ESPP for the nine months ended September 30, 2017 and 2016 was $36,000 and $59,000, respectively. In July 2017, 17,760 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. No employee deductions were withheld for the period beginning July 1, 2017.

In January 2017, 2,496 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.

Restricted stock units

In February 2017, 5,625 RSUs that were granted to our 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 $38.10 at the date of grant vested, and 5,625 shares of the Company’s common stock were issued during the nine months ended September 30, 2017.

In May 2017, 5,625 RSUs that were granted to our 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 $22.90 at the date of grant vested, and 4,125 shares of the Company’s common stock were issued during the nine months ended September 30, 2017.

The following table summarizes the restricted stock activity for the nine months ended September 30, 2017:

Stock-based compensation expense related to RSU grants was $0 and $72,000 for the three and nine months ended September 30, 2017, respectively, and $86,000 and $230,000 for the three and nine months ended September 30, 2016, respectively.