ITEM 7 - 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 and should be read together with the “Risk Factors” section of this Annual Report on Form 10-K for a discussion
of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual
Report and in other reports we file with the Securities and Exchange Commission, particularly those under “Risk Factors.”.
Business Overview
We are a clinical-stage biopharmaceutical company focused on discovering,
licensing, acquiring and developing small molecules and biologics to treat and prevent human disease and alleviate suffering. Our
portfolio is primarily composed of central nervous system (CNS) and immunology product candidates. The CNS portfolio includes both
small molecules and biologics to treat pain, neurologic, psychiatric and addiction conditions. Our lead CNS candidate, TNX-102
SL1, is in mid-Phase 3 development for the management of fibromyalgia, and positive data on the RELIEF Phase 3 trial
were recently reported. We expect interim data from a second Phase 3 study, RALLY, in the third quarter of 20212 and
topline data in the fourth quarter of 2021. We completed enrollment of 50% of participants in the RALLY study in March 2021. The
immunology portfolio includes vaccines to prevent infectious diseases and biologics to address immunosuppression, cancer, and autoimmune
diseases. Our lead vaccine candidate, TNX-18003, is a live replicating vaccine based on the horsepox viral vector platform
to protect against COVID-19, primarily by eliciting a T cell response. We expect efficacy data from animal studies of TNX-1800
in the first quarter of 2021. TNX-8013, live horsepox virus vaccine for percutaneous administration, is in development
to protect against smallpox and monkeypox.
1TNX-102
SL is an investigational new drug and has not been approved for any indication.
2Pending
submission and agreement from FDA on statistical analysis plan.
3TNX-1800
and TNX-801 are investigational new biologics and have not been approved for any indication.
Current Operating Trends
Our current
research and development efforts are focused on developing TNX-102 SL for the treatment of FM, PTSD, AAD and AUD, TNX-1800 as a
potential COVID-19 vaccine, TNX-801 as a potential smallpox vaccine, but we also expend effort on our other pipeline programs,
primarily related to TNX-1300, TNX-1900, TNX-601, TNX-701, TNX-1500, TNX-1600, TNX-1700, TNX-2100, TNX-2300 and TNX-2900. Our research
and development expenses consist of manufacturing work and the cost of drug ingredients used in such work, fees paid to consultants
for work related to clinical trial design and regulatory activities, fees paid to providers for conducting various clinical studies
as well as for the analysis of the results of such studies, and for other medical research addressing the potential efficacy and
safety of our study drugs. We believe that significant investment in product development is a competitive necessity, and we plan
to continue these investments in order to be in a position to realize the potential of our product candidates and proprietary technologies.
We expect that all
of our research and development expenses in the near-term future will be incurred in support of our current and future preclinical
and clinical development programs rather than technology development. These expenditures are subject to numerous uncertainties
relating to timing and cost to completion. We test compounds in numerous preclinical studies for safety, toxicology and efficacy.
At the appropriate time, subject to the approval of regulatory authorities, we expect to conduct early-stage clinical trials for
each drug candidate. We anticipate funding these trials ourselves, and possibly with the assistance of federal grants, contracts
or other agreements. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products
in order to focus our resources on more promising products. Completion of clinical trials may take several years, and the length
of time generally varies substantially according to the type, complexity, novelty and intended use of a product candidate.
The commencement and
completion of clinical trials for our products may be delayed by many factors, including lack of efficacy during clinical trials,
unforeseen safety issues, slower than expected participant recruitment, lack of funding or government delays. In addition, we may
encounter regulatory delays or rejections as a result of many factors, including results that do not support the intended safety
or efficacy of our product candidates, perceived defects in the design of clinical trials and changes in regulatory policy during
the period of product development. As a result of these risks and uncertainties, we are unable to accurately estimate the specific
timing and costs of our clinical development programs or the timing of material cash inflows, if any, from our product candidates.
Our business, financial condition and results of operations may be materially adversely affected by any delays in, or termination
of, our clinical trials or a determination by the FDA that the results of our trials are inadequate to justify regulatory approval,
insofar as cash in-flows from the relevant drug or program would be delayed or would not occur.
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Results of Operations
We anticipate that
our results of operations will fluctuate for the foreseeable future due to several factors, such as 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.
Fiscal year Ended December 31, 2020
Compared to Fiscal year Ended December 31, 2019
Research and
Development Expenses. Research and development expenses for the fiscal year ended December 31, 2020 were $36.2 million,
an increase of $18.0 million, or 99%, from $18.2 million for the fiscal year ended December 31, 2019. This increase in predominately
due to the acquisition of the Trigemina asset for $2.4 million, timing of development milestones related to the Phase 3 RELIEF
study in FM for TNX-102 SL in 2020, initiation of a second Phase 3 study in FM, RALLY, in 2020, as well as new activities related
to the development of TNX-1800 as a potential COVID-19 vaccine, increased activities related to the development of TNX-801 as a
potential smallpox vaccine, and increased spending related to our development pipeline.
General
and Administrative Expenses. General and administrative expenses for the fiscal year ended December 31, 2020 were
$14.4 million, an increase of $3.8 million, or 36%, from $10.6 million incurred in the fiscal year ended December 31, 2019. The
increase is primarily due to an increase in compensation expense of $1.6 million driven by additional personnel added in 2020,
an increase in legal fees of $1.0 million due to increased corporate legal fees and patent prosecution costs, increased financial
reporting expenses of $0.4 million due to multiple shareholder meetings held during the year, an increase in IR/PR costs of $0.3
million, and an increase in insurance premiums of $0.1 million.
License Agreements
On February 11, 2021,
we announced that we have licensed technology using oxytocin-based therapeutics for the treatment of Prader-Willi syndrome and
non-organic failure to thrive disease from Inserm (the French National Institute of Health and Medical Research), Aix-Marseille
Université and Centre Hospitalier Universitaire of Toulouse. The licensing agreement has been negotiated and signed by Inserm
Transfert, the private subsidiary of Inserm, on behalf of Inserm.
The co-exclusive license
allows us to expand our intranasal potentiated oxytocin development program to a new indication. The patents covering the technology
are expected to provide market exclusivity for the co-licensees in the U.S. and Europe through 2031, which exclusivity could be
extended after marketing authorization by a Supplemental Protection Certificate in Europe or a Patent Term Extension in the U.S.,
independent of other Tonix-held patents covering the formulation and oxytocin potentiation technologies for intranasal administration.
On September 16, 2019,
we entered into an exclusive License Agreement (the “Columbia License Agreement”) with the Trustees of Columbia University
in the City of New York (“Columbia”) pursuant to which Columbia granted to us an exclusive license, with the right
to sublicense, certain patents and technical information (collectively, the “TFF2 Technology”) related to a recombinant
Trefoil Family Factor 2 (TFF2), and to develop and commercialize products thereunder (each, a “TFF2 Product”). Pursuant
to the terms of the Columbia License Agreement, Columbia has reserved for itself the right to practice the TFF2 Technology for
academic research and educational purposes.
We paid a five-digit
license fee to Columbia as consideration for entering into the Columbia License Agreement, which was recorded to research and development
expenses in the statement of operations for the year ended December 31, 2019. We are obligated to use Commercially Reasonable Efforts,
as defined in the Columbia License Agreement, to develop and commercialize the TFF2 Product, and to achieve specified developmental
milestones.
We have agreed to pay
Columbia single-digit royalties on net sales of (i) TFF2 Products sold by us or a sublicensee and (ii) any other products that
involve material or technical information related to the TFF2 Product and transferred to us pursuant to the License Agreement (“Other
Products”) sold by us or a sublicensee. Royalties on each particular TFF2 Product are payable on a country-by-country and
Product-by-Product basis until the latest of (i) the date of expiration of the last valid claim in the last to expire of the issued
patents covered by the Columbia License Agreement, and (ii) a specified period of time after the first commercial sale of a TFF2
Product in the country in question. Royalties on each particular Other Product are payable on a country-by-country and product-by-product
basis until a specified period of time after the first commercial sale of such particular Other Product in such country. Royalties
payable on net sales of the TFF2 Product and Other Products may be reduced by 50% of the royalties payable by us to any third party
for intellectual property rights which are necessary for the practice of the rights licensed to us under the Columbia License Agreement,
provided that the royalty payable on a TFF2 Product or Other Product may not be reduced by more than 50%.
We are also obligated
to make contingent milestone payments to Columbia totaling $4.1 million on a Product-by-Product basis upon the achievement of certain
development, approval and sales milestones related to a TFF2 Product. In addition, we shall pay Columbia 5% of consideration, other
than royalty payments and certain other categories of consideration, payable to us by a sublicensee. As of December 31, 2020, no
milestone payments have been accrued or paid in relation to this agreement.
On May 20, 2019, we
entered into an exclusive License Agreement (the “License Agreement”) with Columbia pursuant to which Columbia, for
itself and on behalf of the University of Kentucky and the University of Michigan (collectively, the “Institutions”)
granted to us an exclusive license, with the right to sublicense, certain patents, technical information and material (collectively,
the “Technology”) related to a double-mutant cocaine esterase, and to develop and commercialize products thereunder
(each, a “Product”). Pursuant to the terms of the License Agreement, Columbia has reserved for itself and the Institutions
the right to practice the Technology for academic research and educational purposes.
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We agreed to pay a six-digit license fee to Columbia as consideration for entering into the License Agreement.
We are obligated to use Commercially Reasonable Efforts, as defined in the License Agreement, to develop and commercialize the
Product, and to achieve specified developmental milestones. The first 50% of the license fee was paid by June 30, 2019, while the
remaining 50% license fee, was paid during the second quarter of 2020. Both installments of the license fee were recorded to research
and development expenses in the 2019 statement of operations.
We agreed to pay Columbia
single-digit royalties on net sales of (i) Products sold by us or a sublicensee and (ii) any other products that involve material
or technical information related to the Product and transferred to us pursuant to the License Agreement (“Other Products”)
sold by us or a sublicensee. Royalties on each particular Product are payable on a country-by-country and Product-by-Product basis
until the latest of (i) the date of expiration of the last valid claim in the last to expire of the issued patents covered by the
License Agreement, (ii) a specified period of time after the first commercial sale of a Product in the country in question, or
(iii) expiration of any market exclusivity period granted by a regulatory agency. Royalties on each particular Other Product are
payable on a country-by-country and product-by-product basis until the later of (i) a specified period of time after the first
commercial sale of such particular Other Product in such country or (ii) expiration of any market exclusivity period granted by
a regulatory agency. Royalties payable on net sales of the Product and Other Products may be reduced by 50% of the royalties payable
by us to any third party for intellectual property rights which are necessary for the practice of the rights licensed to us under
the License Agreement, provided that the royalty payable on a Product or Other Product may not be reduced by more than 50%.
We are also obligated
to make contingent milestone payments to Columbia totaling $3 million on a Product-by-Product basis upon the achievement of certain
development, approval and sales milestones related to a Product. In addition, we shall pay Columbia 5% of consideration, other
than royalty payments and certain other categories of consideration, payable to us by a sublicensee. As of December 31, 2020, no
milestone payments have been accrued or paid in relation to this agreement.
Asset Purchase Agreements
On December 22, 2020, we entered into an asset purchase agreement (the “Asset Purchase Agreement”)
with Katana Pharmaceuticals, Inc. (“Katana”) pursuant to which we acquired Katana assets related to insulin resistance
and related syndromes, including obesity (the “Katana Assets”). In connection with the acquisition of the Assets, we
assumed Katana’s rights and obligations under that certain Exclusive License Agreement by and between Katana and The University
of Geneva (“Geneva”) (the “Geneva License “Agreement”) pursuant to an Assignment and Assumption Agreement
with Geneva (“Geneva Assignment and Assumption Agreement”), dated December 22, 2020. As consideration for entering
into the Asset Purchase Agreement, we paid $0.7 million to Katana. The costs associated with the cash payments were recorded to
research and development expenses in the statement of operations for the year ended December 31, 2020. Because the Katana intellectual
property was acquired prior to FDA, the cash consideration totaling $0.7 million, was expensed as research and development costs
since there is no alternative future use and the acquired intellectual property does not constitute a business.
Pursuant to the terms
of the Geneva Assignment and Assumption Agreement, Geneva granted us an exclusive license, with the right to sublicense, certain
patents related to the Katana Assets. We are obligated to use commercially reasonable efforts to diligently develop, manufacture,
and sell products claimed or covered by the patent and will use commercially reasonable efforts to diligently develop markets for
such products. The Geneva License Agreement specifies developmental milestones and the period of time during which such milestones
must be completed and provides for an annual maintenance fee payable to Geneva.
As of December 31,
2020, no milestone payments have been accrued or paid in relation to this agreement.
On June 11, 2020, we entered into an asset purchase agreement (the “Trigemina Asset Purchase Agreement”)
with Trigemina, Inc. (“Trigemina”) and certain shareholders named therein (the “Executive Shareholders”)
pursuant to which we acquired Trigemina assets related to migraine and pain treatment technologies (the “Trigemina Assets”).
In connection with the acquisition of the Trigemina Assets, we assumed Trigemina’s rights and obligations under that certain
Amended and Restated Exclusive License Agreement, dated November 30, 2007, as amended, by and between Trigemina and The Board of
Trustees of the Leland Stanford Junior University (“Stanford”) (the “Stanford License “Agreement”)
pursuant to an Assignment and Assumption Agreement with Stanford (“Assignment and Assumption Agreement”), dated June
11, 2020. As consideration for entering into the Trigemina Asset Purchase Agreement, we paid $824,759 to Trigemina and issued to
Trigemina 2,000,000 shares of our common stock and paid Stanford $250,241 pursuant to the terms of the Assignment and Assumption
Agreement. The common stock is unregistered and subject to a 12 month lock-up and a Shareholder Voting Agreement, dated June 11,
2020, pursuant to which Trigemina and the Executive Shareholders have agreed to vote the common stock on any matter put to a vote
of our shareholders in accordance with management’s recommendations. Both the costs associated with the cash payments and
share issuance, totaling $2.4 million, were recorded to research and development in the statement of operations for the year ended
December 31, 2020. Because the Trigemina intellectual property was acquired prior to FDA approval, the cash and stock 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.
Pursuant to the terms
of the Assignment and Assumption Agreement, Stanford has granted us an exclusive license, with the right to sublicense, certain
patents related to the Trigemina Assets. Stanford has reserved for itself the right to practice under the patents for academic
research and educational purposes. We are obligated to use commercially reasonable efforts to diligently develop, manufacture,
and sell products claimed or covered by the patent and will use commercially reasonable efforts to diligently develop markets for
such products. The Stanford License Agreement specifies developmental milestones and the period of time during which such milestones
must be completed, and provides for an annual maintenance fee payable to Stanford.
As of December 31,
2020, no milestone payments have been accrued or paid in relation to this agreement.
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On August 19, 2019, we entered into an asset purchase agreement (the “TRImaran Asset Purchase Agreement”)
with TRImaran Pharma, Inc. (“TRImaran”) and the selling shareholders named therein (the “Selling Shareholders”)
pursuant to which we acquired TRImaran’s assets related to certain pyran-based compounds (the “TRImaran Assets”).
In connection with the acquisition of the TRImaran Assets, we entered into a First Amended and Restated Exclusive License Agreement
(the “WSU License Agreement”) with Wayne State University (“WSU”) on August 19, 2019. As consideration
for entering into the TRImaran Asset Purchase Agreement, we paid $100,000 to TRImaran and have assumed certain liabilities of TRImaran
totaling $68,500. The $168,500 was recorded to research and development expenses in the statement of operations in 2019. Upon the
achievement of specified development, regulatory and sales milestones, we also agreed to pay TRImaran and the Selling Shareholders,
in restricted stock or cash, at our option, a total of approximately $3.4 million. Pursuant to the terms of the TRImaran Asset
Purchase Agreement, TRImaran and the Selling Shareholders are prohibited from disclosing confidential information related to the
TRImaran Assets and are restricted from engaging, for a period of three years, in the development or commercialization of any therapeutic
containing any pyran-based drug compound for the treatment of post-traumatic stress disorder, attention deficit hyperactivity disorder
or major depressive disorder. Also for a period of three years, if TRImaran or any Selling Shareholder engage in the research or
development of any potential therapeutic compound for the treatment of any central nervous system disorder, TRImaran or such Selling
Shareholder is obliged to provide notice and opportunity to Tonix to make an offer to acquire or license rights with respect to
such product candidate. As of December 31, 2020, no milestone payments have been accrued or paid in relation to this agreement.
Pursuant to the terms
of the WSU License Agreement, WSU granted us an exclusive license, with the right to sublicense, certain patents, technical information
and material (collectively, the “Technology”) related to the TRImaran Assets. WSU has reserved for itself the right
to practice the Technology for academic research and educational purposes. We are obligated to use commercially reasonable efforts
to obtain regulatory approval for one or more products utilizing the Technology (“WSU Products”) and to use commercially
reasonable marketing efforts throughout the term of the WSU License Agreement. The WSU License Agreement specifies developmental
milestones and the period of time during which such milestones must be completed and provides for an annual maintenance fee payable
to WSU. We are obligated to substantially manufacture WSU Products in the United States if WSU Products will be sold in the United
States.
Pursuant to the WSU
License Agreement, we paid $75,000 to WSU as reimbursement of certain patent expenses, and, upon the achievement of specified development,
regulatory and sales milestones, we also agreed to pay WSU, milestone payments totaling approximately $3.4 million. We also agreed
to pay WSU single-digit royalties on net sales of WSU Products sold by us or a sublicensee on a tiered basis based on net sales,
and additional sublicense fees on certain consideration received from sublicensees. Royalties on each particular WSU Product are
payable on a country-by-country and Product-by-Product basis until the date of expiration of the last valid claim in the last to
expire of the issued patents covered by the WSU License Agreement. Royalties payable on net sales of WSU Products may be reduced
by 50% of the royalties payable by us to any third party for intellectual property rights which are necessary for the practice
of the rights licensed to us under the WSU License Agreement, provided that the royalty payable on a WSU Product may not be reduced
by more than 50%. Each party also has the right to terminate the agreement for customary reasons such as material breach and bankruptcy.
The WSU License Agreement contains provisions relating to termination, indemnification, confidentiality and other customary matters
for an agreement of this kind. As of December 31, 2020, no milestone payments have been accrued or paid in relation to this agreement.
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Liquidity and Capital Resources
As of December
31, 2020, we had working capital of $78.2 million, comprised primarily of cash and cash equivalents of $77.1 million and prepaid
expenses and other of $10.9 million, offset by $4.6 million of accounts payable and $4.6 million of accrued expenses. A significant
portion of the accounts payable and accrued expenses are due to work performed in relation to our Phase 3 clinical trial in FM
and our vaccine program. For the years ended December 31, 2020 and 2019, we used approximately $48.6 million and $26.7 million
of cash in operating activities, respectively, which represents cash outlays for research and development and general and administrative
expenses in such periods. The increase in cash outlays principally resulted from an increase in research and development and general
and administrative activities. For the year ended December 31, 2020 and 2019, net proceeds from financing activities were $123.1
million and $12.9 million, respectively, predominately from the sale of our common stock and exercise of warrants.
Cash used by
investing activities for the years ended December 31, 2020 and 2019 was approximately $8.6 million and $17,000, respectively, related
to the purchase of property and equipment.
We believe that our cash resources at December 31, 2020 and the proceeds that we raised from equity offerings
in the first quarter of 2021 will meet our operating and capital expenditure requirements through March 31, 2022, 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-K. 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 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
would be adversely affected.
Future Liquidity Requirements
We expect to incur losses from operations for the near future. We expect to incur increasing research
and development expenses, including expenses related to additional clinical trials and the buildout of our research and development
operations and manufacturing. We will not have enough resources to meet our operating requirements for the one-year period from
filing date of this report.
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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.
We will need to obtain
additional capital in order to fund future research and development activities. 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.
Subsequent to December 31, 2020
On January 11, 2021, we entered into an underwriting agreement (“the January 2021 Financing”)
with A.G.P/Alliance Global Partners (“AGP”), relating to the issuance and sale of 50,000,000 shares of our common stock,
in a registered direct public offering. The public offering price for each share of common stock was $0.80. The January 2021 Financing
closed on January 13, 2021. AGP purchased the shares at a seven percent discount to the then current public price, for an aggregate
discount of $2.8 million. We incurred other offering expenses of approximately $0.3 million. We received net proceeds of approximately
$36.9 million, after deducting the underwriting discount and other offering expenses.
On February 8, 2021,
we entered into an underwriting agreement (“the February 2021 Financing”) with AGP, relating to the issuance and sale
of 58,333,334 shares of our common stock, in a registered direct public offering. The public offering price for each share of
common stock was $1.20. The February 2021 Financing closed on February 9, 2021. AGP purchased the shares at a seven percent discount
to the then current public price, for an aggregate discount of $4.9 million. We incurred other offering expenses of approximately
$0.1 million. We received net proceeds of approximately $65.0 million, after deducting the underwriting discount and other offering
expenses.
2020 Lincoln Park Transaction
On
September 3, 2020, we entered into a purchase agreement (the “2020 Purchase Agreement”) and a registration rights agreement
(the “2020 Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”). Pursuant
to the terms of the 2020 Purchase Agreement, Lincoln Park has agreed to purchase from us up to $30,000,000 of our common stock
(subject to certain limitations) from time to time during the term of the 2020 Purchase Agreement. Pursuant to the terms of the
2020 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 2020 Purchase Agreement.
Pursuant
to the terms of the 2020 Purchase Agreement, we issued 600,000 shares of common stock to Lincoln Park as consideration for its
commitment to purchase shares of our common stock under the 2020 Purchase Agreement. The commitment shares were valued at $498,000
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 2020 Purchase Agreement.
During
the year ended December 31, 2020, we sold an aggregate of approximately 25.4 million shares of common stock under the 2020 Purchase
Agreement, for gross proceeds of approximately $14.6 million.
Under
applicable rules of the NASDAQ Global Market, we could not issue or sell more than 19.99% of the shares of our common stock outstanding
immediately prior to the execution of the 2020 Purchase Agreement (approximately 26 million shares) to Lincoln Park under the 2020
Purchase Agreement without stockholder approval, unless the average price of all applicable sales of our common stock to Lincoln
Park under the 2020 Purchase Agreement equals or exceeds a threshold amount. As we have issued approximately 26 million shares
to Lincoln Park, during the year end December 31, 2020, under the 2020 Purchase Agreement at less than the threshold amount, we
will not sell any additional shares under the 2020 Purchase Agreement without shareholder approval.
July 2020 Financing
On July 13, 2020, we entered into an underwriting agreement with AGP, relating to the issuance and sale
of 20,940,000 shares of common stock, in a registered direct public offering (“the July 2020 Financing”). The public
offering price for each share of common stock was $0.50. The July 2020 Financing closed on July 15, 2020. AGP purchased the shares
at a seven percent discount, for an aggregate discount of $0.7 million. We incurred other offering expenses of approximately $0.1
million. We received net proceeds of approximately $9.6 million, after deducting the underwriting discount and other offering expenses.
2020 At-the-Market Offering
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 the our common stock having an aggregate offering price of up to $50.0
million in at-the-market offerings (“ATM”) sales. On the same day, we filed a prospectus supplement under a shelf registration
relating to the Sales Agreement. 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. On September
4, we filed an amended prospectus supplement under a shelf registration relating to the Sales Agreement to increase the aggregate
offering price to $100.0 million in ATM sales under the Sales Agreement. From date of inception until December 31, 2020, we sold
approximately 102.7 million shares of common stock under the Sales Agreement, for gross proceeds of approximately $71.1 million.
Subsequent to December 31, 2020, we sold 9.5 million shares of common stock under the Sales Agreement, for gross proceeds of approximately
$7.0 million.
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February 2020 Financing
On February 7, 2020,
we entered into an underwriting agreement with AGP pursuant to which we sold securities consisting of 3,837,000 Class A Units at
a public offering price of $0.57 per unit, with each unit consisting of one share of common stock and one warrant to purchase one
share of common stock, and 5,313 Class B Units at a public offering price of $1,000 per unit, with each unit consisting of one
share of Series B Convertible Preferred Stock, with a conversion price of $0.57 per share, convertible into 1,754.386 shares of
common stock and warrants to purchase 1,754.386 shares of our common stock (“the February 2020 Financing”). The warrants
have an exercise price of $0.57, are immediately exercisable and expire five years from the date of issuance.
The February 2020 Financing
closed on February 11, 2020. AGP purchased the Class A and Class B Units at a seven-percent discount to the public offering price,
for an aggregate discount of approximately $0.5 million. We incurred other offering expenses of approximately $0.5 million. We
received net proceeds of approximately $6.5 million, after deducting the underwriting discount and other offering expenses.
After allocating proceeds
to the warrants issued with the Series B Convertible Preferred Stock, the effective conversion price of the Series B Convertible
Preferred stock was determined to be less than the fair value of the underlying common stock at the date of commitment, resulting
in a beneficial conversion feature (“BCF”) at that date. Since the Series B Preferred Stock has no stated maturity
or redemption date and is immediately convertible at the option of the holder, the discount created by the BCF of $1.3 million,
based on intrinsic value, was charged to additional paid in capital as a non-cash “deemed dividend” and included in
net loss to common stockholders.
During the first quarter
of 2020, all 5,313 shares of Series B Convertible Preferred Stock were converted into common stock.
During February and March 2020, 10.8 million of the warrants issued in the February 2020 Financing, with
an exercise price of $0.57, were exercised for proceeds of approximately $6.2 million.
During August 2020,
2.2 million of the warrants issued in the February 2020 Financing, with an exercise price of $0.57, were exercised for proceeds
of approximately $1.3 million.
March 2020 Financing
On February 28, 2020, we entered into an underwriting agreement with AGP, relating to the issuance and
sale of 14,550,000 shares of our common stock, in a registered direct public offering (“the March 2020 Financing”).
The public offering price for each share of common stock was $1.10. The March 2020 Financing closed on March 3, 2020. AGP purchased
the shares at a seven-percent discount to the then current public price, for an aggregate discount of $1.1 million. We incurred
other offering expenses of approximately $0.1 million. We received net proceeds of approximately $14.8 million, after deducting
the underwriting discount and other offering expenses.
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November 2019 Financing
On November 14, 2019,
we entered into an underwriting agreement with AGP pursuant to which we sold securities consisting of 547,420 Class A Units at
a public offering price of $1.94 per unit, with each unit consisting of one share of common stock, one warrant to purchase one
share of common stock (“primary warrant”) and one-half of one warrant to purchase one half of one share common stock
(“common warrant”), and 7,938 Class B Units at a public offering price of $1,000 per unit, with each unit consisting
of one share of Series A Convertible Preferred Stock, with a conversion price of $1.94 per share, convertible into 515.464 shares
of common stock, primary warrants to purchase 515.464 shares of common stock, and common warrants to purchase 257.732 shares of
our common stock (the “November 2019 Financing”). The primary warrants have an exercise price of $1.94, are immediately
exercisable and expire five years from the date of issuance. The common warrants have an exercise price of $1.94, are exercisable
and expire 12 months from the date of issuance. The common warrants are exercisable on a cashless basis at the option of the holder
on the earlier of 30 days from issuance and the date by which an aggregate of $9.0 million of our securities were traded.
The November 2019 Financing
closed on November 19, 2019. AGP purchased the Class A and Class B Units at a seven-percent discount to the public offering price,
for an aggregate discount of approximately $0.6 million. We incurred other offering expenses of approximately $0.5 million. We
received net proceeds from the November 2019 Financing of approximately $7.9 million, after deducting the underwriting discount
and other offering expenses.
After allocating proceeds
to the warrants issued with the Series A Convertible Preferred Stock, the effective conversion price of the Series A Convertible
Preferred Stock was determined to be less than the fair value of the underlying common stock at the date of commitment, resulting
in a BCF at that date. Since the Series A Preferred Stock has no stated maturity or redemption date and is immediately convertible
at the option of the holder, the discount created by the BCF of $2.5 million, based on the intrinsic value, was charged to additional
paid in capital as a non-cash “deemed dividend” and included in net loss to common stockholders.
As of December 31,
2019, all 7,938 shares of Series A Convertible Preferred Stock were converted into common stock.
As a result of the
issuance of common stock in February 2020 for less than the November 2019 warrant exercise price, a repricing of the warrants issued
in the November 2019 Financing was triggered. We recognized a one-time non-cash “deemed dividend” of $0.5 million,
representing the increase in the fair value of the warrants. The non-cash “deemed dividend” was charged to additional
paid in capital and included in net loss to stockholders. During February and March 2020, 2.3 million of the warrants issued in
the November 2019 financing, with an exercise price of $0.57, were exercised for proceeds of approximately $1.3 million.
As a result of the
issuance of common stock in the July 2020 Financing for less than the November 2019 Financing warrant exercise price, a repricing
of the warrants was triggered and the warrants were repriced at $0.50.
During July 2020, 2.3
million of the warrants issued in the November 2019 Financing, with an exercise price of $0.50, were exercised for proceeds of
approximately $1.2 million.
2019 Lincoln Park Transaction
On
August 20, 2019, we entered into a purchase agreement (the “2019 Purchase Agreement”) and a registration rights agreement
(the “2019 Registration Rights Agreement”) with Lincoln Park. Pursuant to the terms of the 2019 Purchase Agreement,
Lincoln Park has agreed to purchase from us up to $15,000,000 of our common stock (subject to certain limitations) from time to
time during the term of the 2019 Purchase Agreement. Pursuant to the terms of the 2019 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 2019 Purchase Agreement.
Pursuant
to the terms of the 2019 Purchase Agreement, we issued 35,529 shares of common stock to Lincoln Park as consideration for its commitment
to purchase shares of our common stock under the 2019 Purchase Agreement. The commitment shares were valued at $200,000 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 2019 Purchase Agreement.
As
a result of receiving stockholder approval on January 16, 2020, we may sell more than 19.9% of its common stock outstanding pursuant
to the 2019 Purchase Agreement without violating Nasdaq Marketplace Rules, including Rule 5635(d), requiring shareholder approval
for the sale, issuance or potential issuance by an issuer of common stock (or securities convertible into or exercisable for common
stock) at a price less than the greater of book or market value.
During
the year ended December 31, 2020, the Company sold an aggregate of approximately 464,471 shares of common stock under the 2019
Purchase Agreement, for gross proceeds of approximately $0.3 million. The Company did not sell any shares of common stock under
the 2019 Purchase Agreement during 2019.
July 2019 Financing
On July 16, 2019, we
entered into an underwriting agreement with Aegis Capital Corp., as representatives of the underwriters (“Aegis”),
relating to the issuance and sale of 900,000 shares of its common stock, in an underwritten public offering (the “July 2019
Financing”). The public offering price for each share of common stock was $6.00. We granted Aegis a 45-day option to purchase
up to an additional 135,000 shares of common stock to cover over-allotments, if any.
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The July 2019 Financing
closed on July 18, 2019. Aegis purchased the shares at an eight percent discount to the then current public price, for an aggregate
discount of $0.4 million. We incurred offering expenses of approximately $0.5 million. We received net proceeds of approximately
$4.5 million, after deducting the underwriting discount and other offering expenses.
December 2018 Financing
On December 7, 2018,
we entered into an underwriting agreement with AGP and Dawson James Securities, Inc. (collectively, the “Underwriters”)
pursuant to which we sold 86,171 Class A Units at a public offering price of $35.00 per unit, with each unit consisting of one
share of common stock and a warrant to purchase one share of common stock, and 11,984 Class B Units at a public offering price
of $1,000 per unit, with each unit consisting of one share of Series A Convertible Preferred Stock, with a conversion price of
$35.00 per share convertible into 28.5714 shares of common stock, and warrants to purchase 28.5714 shares of Common Stock. The
warrants have an exercise price of $35.00, are immediately exercisable and expire five years from the date of issuance.
We also granted the
Underwriters a 45-day option to purchase up to 64,286 shares of common stock and/or additional warrants to purchase up to 64,286
additional shares of common stock.
The December 2018 Financing
closed on December 11, 2018. The Underwriters purchased the Class A and Class B Units at a seven-percent discount to the public
offering price, for an aggregate discount of approximately $1.1 million (or $2.40 per share). We incurred other offering expenses
of approximately $0.4 million. We received net proceeds from the December 2018 Financing of approximately $13.6 million, after
deducting the underwriting discount and other offering expenses.
Additionally, the Underwriters
fully exercised the over-allotment option related to the warrants and purchased additional warrants to acquire 64,000 shares of
common stock for net proceeds of approximately $6,000.
On December 13, 2018,
the Underwriters partially exercised the over-allotment option and purchased 25,000 shares of common stock for net proceeds of
approximately $0.8 million, net of an aggregate discount of $0.1 million (or $2.40 per share).
After allocating proceeds
to the warrants issued with the Series A convertible preferred stock, the effective conversion price of the Series A Convertible
Preferred Stock, after the bifurcation of the warrants, was determined to be less than the fair value of the underlying common
stock at the date of commitment, resulting in a BCF at that date. Since the Series A Preferred Stock has no stated maturity or
redemption date and is immediately convertible at the option of the holder, the discount created by the BCF of $3.3 million, based
on the intrinsic value, was charged to additional paid in capital as a “deemed dividend” and included in net loss to
common stockholders.
During the first
quarter of 2019, the remaining 9,856 shares of Series A Convertible Preferred Stock were converted into 281,610 shares of common
stock.
2018 Lincoln Park Transaction
On
October 18, 2018, we entered into a purchase agreement (the “2018 Purchase Agreement”) and a registration rights agreement
(the “2018 Registration Rights Agreement”) with Lincoln Park. Pursuant to the terms of the 2018 Purchase Agreement,
Lincoln Park has agreed to purchase from us up to $15,000,000 of our common stock (subject to certain limitations) from time to
time during the term of the 2018 Purchase Agreement. Pursuant to the terms of the 2018 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 2018 Purchase Agreement.
Pursuant
to the terms of the 2018 Purchase Agreement, at the time we signed the 2018 Purchase Agreement and the 2018 Registration Rights
Agreement, we issued 3,500 shares of common stock to Lincoln Park as consideration for its commitment to purchase shares of our
common stock under the 2018 Purchase Agreement. The commitment shares were valued at $245,000 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 2018 Purchase
Agreement.
During
the year ended December 31, 2020, we sold an aggregate of approximately 22,754 shares of common stock under the 2018 Purchase Agreement,
for gross proceeds of approximately $0.4 million.
Under
applicable rules of the NASDAQ Global Market, we could not issue or sell more than 19.99% of the shares of its common stock outstanding
immediately prior to the execution of the 2018 Purchase Agreement (approximately 26,200 shares) to Lincoln Park under the 2018
Purchase Agreement without stockholder approval, unless the average price of all applicable sales of its common stock to Lincoln
Park under the 2018 Purchase Agreement equals or exceeds a threshold amount. As we have issued approximately 26,200 shares to Lincoln
Park, by September 30, 2019, under the 2018 Purchase Agreement at less than the threshold amount, we will not sell any additional
shares under the 2018 Purchase Agreement without shareholder approval.
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Stock Compensation
Stock Options
2019 Stock Incentive Plan
On May 3, 2019, our
stockholders approved the Tonix Pharmaceuticals Holding Corp. 2019 Stock Incentive Plan (the “2019 Plan”). The 2019
Plan provided for the issuance of up to 140,000 shares of common stock. With the adoption of the Amended and Restated 2020 Plan
(as defined below), no further grants may be made under the 2019 Plan.
2020 Stock Incentive Plan
On January 16, 2020,
our stockholders approved the Tonix Pharmaceuticals Holding Corp. 2020 Stock Incentive Plan (the “2020 Plan”). The
2020 Plan provided for the issuance of up to 600,000 shares of common stock. With the adoption of the Amended and Restated 2020
Stock Incentive Plan, no further grants may be made under the 2020 Plan.
Amended and Restated 2020 Stock Incentive
Plan
On May 1, 2020, our
stockholders approved the Tonix Pharmaceuticals Holding Corp. Amended and Restated 2020 Stock Incentive Plan (“Amended and
Restated 2020 Plan”), and together with the 2020 Plan and the 2019 Plan, the “Plans”).
Under the terms of the Amended and Restated 2020 Plan, we 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 Amended and Restated 2020
Plan provides for the issuance of up to 10,000,000 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 31st 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 December 31, 2020, 456,250 shares were available for future grants under
the Amended and Restated 2020 Plan. As of March 12, 2021, there are 19,172,111 shares available for future grants under the Amended
and Restated 2020 Plan.
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 have issued performance-based options which vest when target parameters are 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
vesting period using the straight-line method.
The weighted average
fair value of options granted during the year ended December 31, 2020 and 2019, was $0.66 and $16.54 per share, respectively.
Stock-based compensation
expense relating to options granted of $2.9 million, of which $2.0 million and $0.9 million, related to General and Administration
and Research and Development, respectively was recognized for the year ended December 31, 2020.
Stock-based compensation
expense relating to options granted of $1.5 million, of which $1.1 million and $0.4 million, related to General and Administration
and Research and Development, respectively was recognized for the year ended December 31, 2019.
As of December 31,
2020, the Company had approximately $5.6 million of unrecognized compensation cost related to non-vested awards granted under the
Plans, which the Company expects to recognize over a weighted average period of 2.17 years.
Employee Stock Purchase Plan
2019 Employee Stock Purchase Plan
On May 3, 2019, our
stockholders approved the Tonix Pharmaceuticals Holdings Corp. 2019 Employee Stock Purchase Plan (the “2019 ESPP”).
As a result of adoption of the 2020 ESPP, as defined below, by the stockholders, no further grants may be made under the 2019 ESPP
Plan.
2020 Employee Stock Purchase Plan
On May 1, 2020, our
stockholders approved the Tonix Pharmaceuticals Holdings Corp. 2020 Employee Stock Purchase Plan (the “2020 ESPP”).
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The 2020 ESPP allows
eligible employees to purchase up to an aggregate of 300,000 shares of our common stock. Under the 2020 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 2020 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 2020 ESPP,
subject to the statutory limit under the Code. As of December 31, 2020, 245,553 shares were available for future sales under the
2020 ESPP.
The 2020 and 2019 ESPP
are considered compensatory plans with the related compensation cost expensed over the six-month offering period. For the year
ended December 31, 2020 and 2019, $23,000 and $28,000, respectively were expensed. In January 2019, 177 shares that were purchased
as of December 31, 2018, under the 2018 ESPP, were issued. Accordingly, during the quarter ended March 31, 2019, 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. As of December 31, 2019, approximately $9,000 of employee payroll deductions, which
were withheld since July 1, 2019, the commencement of the offering period ending December 31, 2019, were included in accrued expenses
in the accompanying balance sheet. In January 2020, 1,578 shares that were purchased as of December 31, 2019, under the 2019 ESPP,
were issued. Accordingly, during the first quarter of 2020, approximately $2,000 of employee payroll deductions accumulated at
December 31, 2019, related to acquiring such shares, was transferred from accrued expenses to additional paid in capital. The remaining
$7,000 was returned to the employees. As of December 31, 2020, approximately $32,000 of employee payroll deductions have accumulated
and have been recorded in accrued expenses. In January 2021, 54,447 shares that were purchased as of December 31, 2020, under the
2020 ESPP, were issued. Accordingly, during the first quarter of 2021, approximately $28,000 of employee payroll deductions accumulated
at December 31, 2020, related to acquiring such shares, was transferred from accrued expenses to additional paid in capital. The
remaining $4,000 was returned to the employees.
Commitments
Research and Development Contracts
We have entered into contracts with various contract research organizations with outstanding commitments
aggregating approximately $34.6 million at December 31, 2020 for future work to be performed.
Operating Leases
Future minimum lease
payments under operating leases were as follows (in thousands):
Year Ending December 31,
Included interest (32 )
Critical Accounting Policies and Estimates
Our discussion and