NOTE 8 – SHARE-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 December 31, 2015, all reserved shares under the 2012 Plan were subject to granted awards outstanding.

2014 incentive stock option 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 “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. As of December 31, 2015, 651,357 shares were available for future grants under the 2014 Plan.

General

A summary of the stock option activity and related information for the Plans for the years ended December 31, 2015, 2014 2013 is as follows:

	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2013		150,000	$	30.00			$	-
Grants		226,500	$	10.20				-
Exercised		-
Forfeitures or expirations		-
Outstanding at January 1, 2014		376,500	$	18.09			$	-
Grants		850,300	$	9.53			$	-
Exercised		-
Forfeitures or expirations		-
Outstanding at January 1, 2015		1,226,800	$	12.40			$	-
Grants		513,243	$	6.01			$	-
Exercised		-
Forfeitures or expirations		(83,400)		8.17
Outstanding at December 31, 2015		1,656,643	$	10.64		8.35	$	1,125,299
Vested and expected to vest at December 31, 2015		1,656,643	$	10.64		8.35	$	1,125,299
Exercisable at December 31, 2015		744,385	$	14.37		7.66	$	120,817

The aggregate intrinsic value in the preceding tables 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 of issuance.

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 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. Share-based compensation expense related to awards is amortized over the applicable vesting period using the straight-line method.

The weighted-average grant-date fair value of stock options granted was $4.74 in 2015, $8.20 in 2014 and $7.83 in 2013.

The assumptions used in the valuation of stock options granted during the years ended December 31, 2015, 2014 and 2013 were as follows:

	2015	2014	2013
Risk-free interest rate	1.47% to 2.35%	2.03% to 2.52%	2.02%
Expected term of option	6.0 to 9.91 years	6.0 to 9.72 years	6.0 years
Expected stock price volatility	80.91% to 92.13%	92.87% to 100.73%	99.96%

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.

Share-based compensation expense relating to options granted of $4.1 million, $3.1 million and $1.7 million was recognized for the years ended December 31, 2015, 2014 and 2013, respectively.

As of December 31, 2015, the Company had approximately $4.6 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 1.76 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 December 31, 2015, after giving effect to shares purchased as described below, there were 250,406 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. In February 2015, 13,978 shares that were purchased as of December 31, 2014, were issued under the 2014 ESPP, and approximately $0.1 million of employee payroll deductions accumulated at December 31, 2014, related to acquiring such shares, were transferred from accrued expenses to additional paid in capital. In July 2015, 18,021 shares that were purchased as of June 30, 2015, were issued under the 2014 ESPP, and approximately $0.1 million of employee payroll deductions accumulated at June 30, 2015, related to acquiring such shares, was transferred from accrued expenses to additional paid in capital. The compensation expense related to the 2014 ESPP for the year ended December 31, 2015 was $0.1 million. As of December 31, 2015, approximately $0.1 million of employee payroll deductions, which had been withheld since July 1, 2015, the commencement of the offering period ended December 31, 2015, are included in accrued expenses in the accompanying balance sheet. 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.

Restricted stock units

On February 25, 2015, the Company granted an aggregate of 42,000 RSUs with a fair value of $6.24 per unit to its non-employee directors for board services in 2015, in lieu of cash, which vest one year from the grant date.

Stock-based compensation expense related to RSUs of $0.2 million was recognized during the year ended December 31, 2015. As of December 31, 2015, 42,000 unvested RSUs were outstanding and stock-based compensation relating to such RSUs of $44,000 remains unamortized and is being amortized over the remaining period of approximately two months. As of February 25, 2016, the RSUs for the non-employee directors vested.