Item 5. Market for Registrant’s Common Equity
Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our shares of common stock are currently quoted on the Nasdaq Capital Market under the symbol “NRXP.” Our common stock commenced trading on the Nasdaq Capital Market on May 25, 2021. Prior to such date, our shares of common stock were traded on the Nasdaq Capital Market under the symbol “BRPA.”
Holders
As of December 31, 2025, there were approximately 63 record holders of the Company’s common stock. The actual number of stockholders is greater than the number of record holders because stockholders who are beneficial owners but whose shares are held in street name by brokers or other nominees are not counted as separate record holders.
Dividends
Holders of our common stock are entitled to receive such dividends as may be declared by our Board. No cash dividends have been declared or paid with respect to our common stock and no cash dividends are anticipated to be paid in the foreseeable future. Any future decisions as to the payment of dividends will be at the discretion of our Board, subject to applicable law.
Unregistered Sales of Equity Securities and Use of Proceeds
No unregistered sales of equity securities occurred during the year ended December 31, 2025, that were not previously reported.
Purchases of Equity Securities by the Issuer and the Affiliated Purchasers
None.
Securities Authorized for Issuance under Equity Compensation Plans Information
The number of common shares to be issued upon exercise of outstanding stock awards is 542,490 and the number of common shares remaining available for future issuance under the Company’s equity compensation plans (excluding the common shares to be issued upon exercise of outstanding stock awards) is 44,845.
Item 6. [Reserved]
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Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of NRx Pharmaceuticals ’ financial condition and plan of operations together with NRx Pharmaceuticals' consolidated financial statements and the related notes appearing elsewhere herein. In addition to historical information, this discussion and analysis contains forward looking statements that involve risks, uncertainties, and assumptions. NRx Pharmaceuticals ’ actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section entitled “ Risk Factors ” included elsewhere herein. All references to “ Note, ” followed by a number reference from 1 to 15 herein, refer to the applicable corresponding numbered footnotes to these consolidated financial statements .
Overview
The Company is a clinical-stage bio-pharmaceutical company which develops and will distribute, through its wholly-owned operating subsidiary, NeuroRx, Inc., (NeuroRx), novel therapeutics for the treatment of central nervous system disorders including suicidal depression, chronic pain, post-traumatic stress disorder (PTSD) and schizophrenia. NRx is additionally the founder and majority owner of HOPE Therapeutics, Inc. (HOPE), a medical services company that offers interventional psychiatry care to patients with treatment-resistant depression and PTSD with a combination of neuroplastic drugs, transcranial magnetic stimulation (TMS), digital therapeutics, and hyperbaric therapy. All of our current drug development activities are focused on drugs that enhance neuroplasticity by modulating the N-methyl-D-aspartate (NMDA) receptor in the brain and nervous system, a neurochemical pathway that has been disclosed in detail in our annual filings. The Company has three lead drug candidates – NRX-100, a preservative-free formulation of ketamine for intravenous infusion, a generic preservative-free formulation of ketamine (KETAFREE™), and NRX-101, an oral fixed dose combination of D-cycloserine (DCS) and lurasidone. KETAFREE™, NRX-100 and NRX-101 are in the process of submission for Food and Drug Administration (FDA).
In May 2025, the Company reinstated the at-the-market offering and increased the maximum aggregate offering amount and filed a prospectus supplement under the offering agreement for an aggregate of $20,000,000. During the year ended December 31, 2025, the Company sold an aggregate of 2,277,177 shares of Common Stock for approximately $6.54 million, net of $0.2 million in offering costs. Pursuant to the Anson Purchase Agreement, on January 28, 2025, the Company issued $5.4 million of Third Tranche Anson Notes at an 8% original issue discount for total cash proceeds of approximately $5.0 million. On August 18, 2025, the Company entered into the Second RD Purchase Agreement with certain accredited investors for the sale of an aggregate of 3,959,999 shares of the Company’s Common Stock, at a purchase price of $1.65 per share. The Second Registered Direct Offering closed on August 18, 2025, and resulted in net proceeds of approximately $6.2 million, after deducting placement agent fees and other offering-related expenses of approximately $0.3 million. On September 30, 2025, the 1,870,960 shares underlying Anson Warrants were exercised for cash proceeds of $3.09 million. Because the exercise proceeds were received subsequent to September 30, 2025, the Company recorded a subscription receivable asset of $3.09 million as of September 30, 2025. The exercise proceeds of $3.09 million were received on October 1, 2025.
Although no assurances can be given, management believes that it will be able to secure necessary financing to support and consummate both its previously announced acquisitions and potential future acquisition candidates, execute its business plan and achieve its projected revenue objectives.
Since inception, the Company has incurred significant operating losses. For the years ended December 31, 2025 and 2024, the Company’s net loss was $28.6 million and $25.1 million, respectively. As of December 31, 2025, the Company had an accumulated deficit of $306.9 million, a stockholders’ deficit of $15.9 million and a working capital deficit of $19.7 million.
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Going Concern
The Company’s ongoing clinical activities continue to generate losses and net cash outflows from operations. The Company plans to pursue additional equity or debt financing or refinancing opportunities to fund ongoing clinical activities, and for the general corporate purposes of the Company. Such arrangements may take the form of loans, equity offerings, strategic agreements, licensing agreements, joint ventures, or other agreements. The sale of equity could result in additional dilution to the Company’s existing stockholders. The Company cannot make any assurances that additional financing will be available to it and, if available, on acceptable terms, or that it will be able to refinance its existing debt obligations which could negatively impact the Company’s business and operations and could also lead to a reduction in the Company’s operations. The Company will continue to carefully monitor the impact of its continuing operations on its working capital needs and debt repayment obligations. As such, the Company has concluded that substantial doubt exists about the Company’s ability to continue as a going concern for a period of at least twelve months from the date of issuance of these consolidated financial statements. The Company may raise substantial additional funds, and if it does so, it may do so through one or more of the following: issuance of additional debt or equity and/or the completion of a licensing or other commercial transaction for one of the Company’s product candidates.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary if the Company is unable to continue as a going concern.
Components of Results of Operations
Revenue
The Company recognizes patient service revenue in accordance with ASC 606, Revenue from Contracts with Customers . Revenue is recognized as performance obligations are satisfied, which occurs over time as patients simultaneously receive and consume the benefits of the services provided. Each treatment or visit generally represents a separate contract.
Procedural services, such as ketamine infusions, esketamine administration, TMS sessions, and SGB/epidural procedures, are recognized at the point in time when services are rendered.
For the year ended December 31, 2025, the Company recorded total revenue of approximately $1.2 million, which was solely attributable to patient services provided by Dura following its acquisition on September 8, 2025. Prior to the acquisition, the Company did not generate revenue as it was in the development stage and primarily focused on corporate formation, financing, and acquisition-related activities.
The initial post-acquisition revenue reflects only a partial period of operations and therefore is not indicative of the Company’s expected ongoing revenue levels. Management anticipates that revenue will increase in subsequent periods as Dura’s operations are fully integrated and additional clinical capacity, patient volume, and service lines are expanded under the Company’s ownership.
Operating Expenses
Cost of patient services
Cost of patient services consists primarily of direct expenses associated with providing healthcare services, including salaries and benefits for clinical personnel, medical supplies, pharmaceuticals, and other costs directly attributable to patient care. These costs are expensed as incurred.
For the year ended December 31, 2025, cost of patient services related solely to operations of Dura following its acquisition on September 8, 2025. Given the limited period of post-acquisition operations, current cost levels are not representative of the Company’s expected ongoing operating costs. Management anticipates that cost of patient services will increase in proportion with the expected growth in patient volumes and expansion of clinical activities in future periods.
Research and development expense
The Company’s research and development expense consists primarily of costs associated with the Company’s clinical trials, salaries, payroll taxes, employee benefits, and equity-based compensation charges for those individuals involved in ongoing research and development efforts. Research and development costs are expensed as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received.
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General and administrative expense
General and administrative expenses consist primarily of salaries, stock-based compensation, consultant fees, and professional fees for legal and accounting services.
Settlement (income) expense
Settlement (income) expense during the year ended December 31, 2025, consists of amounts related to the resolution of legal claims and income recognized from the reduction of previously accrued settlement liabilities, as certain matters were settled for less than originally estimated.
Results of operations for the years ended December 31, 2025 and 2024
The following table sets forth the Company’s selected statements of operations data for the following periods (in thousands):
December 31,
Change in
2025
2024
Dollars
Net patient service revenue
$
1,225
$
—
$
1,225
Operating expense:
Cost of patient services
$
505
$
—
$
505
Research and development
3,777
6,199
(2,422
)
Selling, general and administrative
13,061
13,500
(439
)
Depreciation and amortization
70
5
65
Settlement (income) expense
36
(1,202
)
1,238
Total operating expense
17,449
18,502
(1,053
)
Loss from operations
$
(16,224
)
$
(18,502
)
$
2,278
Other expense (income):
Interest income
$
(12
)
$
(44
)
$
32
Interest expense
671
230
441
Change in fair value of convertible note payable
3,939
2,654
1,285
Change in fair value of warrant liabilities
4,926
1,657
3,269
Loss on issuance of Registered Direct Offering
730
—
730
Loss on Consideration Shares and Warrants
1,277
—
1,277
Convertible note default penalty
—
849
(849
)
Loss on convertible note conversions
6,201
1,278
4,923
Loss from equity investments
35
—
35
Gain on exercise of warrants
(5,369
)
—
(5,369
)
Total other expense
12,398
6,624
5,774
Loss before tax
(28,622
)
(25,126
)
(3,496
)
Net loss
$
(28,622
)
$
(25,126
)
$
(3,496
)
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Net patient service revenue
For the year ended December 31, 2025, the Company recorded $1.2 million in net patient service revenues from the clinical services provided by Dura following the acquisition dated September 8, 2025. The Company did not record revenues for the year ended December 31, 2024.
Operating expense
Cost of patient services
For the year ended December 31, 2025, the Company recorded $0.5 million in costs of patient services, as compared to $0 incurred during the year ended December 31, 2024. This increase can be attributed to the acquisition of Dura on September 8, 2025.
Research and development expense
For the year ended December 31, 2025, the Company recorded $3.8 million of research and development expense, as compared to approximately $6.2 million for the year ended December 31, 2024. The decrease of $2.4 million is primarily related to a $0.6 million decrease in clinical trials and development and a $1.4 million decrease in regulatory and process development consulting costs. The research and development expense for each of the years ended December 31, 2025 and 2024, includes less than $0.1 million of non-cash stock-based compensation.
General and administrative expense
For the year ended December 31, 2025, the Company recorded $13.1 million of general and administrative expense, as compared to approximately $13.5 million for the year ended December 31, 2024. The decrease of $0.4 million is related primarily to a decrease of $2.7 million in consultant fees and $0.3 million in insurance expenses, partially offset by an increase of $1.1 million in employee costs and $0.9 million in legal fees. General and administrative expense includes $0.2 million of non-cash stock-based compensation for the years ended December 31, 2025 and 2024.
Settlement expense (income)
For the year ended December 31, 2025, the Company recognized settlement expense of less than $0.1 million resulting from certain legal matters that were settled in 2025. The Company recorded $1.2 million in settlement gains during the year ended December 31, 2024 in connection with a vendor settlement.
Depreciation and amortization
Depreciation and amortization expense increased to $70 for the year ended December 31, 2025, compared to $5 for the same period in 2024, primarily due to the recognition of depreciation and amortization on property and equipment and intangible assets acquired in the Dura acquisition completed in September 2025.
Other expense (income)
Interest income
For the year ended December 31, 2025, the Company recorded less than $0.1 million of interest income, as compared to less than $0.1 million of interest income for the year ended December 31, 2024.
Interest expense
For the year ended December 31, 2025, the Company recorded $0.7 million of interest expense related to accrued interest on the refund liability arising from the termination of the License Agreement with Alvogen. For the year ended December 31, 2024, the Company recorded $0.2 million of interest expense relating to premiums for cash payments on the convertible note.
Change in fair value of convertible notes payable
For year ended December 31, 2025, the Company recorded a loss of $3.9 million related to the change in fair value of the convertible notes payable which are accounted for under the fair value option. For the year ended December 31, 2024, the Company recorded a loss of $2.7 million related to the change in fair value of the convertible note payable which is accounted for under the fair value option.
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Change in fair value of warrant liabilities
For the year ended December 31, 2025, the Company recorded a loss of $4.9 million related to the change in fair value of the warrant liabilities, as compared to a loss of $1.7 million for the year ended December 31, 2024. The increase in loss during the year ended December 31, 2025 is attributable to the warrants issued in conjunction with the First, Second and Third Tranches of the Anson Notes, additional shares of Anson Warrants issued as a result anti-dilutive provision, as well as increase in the Company’s stock prices.
Loss on convertible note conversions
For the year ended December 31, 2025, the Company recorded a loss of $6.2 million related to convertible note conversion, as compared to a loss of $1.3 million during the year ended December 31, 2024. These conversions were calculated as the difference between the conversion price per the terms of the Anson first tranche senior secured convertible notes agreements relative to the fair value of the Common Stock on the date of conversion as described further under footnote 9 to the accompanying consolidated financial statements.
Loss from equity investments
For the year ended December 31, 2025, the Company recorded a loss of less than $0.1 million related to its investment in Cohen & Associates LLC, which is recorded at cost and adjusted for the Company’s proportionate share of Cohen & Associates’ net income or loss. Please see Note 18 in the accompanying consolidated financial statements for further information on the investment in Cohen & Associates.
Gain on exercise of warrants
For the year ended December 31, 2025, the Company recorded a $5.4 million gain on the exercise of warrants. This results from the settlement of the warrant liability for exercised warrants (see Note 11).
Liquidity and Capital Resources
The Company has generated minimal revenues, has incurred operating losses since inception, expects to continue to incur significant operating losses for the foreseeable future and may never become profitable. Until such time as the Company is able to establish a significant revenue stream from the sale of its therapeutic products, it is dependent upon obtaining necessary equity and/or debt financing to continue operations. The Company cannot make any assurances that sales of KETAFREE™, NRX-100, and/or NRX-101 will commence in the near term, revenue from clinics with grow, or that additional financings will be available to it on acceptable terms or at all. This could negatively impact our business and operations and could also lead to the reduction of our operations.
At-The Market Offering Agreement
On April 15, 2024, the Company increased the maximum aggregate offering amount of the shares of Common Stock issuable under that certain at-the-market offering agreement, dated August 14, 2023 (the “Offering Agreement”), with H.C. Wainwright & Co., and filed a prospectus supplement under the Offering Agreement for an aggregate of $4.9 million (the “ATM Offering”). On August 14, 2024, the Company reduced the amount under the Offering Agreement to $0 and suspended the ATM Offering. On April 17, 2025, the Company reinstated the ATM Offering and filed a prospectus supplement under the Offering Agreement for an aggregate of $20 million.
Through December 31, 2025, the Company received aggregate net cash proceeds to the Company from the ATM Offering of approximately $8.0 million, with $6.4 million of net aggregate net cash proceeds received during the year ended December 31, 2025.
Cash Flow
The following table presents selected financial information and statistics for each of the periods shown below:
December 31,
2025
December 31,
2024
Balance Sheet Data:
Cash
$
7,797
$
1,443
Total assets
12,956
3,651
Convertible notes payable and accrued interest
—
6,257
Total liabilities
28,893
26,874
Total stockholders' deficit
(15,937
)
(23,223
)
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Years ended
December 31,
2025
2024
Statement of Cash Flow Data:
Net cash used in operating activities
$
(14,112
)
$
(10,637
)
Net cash used in investing activities
(2,810
)
—
Net cash provided by financing activities
23,275
7,485
Net increase (decrease) in cash
$
6,354
$
(3,152
)
Operating Activities
During the year ended December 31, 2025, operating activities used approximately $14.1 million of cash, primarily resulting from a net loss of $28.6 million partially offset by (a) net non-cash losses of $13.0 million, including $4.0 million in change in fair value of convertible promissory notes, $1.0 million of stock-based compensation and Common Stock issued in exchange for services, $6.2 million loss in convertible note conversion, $1.3 million of loss on Consideration Shares and Warrants, $0.4 million in debt issuance costs, $0.7 million in loss on issuance of Register Direct offering, $5.0 million loss in change in fair value of warrant liabilities, $5.4 million in gain on exercise of warrants, and (b) changes in operating assets and liabilities of $1.4 million.
During the year ended December 31, 2024, operating activities used approximately $10.6 million of cash, primarily resulting from a net loss of $25.1 million, reduced by (a) net non-cash losses of $9.2 million, including a loss of $2.7 million in change in fair value of convertible promissory note, loss of $1.7 million in change in fair value of warrants, $0.5 million of stock-based compensation, $1.3 million loss in convertible note redemptions, $1.3 million of warrant issuance costs related to Alvogen termination, $0.8 million of default penalties, $0.9 million in debt issuance costs, and (b) changes in operating assets and liabilities of $5.3 million.
Investing Activities
Net cash used in investing activities was $2.8 million for the year ended December 31, 2025, compared to no cash used in investing activities during the comparable period in 2024. The outflows in the current period were primarily related to the total of $2.4 million of cash consideration paid in connection with the acquisition of Dura, net of cash acquired, and $0.4 million invested in Cohen and Associates. The Company did not incur any significant capital expenditure during either period.
Financing Activities
During the year ended December 31, 2025, financing activities provided $23.2 million of cash resulting from $9.4 million in proceeds from issuance of Common Stock and warrants related to the RD Offering and $5.0 million in proceeds from the Anson Notes, $6.4 million in proceeds from issuance of Common Stock in connection with ATM offering, $3.0 million of proceeds from exercise of liability classified warrant, offset by $0.5 million in repayments of and by $0.2 million of proceeds from insurance notes, and $0.3 million in debt issuance costs due to the fair value election on Anson Notes.
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During the year ended December 31, 2024, financing activities provided $7.4 million of cash resulting from $1.0 million in proceeds from issuance of common stock and warrants issued in a private placement, $4.9 million in proceeds from issuance of common stock and warrants, $6.0 million in proceeds from the Anson Notes, and $4.0 million from warrant proceeds attributes to the Anson Notes offset by $7.9 million in repayments of the convertible notes and $0.9 million in debt issuance costs due to the fair value election on Anson Notes.
Contractual Obligations and Commitments
See Note 9, Debt, and Note 10, Commitments and Contingencies, of the notes to the Company’s consolidated financial statements as of and for the year ended December 31, 2025 included elsewhere in this report for further discussion of the Company’s commitments and contingencies.
Milestone Payments
Pursuant to the legal settlement with Sarah Herzog Memorial Hospital Ezrat Nashim (SHMH) in September 2018, which included the license of intellectual property rights from SHMH, an ongoing royalty of 1% to 2.5% of NRX-101 gross sales is due to SHMH, together with milestone payments of $0.3 million, upon completion of phase 3 trials and commercial sale of NRX-101. The milestone payments for developmental and commercial milestones range from $0.1 million to $0.8 million. Annual maintenance fees are up to $0.2 million.
Dura Acquisition
Under Dura purchase agreement, The Company may be required to pay up to $3.0 million in contingent earn-out payments based on EBITDA performance during the first three years following closing of the acquisition. Payments are subject to the Seller’s continued employment and are prorated based on actual results achieved. The purchase price is also subject to customary post-closing adjustments for working capital, cash, and indebtedness.
Off-Balance Sheet Arrangements
The Company is not party to any off-balance sheet transactions. The Company has no guarantees or obligations other than those which arise out of normal business operations.
Critical Accounting Policies and Significant Judgments and Estimates
The Company's management’s discussion and analysis of its financial condition and results of operations is based on its financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). The preparation of these financial statements requires NRx to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of expenses during the reporting period. In accordance with GAAP, NRx evaluates its estimates and judgments on an ongoing basis. The most critical estimates relate to stock-based compensation, the valuation of warrants, and the valuation of convertible notes payable. NRx bases its estimates and assumptions on current facts, historical experiences, and various other factors that NRx believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company defines its critical accounting policies as those accounting principles that require it to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on its financial condition and results of operations, as well as the specific manner in which the Company applies those principles. While its significant accounting policies are more fully described in Note 2 to its financial statements, the Company believes the following are the critical accounting policies used in the preparation of its financial statements that require significant estimates and judgments.
Stock-based Compensation
We measure stock option awards granted to employees and directors based on the fair value of the award on the date of the grant and recognize compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. For restricted stock awards, the grant date fair value is the fair market value per share as of the grant date based on the closing trading price for the Company’s stock. The straight-line method of expense recognition is applied to awards with service-only conditions. We account for forfeitures as they occur.
We estimate the fair value of each stock option award using the Black-Scholes option-pricing model, which uses as inputs the fair value of our Common Stock and assumptions we make for the volatility of our Common Stock, the expected term of our stock-based awards, the risk-free interest rate for a period that approximates the expected term of our stock-based awards, and our expected dividend yield. Therefore, we estimate our expected volatility based on the implied volatility of publicly traded warrants on our Common Stock and historical volatility of a set of our publicly traded peer companies. We estimate the expected term of our options using the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends on Common Stock and do not expect to pay any cash dividends in the foreseeable future.
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The assumptions used in determining the fair value of stock-based awards represent reasonable estimates, but the estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different in the future.
Warrant Liabilities
We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (FASB) Accounting Standards Codification ASC Topic 480, Distinguishing Liabilities from Equity (ASC 480) and ASC 815, Derivatives and Hedging (ASC 815). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own Common Stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, or date of modification, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair value of the Private Placement Warrants, Anson Warrants, Consideration Warrants, and Anson Registered Direct Offering Warrants were estimated using a Black-Scholes valuation approach and the fair value of the Substitute Warrants was estimated using a modified Black Scholes valuation approach which applies a probability factor based on the earnout cash milestone and earnout shares milestone probabilities of achievement at each reporting period.
Convertible Notes Payable
As permitted under ASC Topic 825, Financial Instruments (ASC 825), the Company elects to account for its convertible promissory notes, which meets the required criteria, at fair value at inception and at each subsequent reporting date. Subsequent changes in fair value are recorded as a component of non-operating loss in the consolidated statements of operations. As a result of electing the fair value option, direct costs and fees related to the convertible promissory notes are expensed as incurred.
The Company estimates the fair value of the convertible notes payable using a Monte Carlo simulation model, which uses as inputs the fair value of our Common Stock and estimates for the equity volatility and volume volatility of our Common Stock, the time to expiration (i.e. expected termination date) of the convertible note, the risk-free interest rate for a period that approximates the time to expiration, and probability of default. Therefore, we estimate our expected future equity and volume volatility based on the historical volatility of both our Common Stock utilizing a lookback period consistent with the time to expiration. The time to expiration is based on the contractual maturity date, giving consideration to the mandatory and potential accelerated redemptions beginning six months from the issuance date. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of measurement for time periods approximately equal to the time to expiration. Probability of default is estimated using Bloomberg's Default Risk function which uses our financial information to calculate a default risk specific to the Company.
The assumptions used in determining the fair value of the convertible note payable represent reasonable estimates, but the estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use significantly different assumptions or estimates, the change in fair value of the convertible note payable recorded to other (income) expense could be materially different in the future.
Purchase Price Allocation
We account for business combinations in accordance with ASC Topic 805, Business Combinations, which requires that the assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date and that the excess of consideration transferred over the fair value of net identifiable assets be recorded as goodwill.
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The allocation of the purchase price to tangible assets (clinic equipment, leasehold improvements) and identifiable intangible assets (e.g., contracts, clinic trade names) and liabilities assumed (e.g., assumed leases, employee benefit obligations) is based on management’s estimate of fair value as of the acquisition date. This allocation process is considered a critical accounting estimate due to the significant judgments and assumptions inherent in determining the estimated fair values, including the selection of valuation methods (e.g., relief from royalty, multi-period excess earnings, replacement cost), discount rates, expected future cash flows, attrition rates, and useful lives of intangible assets. For the Dura acquisition, the estimated useful lives of acquired intangible assets ranged from 3 to 8 years, and discount rates applied ranged from 12% to 15%. Subsequent adjustments, within the one-year measurement period, may be made as additional information becomes available regarding facts and circumstances that existed at the acquisition date.
Goodwill
Goodwill recorded in connection with Dura acquisitions is attributable to the assembled workforce, anticipated growth in the Florida region, and synergies expected from integrating the clinics into our existing operations. Goodwill is not amortized but is subject to annual impairment testing and more frequently if indicators of impairment exist. We test goodwill for impairment for its reporting units on an annual basis, or when events occur, or when circumstances indicate the fair value of a reporting unit is below its carrying value.
We perform our annual goodwill impairment assessment on December 31 st of each year or as impairment indicators dictate.
When evaluating the potential impairment of goodwill, management first assess a range of qualitative factors, including but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and the overall financial performance for each of our reporting units. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then proceed to the impairment testing methodology using an appropriate valuation method.
We compare the carrying value of the reporting unit, including goodwill, with its fair value, as determined by its estimated discounted cash flows. If the carrying value of a reporting unit exceeds its fair value, then the amount of impairment to be recognized is recognized as the amount by which the carrying amount exceeds the fair value.
When required, we may arrive at our estimates of fair value using a discounted cash flow methodology which includes estimates of future cash flows to be generated by specifically identified assets, as well as selecting a discount rate to measure the present value of those anticipated cash flows. Estimating future cash flows requires significant judgment and includes making assumptions about projected growth rates, industry-specific factors, working capital requirements, weighted average cost of capital, and current and anticipated operating conditions. The use of different assumptions or estimates for future cash flows could produce different results.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
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