Item 2. Management’s Discussion and Analysis
Item 2. 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' unaudited, condensed 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.
Overview
On May 24, 2021, Big Rock Partners Acquisition Group (“BRPA”), a special purpose acquisition company, consummated the Agreement and Plan of Merger (as amended, the “Merger Agreement”) with NeuroRx, Inc., a Delaware corporation (“NeuroRx”), and Big Rock Merger Corp., a Delaware corporation and wholly owned, direct subsidiary of BRPA (“Merger Sub”). Pursuant to the Merger Agreement, on May 24, 2021 (the “Closing Date”), which has been accounted for as a reverse recapitalization, Merger Sub was merged with and into NeuroRx, with NeuroRx surviving the merger (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). On the Closing Date, BRPA changed its name to NRX Pharmaceuticals, Inc. (“NRx Pharmaceuticals” or the “Company”).
NRx Pharmaceuticals is a clinical stage pharmaceutical company that is developing, through its wholly owned operating subsidiary, NeuroRx, NRX-100 and NRX-101, the first oral therapeutic for the treatment of Bipolar Depression in patients with Acute Suicidal Ideation and Behavior (ASIB) and Sub-Acute Suicidal Ideation and Behavior (“SSIB”). NRX-100 and NRX-101 were developed based upon 30 years of basic science and clinical expertise contributed by Dr. Daniel Javitt, MD, PhD, related to the role of the brain’s N-methyl-D-aspartate (“NMDA”) receptor in regulating human thought processes in general and in regulating depression and suicidality. The NRX-100 and NRX-101 investigational therapy begins with a single dose of ketamine (NRX-100), a Food & Drug Administration (“FDA”) approved anesthetic, followed by approximately six weeks of daily oral NRX-101. NRX-101 is being developed as a rapid-onset and sustained treatment for bipolar depression with ASIB and SSIB. NRX-101 combines d-Cycloserine, a NMDA receptor modulator, and lurasidone, a 5-HT2a receptor antagonist.
NRX-101 has been awarded Fast Track designation, Breakthrough Therapy designation, a Biomarker Letter of Support, and a Special Protocol Agreement by the FDA. Peer-reviewed and published results from Phase II clinical studies demonstrate a significant decline and stabilization in symptoms of depression and suicidality following administration of DCS in combination with antidepressants. Findings from one of these studies found that bipolar patients who were already receiving a 5-HT2a antagonist demonstrated more than a 50% reduction in symptoms of depression and a 75% reduction in suicidal ideation when ketamine and DCS were added to their treatment regimen. Side effects for patients in a Phase 2a combination study of DCS and 5HT2a included mild sedation, headaches and hypomania. Breakthrough Therapy designation was awarded based on data from the STABIL-B study (NCT02974010) that demonstrated a statistically significant advantage of NRX-101 vs. lurasidone (the active ingredient used in the market leading branded bipolar depression agent) in maintaining remission from depression and suicidality following a single stabilizing dose of ketamine.
In March 2022, NRx Pharmaceuticals announced a primary focus on its psychiatry franchise and the late-stage development of NRX-101 for the treatment of bipolar depression in patients with suicidality. NRX-101 is a fixed dose combination of D-cycloserine, an NMDA antagonist, and lurasidone, a 5-HT 2A atypical antipsychotic and antidepressant, for the maintenance of remission from severe bipolar depression following initial stabilization with ketamine. The previously undiscovered synergy between these two drug classes in the treatment of CNS disorders, combined with the efficacy of D-cycloserine in the treatment of depression and PTSD, is the subject of 47 issued patents and more than 43 pending patents owned by or licensed to NRx Pharmaceuticals.
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NRX-101 Lead Indication – Severe Bipolar Depression in Patients with Acute Suicidal Ideation and Behavior (ASIB) After Initial Stabilization with ketamine
● In 2017, NRX-101 received an investigational new drug (IND) clearance by the U.S. Food and Drug Administration (FDA) and a Phase 2b/3 clinical trial commenced for bipolar depression with ASIB. Later that year, the FDA granted NRX-101 a Fast Track designation for the same indication.
● In 2018, the FDA provided a Letter of Support to the Company encouraging the development of Glutamine+Glutamate (Glx) as a pharmacodynamic biomarker for depression. The letter referenced published and unpublished data demonstrating a significant association between clinical symptoms of depression and levels of brain Glx.
● In the STABIL-B Phase 2 trial, the Phase 2 portion of the Phase 2b/3 trial, patients with bipolar depression and ASIB received either NRX-101 or lurasidone after an intravenous infusion of NRX-100 (ketamine). The proof-of-concept data presented at the American Congress of Neuropsychopharmacology in 2018 demonstrated with statistical significance that NRX-101 treated patients experienced lower depression scores and did not relapse.
● Based on STABIL-B findings, the FDA granted NRX-101 Breakthrough Therapy Designation and a Special Protocol Agreement (“SPA”) for bipolar depression in patients with ASIB, which affects ~150K-180K patients per year in the U.S. The Breakthrough Therapy Designation allows for an expedited rolling submission of a new drug application (“NDA”) for investigational drugs that have demonstrated substantial improvement over existing approved therapies, and the SPA allows for a single registrational trial of NRX-101 in severe bipolar depression in patients with ASIB after stabilization with ketamine, using a protocol similar to the STABIL-B trial with a patient population of less than 100.
● NRx Pharmaceuticals plans to initiate the registrational Phase 3 portion of the Phase 2b/3 clinical trial of bipolar depression in patients with ASIB in 4Q 2022. The trial is designed as a double-blind, adaptive trial with a 2:1 randomization of NRX-101 vs. lurasidone alone in 72 patients. The study is expected to find that following initial stabilization with a single infusion of ketamine (NRX-100), treatment with NRX-101 is superior to lurasidone alone in maintaining remission from symptoms of depression and suicidality as measured by the MADRS-10 depression scale and the CGI suicidality scale.
● NRx Pharmaceuticals announced that it has transferred Phase 3 commercial drug manufacturing processes to the U.S. and released Phase 3 drug manufactured via the expected commercial-stage processes. NRx Pharmaceuticals has submitted its manufacturing file to the FDA. This investigational drug manufactured according to these new processes will be used in the upcoming Phase 3 trial.
● A data readout from the registrational Phase 3 clinical trial is expected in 3Q 2023. Assuming that efficacy endpoints and safety are met, NRx Pharmaceuticals plans to initiate submission of a NDA to the FDA by year-end 2023, as allowed under Breakthrough Therapy Designation.
● Company has received numerous partnering inquiries for NRX-101
NRX-101 Indication – Bipolar Depression in Patients with Sub-acute Suicidal Ideation and Behavior (SSIB)
● A Phase 2 double-blind study completed in 2018 demonstrated the ability of NRX-101 to improve depression and suicidality over 6 weeks when taken twice daily over lurasidone alone after an initial stabilization with ketamine. The current study involving patients with bipolar depression and sub-acute suicidality (not requiring hospitalization) does not include the use of ketamine; all patients are being treated in an outpatient setting.
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● Insights from this study will guide NRx Pharmaceuticals in the potential expansion of the indication for NRX-101 to bipolar depression with SSIB, which represents a significantly 2-3x larger patient population than those with bipolar depression and ASIB. A data readout of this study is expected by 1H 2023.
NRX-101 Indication – Post Traumatic Stress Disorder
● In September 2022, NRx announced plans to investigate PTSD as an additional indication. The Company expects to commence Phase 2 clinical trial planning of NRX-101 in PTSD in 4Q 2022.
● Depression in PTSD may be driven by pathways that are similar to those that drive depression in other conditions (NMDA and 5-HT2A). Additionally, approximately 10% of patients with PTSD may experience suicidality, especially those with severe PTSD.
● In a preclinical PTSD study, D-cycloserine, a component of NRX-101, demonstrated the ability to extinguish recurring images of traumatic events, also known as fear memory, in a validated WKY model of PTSD.
Since inception, NRx Pharmaceuticals has incurred significant operating losses. For the three months ended September 30, 2022 and 2021, NRx Pharmaceuticals’ net loss was $9.1 million and $37.0 million, respectively. For the nine months ended September 30, 2022 and 2021, NRx Pharmaceuticals’ net loss was $29.5 million and $62.7 million, respectively. As of September 30, 2022, NRx Pharmaceuticals had an accumulated deficit of $212.8 million.
Components of Results of Operations
Operating expenses
Research and development expenses
NRx Pharmaceuticals’ research and development expenses consist primarily of costs associated with NRx Pharmaceuticals’ 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.
General and administrative expenses
General and administrative expense consists primarily of salaries, stock-based compensation, consultant fees, and professional fees for legal and accounting services.
Settlement Expense
Settlement expense consists primarily of settlement expenses related to the GEM Warrant. See Note 8 “Commitments and Contingencies – Share Subscription Facility Agreement – GEM” of the notes to the Company’s unaudited condensed consolidated financial statements included elsewhere in this report for further information.
Reimbursement of expenses from Relief Therapeutics
Reimbursement of expenses from Relief Therapeutics consisted of reimbursable expenses as part of the Collaboration Agreement. See Note 8 “Commitments and Contingencies – Relief Therapeutics Collaboration Agreement” of the notes to the Company’s unaudited condensed consolidated financial statements included elsewhere in this report for further information.
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Results of operations for the three months ended September 30, 2022 and 2021
The following table sets forth NRx Pharmaceuticals’ selected statements of operations data for the following periods (in thousands):
Three months ended September 30,
Change
2022
2021
Dollars
(Unaudited)
Operating expenses:
Research and development
$
4,129
$
6,276
$
(2,147)
General and administrative
5,012
13,823
(8,811)
Total operating expenses
9,141
20,099
(10,958)
Loss from operations
$
(9,141)
$
(20,099)
$
10,958
Other (income) expenses:
Interest income
$
(95)
$
—
$
(95)
Interest expense
—
5
(5)
Change in fair value of warrant liabilities
37
16,537
(16,500)
Change in fair value of Earnout Cash liability
—
408
(408)
Total other (income) expenses
(58)
16,950
(17,008)
Net loss
$
(9,083)
$
(37,049)
$
27,966
Operating expenses
Research and development expenses
For the three months ended September 30, 2022, NRx Pharmaceuticals recorded $4.1 million of research and development expenses compared to $6.3 million for the three months ended September 30, 2021. The decrease of $2.1 million related primarily to a decrease of $1.5 million in clinical trials and development expenses related to ZYESAMI, a decrease of $0.6 million related to fees paid to regulatory and process development consultants, a decrease of $0.2 million in stock-based compensation, partially offset by an increase of $0.2 million in other regulatory and process development expenses. The $4.1 million and $6.3 million of research and development expenses for the three months ended September 30, 2022 and 2021, respectively, include less than $0.1 million and $0.2 million, respectively, of non-cash stock-based compensation.
General and administrative expenses
For the three months ended September 30, 2022, NRx Pharmaceuticals recorded $5.0 million of general and administrative expenses compared to $13.8 million for the three months ended September 30, 2021. The decrease of $8.8 million was primarily, related to a decrease of $8.3 million of consultant fees, a decrease of $0.8 million in stock-based compensation expense, a decrease of $0.3 million in other general and administrative expenses, a decrease of less than $0.1 million in legal and professional fees, partially offset by an increase of $0.6 million in payroll and salary expenses. The $5.0 million and $13.8 million of general and administrative expenses for the three months ended September 30, 2022 and 2021, respectively, include $0.5 million and $1.3 million, respectively, of non-cash stock-based compensation.
Other (income) expenses
Interest income
For the three months ended September 30, 2022, NRx Pharmaceuticals recorded approximately $0.1 million of interest income. The increase is primarily related to the earned interest income on the money market account.
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Change in fair value of warrant liabilities
For the three months ended September 30, 2022, NRx Pharmaceuticals recorded a loss of less than $0.1 million related to the change in fair value of the warrant liabilities compared to a loss of $16.5 million for the three months ended September 30, 2021. The decrease of $16.5 million related to the decrease in the fair value of certain Substitute Warrants and the Placement Warrants assumed pursuant to the Merger Agreement.
Change in fair value of Earnout Cash liability
For the three months ended September 30, 2022, NRx Pharmaceuticals recorded a gain of $0.4 million for the three months ended September 30, 2021. The gain related to the decrease in the fair value of the Earnout Cash liability pursuant to the Merger Agreement.
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Results of operations for the nine months ended September 30, 2022 and 2021
The following table sets forth NRx Pharmaceuticals’ selected statements of operations data for the following periods (in thousands):
Nine months ended September 30,
Change
2022
2021
Dollars
(Unaudited)
Operating expenses:
Research and development
$
12,571
$
13,844
$
(1,273)
General and administrative
21,876
28,382
(6,506)
Settlement expense
—
21,366
(21,366)
Reimbursement of expenses from Relief Therapeutics
—
(771)
771
Total operating expenses
34,447
62,821
(28,374)
Loss from operations
$
(34,447)
$
(62,821)
$
28,374
Other (income) expenses:
Gain on extinguishment of debt
$
—
$
(121)
$
121
Interest income
(119)
—
(119)
Interest expense
3
16
(13)
Change in fair value of warrant liabilities
(236)
(823)
587
Change in fair value of Earnout Cash liability
(4,582)
763
(5,345)
Total other (income) expenses
(4,934)
(165)
(4,769)
Net loss
$
(29,513)
$
(62,656)
$
33,143
Operating expenses
Research and development expenses
For the nine months ended September 30, 2022, NRx Pharmaceuticals recorded $12.6 million of research and development expenses compared to $13.8 million for the nine months ended September 30, 2021. The decrease of $1.3 million is related to a decrease of $1.5 million in clinical trials and development expenses related to ZYESAMI, a decrease of $0.5 million in fees paid to regulatory and process development consultants, partially offset by an increase of $0.7 million in other regulatory and process development costs. The $12.6 million and $13.8 million of research and development expenses for the nine months ended September 30, 2022 and 2021, respectively, include $0.5 million and $0.4 million, respectively, of non-cash stock-based compensation.
General and administrative expenses
For the nine months ended September 30, 2022, NRx Pharmaceuticals recorded $21.9 million of general and administrative expenses compared to $28.4 million for the nine months ended September 30, 2021. The decrease of $6.5 million was primarily, related to a decrease of $12.3 million in consultant fees, a decrease of $3.4 million in stock-based compensation expense, partially offset by an increase of $4.1 million in legal, professional and accounting fees, an increase of $3.7 million in insurance expense, an increase of $0.9 million in payroll and salary expenses, and an increase of $0.5 million in other general and administrative expenses. The $21.9 million and $28.4 million of general and administrative expenses for the nine months ended September 30, 2022 and 2021, respectively, include $2.4 million and $5.8 million, respectively, of non-cash stock-based compensation.
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Settlement expense
For the nine months ended September 30, 2022, NRx Pharmaceuticals recorded no settlement expense compared to $21.4 million of settlement expense for the nine months ended September 30, 2021 related to the GEM Warrant reflecting the incremental value through the date of issuance.
Reimbursement of expenses from Relief Therapeutics
For the nine months ended September 30, 2022, NRx Pharmaceuticals recorded no reimbursement of expenses from Relief Therapeutics compared to $0.8 million of reimbursement of expenses from Relief Therapeutics for the nine months ended September 30, 2021.
Other (income) expenses
Gain on extinguishment of debt
For the nine months ended September 30, 2022, NRx Pharmaceuticals recorded no gain on extinguishment of debt compared to $0.1 million for the nine months ended September 30, 2021. The decrease of $0.1 million related to the forgiveness of the PPP Loan which resulted in a gain on extinguishment for the outstanding principal and accrued and unpaid interest for the nine months ended September 30, 2021.
Interest income
For the nine months ended September 30, 2022, NRx Pharmaceuticals recorded $0.1 million of interest income. The increase of less than $0.1 million related primarily to the earned interest income on the money market account.
Change in fair value of warrant liabilities
For the nine months ended September 30, 2022, NRx Pharmaceuticals recorded a gain of $0.2 million related to the change in fair value of the warrant liabilities compared to a gain of $0.8 million for the nine months ended September 30, 2021. The decrease of $0.6 million related to the decrease in the fair value of certain Substitute Warrants and the Placement Warrants assumed pursuant to the Merger Agreement.
Change in fair value of Earnout Cash liability
For the nine months ended September 30, 2022, NRx Pharmaceuticals recorded a gain of $4.6 million related to the change in fair value of the Earnout Cash liability compared to a loss of $0.8 million for the nine months ended September 30, 2021. The decrease of $4.6 million is related to the decrease in the fair value of the Earnout Cash liability pursuant to the Merger Agreement.
Liquidity and Capital Resources
NRx Pharmaceuticals has generated no revenues, has incurred operating losses since inception, and expects to continue to incur significant operating losses for the foreseeable future and may never become profitable. Until such time as NRx Pharmaceuticals is able to establish a revenue stream from the sale of its therapeutic products, NRx Pharmaceuticals is dependent upon obtaining necessary equity and/or debt financing to continue operations. NRx Pharmaceuticals cannot make any assurances that sales of NRX-101 will commence in the near term or that additional financings will be available to it and, if available, on acceptable terms or at all. This could negatively impact NRx Pharmaceuticals' business and operations and could also lead to the reduction of NRx Pharmaceuticals' operations.
NRx Pharmaceuticals believes that it currently has sufficient funds and, if necessary, the ability to reduce expenditures, to support operations through at least the next twelve months from the date hereof. NRx Pharmaceuticals is dependent upon obtaining necessary equity and/or debt financing to continue operating. NRx Pharmaceuticals cannot make any assurances that additional financing will be available to it and, if available, on acceptable terms or at all. This could negatively affect the Company’s business and operations and could also lead to the reduction of the Company's operations.
On November 4, 2022, the Company issued an 9% redeemable promissory note (the “Note”) to Streeterville Capital, LLC, a Utah limited liability company, for an aggregate principal amount of $11,020,000. The Company intends to use the proceeds from such issuance for general corporate purposes. The Note matures 18 months from the date of issuance subject
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to certain acceleration provisions. The Note carries an original issue discount of $1,000,000 which was deducted from the principal balance of the Note. The net proceeds from the issuance of the Note was $10,000,000 after transaction costs including the original issue discount, legal and other fees are included.
The Company has the option to prepay the Note during the term by paying an amount equal to 110% of the principal, interest, and fees owed as of the prepayment date. The noteholder has the right to redeem up to $1,000,000 of the outstanding balance of the Note per month starting six months after the issuance date. Payments may be made by the Company at its option in: (i) in cash, (ii) by paying the redemption amount in the form of shares of Common Stock with the number of redemption shares being equal to the portion of the applicable redemption amount divided by the Redemption Conversion Price (as defined below), or (iii) a combination of cash and shares of common stock. The “Redemption Conversion Price” on any given redemption date equals 85% multiplied by the average of the two lowest daily volume weighted average prices per share of the common stock during the ten trading days immediately preceding the date that the noteholder delivers notice electing to redeem a portion of the Note. Beginning May 1, 2023, in the event (a) the daily dollar trading volume of the common stock of the Company on any given trading day is at least fifty percent (50%) greater than the lower of (i) the median daily dollar trading volume over the previous ten (10) trading days or (ii) the daily dollar trading volume on the trading day immediately preceding the date of measurement or (b) if the closing trade price on any given trading day is at least thirty percent (30%) greater than the Nasdaq Minimum Price, then lender will be entitled to redeem over the following ten (10) trading days an amount of indebtedness then outstanding under the Note equal to twice (2x) the monthly redemption amount of $1,000,000 solely by payment by stock, if permitted under the agreement, subject to maximum percentage and other ownership limitations.
Private Placement
On February 2, 2022, the Company completed a private placement and issued 7,824,727 shares of common stock and Preferred Investment Options to purchase up to an aggregate of 7,824,727 shares of common stock. The Preferred Investment Options have an exercise price of $3.07 per share and may be exercised any time on or after August 2, 2022.
The form of the Preferred Investment Option is a warrant. The measurement of fair value was determined utilizing a Black-Scholes model considering all relevant assumptions current at February 2, 2022, the date of issuance (i.e., share price of $2.94, exercise price of $3.07, term of five years beginning August 2, 2022, volatility of 82.8%, risk-free rate of 1.60%, and expected dividend rate of 0%). The grant date fair value of these Preferred Investment Options was estimated to be $15.5 million on February 2, 2022 and is reflected within additional paid-in capital as of September 30, 2022.
In addition, on February 2, 2022, the Company issued fully vested Preferred Investment Options to the placement agent with an exercise price of $3.99. As these Preferred Investment Options were issued for services provided in facilitating the private placement, the Company recorded the fair value of such Preferred Investment Options as a cost of capital on the issuance date. The measurement of fair value was determined utilizing a Black-Scholes model considering all relevant assumptions current at February 2, 2022, the date of issuance (i.e., share price of $2.94, exercise price of $3.99, term of five years beginning August 2, 2022, volatility of 82.8%, risk-free rate of 1.60%, and expected dividend rate of 0%).
Reverse Recapitalization Merger and Subsequent Equity Issuances
Pursuant to the terms of the Merger Agreement, NeuroRx’s securityholders (including option holders and warrant holders) who own NeuroRx securities immediately prior to the Effective Time will have the contingent right to receive their pro rata portion of (i) an aggregate of 25,000,000 shares of Common Stock (“Earnout Shares”) if, prior to December 31, 2022, the NeuroRx COVID-19 Drug (i.e., ZYESAMI) receives emergency use authorization by the Food and Drug Administration (“FDA”) and NeuroRx submits and the FDA files for review a new drug application for the NeuroRx COVID-19 Drug (i.e., ZYESAMI) (the occurrence of the foregoing, the “Earnout Shares Milestone”), and (ii) an aggregate of $100.0 million in cash (“Earnout Cash”) upon the earlier to occur of (x) FDA approval of the NeuroRx COVID-19 Drug (i.e., ZYESAMI) and the listing of the NeuroRx COVID-19 Drug in the FDA’s “Orange Book” and (y) FDA approval of the NeuroRx Antidepressant Drug Regimen (i.e., NRX-100/101) and the listing of the NeuroRx Antidepressant Drug Regimen (i.e., NRX-100/101) in the FDA’s “Orange Book,” in each case prior to December 31, 2022 (the occurrence of either of clauses (x) or (y), the “Earnout Cash Milestone”). If the Earnout Shares Milestone is achieved, the Earnout Shares will be issued within five (5) Business Days after the occurrence of the Earnout Shares Milestone. If the Earnout Cash Milestone is achieved, the Merger Agreement does not require the Earnout Cash to be delivered to NeuroRx securityholders within any specified period of time, and the board of directors of NRx Pharmaceuticals will use its good
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faith judgment to determine the date to pay the Earnout Cash. At June 30, 2022, the fair value of the Earnout Cash liability has been estimated to be $0 million. Upon closing of the Merger, the estimated fair value of the Earnout Shares was $255.8 million with such amount recognized as a deemed dividend. As the Company is in an accumulated deficit position as of the measurement date, the resulting deemed dividend is recorded as a reduction of additional paid-in capital with a corresponding offset recorded to additional paid-in capital (i.e., net impact to additional paid-in capital of $0). The benefit of the contingent right to receive Earnout Cash for option and warrant holders occurs through the Option Exchange Ratio and therefore the amount of Earnout Cash for common stockholders is approximately $0 million.
In connection with the Merger, a number of subscribers (each, a “Subscriber”) purchased from the Company an aggregate of 1,000,000 shares of Common Stock (the “PIPE”), for a purchase price of $10.00 per share and an aggregate purchase price of $10.0 million (the “PIPE Shares”), pursuant to separate subscription agreements (each, a “Subscription Agreement”) entered into prior to the Closing Date. The Company received $8.1 million in net proceeds after transaction costs from the sale of PIPE Shares.
The following table presents selected financial information and statistics for each of the periods shown below:
September 30, 2022
December 31, 2021
(Unaudited)
Balance Sheet Data:
Cash
$
18,249
$
27,605
Total assets
24,824
32,729
Earnout cash liability
—
4,582
Total liabilities
8,042
11,923
Total stockholders' equity (deficit)
16,782
20,806
September 30,
2022
2021
(Unaudited)
Statement of Cash Flow Data:
Net cash used in operating activities
$
(31,437)
$
(26,423)
Net cash used in investing activities
(11)
(7)
Net cash provided by financing activities
22,092
63,455
Net (decrease) increase in cash
$
(9,356)
$
37,025
Operating activities
During the nine months ended September 30, 2022, operating activities used $31.4 million of cash, primarily resulting from a net loss of $29.5 million, increased by net non-cash gains of $2.0 million, including $4.6 million of gain from the change in fair value of earn out liability and $0.2 million of gain from the change in fair value of warrant liabilities, partially offset by $2.9 million of stock-based compensation expense, and an increase in net operating assets of less than $0.1 million.
During the nine months ended September 30, 2021, operating activities used $26.4 million of cash, primarily resulting from a net loss of $62.7 million, reduced by non-cash charges of $40.2 million, including $21.4 million of non-cash settlement expense related to the GEM Warrant, $12.8 million in consulting expense, $6.2 million of stock-based compensation expense, $0.8 million of change in fair value of earnout cash liability, partially offset by a gain from the change in fair value of warrant liability of $0.8 million, a gain on extinguishment of debt of $0.1 million, and an increase in net operating assets of $4.0 million.
Financing activities
During the nine months ended September 30, 2022, financing activities provided $22.1 million of cash resulting from $22.6 million in net proceeds received by the Company from the issuance of common stock and preferred investment options in a private placement partially offset by $0.5 million of repayment of Relief Therapeutics loan.
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During the nine months ended September 30, 2021, financing activities provided $63.5 million of cash, primarily resulting from $27.4 million in repayment of notes payable assumed in Merger, $16.7 million in proceeds from issuance of common stock for exercise of warrant, $11.1 million for the effect of the merger, net of transaction costs, $9.6 million in proceeds from issuance of common stock and exercise of stock options, partially offset by $1.1 million in repayment of notes payable assumed in Merger and $0.2 million in repayment of notes payable – related party.
Contractual Obligations and Commitments
See Note 8, Commitments and Contingencies, of the notes to NRx Pharmaceuticals’ unaudited condensed consolidated financial statements as of and for the three months ended months ended and nine months ended September 30, 2022 included elsewhere in this report for further discussion of NRx Pharmaceuticals' 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.
Off-Balance Sheet Arrangements
NRx Pharmaceuticals is not party to any off-balance sheet transactions. NRx Pharmaceuticals has no guarantees or obligations other than those which arise out of normal business operations.
Critical Accounting Policies and Significant Judgments and Estimates
NRx Pharmaceuticals' 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 GAAP. The preparation of these financial statements requires NRx Pharmaceuticals 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 Pharmaceuticals evaluates its estimates and judgments on an ongoing basis. The most significant estimates relate to the Earnout Cash Liability, stock-based compensation, and the valuation of warrants. NRx Pharmaceuticals bases its estimates and assumptions on current facts, historical experiences, and various other factors that NRx Pharmaceuticals 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.
NRx Pharmaceuticals 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 NRx Pharmaceuticals applies those principles. While its significant accounting policies are more fully described in Note 3 to its financial statements, NRx Pharmaceuticals believes the following are the critical accounting policies used in the preparation of its financial statements that require significant estimates and judgments.
Earnout Cash Liability
The fair value of the Earnout Cash liability has been estimated using probability-weighted discounted cash flow models (DCFs) with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The most significant inputs include whether (a) the FDA approves the Company’s NDAs for ZYESAMI and/or NRX-101, (b) if such approval is granted, whether such approval will be received on or before December 31, 2022, and (c) if such approval is granted, whether ZYESAMI and/or NRX-101 will be listed in the FDA’s Orange Book on or before December 31, 2022. The DCFs incorporate Level 3 inputs including estimated discount rates that we believe market participants would consider relevant in pricing and the projected timing and amount of cash flows, which are estimated and developed in consideration of the uncertainties associated with the obligations. Because: (i) ZYESAMI
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NIH Phase III trial was stopped due to futility, and (ii) NRX-101 Phase III trial has not yet started, management estimated the probability as of September 30, 2022 of achieving the required milestones for payment of the Earnout Cash to be de minimis and therefore, the September 30, 2022 Earnout Cash liability is zero. Changes in the estimated fair value of the Earnout Cash Liability are recognized as a gain or loss in the statements of operations.
Fair value of common and preferred stock
Prior to the Merger, in order to determine the fair value of shares of its common stock, the Company's board of directors considered, among other things, contemporaneous valuations of its common stock and preferred stock based on arms-length transactions with third party investors. Subsequent to the Merger, the Board determines the fair value of the Common Stock based on the closing market price on the date of grant.
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. 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.
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 ASC 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 Placement Warrants was 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, we are not required to provide the information required by this Item.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.