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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-03-31 · 157 added, 161 removed, 88 unchanged (78% of the section changed)

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(“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 Behavior/Ideation (ASIB) and Sub-Acute Suicidal Ideation and Behavior (“SSIB”), and ZYESAMI (aviptadil), an intravenous and inhaled drug to treat respiratory failure in COVID-19 and potentially other respiratory disorders.

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 therapy begins with a single dose of ketamine (NRX-100), an FDA approved anesthetic, followed by approximately six weeks of daily oral NRX-101.

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 DCS, a NMDA receptor modulator, and lurasidone, a 5-HT2a receptor antagonist.

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 declin e and stabili zation in symptoms of depression and suicidality following administration of DCS.

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 P2a combination study of DCS and 5HT2a included mild sedation, headaches and hypomania.

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 current standard of care) in maintaining remission from depression and suicidality following a single stabilizing dose of ketamine.

In March 2020, NRx Pharmaceuticals initiated development of RLF-100 (aviptadil acetate) (now reformulated as ZYESAMI by NRx Pharmaceuticals) in partnership with Relief Therapeutics Holding AG (“Relief Therapeutics”).

ZYESAMI is based on 50 years of research, pioneered by Professor Sami Said, on the role of aviptadil in preventing and treating acute lung injury by protecting the Type II cell in the lung.

The rights to Professor Said’s scientific work are licensed by the Company from the Research Foundation for the State University of New York.

NRx Pharmaceuticals and Relief Therapeutics entered into a Binding Collaboration Agreement on September 18, 2020 (the “Collaboration Agreement”) for the clinical development and, if approved, the sale of aviptadil.

The Collaboration Agreement provided for funding by Relief Therapeutics of certain clinical trials, formulation and manufacturing of aviptadil, as well as established sales territories for each party and share of the profits in those territories for “Product” as defined in the Collaboration Agreement.

Relief Therapeutics has reimbursed the Company approximately $10.9 million for expenses but has subsequently declined to reimburse the Company for additional costs.

On October 6, 2021, Relief Therapeutics filed a complaint in New York State Court, claiming that the Company failed to honor its obligations under the Collaboration Agreement.

Relief Therapeutics ’ complaint seeks several remedies, including damages for alleged breaches of the terms of the Collaboration Agreement.

The Company believes that the claims are baseless and without merit.

On January 10, 2022 the Company filed a complaint in New York State Court, claiming Relief Therapeutics breached and repudiated the Collaboration Agreement.

The Company’s complaint seeks damages of at least $185.0 million.

However, the parties to the lawsuits agreed to engage in an effort to amicably resolve the litigation, held a mediation meeting on February 22, 2022, and plan to hold an additional mediation meeting in the coming months.

If the mediation does not resolve the dispute, the Company intends to defend itself vigorously and to prosecute significant claims against Relief Therapeutics.

In an open-label, single center trial at Houston Methodist Hospital, ZYESAMI demonstrated a statistically significant 9-fold advantage in probability of survival and recovery from respiratory failure compared to the standard of care among patients with COVID-19 respiratory failure.

On June 1, 2021, NRx Pharmaceuticals reported Phase IIb/III study results of ZYESAMI in patients with respiratory failure due to critical COVID-19.

The study identified a statistically significant increase in the likelihood that patients treated with ZYESAMI would be alive and free of respiratory failure at 60 days, compared to those treated with placebo, and identified a significantly shorter median hospital stay.

The clinical study report filed with the FDA further documented statistically significant advantages for ZYESAMI on all major secondary endpoints.

On the basis of these results, NRx Pharmaceuticals applied for FDA Emergency Use Authorization (“EUA”) on May 31, 2021.

In November 2021, the FDA notified us that it was unable to issue the EUA at that time due to insufficient data regarding the known and potential benefits of ZYESAMI and the known and potential risks of ZYESAMI in patients suffering from critical COVID-19 with respiratory failure.

In response, in February 2022, the Company filed a new request for EUA in patients with COVID-19 respiratory failure who are at immediate risk of death despite treatment with remdesivir and other approved therapies.

As of the date of this annual report, that request is still pending.

Should an EUA be granted, this would provide NRx Pharmaceuticals with a one-year period during which ZYESAMI could be marketed for the treatment of COVID-19 in the U.S.

in advance of the filing a new drug application (“NDA”) with the FDA for formal approval of ZYESAMI for the treatment of COVID-19 based on the recently completed clinical trial and the additional clinical trials currently underway, including the NIH ACTIV3b/TESICO trial (NCT 04843761).

If authorized for use, ZYESAMI would fill a high unmet need in the U.S.

specifically for COVID-19 patients who are critically ill with respiratory failure, as current options have only limited applicability in this patient segment.

On October 8, 2021, the Company submitted an updated manufacturing module to its FDA Investigational New Drug file documenting this change in manufacture and stability.

On November 8, 2021, the FDA communicated with the Company that the manufacturing update had been reviewed and that no “clinical hold” items had been identified (this is the regulatory language that allows an investigational product to be given to patients).

The Company initiated a parallel manufacturing process to conform to EU and UK standards.

In October 2021, the Company announced that a European Qualified Person audit was conducted, and no major deficiencies were identified, thus clearing ZYESAMI’s use in EU investigational programs.

Although NRx Pharmaceuticals’ initial focus has been on the use of intravenous ZYESAMI, NRx Pharmaceuticals also received permission from the FDA to test inhaled ZYESAMI in a phase II/III clinical trial for patients with early disease.

NRx Pharmaceuticals believes that the inhaled drug may be more convenient for some patients to self-administer than receiving the intravenous drug.

This clinical trial commenced in January 2021 but has been temporarily paused

pending a review of technical issues about the optimal delivery of the drug to the trial patients .

In July 2021, the Company signed an agreement for a Phase II Inhaled clinical trial of ZYESAMI in the nation of Georgia, but the Company has decided not to proceed with this trial.

In addition, a separate inhaled study being conducted by I-SPY was stopped after it showed futility, most likely driven by the challenges of administering nebulized medication to patients receiving high flow oxygen support although other factors may also play a role.

Based on the data received from the two incomplete studies, we plan to explore the application of this form in patients with earlier forms of COVID-19 and other respiratory diseases who are still able to inhale normally and do not have inflammatory debris clogging their alveoli.

On July 11, 2021, NRx Pharmaceuticals entered into a Memorandum of Understanding with the Ministry of Defense of the State of Israel (the “MoU”) for an exclusive, worldwide license to develop a novel COVID-19 vaccine (BriLife TM ) developed by the Israel Institute for Biological Research (“IIBR”).

However, after investigating the manufacturing requirements of the vaccine, the expected regulatory path for approval in Israel and the EU, the commercial opportunity, and the financial commitment required for development of the vaccine, the Company decided not to continue with the project.

We plan to effect a transition in consultation with the IIBR.

This decision was communicated to the IIBR in a letter dated March 20, 2022.

As part of the Company’s consideration of the vaccine project, the Company entered into a Shareholder Agreement, dated October 15, 2021 (the “Agreement”), with Shimshon Hen and David Sepiashvili, each an Israeli citizen (the “Consultants”), under which the Consultants agreed to provide certain consulting services, and which set out a framework for establishing a potential joint venture between the Consultants and the Company that would have been responsible for the development and commercialization of the BriLife vaccine.

Pursuant to the terms of the Agreement, the Company issued an aggregate of 4,000,000 shares of the Company’s Common Stock to the Consultants on October 20, 2021 under the Company’s 2021 Omnibus Incentive Plan.

The Company is evaluating its options with respect to the Consultants.

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.

NRX-101 in 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 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.

● We are initiating a new registrational study of NRX-101 for the treatment of severe bipolar depression with ASIB, a potentially lethal condition that currently takes the lives of thousands of Americans each year, after initial stabilization with NRX-100 (described below).

We intend to use newly manufactured material that was manufactured using the expected commercial process.

On January 3, 2023, the Company announced that its first clinical trial sites had been contracted for this study, but patient recruiting has not begun.

● On February 14, 2023, the Company announced its receipt of the written minutes of a Type B meeting held with the FDA on January 11, 2023, to outline the clinical & preclinical requirements for registration of NRX-101.

Overall, the FDA suggested expanding the safety data base of NRX-101 to allow for chronic/intermittent use of NRX-101, as well as a broadening of the addressable population of the indication (under the SPA or otherwise) to patients with severe bipolar depression and recent acute suicidality regardless of how the initial stabilization was accomplished could represent a more straightforward development program.

This broader indication would enable the Company to potentially demonstrate the use of NRX-101 to maintain stabilization from suicidality in patients stabilized either with ketamine (NRX-100) or with other standard of care therapeutic approaches.

FDA encouraged the Company to request a Breakthrough Therapy Planning Meeting for NRX-101, which we intent to do in the next few months.

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.

Consolidated NRX-101 Program in Suicidal Treatment-Resistant Bipolar Depression

Based on the comments and guidance from the FDA in its recent Type B meeting regarding the registrational Acute Suicidality trial and a potentially broader indication, as well as the guidance it received from the DSMB regarding the ongoing Phase IIb/3 clinical study of NRX-101 for the treatment of severe bipolar depression in patients with SSIB, the Company is evaluating changes to its registrational program for NRX-101 and will seek to consolidate patients originally expected to enroll in the ASIB study into the currently enrolling Phase IIb/3 trial.

This would potentially allow registration of NRX-101 for Suicidal Treatment-Resistant Bipolar Depression, regardless of the mechanism of stabilization.

With the FDA’s guidance to enroll patients for the acute (SPA) study in the outpatient setting only after stabilization, the design of this trial has effectively converged with the currently enrolling phase IIb/3 trial;

patients within both groups are deemed to have treatment resistant bipolar depression with suicidality.

This broader indication may also offer significant advantages in commercialization, while negating the need for a separate NDA for ketamine in Suicidal stabilization.

● The US population of patients with Suicidal Treatment Resistant Bipolar Depression is estimated to be between 700,000 and 1,000,000 people.

● We expect top-line data from this trial in the first quarter of 2024.

NRX-101 Indication – Post Traumatic Stress Disorder

● NRx plans to commence a Phase 2 clinical trial of NRX-101 in PTSD in the second half of 2023.

● 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.

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As of December 31, 2022, NRx Pharmaceuticals had an accumulated deficit of $223.0 million.

COVID-19 Outbreak

On January 30, 2020, the WHO announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 Outbreak”) a nd the risks to the international community as the virus spreads globally beyond its point of origin.

In March 2020, the WHO classified the COVID-19 Outbreak as a pandemic, based on the rapid increase in exposure globally.

The full impact of the COVID-19 Outbreak continues to evolve.

As such, NRx Pharmaceuticals cannot estimate the full magnitude, whether positive or negative, that the pandemic will have on our business.

If the COVID-19 Outbreak continues, it may have a material adverse effect on our financial condition, liquidity, and future results of operations for the year ending December 31, 2022 and beyond.

Management is actively monitoring the impact of the global pandemic on its financial condition, liquidity, operations, industry, and workforce.

Alternatively, the COVID-19 Outbreak could have a material positive effect on market demand for ZYESAMI.

Given the daily evolution of the COVID-19 Outbreak, the uncertainty around the emergence of new strains, the global responses to curb its spread, and the uncertainty of the authorization / approval of ZYESAMI by the FDA, NRx Pharmaceuticals is not able to estimate the effects of the COVID-19 Outbreak on its results of operations, financial condition, or liquidity for the year ending December 31, 2022 and beyond.

Aside from our COVID-19 related trials, as a result of the COVID-19 Outbreak, our other trials have been halted, although we expect to resume our trials for NRX-100 and the registrational and NRX-101 study in the second half of 2022.

We are currently initiating a Phase II study of NRX-101 in patients with bipolar depression and sub-acute Suicidality (SSIB).

This study will enroll patients that do not need to be hospitalized and certain study visits can be done remotely.

This will enable us to better prepare for the start of our registrational P2/3 SPA studies of NRX-100 /NRX-101 in patients with severe bipolar depression and acute suicidal ideation and behavior (“ASIB”).

Components of Results of Operations

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Research and development expenses

NRx Pharmaceuticals’ research and development expenses consist primarily of costs associated with clinical trials, salaries, payroll taxes, employee benefits, and equity-based compensation charges for individuals involved in ongoing research and development efforts.

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 used.

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

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Settlement Expense

Settlement expense consists primarily of settlement expenses related to the GEM Warrant as further discussed in footnote 9 to the Company’s 2021 Audited Financial Statements under “Share Subscription Facility Agreement – GEM”.

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 consolidated financial statements included elsewhere in this report for further information.

Reimbursement of expenses from Relief Therapeutics

Reimbursement of expenses from Relief Therapeutics consists of reimbursable expenses as part of the Collaboration Agreement .

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 consolidated financial statements included elsewhere in this report for further information.

Results of operations for the years ended December 31, 2022 and 2021

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Gain on extinguishment of debt

Interest income

Interest expense

Change in fair value of warrant liability

Change in fair value of convertible note payable

Change in fair value of warrant liabilities

Change in fair value of Earnout Cash liability

Change in fair value of embedded put

Loss on conversion of convertible notes payable

Total other (income) expenses

2 unchanged sentences

Research and development expenses

For the year ended December 31, 2021, we recorded $20.3 million of research and development expenses compared to $10.6 million for the year ended December 31, 2020.

The increase of $9.6 million related primarily to an increase of $6.9 million in clinical trials and development expenses related to ZYESAMI;

an increase of $2.1 million related to fees paid to regulatory and process development consultants, an increase of $0.9 million in stock-based compensation expense, partially offset by a decrease of $0.3 million in other regulatory and process development costs.

For the year ended December 31, 2022, NRx Pharmaceuticals recorded $17.0 million of research and development expenses compared to $20.3 million for the year ended December 31, 2021.

The decrease of $3.2 million is related primarily to a decrease of $2.5 million in clinical trials and development expenses related to ZYESAMI, $0.7 million in stock-based compensation expense, $0.8 million related to fees paid to regulatory and process development consultants, partially offset by an increase of $0.5 in other regulatory and process development costs and $0.3 million in shipping, freight, and delivery costs.

The $17.0 million and $20.3 million of research and development expenses for the years ended December 31, 2022 and 2021, respectively, include $0.6 million and $1.3 million, respectively, of non-cash stock-based compensation.

General and administrative expenses

For the year ended December 31, 2021, we recorded $74.9 million of general and administrative expenses compared to $11.4 million for the year ended December 31, 2020.

The increase of $63.5 million related primarily to $56.0 million of consultant fees, of which $41.0 million relates to the fair value of common stock issued related to the Shareholder Agreement described in footnote 10 of the Company’s 2021 Audited Financial Statements under “VaccineCo Agreement and Issuance of Shares”, an increase of $6.2 million in stock-based compensation, an increase of $4.0 million in insurance expense, an increase of $1.5 million in legal and professional fees, an increase of $0.8 million for employee expenses, and an increase of $0.4 million in other general and administrative expenses, partially offset by a decrease of $5.4 million of warrant expense for warrants issued to board members for services.

The $74.9 million and $11.4 million of general and administrative expenses for the years ended December 31, 2021 and 2020 respectively, include $60.3 million and $5.7 million, respectively, of non-cash stock-based compensation, consulting fees, and warrant expense.

For the year ended December 31, 2022, NRx Pharmaceuticals recorded $27.3 million of general and administrative expenses compared to $74.9 million for the year ended December 31, 2021.

The decrease of $47.6 million was primarily, related to a decrease of $53.3 million in consultant fees, of which $41.0 million related to the fair value of common stock issued in accordance to the Shareholder Agreement described in footnote 9 of the Company’s 2022 Audited Financial Statements under “VaccineCo Agreement and Issuance of Shares” and $4.8 million related to the fair value of the 200,000 shares of Common Stock issued pursuant to the BCMA as further describe in footnote 9 of the Company’s 2022 Audited Financial Statements under “Common Stock,” and $3.5 million in stock-based compensation expense, partially offset by an increase of $3.7 million in insurance expenses, $3.4 million in legal, professional and accounting fees, $1.5 million in employee expenses, and $0.6 million in other general and administrative expenses.

The $27.3 million and $74.9 million of general and administrative expenses for the years ended December 31, 2022 and 2021, respectively, include $3.0 million and $60.3 million, respectively, of non-cash stock-based compensation.

Settlement expense

For the year ended December 31, 2021, we recorded $21.4 million of settlement expense compared to $39.5 million of settlement expense for the year ended December 31, 2020.

For the year ended December 31, 2022, NRx Pharmaceuticals recorded no settlement expense compared to $21.4 million of settlement expense for the year ended December 31, 2021 related to the GEM Warrant reflecting the incremental value of the warrant from the date of issuance through the date of exercise.

Settlement expense is a non-cash expense related to the GEM Warrant.

Reimbursement of expenses from Relief Therapeutics

For the year ended December 31, 2021, we recorded $0.8 million of reimbursement of expenses from Relief Therapeutics compared to $10.2 million of reimbursement of expenses from Relief Therapeutics for the year ended December 31, 2020.

For the year ended December 31, 2022, NRx Pharmaceuticals received no reimbursement of expenses from Relief Therapeutics compared to $0.8 million of reimbursement of expenses from Relief Therapeutics for the year ended December 31, 2021.

Other (income) expenses

Gain on extinguishment of debt

For the year ended December 31, 2021, NRx Pharmaceuticals recorded $0.1 million of gain on extinguishment of debt and did not record a gain or loss for the year ended December 31, 2020.

The increase 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.

Interest expense

For the year ended December 31, 2021, we recorded less than $0.1 million of interest expense compared to $0.1 million for the year ended December 31, 2020.

The decrease of less than $0.1 million related primarily to the conversion of convertible notes payable in 2020.

Change in fair value of warrant liability

For the year ended December 31, 2021, NRx Pharmaceuticals recorded a gain of $1.7 million related to the change in fair value of the warrant liability and did not record any gain or loss for the year ended December 31, 2020.

The gain related to the decrease in the fair value of the Placement Warrants assumed pursuant to the Merger Agreement.

For the year ended December 31, 2022, NRx Pharmaceuticals recorded no gain on extinguishment of debt compared to $0.1 million for the year ended December 31, 2021 which was related to 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.

Interest income

For the year ended December 31, 2022, NRx Pharmaceuticals recorded $0.2 million of interest income.

Change in fair value of convertible note payable

For the year ended December 31, 2022, NRx Pharmaceuticals recorded $0.5 million related to the change in fair value of the convertible note payable which is accounted for under the fair value option.

Change in fair value of warrant liabilities

For the year ended December 31, 2022, NRx Pharmaceuticals recorded a gain of $0.3 million related to the change in fair value of the warrant liabilities compared to a gain of $1.7 million for the year ended December 31, 2021.

The decrease of $1.4 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 year ended December 31, 2021, NRx Pharmaceuticals recorded a gain of $20.9 million related to the decrease in fair value of the Earnout Cash liability and did not record any gain or loss for the year ended December 31, 2020.

The gain primarily resulted from a decrease in the probability of achieving the Earnout Cash milestones by December 31, 2022 due to changes to the anticipated re-start date of the NRX-101 Phase III clinical trial, slower enrollment in the NIH’s ZYESAMI clinical trial, and the FDA’s November decision not to approve EUA for ZYESAMI.

Loss on conversion of convertible notes payable

For the year ended December 31, 2021, we did not record a loss on conversion of convertible notes payable and recorded $0.3 million of loss on conversion of convertible notes payable for the year ended December 31, 2020.

The decrease of $0.3 million related to the loss on extinguishment for the difference between the carrying value of the convertible notes, unamortized debt discount, and the fair value of the embedded put option, and the fair value of common shares issued.

For the year ended December 31, 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 gain of $20.9 million for the year ended December 31, 2021.

The gains are a result of the decrease in the fair value of the Earnout Cash liability pursuant to the Merger Agreement.

The gains primarily resulted from not achieving the Earnout Cash milestones by December 31, 2022 due to changes to the anticipated re-start date of the NRX-101 Phase III clinical trial, slower enrollment in the NIH’s ZYESAMI clinical trial, and the FDA’s November decision not to approve EUA for ZYESAMI.

Liquidity and Capital Resources

The following table presents selected financial information and statistics as of and for the years ended December 31, 2021 and 2020 (in thousands):

Years ended December 31,

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.

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 $11.0 million.

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 to certain acceleration provisions.

The Note carries an original issue discount of $1.0 million which was deducted from the principal balance of the Note.

The net proceeds from the issuance of the Note was $10.0 million 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 $1.0 million 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 with a 10% premium for the amount redeemed, (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 $1.0 million solely by payment by stock, if permitted under the agreement, subject to maximum percentage (9.99%) and other ownership limitations.

As of the date hereof, the Company did not meet the conditions to repay the Note by the delivery of shares of common stock.

The Company evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year beyond the date of filing of this Annual Report on Form 10-K.

We have typically funded our operating costs, acquisition activities, working capital requirements and capital expenditures with proceeds from the issuances of our common stock and other financing arrangements.

If the Company is not able to make the required payments for the above Note in common stock and must use its cash for these payments, the Company believes that it does not have sufficient funds to support operations (which are subject to change) through the next year from the date the condensed consolidated financial statements are issued.

The Company plans to address this matter by pursuing additional financing opportunities in 2023 to strengthen its balance sheet similar to the successful transaction completed in March 2023.

In addition, as we execute our business plan over the next 12 months, we intend to carefully monitor the impact of our continuing operations on our working capital needs and cash balances relative to the availability of cost-effective debt and equity financing.

The Company’s ongoing clinical activities continue to generate losses and net cash outflows from operations.

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 Company cannot make any assurances that additional financing will be available to it and, if available, on acceptable terms or at all.

This could negatively impact the Company’s business and operations and could also lead to a reduction in the Company’s operations.

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 December 31, 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%).

The following table presents selected financial information and statistics for each of the periods shown below:

Balance Sheet Data:

Earnout cash liability

Convertible note payable

Total liabilities

Total stockholders' equity (deficit)

Total stockholders' equity

Statement of Cash Flow Data:

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Net cash provided by financing activities

Net increase in cash

We believe our cash will be sufficient to fund our planned operations and capital expenditure requirements for at least the next 12 months after the date the financial statements are issued.

We have based this estimate on assumptions that may prove to be wrong and we could utilize our cash sooner than we currently expect.

NRx Pharmaceuticals cannot make any assurances that sales of ZYESAMI 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 expects to continue to incur operating losses and net cash outflows until such time as it generates a level of revenue from sale or licensing of drug products to support its cost structure.

There is no assurance that NRx Pharmaceuticals will achieve profitable operations and if achieved, whether it will be sustained on a continued basis.

NRx Pharmaceuticals intends to fund ongoing activities by raising additional capital through equity or debt financings.

There can be no assurance that NRx Pharmaceuticals will be successful in raising that additional capital or that such capital, if available, will be on terms that are acceptable to NRx Pharmaceuticals.

If NRx Pharmaceuticals is unable to raise sufficient additional capital, NRx Pharmaceuticals may be compelled to reduce the scope of its operations and planned capital expenditures.

Reverse Recapitalization Merger

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 (the “Earnout Shares”) if, prior to December 31, 2022, ZYESAMI receives emergency use authorization by the “FDA” and NeuroRx submits and the FDA files for review a new drug application for ZYESAMI (the occurrence of the foregoing, the “Earnout Shares Milestone”), and (ii) an aggregate of $100.0 million in cash (the “Earnout Cash”) upon the earlier to occur of (x) FDA approval of ZYESAMI and the listing of ZYESAMI in the FDA’s “Orange Book” and (y) FDA approval of NRX-100 and NRX-101 and the listing of the NRX-100 and NRX-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 faith judgment to determine the date to pay the Earnout Cash.

At December 31, 2021, the fair value of the Earnout Cash liability has been estimated to be $4.6 million.

Upon closing of the Merger, the estimated fair value of the Earnout Shares was $253.1 million with such amount recognized as a deemed dividend.

As NRx Pharmaceuticals 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 $88.8 million.

In connection with the Merger, a number of subscribers (each, a “PIPE Subscriber”) purchased from NRx Pharmaceuticals an aggregate of 1,000,000 shares of Common Stock, for a purchase price of $10.00 per share (the “PIPE Investment”) and an aggregate purchase price of $10.0 million (the “PIPE Shares”), pursuant to subscription agreements (each, a “Subscription Agreement”) entered into prior to the Closing Date.

NRx Pharmaceuticals received $8.1 million in net proceeds from the PIPE Investment after transaction costs.

Private Placements

On August 23, 2021, the Company completed a private placement (the “2021 Private Placement”) and issued 2,727,273 shares of common stock for a purchase price of $11.00 per share and preferred investment options to purchase up to an aggregate of 2,727,273 shares of common stock for a purchase price of $12.00.

NRx Pharmaceuticals received $27.4 million in net proceeds from the 2021 Private Placement.

On February 2, 2022, the Company completed a private placement (the “2022 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 purchase price for one share of common stock and one preferred investment option was $3.195.

The investment options have an exercise price of $3.07 per share.

The aggregate gross proceeds to the Company from the 2022 Private Placement were approximately $25.0 million, before deducting placement agent fees and other offering expenses.

The Company sold 3,642,727 shares of common stock during the year ended December 31, 2021, generating gross proceeds of $37.0 million.

The Company issued 3,830,586 shares of common stock pursuant to warrants and Unit Purchase Options exercised during the year ended December 31, 2021, and received gross proceeds from the warrant exercise of $16.7 million.

The Company issued 4,834,045 shares of common stock for consulting services during the year ended December 31, 2021, and recognized non-cash consulting expense in general and administrative expenses of $53.8 million.

The Company sold 556,043 shares of common stock during the year ended December 30, 2020, and received gross proceeds of $2.6 million.

The Company issued 1,138,199 shares of common stock to settle the conversion of notes payable during the year ended December 31, 2020, and recorded a loss of $0.3 million.

The Company issued 30,020 shares of common stock with a fair value of $0.1 million in settlement of accounts payable worth $0.1 million.

Net (decrease) increase in cash

Operating activities

During the year ended December 31, 2022, operating activities used $39.8 million of cash, primarily resulting from a net loss of $39.8 million, increased by (a) net non-cash gains of $0.7 million, including $4.6 million for the change in fair value of earnout cash liability, (ii) $0.3 million for the change in fair value of warrant liabilities, partially offset by (i) $3.6 million of stock-based compensation expense, (ii) $0.5 million for the change in fair value of convertible promissory note, and (b) changes in operating assets and liabilities of $0.7 million.

During the year ended December 31, 2021, operating activities used $37.7 million of cash, primarily resulting from a net loss of $93.1 million, reduced by (a) non-cash charges of $60.3 million, including (i) $53.8 million of non-cash consulting

fees paid in common stock, (ii) $21.4 million of non-cash settlement expense related to the GEM Warrant, (iii) $7.8 million of stock-based compensation expense, (iv) $20.9 million of change in fair value of Earnout Cash liability, partially offset by (i) gains from the change in fair value of warrant liability of $1.7 million, and (ii) $0.1 million in extinguishment of debt related to the PPP loan, and (b) changes in operating assets and liabilities of $4.9 million, including increases of $4.8 million and less than $0.1 million in prepaid expenses and other assets and accounts payable, respectively, partially offset by decreases of $0.9 million and $0.8 million in accrued expenses and other liabilities and accounts receivable, respectively.

Financing activities

During the year ended December 31, 2022, financing activities provided $32.2 million of cash resulting from $22.7 million in proceeds from issuance of common stock and warrants issued in private placement, net of issuance costs, $10.0 million in proceeds from convertible notes payable, net of discount and issuance costs, partially offset by $0.5 million of repayment of Relief Therapeutics loan notes payable.

During the year ended December 31, 2021, financing activities provided $63.5 million of cash, primarily resulting from $27.4 million from the issuance of shares of our common stock and warrants in private placement, $16.7 million proceeds from issuance of common stock for exercise of the GEM Warrants, $11.1 million for the effect of the Merger, PIPE financing, net of transaction costs, $9.6 million from proceeds from issuance of shares of NRx Pharmaceuticals’ common stock, partially offset by $1.1 million from repayment of notes payable assumed in the Merger, and a $0.2 million repayment of a note payable plus accrued and unpaid interest with a vendor.

Contractual Obligations and Commitments

See Note 7, Debt and Note 8, Commitments and Contingencies, of the notes to NRx Pharmaceuticals’ consolidated financial statements as of and for the year ended December 31, 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 shall be due to SHMH, together with milestone payments upon completion of Phase II trials, Phase III trials and commercial sale of NRX-101.

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 range up to $0.2 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.

Operating activities

During the year ended December 31, 2021, operating activities used $37.7 million of cash, primarily resulting from a net loss of $93.1 million reduced by (a) non-cash charges of $60.3 million, including (i) $53.8 million of non-cash consulting fees paid in common stock, (ii) $21.4 million of non-cash settlement expense related to GEM Warrant, (iii) $7.8 million of stock-based compensation expense, (iv) $20.9 million in change in fair value of Earnout Cash liability, partially offset by (i) gains for the change in fair value of the warrant liability of $1.7 million and (ii) $0.1 million in extinguishment of debt related to the PPP loan, and (b) changes in operating assets and liabilities of $4.9 million, including increases of $4.8 million and less than $0.1 million in prepaid expenses and other assets and accounts payable, respectively, partially offset by decreases of $0.9 million and $0.8 million in accrued expenses and other liabilities and accounts receivable, respectively.

During the year ended December 31, 2020, operating activities used $2.3 million of cash, primarily resulting from a net loss of $51.8 million reduced by non-cash charges of $46.1 million, including $39.5 million of non-cash settlement expense related to the GEM Warrant, $5.4 million of warrant expense for warrants issued to board members for services, $0.7 million of stock-based compensation expense, $0.3 million of loss on conversion of notes payable, and changes in operating assets and liabilities of $3.5 million, including increases of $3.2 million in accrued expenses and other liabilities, $0.1 million in prepaid expenses and other assets.

Financing activities

During the year ended December 31, 2020, financing activities provided $3.2 million of cash, primarily resulting from $2.6 million of proceeds from the issuance of shares of NRx Pharmaceuticals’ common and preferred stock, and $0.6 million in proceeds from notes payable.

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 U.S.

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 U.S.

GAAP, NRx Pharmaceuticals evaluates its estimates and judgments on an ongoing basis.

The most significant estimates relate to the valuation of Earnout Cash Liability, conversion features of convertible notes and Common Stock and the valuation of stock options and warrants.

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, the convertible note payable 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 2 to its financial statements appearing

elsewhere in this annual report, NRx Pharmaceuticals believes the following are the critical accounting policies used in the preparation of its financial statements that require significant estimates and judgments.

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.

Changes in the estimated fair value of the Earnout Cash Liability are recognized as a gain or loss in the statements of operations.

The following expired as of December 31, 2022 and was unearned, prior to this the fair value of the Earnout Cash liability was estimated using probability-weighted discounted cash flow models (DCFs) with significant inputs that were not observable in the market and thus represented a Level 3 fair value measurement as defined in ASC 820.

The most significant inputs included whether (a) the FDA approved the Company’s NDAs for ZYESAMI and/or NRX-101, (b) if such approval was granted, whether such approval was received on or before December 31, 2022, and (c) if such approval was granted, whether ZYESAMI and/or NRX-101 was listed in the FDA’s Orange Book on or before December 31, 2022.

The DCFs incorporated 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 were estimated and developed in consideration of the uncertainties associated with the obligations.

As (i) ZYESAMI NIH Phase III trial was stopped due to futility, and (ii) NRX-101 Phase III trial has not yet started, the Earnout period expired without achieving the milestones and therefore, the Earnout Cash liability has been relieved.

Changes in the estimated fair value of the Earnout Cash Liability were recognized as gains or losses 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 Board of NRx Pharmaceuticals considered, among other things, contemporaneous valuations of its Common Stock and preferred stock based on arms-length transactions with third party investors.

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.

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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.

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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 Liability

NRx Pharmaceuticals accounts 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”) 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 Common Stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the control of NRx Pharmaceuticals, among other conditions for equity classification.

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, 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-Merton valuation model, which requires the use of subjective assumptions that could materially impact the estimation of fair value and related expense to be recognized.

These assumptions include (i) the expected volatility of our stock price, (ii) the period of time over which the holders are expected to hold their Placement Warrants prior to exercise (expected lives), (iii) expected dividend yield on our common stock, and (iv) risk-free interest rates, which are based on quoted U.S.

Treasury rates for securities with maturities approximating the options’ expected lives.

Developing these assumptions requires the use of judgment.

NRx Pharmaceuticals, both prior to and after the Merger, lacks company-specific historical and implied volatility information.

Therefore, we estimate our expected stock volatility based on the historical volatility of a publicly traded set of peer companies.

Expected lives are principally based on our historical exercise experience with previously issued stock-based awards.

The expected dividend yield is zero as we have never paid dividends and do not currently anticipate paying any in the foreseeable future.

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.

Convertible note payable

As permitted under Financial Accounting Standards Board ("FASB”) Accounting Standards Codification ("ASC”) Topic 825, Financial Instruments ("ASC 825”), the Company elects to account for its convertible promissory note, 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 note 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 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 volatility based on the actual volatility of our common stock and historical volatility of 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.

Quantitative and Qualitative Disclosures About Market Risk.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis