Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of NRx Pharmaceuticals’ financial condition and plan of operations together with NRx Pharmaceuticals' consolidated financial statements and the related notes appearing elsewhere herein. In addition to historical information, this discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions. NRx Pharmaceuticals’ actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section entitled “Risk Factors” included elsewhere herein.
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 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.
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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. For the years ended December 31, 2022 and 2021, NRx Pharmaceuticals’ net loss was $39.8 million and $93.1 million, respectively. As of December 31, 2022, NRx Pharmaceuticals had an accumulated deficit of $223.0 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 expenses consist primarily of salaries, stock-based compensation, consultant fees, and professional fees for legal and accounting services.
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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 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 consolidated financial statements included elsewhere in this report for further information.
Results of operations for the years ended December 31, 2022 and 2021
The following table sets forth NRx Pharmaceuticals’ selected statements of operations data for the following periods (in thousands):
Years Ended December 31,
Change
2022
2021
Dollars
Operating expenses:
Research and development
$
17,027
$
20,257
$
(3,230)
General and administrative
27,308
74,944
(47,636)
Settlement expense
—
21,366
(21,366)
Reimbursement of expenses from Relief Therapeutics
—
(771)
771
Total operating expenses
44,335
115,796
(71,461)
Loss from operations
$
(44,335)
$
(115,796)
$
71,461
Other (income) expenses:
Gain on extinguishment of debt
$
—
$
(121)
$
121
Interest income
(249)
—
(249)
Interest expense
—
18
(18)
Change in fair value of convertible note payable
505
—
505
Change in fair value of warrant liabilities
(255)
(1,692)
1,437
Change in fair value of Earnout Cash liability
(4,582)
(20,938)
16,356
Total other (income) expenses
(4,581)
(22,733)
18,152
Loss before tax
(39,754)
(93,063)
53,309
Net loss
$
(39,754)
$
(93,063)
$
53,309
Operating expenses
Research and development expenses
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.
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General and administrative expenses
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, 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, 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, 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.
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Change in fair value of Earnout Cash liability
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
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.
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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:
December 31,
2022
2021
Balance Sheet Data:
Cash
$
20,054
$
27,605
Total assets
25,816
32,729
Earnout cash liability
—
4,582
Convertible note payable
10,525
—
Total liabilities
18,407
11,923
Total stockholders' equity
7,409
20,806
Statement of Cash Flow Data:
Net cash used in operating activities
(39,755)
(37,703)
Net cash used in investing activities
(10)
(7)
Net cash provided by financing activities
32,214
63,456
Net (decrease) increase in cash
$
(7,551)
$
25,746
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
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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 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, 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
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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 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 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. For restricted stock awards, the grant date fair value is the fair market value per share as of the grant date based on the closing trading price for the Company’s stock. The straight-line method of expense recognition is applied to awards with service-only conditions. We account for forfeitures as they occur.
We estimate the fair value of each stock option award using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock-based awards, the risk-free interest rate for a period that approximates the expected term of our stock-based awards, and our expected dividend yield. Therefore, we estimate our expected volatility based on the implied volatility of publicly traded warrants on our common stock and historical volatility of a set of our publicly traded peer companies. We estimate the expected term of our options using the "simplified" method for awards that qualify as "plain-vanilla" options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that we have never paid cash dividends on common stock and do not expect to pay any cash dividends in the foreseeable future.
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
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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.
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.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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