Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of NRx Pharmaceuticals’ financial condition and plan of operations together with NRx Pharmaceuticals' unaudited, condensed consolidated financial statements and the related notes appearing elsewhere herein. In addition to historical information, this discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions. NRx Pharmaceuticals’ actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section entitled “Risk Factors” included elsewhere herein.
Overview
On May 24, 2021, Big Rock Partners Acquisition Group (“BRPA”), a special purpose acquisition company, consummated the Agreement and Plan of Merger (as amended, the “Merger Agreement”) with NeuroRx, Inc., a Delaware corporation (“NeuroRx”), and Big Rock Merger Corp., a Delaware corporation and wholly owned, direct subsidiary of BRPA (“Merger Sub”). Pursuant to the Merger Agreement, on May 24, 2021 (the “Closing Date”), which has been accounted for as a reverse recapitalization, Merger Sub was merged with and into NeuroRx, with NeuroRx surviving the merger (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). On the Closing Date, BRPA changed its name to NRX Pharmaceuticals, Inc. (“NRx Pharmaceuticals” or the “Company”).
NRx Pharmaceuticals is a clinical stage pharmaceutical company that is developing, through its wholly owned operating subsidiary, NeuroRx, NRX-100 and NRX-101, the first oral therapeutic for the treatment of Bipolar Depression in patients with Acute Suicidal Ideation and Behavior (ASIB) and Sub-Acute Suicidal Ideation and Behavior (“SSIB”). NRX-100 and NRX-101 were developed based upon 30 years of basic science and clinical expertise contributed by Dr. Daniel Javitt, MD, PhD, related to the role of the brain’s N-methyl-D-aspartate (“NMDA”) receptor in regulating human thought processes in general and in regulating depression and suicidality. The NRX-100 and NRX-101 investigational therapy begins with a single dose of ketamine (NRX-100), a Food & Drug Administration (“FDA”) approved anesthetic, followed by approximately six weeks of daily oral NRX-101. NRX-101 is being developed as a rapid-onset and sustained treatment for bipolar depression with ASIB and SSIB. NRX-101 combines d-Cycloserine, or DCS, 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.
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.
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● 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 were 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 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 intend 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 Type B meeting regarding the registrational Acute Suicidality trial and a potentially broader indication, as well as guidance the Company received from the Data
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Safety Monitoring Board (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 potentially 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 fourth quarter of 2023.
NRX-101 Indication – Post Traumatic Stress Disorder
● 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.
Financial Results
Since inception, NRx Pharmaceuticals has incurred significant operating losses. For the three months ended June 30, 2023 and 2022, NRx Pharmaceuticals’ net loss was $8.7 million and $7.0 million, respectively. For the six months ended June 30, 2023 and 2022, NRx Pharmaceuticals’ net loss was $19.8 million and $20.4 million, respectively. As of June 30, 2023, NRx Pharmaceuticals had an accumulated deficit of $242.8 million.
Components of Results of Operations
Operating expenses
Research and development expenses
NRx Pharmaceuticals’ research and development expenses consist primarily of costs associated with NRx Pharmaceuticals’ clinical trials, salaries, payroll taxes, employee benefits, and equity-based compensation charges for those individuals involved in ongoing research and development efforts. Research and development costs are expensed as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received.
General and administrative expenses
General and administrative expenses consist primarily of salaries, stock-based compensation, consultant fees, and professional fees for legal and accounting services.
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Results of operations for the three months ended June 30, 2023 and 2022
The following table sets forth NRx Pharmaceuticals’ selected statements of operations data for the following periods (in thousands):
Three months ended June 30,
Change
2023
2022
Dollars
Operating expenses:
Research and development
$
3,873
$
2,958
$
915
General and administrative
4,065
6,642
(2,577)
Settlement expense
250
—
250
Total operating expenses
8,188
9,600
(1,412)
Loss from operations
$
(8,188)
$
(9,600)
$
1,412
Other (income) expenses:
Interest income
$
(145)
$
(23)
$
(122)
Change in fair value of convertible note payable
663
—
663
Change in fair value of warrant liabilities
11
(116)
127
Change in fair value of Earnout Cash liability
—
(2,479)
2,479
Total other (income) expenses
529
(2,618)
3,147
Net loss
$
(8,717)
$
(6,982)
$
(1,735)
Research and development expenses
For the three months ended June 30, 2023, NRx Pharmaceuticals recorded $3.9 million of research and development expenses compared to $3.0 million for the three months ended June 30, 2022. The increase of $0.9 million is related primarily to an increase of $1.3 million in clinical trials and development expenses related to the NRX-101 program for Suicidal Treatment-Resistant Bipolar Depression and $0.1 million in shipping, freight, and delivery costs, partially offset by a decrease of $0.4 million related to fees paid to regulatory and process development consultants, and $0.1 million in stock-based compensation . The research and development expenses for the three months ended June 30, 2023 and 2022, respectively, include $0.1 million and $0.2 million, respectively, of non-cash stock-based compensation.
General and administrative expenses
For the three months ended June 30, 2023, NRx Pharmaceuticals recorded $4.1 million of general and administrative expenses compared to $6.6 million for the six months ended June 30, 2022. The decrease of $2.5 million is related primarily to a decrease of $1.0 million in insurance expenses, $0.7 million in consultant fees, $0.7 million in legal, professional and accounting fees, $0.3 million in stock-based compensation expense, partially offset by an increase in $0.2 million in employee expenses. The general and administrative expenses for the three months ended June 30, 2023 and 2022, respectively, include $0.4 million and $0.8 million, respectively, of non-cash stock-based compensation.
Other (income) expenses
Interest income
For the three months ended June 30, 2023, NRx Pharmaceuticals recorded $0.1 million of interest income compared to less than $0.1 of interest income for the three months ended June 30, 2022. The increase of $0.1 million is due to the Company’s money market account.
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Change in fair value of convertible note payable
For the six months ended June 30, 2023, NRx Pharmaceuticals recorded a loss of $0.7 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 three months ended June 30, 2023, NRx Pharmaceuticals recorded a loss of less than $0.1 million in fair value of warrant liabilities compared to a gain of $0.1 million for the three months ended June 30, 2022. The decrease of $0.1 million related to the decrease in the fair value of certain Substitute Warrants and the Private Placement Warrants assumed pursuant to the Merger Agreement.
Change in fair value of earnout cash liability
For the three months ended June 30, 2023, NRx Pharmaceuticals recorded no change in fair value of the earnout cash liability compared to a gain of $2.5 million for the three months ended June 30, 2022. The earnout cash milestones were not achieved by December 31, 2022 and therefore the earnout cash liability expired. The gain for the three months ended June 30, 2022 related to the decrease in fair value of the earnout cash liability.
Results of operations for the six months ended June 30, 2023 and 2022
The following table sets forth NRx Pharmaceuticals’ selected statements of operations data for the following periods (in thousands):
Six Months Ended June 30,
Change
2023
2022
Dollars
(Unaudited)
Operating expenses:
Research and development
$
7,523
$
8,441
$
(918)
General and administrative
9,850
16,864
(7,014)
Settlement expense
250
—
250
Total operating expenses
17,623
25,305
(7,682)
Loss from operations
$
(17,623)
$
(25,305)
$
7,682
Other (income) expenses:
Interest income
$
(301)
$
(23)
$
(278)
Interest expense
—
3
(3)
Change in fair value of convertible note payable
2,435
—
2,435
Change in fair value of warrant liabilities
(1)
(273)
272
Change in fair value of Earnout Cash liability
—
(4,582)
4,582
Total other (income) expenses
2,133
(4,875)
7,008
Net loss
$
(19,756)
$
(20,430)
$
674
Operating expenses
Research and development expenses
For the six months ended June 30, 2023, NRx Pharmaceuticals recorded $7.5 million of research and development expenses compared to $8.4 million for the six months ended June 30, 2022. The decrease of $0.9 million is related primarily to a decrease of $0.6 million in clinical trials and development expenses related to ZYESAMI, $0.5 million related to fees paid to regulatory and process development consultants, $0.2 million in stock-based compensation, partially offset by an increase in $0.2 million in other regulatory and process development costs and $0.2 million in shipping, freight, and delivery costs. The research and development
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expenses for the six months ended June 30, 2023 and 2022, respectively, include $0.2 million and $0.4 million, respectively, of non-cash stock-based compensation.
General and administrative expenses
For the six months ended June 30, 2023, NRx Pharmaceuticals recorded $9.9 million of general and administrative expenses compared to $16.9 million for the six months ended June 30, 2022. The decrease of $7.0 million is related primarily to a decrease of $4.6 million in legal, professional and accounting fees, $1.6 million in insurance expenses, $0.9 million in stock-based compensation expense, $0.4 million in consultant fees, partially offset by an increase in $0.5 million in employee expenses. The general and administrative expenses for the six months ended June 30, 2023 and 2022, respectively, include $1.0 million and $1.9 million, respectively, of non-cash stock-based compensation.
Other (income) expenses
Interest income
For the six months ended June 30, 2023, NRx Pharmaceuticals recorded $0.3 million of interest income compared to less than $0.1 of interest income for the six months ended June 30, 2022. The increase of $0.3 million is due to the Company’s money market account.
Change in fair value of convertible note payable
For the six months ended June 30, 2023, NRx Pharmaceuticals recorded a loss of $2.4 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 six months ended June 30, 2023, NRx Pharmaceuticals recorded a gain of less than $0.1 million related to the change in fair value of the warrant liabilities compared to a gain of $0.3 million for the six months ended June 30, 2022. The decrease of $0.3 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 six months ended June 30, 2023, NRx Pharmaceuticals recorded no change in fair value of the earnout cash liability compared to a gain of $4.6 million for the six months ended June 30, 2022. The earnout cash milestones were not achieved by December 31, 2022 and therefore the earnout cash liability expired. The gain for the six months ended June 30, 2022 related to the decrease in fair value of the earnout cash liability.
Liquidity and Capital Resources
The Company has generated no revenues, has incurred operating losses since inception, expects to continue to incur significant operating losses for the foreseeable future and may never become profitable. Until such time as the Company is able to establish a 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 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 March 8, 2023, NRx Pharmaceuticals entered into a securities purchase agreement with certain accredited investors (the “March Investors”), providing for the issuance and sale of 3,866,666 shares of the Company’s common stock (“Common Stock”) and warrants to purchase up to 3,866,666 shares of Common Stock (the “March Investor Warrants”) in a registered direct offering priced at-the-market under Nasdaq rules for a purchase price of $0.75 per share (the “March
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Offering”). The March Investors have agreed not to transfer the Common Stock for six months following the date of issuance. The March Investor Warrants have an exercise price of $0.75 per share, are initially exercisable beginning six months following the date of issuance (the “March Initial Exercise Date”) and will expire 5 years from the March Initial Exercise Date. The aggregate gross proceeds to the Company from the March Offering were approximately $2.9 million. The Company intends to use the net proceeds from such offering for working capital and general corporate purposes. The closing of the sale of these securities occurred on March 9, 2023.
On June 2, 2023, the Company entered into a License Agreement (the “License Agreement”) with Alvogen Pharma US, Inc., Alvogen, Inc. and Lotus Pharmaceutical Co. Ltd. (collectively, “Alvogen”). Under the License Agreement, NRx granted Alvogen an exclusive, worldwide, transferable and sublicensable license under certain intellectual property (including patents, know-how and trademarks) owned or controlled by NRx to develop (with certain limitations), manufacture, and commercialize NRX-101, for the treatment of bipolar depression with suicidality. The term of the license is, on a country-by-country basis, 20 years from the first commercial sale of NRX-101 in such country, extendable by Alvogen for a two-year period upon its request made prior to the expiration of such 20-year period. During the term of the License Agreement, the parties have agreed (on behalf of themselves and their affiliates) not to research, develop, seek or obtain any regulatory approval for the manufacturing, marketing, sale, or other commercialization of any product containing a fixed dose combination of D-cycloserine and lurasidone in the treatment of bipolar depression with suicidality, nor to authorize or assist (including by investing in or otherwise providing funding to) any third party to do so.
During the term of the License Agreement, NRx is permitted to develop additional products containing D-cycloserine in combination with one or more other active antidepressant or antipsychotic ingredients for use outside of the field of treatment of bipolar depression with suicidality, such as in post-traumatic stress disorder (PTSD) or chronic pain in depression, in which case, if NRx wishes to license rights to develop or commercialize such additional products or indications, Alvogen has a right of first negotiation to obtain such a license.
Under the terms of the License Agreement, we have the right to an aggregate of up to $330 million in cash milestone payments, including an initial $10 million First Milestone Payment, upon the achievement of certain milestones. A second milestone payment of $5 million is due upon Alvogen’s receipt of a copy of the FDA’s notice of NDA Approval for Product with the label indication for the treatment of bipolar depression with sub-acute or acute suicidality. Additional cash milestone payments will become payable to us upon the achievement of net sales targets measured over the trailing four quarters. Alvogen has also agreed to pay the Company royalties based on the net sales of NRX-101.
On June 6, 2023, the Company entered into a securities purchase agreement with institutional investors (the “June Investors”), providing for the issuance and sale of 9,670,002 shares of the Company’s Common Stock and warrants to purchase up to 9,670,002 shares of Common Stock (the “June Investor Warrants”). The Common Stock was issued in a registered direct offering for a purchase price of $0.65 per share (the “June Offering”) and the June Investor Warrants were offered pursuant to a private placement under Section 4(a)(2) of the Securities Act. The June Investor Warrants have an exercise price of $0.6525 per share, are initially exercisable beginning six months following the date of issuance (the “June Initial Exercise Date”) and will expire five and one half years from the date of issuance. The aggregate net proceeds to the Company from the June Offering were approximately $6.28 million. The Company intends to use the net proceeds from the June offering for working capital and general corporate purposes.
NRx Pharmaceuticals believes that it does not currently have sufficient funds and, if necessary, the ability to reduce expenditures, to support operations through at least the next twelve months from the date of this quarterly report. NRx Pharmaceuticals is dependent upon obtaining necessary equity and/or debt financing to continue operating. NRx Pharmaceuticals cannot make any assurances that additional financing will be available to it on acceptable terms or at all. This could negatively affect the Company’s business and operations and could also lead to the reduction of the Company's operations.
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The following table presents selected financial information and statistics for each of the periods shown below:
June 30, 2023
December 31, 2022
Balance Sheet Data:
(Unaudited)
Cash
$
14,969
$
20,054
Total assets
19,809
25,816
Convertible note payable
12,692
10,525
Total liabilities
22,617
18,407
Total stockholders' (deficit) equity
(2,808)
7,409
June 30,
2023
2022
(Unaudited)
Statement of Cash Flow Data:
Net cash used in operating activities
(13,901)
(25,171)
Net cash used in investing activities
(2)
(6)
Net cash provided by financing activities
8,818
22,120
Net (decrease) increase in cash
$
(5,085)
$
(3,057)
Operating activities
During the six months ended June 30, 2023, operating activities used $13.9 million of cash, primarily resulting from a net loss of $19.8 million, reduced by (a) net non-cash losses of $3.9 million, including $2.4 million in change in fair value of convertible promissory note and $1.2 million of stock-based compensation, and (b) changes in operating assets and liabilities of $1.9 million.
During the six months ended June 30, 2022, operating activities used $25.2 million of cash, primarily resulting from a net loss of $20.4 million, increased by net non-cash gains of $2.5 million, including $4.6 million of gain from the change in fair value of earn out liability and $0.3 million of gain from the change in fair value of warrant liabilities, partially offset by $2.3 million of stock-based compensation expense, and an increase in net operating assets of $2.2 million.
Financing activities
During the six months ended June 30, 2023, financing activities provided $8.8 million of cash resulting from $8.1 million in proceeds from issuance of common stock and warrants issued in a private placement, net of issuance costs.
During the six months ended June 30, 2022, financing activities provided $22.1 million of cash resulting from $22.6 million in net proceeds received by the Company from the issuance of common stock and preferred investment options in a private placement partially offset by $0.5 million of repayment of the loan between the Company and Relief Therapeutics Holding S.A.
Contractual Obligations and Commitments
See Note 7, Debt, and Note 8, Commitments and Contingencies, of the notes to the Company’s unaudited condensed consolidated financial statements as of and for the three months ended June 30 , 2023 included elsewhere in this report for further discussion of the Company’s commitments and contingencies.
Milestone Payments
Pursuant to the legal settlement with Sarah Herzog Memorial Hospital Ezrat Nashim (“SHMH”) in September 2018, which included the license of intellectual property rights from SHMH, an ongoing royalty of 1% to 2.5% of NRX-101 gross sales is due to SHMH, together with milestone payments of $0.3 million, upon completion of phase 3 trials and commercial sale of NRX-101. The milestone payments for developmental and commercial milestones range from $0.1 million to $0.8 million. Annual maintenance fees are up to $0.2 million.
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Off-Balance Sheet Arrangements
The Company is not party to any off-balance sheet transactions. The Company has no guarantees or obligations other than those which arise out of normal business operations.
Critical Accounting Policies and Significant Judgments and Estimates
The Company's management’s discussion and analysis of its financial condition and results of operations is based on its financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of these financial statements requires NRx Pharmaceuticals to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of expenses during the reporting period. In accordance with GAAP, NRx Pharmaceuticals evaluates its estimates and judgments on an ongoing basis. The most significant estimates relate to the earnout cash liability, stock-based compensation, and the valuation of warrants. NRx Pharmaceuticals bases its estimates and assumptions on current facts, historical experiences, and various other factors that NRx Pharmaceuticals believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
NRx Pharmaceuticals defines its critical accounting policies as those accounting principles that require it to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on its financial condition and results of operations, as well as the specific manner in which NRx Pharmaceuticals applies those principles. While its significant accounting policies are more fully described in Note 3 to its financial statements, NRx Pharmaceuticals believes the following are the critical accounting policies used in the preparation of its financial statements that require significant estimates and judgments.
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 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
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the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, or date of modification, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair value of the Private Placement Warrants 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 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
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