NRX Pharmaceuticals, Inc. Debt Disclosure

7. Debt

 

Streeterville Convertible Note

 

On November 4, 2022, the Company issued an 9% redeemable promissory note (as amended, the “Streeterville Note”) to Streeterville Capital, LLC, a Utah limited liability company (“Streeterville”), for an aggregate principal amount of $11.0 million. The Streeterville Note originally matured 18 months from the date of issuance subject to certain acceleration provisions. The Streeterville Note carried an original issue discount of $1.0 million which was deducted from the principal balance of the Streeterville Note. The net proceeds from the issuance of the Streeterville Note was $10.0 million after transaction costs including the original issue discount, legal and other fees are included.

 

The initial terms of the Streeterville Note included the following provisions, certain of which were subsequently modified, as described below. The Company had the option to prepay the Streeterville 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 had the right to redeem up to $1.0 million of the outstanding balance of the Streeterville Note per month starting six months after the issuance date (the “Maximum Monthly Redemption Amount”). Payments could be made by the Company at their option in: (i) in cash with a 10% premium (the “Redemption 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 equaled 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 delivered notice electing to redeem a portion of the Streeterville 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 was 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 was at least thirty percent (30%) greater than the Nasdaq Minimum Price, then the lender would be entitled to redeem over the following ten (10) trading days an amount of indebtedness then outstanding under the Streeterville Note equal to twice the monthly redemption amount of $1.0 million solely by payment by stock, if permitted under the agreement, subject to the Maximum Percentage (as defined in the Streeterville Note) and other ownership limitations.

 

The Streeterville Note contained certain Trigger Events (as defined in the Streeterville Note) that generally, if uncured within five trading days, could result in an event of default in accordance with the terms of the Streeterville Note (such event, an “Event of Default”). Upon an Event of a Default, the Lender could consider the Streeterville Note immediately due and payable. Upon an Event of Default, the interest rate could also be increased to the lesser of 18% per annum or the maximum rate permitted under applicable law (see below). 

 

Due to these embedded features within the Streeterville Note, the Company elected to account for the Streeterville Note at fair value at inception. Subsequent changes in fair value were recorded as a component of other income (loss) in the consolidated statements of operations.

 

StreetervilleConvertible Note Amendments

 

On March 30, 2023, the Company entered into an Amendment to the Note (the “First Amendment”), pursuant to which the Maximum Percentage was set at 9.99% of the number of shares of Common Stock outstanding on a given date.

 

On July 7, 2023, the Company entered into Amendment #2 to the Streeterville Note with Streeterville (the “Second Amendment”). Pursuant to the Second Amendment, the Company agreed to amend the redemption provisions of the Streeterville Note to provide that the Company would pay to Streeterville an amount in cash equal to $1.8 million on or before July 10, 2023, which amount was paid on July 10, 2023. In addition, the Company agreed that, beginning on or before July 31, 2023, and on or before the last day of each month until December 31, 2023, the Company would pay Streeterville an amount equal to $0.4 million in cash, less any amount satisfied by the delivery of Redemption Conversion Shares (as defined below). Notwithstanding the foregoing, Streeterville could also submit a request for redemption of up to an aggregate of $1.0 million per month in accordance with the terms of the Second Amendment. However, the portion of each payment that was not satisfied by the delivery of Redemption Conversion Shares was the maximum amount of cash the Company would have been required to pay in accordance with the Second Amendment during the period from July 31, 2023 and on or before the last day of each month until December 31, 2023. The redemption of the Maximum Monthly Redemption Amount in excess of the Minimum Amount would be satisfied by the delivery of additional Redemption Conversion Shares.

 

On February 9, 2024, the Company entered into Amendment #3 to the Streeterville Note (the “Third Amendment”), with Streeterville. In accordance with the Third Amendment, the Company and Streeterville agreed to amend the redemption provisions of the Streeterville Note to provide that the Company would pay to Streeterville an amount in cash equal to $1.1 million on February 12, 2024, which the amount was paid on February 12, 2024. In addition, beginning on or before February 29, 2024, and on or before the last day of each month until July 31, 2024, the Company was obligated to pay Streeterville an amount equal to $0.4 million in cash, less any amount satisfied by the delivery of Redemption Conversion Shares. During the first three months of this amended payment period, Streeterville could not request to redeem amounts greater than $0.4 million per month.

 

After April 30, 2024, and for the remainder of the payment period through July 31, 2024, Streeterville could redeem any Redemption Amount (as defined in the Streeterville Note), including an amount in excess of the Minimum Payment, subject to the Maximum Monthly Redemption Amount. During the period through July 31, 2024, the Company was permitted to pay the Redemption Amounts by delivery of the Redemption Conversion Shares (as defined below) without regard to the existence of any Equity Conditions Failure, to the extent Streeterville submits redemption notices during such month pursuant to the terms of the Streeterville Note, and only for the Redemption Amounts covered by such notices. Moreover, the Redemption Premium would continue to apply to the Redemption Amounts. To the extent there was an outstanding balance under the Streeterville Note after July 31, 2024, the Company would be required to pay such outstanding balance in full in cash by August 31, 2024. As a result of the alleged Event of Default mentioned below, the Company did not pay any Redemption Amounts during the three months ended September 30, 2024, prior to the settlement, also as described below.

 

During the Minimum Payment Period (defined in the Streeterville Note, as amended), the Company was permitted to pay the Redemption Amounts in the form of shares of Common Stock of the Company (the “Redemption Conversion Shares”) calculated on the basis of the Redemption Conversion Price (as defined in the Streeterville Note) without regard to the existence of an Equity Conditions Failure. Moreover, the Redemption Premium (as defined in the Streeterville Note) would continue to apply to the Redemption Amounts.

 

Both the Second Amendment and the Third Amendment (considered cumulatively with the Second Amendment) were deemed to be debt modifications and did not give rise to a debt extinguishment in accordance with FASB ASC Topic 470, Debt, which was accounted for prospectively. The modification did not result in recognition of a gain or loss in the consolidated statements of operations as the modifications were not considered debt extinguishments, but impacted interest expense recognized in subsequent periods, prior to the settlement of the Streeterville Note.

 

Convertible Note Fair Value Measurements

 

The Company estimated the fair value of the Streeterville Note using a Monte Carlo simulation model, which used as inputs the fair value of its Common Stock and estimated for the equity volatility and volume volatility of its Common Stock, the time to expiration of the Streeterville Note, the risk-free interest rate for a period that approximated the time to expiration, and probability of default. Therefore, the Company estimated its expected future volatility based on the actual volatility of its Common Stock and historical volatility of its Common Stock utilizing a lookback period consistent with the time to expiration. The time to expiration was 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 was 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 was estimated using either Bloomberg's Default Risk function, which uses its financial information to calculate a default risk specific to the Company, or management's estimates which included, the Company's current cash runway, current efforts to raise financing, and current economic environment.

 

The discount to the principal amount was included in the carrying value of the Streeterville Note. During 2022, the Company recorded a debt discount of approximately $1.0 million upon issuance of the Streeterville Note for the original issue discount of $1.0 million. As a result of electing the fair value option, any direct costs and fees related to the Streeterville Note were expensed as incurred. For the years ended December 31, 2024 and 2023, the Company recorded a gain from the change in fair value of the Streeterville Note of $1.8 million and $2.7 million, respectively, which was recognized in other (income) expense on the consolidated statements of operations as a result of the Company’s election of the fair value option. 

 

During the year ended December 31, 2024, the Company made cash principal repayments on the Note of approximately $7.4 million, made cash interest payments on the Note of approximately $0.5 million, including $0.2 million of redemption premiums, issued shares of Common Stock as principal repayment of $0.3 million, and issued shares of Common Stock as interest repayment of $0.1 million, and incurred a default penalty of $0.8 million.

 

During the year ended December 31, 2023, the Company made cash principal repayments on the Note of approximately $2.3 million, made cash interest payments on the Note of approximately $0.9 million, including $0.1 million of redemption premiums, issued shares of Common Stock as principal repayment of $0.7 million, and issued shares of Common Stock as interest repayment of $0.2 million.

 

As of December 31, 2024 and 2023, the Note carried a remaining principle balance of $0 and $8.3 million, respectively. Refer to Note 11 for the reconciliation of the fair values for the periods presented.

 

Alleged Default

 

On April 24, 2024, the Company received written notice from counsel for Streeterville that an alleged event of default occurred with respect to the Streeterville Note issued by the Company in favor of Streeterville (the “Notice”). The Notice alleged that, among other things, (i) the announcement of the plan to partially spin-off of HOPE (the “Spin-Off”), constituted a “Fundamental Transaction” (as defined in the Streeterville Note) for which the Company failed to obtain Streeterville’s prior written consent before undertaking such transaction; and (ii) the Company failed to pay the Minimum Payment, as defined in the Streeterville Note, by April 8, 2024, following a Redemption Notice issued on April 3, 2024 by Streeterville to the Company, each of which resulted in the failure to cure a Trigger Event and subsequent Event of Default of the Streeterville Note, resulting in the acceleration of all of the outstanding amounts due thereunder.

 

Streeterville also filed a complaint (the “Complaint”) naming the Company as a defendant in the Third Judicial District Court of Salt Lake County, Utah. The Complaint was seeking, among other things: (i) declaratory relief for an order enjoining the Company from undertaking any Fundamental Transaction, including the Spin-Off, or otherwise issuing Common Stock or other equity securities (such as the shares of HOPE pursuant to the announced Spin-Off); and (ii) repayment of the Streeterville Note and other unspecified amounts of damages, costs and fees, but no less than $6.5 million, or the amounts currently outstanding under the Streeterville Note.

 

On July 29, 2024, in connection with the alleged Event of Default that Streeterville claimed occurred with respect to the Streeterville Note, the Company announced an order of the Utah arbitrator denying the petition of Streeterville to enjoin Spin-Off of 49% of shares in HOPE to current shareholders of the Company. The purpose of the proposed Spin-Off was to provide the Company’s shareholders with valuable consideration and to provide HOPE (currently a wholly-owned subsidiary) with a sufficient shareholder base to enable future listing on a national exchange. The arbitrator also denied Streeterville’s petition to enjoin the Company from selling additional shares of Common Stock to finance ongoing operations.

 

Streeterville Settlement 

 

On August 12, 2024, the Company and Streeterville entered into a Settlement and Release of Claims (the “Settlement Agreement”), whereby the Company and Streeterville agreed to settle all disputes between the parties and release the Company from all obligations arising from the Notes at certain Securities Purchase Agreement, dated November 4, 2022 (“Streeterville Notes”), between the Company and Streeterville, and that certain Convertible Promissory Note, dated November 4, 2022, issued to Streeterville by the Company, in exchange for a payment of $2.5 million upon the initial closing of the sale of the Anson Notes, and within 60 days thereafter, a second payment of $3.05 million. The Company made the $2.5 million payment upon the Anson Notes closing on  August 15, 2024. The Company made the final $3.05 million payment in October 10, 2024 using proceeds from the Second Closing of Anson Convertible Promissory Note.

 

The Company evaluated the terms of the Settlement Amendment in accordance with ASC 470-50, Debt Modifications and Extinguishments. Both the Settlement Amendment and the Third Amendment (considered cumulatively with the Settlement Amendment) were deemed to be debt modifications and did not give rise to a debt extinguishment in accordance with ASC Topic 470, Debt, which will be accounted for prospectively. The modifications did not result in recognition of a gain or loss in the consolidated statements of operations as the modifications were not considered debt extinguishments, but will impact interest expense and the determination of fair value in future periods.

 

The following table presents the Streeterville Note as of December 31, 2024 and 2023 (in thousands):

 

		December 31,
		2024				2023
Par value of the Note		$	11,020			$	11,020
Unamortized original issue discount			(497	)			(497	)
Default penalty			849				—
Conversions and repayments of principal and interest (shares and cash)			(12,324	)			(4,072	)
Carrying value of the Note before current period change in fair value			(952	)			6,451
Cumulative fair value adjustments through earnings			952				2,707
Cumulative fair value adjustments through accumulated other comprehensive loss			—				3
Total carrying value of Note		$	—			$	9,161
Convertible note payable - current portion		$	—			$	9,161
Convertible note payable, net of current portion		$	—			$	—

 

Anson Convertible Promissory Notes

 

On August 12, 2024, the Company entered into the Purchase Agreement with Investors. The Company agreed to sell, in three equal tranches, original issue discount Anson Notes in the aggregate principal amount of up to approximately $16.3 million for an aggregate purchase price of up to approximately $15.0 million and warrants to purchase that amount of shares equal to 50% of the principal amount of the Notes divided by the VWAP of the Company’s Common Stock, as listed on the Nasdaq Capital Market, on the day prior to the closing of each respective tranche under the Anson Warrants. 

 

In connection with the above offering, the Company engaged EF Hutton LLC as placement agent (the “Placement Agent”), Pursuant to the terms of the engagement with the Placement Agent, the Company paid a cash fee of 7% of the gross proceeds the Company receives in the offering at closing.  

 

2024 Senior Secured Convertible Promissory Notes 

 

On August 14, 2024, the Company entered into the first tranche Senior Secured Convertible Note Agreements (the “First Tranche Notes”) with Anson Investment Master Fund LP and Anson East Master Fund LP (collectively “Anson”) at various amounts for an aggregate of $5.435 million subject to an original issuance discount of 8% or $435,000, less other cash issuance costs of $521,000, resulting in net cash proceeds of $4.5 million, prior to any allocation to the Anson Warrants. The First Tranche Notes bear interest at a rate of 6% per annum (or 10% during the occurrence of any Event of Default (as defined in the First Tranche Notes)) and have a term of 15 months from the issuance date, maturing on November 14, 2025 (the “First Tranche Maturity Date”) (see Note 9). 

 

On August 14, 2024, in conjunction with the issuance of the First Tranche Notes, the Company issued warrants to purchase up to 1,349,305 shares of the Company’s Common Stock.

 

The First Tranche Notes are convertible at the option of the holder at any time after issuance into Common Stock, at a per share conversion price equal to the lower of (a) $2.4168, (the “Fixed Conversion Price”) or (b) a price equal to 92% of the lowest VWAP during the seven trading day period immediately preceding the effective conversion date (the “Alternate Conversion Price”, and together with the Fixed Conversion Price, the “Conversion Price”). If the Conversion Price is less than $0.38 (the “Floor Price”), then in addition to the issuance of Common Stock upon conversion the Company will pay cash as a true-up which is determined by the product of (i) the difference between (y) the Floor Price less (z) the Conversion Price then in effect, multiplied by (ii) the conversion amount that is being paid in Common Stock. 

 

The terms of the First Tranche Notes do not allow any conversion of the First Tranche Notes if it results in Anson owning more than 4.99% of the outstanding shares of Common Stock (the "Beneficial Ownership Limitation"). This limitation can be adjusted up to 9.99% with prior notice, effective 61 days after such notice. Anson must ensure compliance with this limitation when submitting a notice of conversion, and the Company will rely on Anson's representation of compliance.

 

If the Company issues or grants options for Common Stock at a price lower than the current Conversion Price, the Conversion Price will be adjusted to match this lower price, (the “Base Conversion Price”). The Company must notify Anson of any such issuance, and Anson is entitled to convert shares based on the new Base Conversion Price.

 

If the Company offers purchase rights to holders of Common Stock, Anson will be entitled to acquire those rights as if they had fully converted the Note, subject to the Beneficial Ownership Limitation. If exercising these rights would exceed the Beneficial Ownership Limitation, the rights will be held in abeyance until they can be exercised without exceeding the limit.

 

The First Tranche Notes contain mandatory redemption features, whereby if at any time the First Tranche Notes are outstanding, the Company will be required to: (A) use up to 30% of the gross proceeds from any Subsequent Financings (as defined in the Purchase Agreement) in cash, to redeem all or a portion of the Note for an amount equal to the outstanding principal, plus all accrued but unpaid interest, plus all liquidated damages (the “Redemption Obligations”), multiplied by 1.05 (the “Mandatory Redemption Amount”); (B) redeem all of the Redemption Obligations at the Mandatory Redemption Amount in the event of a Change of Control Transaction (as defined in the First Tranche Notes); (C) redeem the Redemption Obligations for the Mandatory Redemption Amount in the event a registration statement is not available for each of the offer and resale of the shares issuable upon conversion of the First Tranche Notes (the “Conversion Shares”); and (D) redeem the Redemption Obligations for the Mandatory Redemption Amount if the Shareholder Approval is not obtained within 180 days following the date of issuance of the First Tranche Notes. 

 

The First Tranche Notes contain certain covenants, and events of default and triggering events, respectively, which would require repayment of the obligations outstanding pursuant to such instruments. The obligations of the Company pursuant to the First Tranche Notes are (i) secured by all assets of the Company and all subsidiaries of the Company pursuant to the Security Agreement and Patent Security Agreement, dated August 14, 2024, by and among the Company, the subsidiaries of the Company, and the Investors, and (ii) guaranteed jointly and severally by the subsidiaries of the Company pursuant to the Subsidiary Guarantee, dated August 14, 2024, by and among the Company, the subsidiaries of the Company, and the Investors. 

 

Pursuant to the Purchase Agreement, on October 10, 2024 (the “Second Closing Date”), the Company sold a total of $5.435 million in Notes (the “Second Tranche Notes”, and collectively with the First Tranche Notes, the ("Anson Notes")) subject to an original issue discount of 8% or $435,000 less other cash issuance cost of $375,000, with an aggregate purchase price of approximately $5.0 million, and Warrants to purchase up to 1,846,128 shares of Common Stock. The Second Tranche Notes are convertible into Common Stock, at a per share conversion price equal to by the lower of (a) $1.7664 or (b) a price equal to 92% of the lowest VWAP during the seven trading day period immediately preceding the effective date set forth in a Notice of Conversion delivered by an Investor to the Company. The Conversion Price is subject to, among other customary provisions, downward adjustment in the event of any future issuance by the Company of common stock below the then effective Conversion Price. $3.05 million of the note proceeds were used to repay the Streeterville note.

 

In connection with the above Second Tranche Notes”, the Company engaged Placement Agent. Pursuant to the terms of the engagement with the Placement Agent, the Company paid a cash fee of 7% of the gross proceeds the Company received in the Second Closing and incurred certain additional other issuance costs and reimbursement for legal counsel disbursements and placement agent, for aggregate issuance costs of approximately $0.4 million.

 

Due to these embedded features within the Anson Notes, the Company elected to account for the First and Second Tranche Notes at fair value at inception. Subsequent changes in fair value are recorded as a component of other income (loss) in the consolidated statements of operations. Additionally the portion of changes in the fair value related to changes in credit risk are recorded to other comprehensive income in the consolidated statements of operations. To determine the initial carrying value of the Notes and the warrants issued to Anson under the First and Second Tranche Notes (see Note 9), the Company allocated the proceeds using the fair value method. After allocation, the initial carrying value of the First Tranche Notes and the warrants issued to Anson were $2.9 million and $2.1 million, respectively, and the initial carrying value of the Second Tranche Notes and the warrants issued to Anson were $3.1 million and $1.9 million, respectively Refer to Note 11 for the reconciliation of the fair values for the periods presented. 

 

During the year ended December 31, 2024, Anson converted $4.2 million of principal and interest of the First Tranche Note into common stock, resulting in the issuances of 3,676,796 shares of Common Stock and loss on redemption of $1.3 million (see Note 9). As of December 31, 2024, the principal and accrued interest balance of the Anson Notes was $6.75 million and $0.1 million, respectively. During the year ended December 31, 2024, the Company recorded a loss from the change in fair value of the First Tranche Notes of $4.4 million, which was recognized in other (income) expense on the consolidated statements of operations as a result of the Company’s election of the fair value option. At December 31, 2024 the effective interest rate of the First and the Second Tranche Note was 82% and 53%, respectively.

 

From January 2, 2025 to January 3, 2025, the Company received conversion notices from Anson resulting in the conversion of the remaining principal of the First Tranche Note of $1.3 million of principal and interest in full from the First Tranche Note into 1,004,055 shares of Common Stock (see Note 15).

 

The following table presents the Anson Notes as of December 31, 2024 (in thousands):

 

		December 31, 2024
Par value of the Anson Notes		$	10,870
Initial original issue discount			(870	)
Conversions and repayments of principal and interest (shares)			(4,190	)
Carrying value of the Anson Notes before current period change in fair value			5,810
Fair value allocated to Common Stock liability classified warrants			(3,966	)
Fair value adjustment through earnings			4,413
Total carrying value of Anson Notes		$	6,257
Convertible note payable - current portion		$	1,246
Convertible note payable, net of current portion		$	5,011