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PROSPECTUS
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Filed Pursuant to
Rule 424(b)(3)
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Registration No. 333-259915
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Up to 19,816,610 Shares of Common Stock
Up to 9,195,000 Shares of Common Stock Issuable
Upon Exercise of Warrants
Up to 3,445,000 Warrants
This prospectus relates to the issuance by us of
an aggregate of up to 9,195,000 shares of our common stock, $0.0001 par value per share (“Common Stock”), which consists
of (i) up to 3,445,000 shares of Common Stock that are issuable upon the exercise of 3,445,000 warrants (the “Placement
Warrants”) originally issued in a private placement in connection with the initial public offering of Blue Water Acquisition
Corp. (“Blue Water”) by the holders thereof and (ii) up to 5,750,000 shares of Common Stock that are issuable
upon the exercise of 5,750,000 warrants (the “Public Warrants” and, together with the Placement Warrants, the “Warrants”)
originally issued in the initial public offering of Blue Water by the holders thereof. We will receive the proceeds from any exercise
of any Warrants for cash.
This prospectus also relates
to the offer and sale from time to time by the selling securityholders named in this prospectus (the “Selling Securityholders”)
of (i) up to 19,816,610 shares of Common Stock (including up to 3,445,000 shares of Common Stock that may be issued upon exercise
of the Placement Warrants) and (ii) up to 3,445,000 Placement Warrants. We will not receive any proceeds from the sale of shares
of Common Stock or Warrants by the Selling Securityholders pursuant to this prospectus. However, we will pay the expenses, other than
underwriting discounts and commissions and expenses incurred by the Selling Securityholders for brokerage, accounting, tax or legal services
or any other expenses incurred by the Selling Securityholders in disposing of the securities, associated with the sale of securities pursuant
to this prospectus.
We are registering the securities for resale pursuant
to the Selling Securityholders’ registration rights under certain agreements between us and the Selling Securityholders. Our registration
of the securities covered by this prospectus does not mean that the Selling Securityholders will offer or sell any of the shares of Common
Stock or Warrants. The Selling Securityholders may offer, sell or distribute all or a portion of their shares of Common Stock or Warrants
publicly or through private transactions at prevailing market prices or at negotiated prices. We will not receive any proceeds from the
sale of shares of Common Stock or Warrants by the Selling Securityholders pursuant to this prospectus. We provide more information about
how the Selling Securityholders may sell the shares or Warrants in the section entitled “Plan of Distribution.”
We are an “emerging growth company”
as defined in Section 2(a) of the Securities Act of 1933, as amended, and are subject to reduced public company reporting requirements.
This prospectus complies with the requirements that apply to an issuer that is an emerging growth company.
The Common Stock and Public
Warrants are listed on The Nasdaq Global Market (“Nasdaq”) under the symbols “CRXT” and “CRXTW,”
respectively. On October 6, 2021, the closing price of the Common Stock was $3.80 and the closing price for the Public Warrants was $0.6500.
See
the section entitled “Risk Factors” beginning on page 5 of this prospectus to read about factors you should consider before
buying our securities.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The date of this prospectus is October 7, 2021.
TABLE OF CONTENTS
You should rely only on the information provided
in this prospectus, as well as the information incorporated by reference to exhibits to the registration statement of which this prospectus
forms a part and any applicable prospectus supplement. Neither we nor the Selling Securityholders have authorized anyone to provide you
with different information. Neither we nor the Selling Securityholders are making an offer of these securities in any jurisdiction where
the offer is not permitted. You should not assume that the information in this prospectus or any applicable prospectus supplement is accurate
as of any date other than the date of the applicable document. Since the date of this prospectus and the documents filed as exhibits to
the registration statement of which this prospectus forms a part, our business, financial condition, results of operations and prospects
may have changed.
ABOUT
THIS PROSPECTUS
This prospectus is part of a registration statement
on Form S-1 that we filed with the SEC using the “shelf” registration process. Under this shelf registration process,
the Selling Securityholders may, from time to time, sell the securities offered by them described in this prospectus. We will not receive
any proceeds from the sale by such Selling Securityholders of the securities offered by them described in this prospectus. This prospectus
also relates to the issuance by us of the shares of Common Stock issuable upon the exercise of any Warrants. We will not receive any proceeds
from the sale of shares of Common Stock underlying the Warrants pursuant to this prospectus, except with respect to amounts received by
us upon the exercise of the Warrants for cash.
Neither we nor the Selling Securityholders have
authorized anyone to provide you with any information or to make any representations other than those contained in this prospectus or
any applicable prospectus supplement or any free writing prospectuses prepared by or on behalf of us or to which we have referred you.
Neither we nor the Selling Securityholders take responsibility for, or provide any assurance as to the reliability of, any other information
that others may give you. Neither we nor the Selling Securityholders will make an offer to sell these securities in any jurisdiction where
the offer or sale is not permitted.
We may also provide a prospectus supplement or post-effective
amendment to the registration statement to add information to, or update or change information contained in, this prospectus. You should
read both this prospectus and any applicable prospectus supplement or post-effective amendment to the registration statement together
with the additional information to which we refer you in the sections of this prospectus entitled “Where You Can Find More Information.”
On
the Closing Date, Clarus Therapeutics Holdings, Inc., a Delaware corporation (f/k/a Blue Water Acquisition Corp.), consummated the previously
announced business combination pursuant to the terms of the Merger Agreement, by and among Blue Water, Blue Water Merger Sub Corp., a
Delaware corporation (“Merger Sub”) and Legacy Clarus.
Pursuant
to the terms of the Merger Agreement, a business combination between Blue Water and Legacy Clarus was effected through the merger of Merger
Sub with and into Legacy Clarus, with Legacy Clarus surviving as the post-merger company and as a wholly owned subsidiary of Blue Water.
On the Closing Date, the registrant changed its name from Blue Water Acquisition Corp. to Clarus Therapeutics Holdings, Inc. (the “Combined
Entity”).
Unless
the context indicates otherwise, references in this prospectus to the “Company,” “Clarus,” “we,” “us,”
“our,” “Combined Entity” and similar terms refer to Clarus Therapeutics Holdings,
Inc. (formerly known as Blue Water Acquisition Corp.) and its consolidated subsidiaries (including Legacy Clarus). References to “Blue
Water” refer to our predecessor company prior to the consummation of the Merger.
In addition,
in this prospectus, unless otherwise stated or the context otherwise requires:
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“Blue Water” means Blue Water
Acquisition Corp., a Delaware corporation, which was renamed “Clarus Therapeutics Holdings, Inc.” in connection with the Closing.
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“Blue Water IPO,” “IPO”
or “Initial Public Offering” means Blue Water’s initial public offering that was consummated on December 17,
2020.
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“Board” means the board of
directors of Clarus.
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“Business Combination” means
the Merger and the other transactions contemplated by the Merger Agreement.
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“Bylaws” means the Amended
and Restated Bylaws of Clarus Therapeutics Holdings, Inc.
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“Certificate of Incorporation”
means the Second Amended and Restated Certificate of Incorporation of Clarus Therapeutics Holdings, Inc.
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“Closing” means the closing
of the Business Combination.
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“Closing Date” means September
9, 2021.
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“Code” means the Internal
Revenue Code of 1986, as amended.
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“Common Stock” means the common
stock, $0.0001 par value per share, of the Company.
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“DGCL” means the General Corporation
Law of the State of Delaware, as amended.
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“Effective Time” means the
effective time of the Merger in accordance with the Merger Agreement.
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“Exchange Act” means the Securities
Exchange Act of 1934, as amended.
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“Founder Shares” means Class B
common stock purchased by the Sponsor on June 30, 2020.
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“Legacy Clarus” means Clarus
Therapeutics, Inc., a Delaware corporation, and a wholly-owned subsidiary of the Company.
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“Merger” means the merger
of Merger Sub with and into Legacy Clarus, with Legacy Clarus continuing as the surviving corporation and as a wholly-owned subsidiary
of the Company, in accordance with the terms of the Merger Agreement.
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“Merger Agreement” means the
Agreement and Plan of Merger, dated April 27, 2021, and as it may further be amended or supplemented from time to time, by and among
Blue Water, Merger Sub and Legacy Clarus.
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“Placement Warrants” means
3,445,000 warrants to purchase shares of Common Stock issued to the Sponsor in the private placement (including the additional warrants
purchased after the Blue Water IPO in connection with the overallotment securities issued to Blue Water’s underwriters). Each Placement
Warrant entitles the holder thereof to purchase one share of Common Stock for $11.50 per share.
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“Public Warrants” means warrants
underlying the Units issued in the Blue Water IPO. Each Public Warrant entitles the holder thereof to purchase one share of Common Stock
for $11.50 per share.
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“SEC” means the U.S. Securities
and Exchange Commission.
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“Securities Act” means the
Securities Act of 1933, as amended.
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“Sponsor” means Blue Water
Sponsor LLC.
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“Warrants” means any of the
Placement Warrants and the Public Warrants.
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“Warrant Agreement” means
that certain Warrant Agreement, dated December 15, 2020, between Blue Water and Continental Stock Transfer & Trust Company, as the
warrant agent
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. We have based these forward-looking
statements on our current expectations and projections about future events. All statements, other than statements of present or historical
fact included in this prospectus, our future financial performance, strategy, expansion plans, future operations, future operating results,
estimated revenues, losses, projected costs, prospects, plans and objectives of management are forward-looking statements. Any statements
that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions,
are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,”
“believe,” “continue,” “could,” “estimate,” “expect,” “intends,”
“may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,”
“should,” “will,” “would” or the negative of such terms or other similar expressions. These forward-looking
statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements. Except as otherwise required by applicable law, we disclaim any duty to update
any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances
after the date of this prospectus. We caution you that these forward-looking statements are subject to numerous risks and uncertainties,
most of which are difficult to predict and many of which are beyond our control.
Forward-looking statements in this prospectus may
include, for example, statements about:
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our ability to realize the benefits from the Business Combination;
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the ability to maintain the listing of the Common Stock on the Nasdaq Global
Market;
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future financial performance;
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potential liquidity and trading of our securities;
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the impact from the outcome of any known and unknown litigation;
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our ability to forecast and maintain an adequate rate of revenue growth and
appropriately plan expenses;
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expectations regarding future expenditures;
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the future mix of revenue and effect on gross margins;
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the attraction and retention of qualified directors, officers, employees
and key personnel;
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our ability to compete effectively in a competitive industry;
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our ability to protect and enhance our corporate reputation and brand;
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expectations concerning our relationships and actions with third parties;
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the impact from future regulatory, judicial, and legislative changes in our
industry;
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the ability to locate and acquire complementary products or product candidates
and integrate those into our business;
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future arrangements with, or investments in, other entities or associations;
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intense competition and competitive pressures from other companies in the
industries in which we operate; and
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other economic, business and/or competitive factors, risks and uncertainties,
including those set forth in this prospectus in the section entitled “Risk Factors.”
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All of these forward-looking statements are subject
to a number of risks and uncertainties, including those set forth in this prospectus in the section entitled “Risk Factors.”
Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Additional cautionary statements
or discussions of risks and uncertainties that could affect our results or the achievement of the expectations described in forward-looking
statements may also be contained in any accompanying prospectus supplement.
Should one or more of the risks or uncertainties
described in this prospectus, or should underlying assumptions prove incorrect, actual results and plans could differ materially from
those expressed in any forward-looking statements. Additional information concerning these and other factors that may impact the operations
and projections discussed herein can be found in the section entitled “Risk Factors” and in our periodic filings with the
SEC. Our SEC filings are available publicly on the SEC’s website at www.sec.gov.
You should read this prospectus and any accompanying
prospectus supplement completely and with the understanding that our actual future results, levels of activity and performance as well
as other events and circumstances may be materially different from what we expect. We qualify all of our forward-looking statements by
these cautionary statements.
PROSPECTUS SUMMARY
This summary highlights selected information appearing
in this prospectus. Because it is a summary, it may not contain all of the information that may be important to you. To understand this
offering fully, you should read this entire prospectus carefully, including the information set forth in the sections entitled “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
“Unaudited Pro Forma Condensed Combined Financial Information,” “Business” and the consolidated
financial statements and related notes included elsewhere in this prospectus before making an investment decision.
The Company
We are a pharmaceutical company
focused on the commercialization of JATENZO, an oral T-replacement therapy approved by the U.S. Food and Drug Administration (“FDA”).
Our primary goal is to make JATENZO the preferred choice for T-replacement therapy among men with T-deficiency accompanied by
an associated medical condition, referred to as hypogonadism. In parallel, we plan to develop into a pharmaceutical company initially
focused on the development and commercialization of T and metabolic therapies for men and women.
Background
Blue Water was a blank check
company incorporated in Delaware on May 22, 2020 and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition,
stock purchase, reorganization or similar business combination with one or more businesses.
On
September 9, 2021, Clarus Therapeutics Holdings, Inc., a Delaware corporation (f/k/a Blue Water Acquisition Corp.), consummated
the previously announced business combination pursuant to the terms of the Merger Agreement by and among Blue Water, Merger Sub and Legacy
Clarus in which Merger Sub merged with and into Legacy Clarus, with Legacy Clarus surviving as the post-merger company and as a wholly
owned subsidiary of Clarus Therapeutics Holdings, Inc. On the Closing Date, we changed our name from Blue Water Acquisition Corp. to Clarus
Therapeutics Holdings, Inc.
In
accordance with the terms and subject to the conditions of the Merger Agreement, at the Effective Time:
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an aggregate of 17,751,348 shares of Class A common stock, par value $0.0001 per share, of Blue Water
(“Blue Water Class A common stock”) were issued to the holders of:
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(i)
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certain shares of Legacy Clarus preferred stock issued and outstanding immediately prior to the Effective
Time (such shares, the “Legacy Clarus Consideration-Receiving Preferred Stock”); and
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(ii)
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the holders of certain convertible and non-convertible promissory notes of Legacy Clarus outstanding
as of the Effective Time (such notes, the “Legacy Clarus Consideration-Receiving Notes”);
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warrants to purchase an aggregate 61,146 shares of Legacy Clarus stock were converted into warrants to
purchase an aggregate 9,246 shares of Common Stock (such converting warrants, the “Legacy Clarus Converting Warrants”)
and
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all shares of Legacy Clarus capital stock (other than the Legacy Clarus Consideration-Receiving Preferred
Stock), and all outstanding options, warrants or rights to purchase or subscribe for any Legacy Clarus capital stock, securities convertible
into or exchangeable for, or that otherwise conferred on the holder any right to acquire any capital stock of Legacy Clarus (in each case,
other than the Legacy Clarus Consideration-Receiving Notes and the Legacy Clarus Converting Warrants), whether or not exercised prior
to the Effective Time, were cancelled, retired and terminated without any consideration or any liability to Legacy Clarus with respect
thereto. In addition, all shares of Class B common stock, par value $0.0001 per share, of Blue Water (“Blue Water Class B
common stock”, and together with the Blue Water Class A common stock, the “Blue Water common stock”)
were converted into Blue Water Class A common stock in accordance with Blue Water’s amended and restated certificate of incorporation
(the “Blue Water Charter”).
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Following
the Effective Time, upon filing of the Certificate of Incorporation, all shares of Blue Water common stock were redesignated as Common
Stock.
The
Common Stock and Public Warrants are currently listed on Nasdaq under the symbols “CRXT” and “CRXTW,” respectively.
The
rights of holders of the Common Stock and Warrants are governed by the Certificate of Incorporation, the Bylaws and the DGCL, and, in
the case of the Warrants, the Warrant Agreement. See the sections entitled “Description of our Securities” and “Certain
Relationships and Related Party Transactions.”
Risks Associated with
Our Business
Our
ability to implement our business strategy is subject to numerous risks that you should be aware of before making an investment decision.
These risks are described more fully in the section entitled “Risk Factors,” following this prospectus summary. These
risks include the following, among others:
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There is substantial doubt about our ability to continue as a going concern.
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We have incurred significant indebtedness in connection with our business and servicing our debt requires
a significant amount of cash. We may not have sufficient cash flow from our operations to satisfy the financial covenants in our debt
agreements. We may not receive a waiver of default for outstanding indebtedness for which we may be in default in the future.
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We have identified material weaknesses in our internal control over financial reporting, and we may identify
future material weaknesses in our internal control over financial reporting.
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JATENZO is the only product we are commercializing, and we depend almost entirely on its success.
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We have limited experience as a commercial company and the marketing and sale of JATENZO or any future
approved drugs may be unsuccessful or less successful than anticipated.
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Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
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Our reliance on third-party suppliers and distributors could harm our ability to commercialize JATENZO.
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The ongoing COVID-19 pandemic is having, and is expected to have, an adverse impact on our business.
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The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion
of off-label uses. If we are found to have improperly promoted off-label uses, we may become subject to significant liability.
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Even though we have received marketing approval for JATENZO in the United States, we may never receive
marketing approval outside of the United States, or receive pricing and reimbursement outside the United States at acceptable levels.
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Recent federal legislation may increase pressure to reduce prices of certain pharmaceutical products paid
for by Medicare.
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Testosterone (T) is a Schedule III (non-narcotic) substance under the Controlled Substances Act and any
failure to comply with this act or its state equivalents would have a negative impact on our business.
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If coverage and reimbursement for JATENZO are limited, it may be difficult to profitably sell JATENZO.
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Our market is subject to intense competition.
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If we are unable to obtain or protect intellectual property rights related to JATENZO, we may not be able
to compete effectively in our market.
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We may be involved in lawsuits and proceedings to protect or enforce our patents, which could be expensive,
time consuming and unsuccessful.
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We will need to grow our company, and may encounter difficulties in managing this growth.
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Our future success depends on our ability to retain our chief executive officer, chief financial officer
and chief commercial officer and to attract, retain and motivate qualified personnel.
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Our debt agreements contain restrictions that limit our flexibility in operating our business.
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Corporate Information
The mailing address for
our principal executive office is 555 Skokie Boulevard, Suite 340, Northbrook, Illinois 60062, and our telephone number is (847)
562-4300. Our website address is https://clarustherapeutics.com. The information contained in or accessible from our website is
not incorporated into this prospectus, and you should not consider it part of this prospectus. We have included our website address in
this prospectus solely as an inactive textual reference.
Implications of Being
an Emerging Growth Company and a Smaller Reporting Company
We
are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will
remain an emerging growth company under the JOBS Act until the earliest of (a) the last day of our first fiscal year following the fifth
anniversary of Blue Water’s IPO, (b) the last date of our fiscal year in which we have total annual gross revenue of at least $1.07
billion, (c) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700.0
million of outstanding securities held by non-affiliates or (d) the date on which we have issued more than $1.0 billion in non-convertible
debt securities during the previous three years.
We
are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even
after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting
companies and will be able to take advantage of these scaled disclosures for so long as the market value of the Common Stock held by non-affiliates
is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0
million during the most recently completed fiscal year and the market value of the Common Stock held by non-affiliates is less than $700.0
million measured on the last business day of our second fiscal quarter.
As
a result, the information in this prospectus and that we provide to our investors in the future may be different than what you might receive
from other public reporting companies.
The
Offering
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Issuer
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Clarus Therapeutics Holdings, Inc. (formerly known as Blue Water Acquisition Corp. )
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Issuance of Common Stock
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Shares of Common Stock Offered by the Company
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9,195,000 shares of Common Stock, including shares of Common Stock issuable upon exercise of the Warrants, consisting of (i) 3,445,000 shares of Common Stock that are issuable upon the exercise of 3,445,000 Placement Warrants by the holders thereof; and (ii) 5,750,000 shares of Common Stock that are issuable upon the exercise of 5,750,000 Public Warrants.
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Shares of Common Stock Outstanding Prior to Exercise of All Warrants
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21,725,817 shares (as of September 27, 2021).
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Shares of Common Stock Outstanding Assuming Exercise of All Warrants
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30,920,817 shares (based on total shares outstanding as of September
27, 2021).
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Exercise Price of Warrants
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$11.50 per share, subject to adjustment as described herein.
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Use of Proceeds
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We will receive up to an aggregate of approximately $105.7 million from the exercise of the Warrants, assuming the exercise in full of all of the Warrants for cash. We expect to use the net proceeds from the exercise of the Warrants for general corporate purposes. See the section entitled “Use of Proceeds.”
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Resale of Common Stock and Warrants
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Shares of Common Stock Offered by the Selling Securityholders
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19,816,610 shares of Common Stock (including up to 3,445,000 shares of Common Stock that may be issued upon exercise of the Placement Warrants)
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Warrants Offered by the Selling Securityholders
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3,445,000 Placement Warrants.
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Redemption
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The Warrants are redeemable in certain circumstances. See the section entitled “Description of our Securities — Warrants” for further discussion.
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Use of Proceeds
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We will not receive any proceeds from the sale of shares of Common Stock or Warrants by the Selling Securityholders.
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Lock-Up Restrictions
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Certain of our stockholders are subject to certain restrictions on transfer until the termination of applicable lock-up periods. See the section entitled “Certain Relationships and Related Party Transactions” for further discussion.
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Market for Common Stock and Warrants
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The Common Stock and Public Warrants are currently traded on Nasdaq under the symbols “CRXT” and “CRXTW,” respectively.
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Risk Factors
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See the section entitled “Risk Factors” and other information included in this prospectus for a discussion of factors you should consider before investing in our securities.
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RISK
FACTORS
Investing in our securities involves risks. Before
you make a decision to buy our securities, in addition to the risks and uncertainties discussed above under “Cautionary Note Regarding
Forward-Looking Statements,” you should carefully consider the specific risks set forth herein. If any of these risks actually occur,
it may materially harm our business, financial condition, liquidity and results of operations. As a result, the market price of our securities
could decline, and you could lose all or part of your investment. Additionally, the risks and uncertainties described in this prospectus
or any prospectus supplement are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known
to us or that we currently believe to be immaterial may become material and adversely affect our business.
Risks Related to Business Operations and Commercialization
We have incurred significant operating losses
and there is substantial doubt about our ability to continue as a going concern, which may affect our ability to obtain future financing
and may require us to curtail our operations. We will need to raise additional capital to support our operations.
We have experienced negative
operating cash flows and have accumulated significant accrued liabilities. Our net loss was $18.1 million and $33.5 million for the three
and six months ended June 30, 2021, respectively. and we had an accumulated deficit of $359.3 million as of June 30, 2021.
Although we completed the Business Combination in September 2021, we expect that our revenue generated from the sales of JATENZO along
with existing cash and cash equivalents of $10.3 million as of June 30, 2021 and proceeds from the Merger will not be sufficient to fund
our operating expenses in order to maximize the commercial launch of JATENZO and capital expenditure requirements for 12 months from
through at least 12 months from the date that our condensed financial statements are available to be issued.
We plan to seek additional
funding through the expansion of our commercial efforts to grow JATENZO and our operating cash flow, business development efforts to
out-license JATENZO internationally, equity financings, debt financings, or other capital sources including collaborations with
other companies or other strategic arrangements with third parties. There can be no assurance that these future financing efforts will
be successful. If we are unable to obtain funding or generate operating cash flow, we will be forced to delay, reduce or eliminate some
or all of its product portfolio expansion or commercialization efforts, which could adversely affect our business prospects, or we may
be unable to continue operations.
Based on our recurring
losses from operations incurred since inception, expectation of continuing operating losses for the foreseeable future, and need to
raise additional capital to finance our future operations, we have concluded that our cash and cash equivalents will not be
sufficient to fund our operating expenses, capital expenditure requirements and debt service payments through at least the next
twelve months and that there is substantial doubt about our ability to continue as a going concern. Our unaudited financial
statements contained elsewhere in this prospectus do not include any adjustments that might result from the outcome of this
uncertainty. Additionally, our independent registered public accounting firm’s report for the year ended December 31, 2020
contained an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern.
Legacy Clarus has incurred significant indebtedness
in connection with our business and servicing its debt requires a significant amount of cash. Legacy Clarus may not have sufficient cash
flow from operations to satisfy the financial covenants in its debt agreements. Legacy Clarus may not receive a waiver of default for
outstanding indebtedness for which Legacy Clarus may be in default in the future.
In March 2020, Legacy Clarus
issued and sold senior secured notes to certain purchasers. The terms of the senior secured notes provide for semi-annual payments
on March 1 and September 1. Until March 2022, only interest is payable on the notes. Legacy Clarus did not pay interest of approximately
$2.99 million due September 1, 2021. On September 28, 2021, Legacy Clarus and the noteholders entered into Supplemental Indenture No.
3, which supplements the existing indenture, pursuant to which they agreed to defer the September 1, 2021 interest payment to March 1,
2022, at an increased interest rate of 18.5%. Pursuant to Supplemental Indenture No. 3, Legacy Clarus also agreed, among other things,
to commence a process to refinance, redeem or repay all notes outstanding under the indenture.
Beginning in September 1,
2022, in addition to interest payments, Legacy Clarus is required to make principal payments of $6 million on each of September 1,
2022, March 1, 2023, September 1, 2023 and March 1, 2024. Thereafter, in addition to interest payments, Legacy Clarus is
required to make principal payments of $8 million on each of September 1, 2024 and March 1, 2025. Additionally, on February 1,
2023, Legacy Clarus is required to make a payment of principal in the amount of $3.125 million, which is the amount of a payment-in-kind note
Legacy Clarus issued on May 27, 2021, plus accrued and unpaid interest in respect of such principal.
If Legacy Clarus is unable
to make payments when due under our debt agreements, or repay these obligations at maturity, and Legacy Clarus is otherwise unable to
extend the maturity dates or refinance these obligations, Legacy Clarus would be in default. We cannot provide any assurances that Legacy
Clarus will be able to generate the necessary amount of capital to make payments as they become due, or to repay these obligations, or
that Legacy Clarus will be able to extend the maturity dates or otherwise refinance these obligations. In the event of default on any
of these loans, the noteholders have the right to exercise all remedies available under the indenture to receive the funds due. Accordingly,
a default would have a material adverse effect on our business. In addition, the agreements governing Legacy Clarus’s indebtedness
include certain debt service and other financial covenants that Legacy Clarus must satisfy. In the past, Legacy Clarus has defaulted on
certain of these covenants and has entered into forbearance agreements to waive Legacy Clarus defaults from the noteholders.
We cannot provide any assurance that the noteholders would provide
us with a consent or enter into a forbearance agreement should Legacy Clarus not be in compliance in the future. A failure to maintain
compliance, in the event the noteholders do not agree to a consent for the non-compliance, would cause the outstanding borrowings to be
in default and payable on demand which would have a material adverse effect on us.
Legacy Clarus identified material weaknesses
in its internal control over financial reporting, and we may identify future material weaknesses in our and our internal control over
financial reporting.
During the preparation of the
financial statements of Legacy Clarus for the fiscal year ended December 31, 2020, management identified material weaknesses in our
internal control over financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial
statements will not be prevented or detected and corrected on a timely basis.
Specifically, Legacy Clarus
management identified a combination of deficiencies in our internal controls within the financial reporting function that result from
an ineffective design and implementation of an appropriate system of controls. The material weaknesses identified include (i) insufficient
supervision and review, (ii) a lack of segregation of duties and (iii) a lack of access and input controls related to its financial reporting
systems. Management believes these deficiencies are the result of a lack of accounting personnel to provide the necessary segregation
and review.
We have started the process
of remediating these deficiencies and will continue to take initiatives to improve our internal control over financial reporting and disclosure
controls. Towards this end, we are in the process of hiring additional accounting personnel. Management believes these efforts will address
the issues that led to the aforementioned deficiencies. We are committed to appropriately staffing the accounting and reporting functions.
However, the implementation of these initiatives is not complete and may not fully address the material weaknesses in our internal control
over financial reporting and we cannot assure you that we will not identify other material weaknesses or deficiencies, which could negatively
impact our results of operations in future periods.
More generally, the process
of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react
to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting
system that satisfies our reporting obligations. If we are unable to meet the demands that will be placed upon us as a public company,
including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report its financial results in future periods,
or report them within the timeframes required by law or securities exchange regulations. Failure to comply with the Sarbanes-Oxley Act,
when and as applicable, could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. Any
failure to maintain or implement required new or improved controls, or any difficulties encountered in their implementation, could result
in additional material weaknesses or significant deficiencies, cause us to fail to meet our reporting obligations or result in material
misstatements in our financial statements. Furthermore, if we cannot provide reliable financial reports or prevent fraud, our business
and results of operations could be harmed, and investors could lose confidence in our, reported financial information. We also could become
subject to investigations by Nasdaq, the SEC or other regulatory authorities.
We depend almost entirely on the success
of our product, JATENZO. There is no assurance that our commercialization efforts in the United States with respect to JATENZO will
be successful or that we will be able to generate revenues at the levels or within the timing we expect or at the levels or within the
timing necessary to support our goals.
Our lead product, JATENZO,
was approved by the FDA in March 2019 and became commercially available in the United States in February 2020. Through
June 30, 2021, we have generated $11.0 million in gross revenues from the sale of JATENZO in the United States.
Our business currently depends
heavily on our ability to successfully commercialize JATENZO, an androgen indicated for T-replacement therapy, in the United States
to treat adult men with hypogonadism due to certain medical conditions. We may never be able to successfully commercialize the product
or meet our expectations with respect to revenues. We may be subject to patent litigation that could materially impact or prevent commercialization.
For example, Lipocine, Inc. (“Lipocine”) sued us for infringement of their patents. Although we prevailed in our motion
on summary judgment in the litigation claims with Lipocine and entered into a global settlement agreement with Lipocine, additional claims
from other third parties could arise in the future. This and other proceedings are discussed in “Business— Legal
Proceedings.”
Prior to our launch in February 2020,
we had never marketed, sold or distributed for commercial use any pharmaceutical product. There is no guarantee that the infrastructure,
systems, processes, policies, personnel, relationships and materials we have built to launch and commercialize JATENZO in the United States
will be sufficient for us to achieve success at the levels we expect. Additionally, healthcare providers may not prescribe JATENZO due
to safety risks posed by T-replacement products. We may also encounter challenges related to the reimbursement of JATENZO, even if
we have positive early indications from payors, including potential limitations in the scope, breadth, availability, or amount of reimbursement
covering each product. Similarly, healthcare settings or patients may determine that the financial burdens of treatment are not acceptable.
Our results may also be negatively impacted if we have not adequately sized our field teams or our targeting strategy is inadequate or
if we encounter deficiencies or inefficiencies in our infrastructure or processes. Any of these issues could impair our ability to successfully
commercialize JATENZO or to generate substantial revenues or profits or to meet our expectations with respect to the amount or timing
of revenue or profits. Any issues or hurdles related to our commercialization efforts may materially adversely affect our business, results
of operations, financial condition and prospects. There is no guarantee that we will be successful in our launch or commercialization
efforts with respect to JATENZO.
We have limited experience as a commercial
company and the marketing and sale of JATENZO or any future approved drugs may be unsuccessful or less successful than anticipated.
While we have initiated the
commercial launch of JATENZO in the United States, we have limited experience as a commercial company and there is limited information
about our ability to successfully overcome many of the risks and uncertainties encountered by companies commercializing drugs in the biopharmaceutical
industry. To execute our business plan, in addition to successfully marketing and selling JATENZO, we will need to successfully:
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establish and maintain our relationships with healthcare
providers who will be treating the patients who may receive JATENZO and any future products;
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obtain adequate pricing and reimbursement for JATENZO and
any future products;
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develop and maintain successful strategic alliances; and
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manage our spending as costs and expenses increase due to
clinical trials, marketing approvals, and commercialization.
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If we are unsuccessful in accomplishing
these objectives, we may not be able to successfully commercialize JATENZO and any future product candidates, raise capital, expand our
business, or continue our operations.
The sales, marketing and distribution capabilities
we have built may not be sufficient to overcome the challenges associated with commercializing JATENZO. We may not be able to build sufficient
sales, marketing and distribution capabilities with respect to any of our future product candidates, if successfully developed and approved.
If we are unsuccessful in these efforts, or if we are unable to achieve market acceptance for any approved products, our business, results
of operations, financial condition and prospects will be materially adversely affected.
JATENZO is the first product
we have marketed, sold and distributed for commercial use. There is no guarantee that the systems, processes, policies, relationships
and materials we have built will be sufficient to overcome the challenges associated with commercializing JATENZO or for successful commercialization
of the product in the United States as a treatment for adult men with hypogonadism due to certain medical conditions.
We have established a specialty
sales force to promote JATENZO to endocrinologists and urologists, as well as high-prescribers of T-replacement therapies among
primary care physicians (“PCPs”) in the United States. In addition, we will need to commit significant additional
management and other resources to establish and grow our sales organization. We may not be able to achieve the necessary development and
growth in a cost-effective manner or realize a positive return on our investment. We will also have to compete with other pharmaceutical
companies to recruit, hire, train and retain sales and marketing personnel. In addition, we plan to explore partnership or co-promotion arrangements
with established pharmaceutical companies that have PCP-focused sales forces or contract with an outside sales force to achieve broader
penetration into the U.S. PCP market, which may prove costly or difficult to implement. If we are unable to grow our sales force, or enter
into agreements with third parties that have existing sales forces, we will not be able to successfully commercialize JATENZO and our
ability to generate revenue will be impaired.
Our ability to utilize our net operating
loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Code,
if a corporation undergoes an “ownership change” (generally defined as a greater than 50 percentage point change (by value)
in the ownership of its equity over a three-year period), the corporation’s ability to use its pre-change net operating
loss (“NOL”) carryforwards and certain other pre-change tax attributes to offset its post-change income may
be limited. We have experienced such ownership changes in the past, and we may experience ownership changes in the future as a result
of the Business Combination or subsequent shifts in our stock ownership, some of which are outside our control. As of December 31,
2020, we had U.S. federal and state NOL carryforwards of $189.2 million and $169.1 million, respectively, and our ability to
utilize those NOLs could be limited by an “ownership change” as described above, which could result in increased tax liability
to us. Furthermore, our ability to utilize our NOLs or credits is conditioned upon our attaining profitability and generating U.S. federal
and state taxable income. As a result, the amount of the NOL and tax credit carryforwards presented in our financial statements could
be limited and may expire unutilized. Federal NOL carryforwards generated in taxable years beginning after December 31, 2017 will
not be subject to expiration. However, any such NOL carryforwards may only offset 80% of our annual taxable income in taxable years beginning
after December 31, 2020.
Risk Related to Our Dependence on Third Parties
Our reliance on third-party suppliers and
distributors could harm our ability to commercialize JATENZO or any product candidates that may be approved in the future.
We do not currently own or
operate manufacturing facilities for the production of JATENZO or any product candidates that may be approved in the future. We rely on
third-party suppliers to manufacture and supply the active pharmaceutical ingredient and drug product required for our commercial
supply and clinical studies which may not be able to produce sufficient inventory to meet commercial demand in a cost-efficient, timely
manner, or at all. Our third-party suppliers may not be required to, or may be unable to, provide us with any guaranteed minimum
production levels or have sufficient dedicated capacity for our drugs. As a result, there can be no assurances that we will be able to
obtain sufficient quantities of JATENZO, which could have a material adverse effect on our business as a whole.
If any contract manufacturing
organization (“CMO”) with whom we contract fails to perform its obligations, we may be forced to manufacture the materials
ourselves, for which we may not have the capabilities or resources, or enter into an agreement with a different CMO, which we may not
be able to do on reasonable terms, if at all. In either scenario, our clinical trials or commercial distribution could be delayed significantly
as we establish alternative supply sources. In some cases, the technical skills required to manufacture our products or product candidates
may be unique or proprietary to the original CMO and we may have difficulty, or there may be contractual restrictions prohibiting us from,
transferring such skills to a back-up or alternate supplier, or we may be unable to transfer such skills at all. In addition, if
we are required to change CMOs for any reason, we will be required to verify that the new CMO maintains facilities and procedures that
comply with quality standards and with all applicable regulations. We will also need to verify, such as through a manufacturing comparability
study, that any new manufacturing process will produce our product according to the specifications previously submitted to or approved
by the FDA or another regulatory authority. The delays associated with the verification of a new CMO could negatively affect our ability
to develop product candidates or commercialize our products in a timely manner or within budget. Furthermore, a CMO may possess technology
related to the manufacture of our product candidate that such CMO owns independently. This would increase our reliance on such CMO or
require us to obtain a license from such CMO in order to have another CMO manufacture our products or product candidates. In addition,
in the case of the CMOs that supply our product candidates, changes in manufacturers often involve changes in manufacturing procedures
and processes, which could require that we conduct bridging studies between our prior clinical supply used in our clinical trials and
that of any new manufacturer. We may be unsuccessful in demonstrating the comparability of clinical supplies which could require the conduct
of additional clinical trials.
Additionally, on March 27,
2020, former President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in
response to the COVID-19 pandemic. Throughout the COVID-19 outbreak, there has been public concern over the availability and
accessibility of critical medical products, and the CARES Act enhances FDA’s existing authority with respect to drug shortage measures.
Under the CARES Act, we must have in place a risk management plan that identifies and evaluates the risks to the supply of approved drugs
for certain serious diseases or conditions for each establishment where the drug or API is manufactured. The risk management plan will
be subject to FDA review during an inspection. If we experience shortages in the supply of our marketed products, our results could be
materially impacted.
We rely on two suppliers for our supply
of TU, the active pharmaceutical ingredient of JATENZO, and the loss of either of these suppliers could impair our ability to procure
sufficient amounts of TU to meet demand for JATENZO.
We rely on two third-party suppliers,
Pharmacia & Upjohn Company LLC (“Pfizer”) and Zhejiang Xianju Pharmaceutical Co., LTD (“Xianju”),
for our supply of T-undecanoate (“TU”), the API of JATENZO. Because there are only a limited number of TU suppliers
in the world, if either of these parties ceases to provide us with TU or materially reduces the amount of TU they can provide us with,
including below the minimum supply obligations in the case of our agreement with Pfizer, we may be unable to procure sufficient amounts
of TU on commercially favorable terms, or may not be able to obtain it in a timely manner. Furthermore, the limited number of suppliers
of TU may provide such companies with greater opportunity to raise their prices. Any increase in price for TU will likely reduce our gross
margins.
We depend on Catalent for the supply of
the softgel capsules for JATENZO and the termination of our agreement with Catalent would hurt our business.
Our JATENZO softgel capsules
are manufactured by Catalent Pharma Solutions, LLC (“Catalent”) pursuant to an exclusive manufacturing agreement between
Catalent and us that we entered into on July 23, 2009 and subsequently amended in October 2012, November 2012 and June 2017.
Pursuant to the terms of the manufacturing agreement, Catalent will be our sole supplier of JATENZO softgel capsules on a worldwide basis.
As part of our manufacturing agreement, Catalent has also granted to us a nonexclusive royalty-free license to certain of its proprietary
technology to the extent it is relevant to the manufacture, use or sale of JATENZO.
Reliance on a third-party manufacturer
involves risks to which we would not be subject if we manufactured JATENZO ourselves, including reliance on the third party for regulatory
compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond
our control and the possibility of termination or nonrenewal of the agreement by the third party at a time that is costly or damaging
to us. The FDA and other regulatory authorities require that JATENZO be manufactured according to current Good Manufacturing Practice
(“cGMP”), and we are ultimately responsible for ensuring JATENZO is manufactured in accordance with cGMP even though
we use contract manufacturers. Any failure by our third-party manufacturers to comply with cGMP could be the basis for action by
the FDA to withdraw approvals previously granted to us and for other regulatory action.
The Catalent manufacturing
agreement remains in effect by its terms until March 2025 but is automatically renewable for additional two-year terms if not
terminated one year prior to the initial termination date or any renewal period. Catalent can terminate the manufacturing agreement at
any time provided that they give us 24 months’ written notice of their decision to terminate. We are required to purchase a
minimum quantity of JATENZO softgel capsules. We are also required to pay to Catalent an annual commercial occupancy fee and an annual
product maintenance fee effective January 1 of the year that commercial manufacture of JATENZO occurs.
If Catalent terminates the
manufacturing agreement, we would need to identify a new supplier of JATENZO softgel capsules, which could result in an interruption of
the continued supply of JATENZO. In addition, we would lose the benefits of and rights to use Catalent’s proprietary technology
and, to the extent that we were relying upon this technology, would need to negotiate for separate rights to it. The FDA likely will require
the facilities of any new manufacturer of JATENZO to pass inspection before approving the change to such new manufacturer and would also
potentially require that we run additional studies if we change the softgel formulation of JATENZO. Although it is likely that clinical
studies will not be necessary, there is no guarantee of this. Accordingly, the termination of the Catalent manufacturing agreement could
have a material adverse effect on our business, results of operations, financial condition and prospects.
If we do not establish successful partnership
or co-promotion arrangements, our commercialization plans for JATENZO may be impacted.
We have established our own
commercial organization in the United States, however, in order to achieve deeper penetration into the PCP market in the United States;
we expect to enter into marketing or co-promotion arrangements with established pharmaceutical companies that have a PCP-focused sales
force or contract with an outside sales force. Additionally, we expect to consider strategic partnerships to assist in obtaining marketing
approval for and commercialization of JATENZO outside of the United States. We will face significant competition in seeking appropriate
partners and these partnership or co-promotion arrangements are complex and time-consuming to negotiate and document. We may
not be able to negotiate partnership or co-promotion arrangements on acceptable terms, or at all. If we are unable to enter into
partnership or co-promotion arrangements, we may have to curtail or delay commercialization of JATENZO in certain geographies, reduce
the scope of our sales or marketing activities, reduce the scope of our commercialization plans, or increase our expenditures and undertake
commercialization activities at our own expense. If we elect to increase our expenditures to fund commercialization activities outside
of the United States on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms,
or at all.
If we enter into a partnership or co-promotion
arrangement and a partner terminates or fails to perform its obligations under an agreement with us, the commercialization of JATENZO
could be delayed or negatively impacted.
If we enter into partnership
or co-promotion arrangements and any of our partners does not devote sufficient time and resources for a partnership or co-promotion arrangement
with us, we may not realize the potential commercial benefits of the arrangement. In addition, if any future partner were to breach or
terminate its arrangements with us, the commercialization of JATENZO in countries outside the United States could be delayed, curtailed
or terminated because we may not have sufficient financial resources or capabilities to continue commercialization of JATENZO on our own
in such locations.
Competition may negatively
impact a partner’s focus on and commitment to JATENZO and, as a result, could delay or otherwise negatively affect the commercialization
of JATENZO outside of the United States or in the general PCP market in the United States. If future partners fail to effectively
commercialize JATENZO for any of these reasons, our sales of JATENZO may be limited.
The ongoing COVID-19 pandemic is having,
and is expected to have, an adverse impact on our business, financial condition and results of operations, including our commercial operations
and sales.
The ongoing COVID-19 pandemic
may continue to have a negative impact on the global economy which could impact our business and results of operations. The continued
spread of COVID-19 could adversely impact our operations. In response to the spread of COVID-19, we have taken temporary precautionary
measures intended to help minimize the risk of the virus to our employees, including encouraging all employees to work remotely. Notwithstanding
these measures, the COVID-19 pandemic could affect the health and availability of our workforce as well as those of the third parties
we rely on taking similar measures.
Business interruptions from
the current COVID-19, or a future, pandemic may also adversely impact our commercial operations, including:
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adversely impacting the third parties we solely rely on to
sufficiently manufacture JATENZO in quantities we require including the availability of raw materials and other supply chain requirements;
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decreasing the demand for JATENZO; and
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the ability of our sales representatives to reach healthcare
customers.
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The full extent to which the
COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future
developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19,
the actions taken to contain it or treat its impact and the economic impact on local, regional, and national markets.
Risk Related to Development and Regulation
We may not be able to gain market acceptance
for JATENZO.
The commercial success of JATENZO
will depend upon the acceptance of the product by the medical community, including physicians, patients and healthcare payors.
Some physicians and patients
may determine that the benefits of JATENZO as a T-replacement therapy in adult males do not outweigh the risks, including those risks
set forth in the boxed warning for JATENZO. The boxed warning for JATENZO warns physicians that JATENZO can cause blood pressure increases
that can increase the risk of major adverse cardiovascular events, including non-fatal myocardial infarction, non-fatal stroke
and cardiovascular death. Physicians are recommended to consider the patient’s baseline cardiovascular risk and ensure blood pressure
is adequately controlled. Furthermore, physicians are encouraged to monitor for and treat new-onset hypertension or exacerbations
of pre-existing hypertension.
Physicians may be hesitant
to prescribe JATENZO, and patients may be hesitant to take JATENZO, because of the boxed warning. These potential risks may make it more
difficult for a patient to decide to begin JATENZO or to stay on JATENZO.
The degree of market acceptance
of JATENZO will also depend on a number of other factors, including:
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physicians’ views as to the scope of the approved indication
and limitations on use and warnings and precautions contained in JATENZO’s approved labeling;
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the availability, efficacy and safety of competitive therapies;
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pricing and the perception of physicians and payors as to
cost effectiveness;
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the existence of sufficient third-party coverage or
reimbursement; and
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the effectiveness of our sales, marketing and distribution
strategies.
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If we are not able to achieve
a high degree of market acceptance of JATENZO for T-replacement therapy, we may not be able to achieve our revenue goals or other
financial goals or to achieve profitability or cash-flow break-even in the time periods we expect, or at all.
The FDA and other regulatory agencies actively
enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found to have improperly promoted off-label uses,
we may become subject to significant liability.
The FDA and other regulatory
agencies strictly regulate the promotional claims that may be made about prescription products, such as JATENZO. In particular, a product
may not be promoted for uses that are not approved by the FDA or other regulatory agencies as reflected in the product’s approved
labeling. For instance, we received marketing approval for JATENZO for the treatment of adult men with hypogonadism due to certain medical
conditions. Physicians may in their practice prescribe JATENZO to their patients in a manner that is inconsistent with the approved labeling.
If we are found to have promoted such off-label uses, we may become subject to public advisory or enforcement letters, reputational
damage, and significant liability. The U.S. federal government has levied large civil and criminal fines against companies for alleged
improper promotion under both the federal Anti-kickback Statute and False Claims Act and has enjoined several companies from engaging
in off-label promotion. The FDA has also requested that companies enter into consent decrees, corporate integrity agreements or permanent
injunctions under which specified promotional conduct is changed or curtailed. If we cannot successfully manage the promotion of JATENZO
to ensure it remains consistent with its approved labeling, we could become subject to significant liability, which would materially adversely
affect our business and financial condition.
Even though we have obtained marketing approval
for JATENZO in the United States, physicians and patients using other T-replacement therapies may choose not to switch to our product.
Physicians often show a reluctance
to switch their patients from existing drug products even when new and potentially more effective and convenient treatments enter the
market. Patients also often acclimate to the brand or type of drug product that they are currently taking and do not want to switch unless
their physician recommends switching products or they are required to switch drug treatments due to lack of coverage and reimbursement
for existing drug treatments. In addition, men who are currently tolerating their current T-replacement therapy may not want to switch
to a new product, including our product, particularly given the boxed warning, which includes warnings relating to blood pressure increases,
and a limitation of use in the labeling that states that the safety and efficacy of JATENZO in males less than 18 years has not been
established. The existence of either or both of physician or patient reluctance in switching to JATENZO, would depress demand for JATENZO
and compromise our ability to successfully commercialize it.
We may still face future development and
regulatory difficulties, and we will be subject to post-marketing regulatory requirements.
Even though we have received
marketing approval, we continue to be subject to conducting required postmarketing studies and clinical trials, and regulatory authorities
may still impose significant restrictions on JATENZO’s indicated uses or marketing or impose further ongoing requirements for potentially
costly post-approval studies. If we or a regulatory agency discover previously unknown problems with JATENZO, such as adverse events
of unanticipated severity or frequency, a regulatory agency may impose restrictions on JATENZO including withdrawal of marketing approval.
JATENZO is also subject to ongoing FDA requirements governing the labeling, packaging, storage, advertising and promotion of the product
and recordkeeping and submission of safety and other post-market information. The FDA has significant post-marketing authority,
including, for example, the authority to require labeling changes based on new safety information and to require post-marketing studies
or clinical trials to evaluate serious safety risks related to the use of a drug. The FDA also has the authority to require the submission
of a risk evaluation and mitigation strategy (“REMS”), either as part of a New Drug Application (an “NDA”)
or after the drug has been approved should FDA become aware of new safety information about a drug and determine that a REMS is necessary
to ensure that the benefits of the drug outweigh its risks. A REMS could, for example, limit prescribing to certain physicians or medical
centers that have undergone specialized training, limit treatment to patients who meet certain safe-use criteria or require treated
patients to enroll in a registry. Any REMS required by the FDA may lead to increased costs to assure compliance with new post-approval regulatory
requirements and potential requirements or restrictions on the sale of approved products, all of which could lead to lower sales volume
and revenue.
Manufacturers of drug products
and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance
with cGMP and other regulations. In addition, if we or a regulatory agency discover previously unknown problems with the facility where
JATENZO is manufactured, including the facility where Catalent manufactures JATENZO, a regulatory agency may impose restrictions on JATENZO,
the manufacturer or us, including requiring withdrawal of JATENZO from the market or suspension of manufacturing. If we or the operators
of the manufacturing facilities for JATENZO fail to comply with applicable regulatory requirements, a regulatory agency may:
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issue warning or untitled letters or notice of violation
letters;
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seek an injunction or impose civil or criminal penalties
or monetary fines;
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suspend or withdraw marketing approval;
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suspend any ongoing clinical trials;
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refuse to approve pending applications or supplements to
applications submitted by us;
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suspend or impose restrictions on operations, including costly
new manufacturing requirements; or
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seize or detain products, refuse to permit the import or
export of products, or request that we initiate a product recall.
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If we become subject to adverse
regulatory action, the occurrence of such an event or penalty described above may inhibit or diminish our ability to commercialize JATENZO
and generate revenue.
Even though we have received marketing approval
for JATENZO in the United States, we may never receive marketing approval outside of the United States, or receive pricing and
reimbursement outside the United States at acceptable levels.
We may never receive, regulatory
approval to market JATENZO or other future product candidates outside of the United States or in any particular country or region,
including in the European Union (“EU”). In order to market any product outside of the United States, we must establish
and comply with the numerous and varying safety, efficacy and other regulatory requirements of other countries. Approval procedures vary
among countries and can involve additional non-clinical studies or clinical trials, additional work related to manufacturing and
analytical testing on controls, and additional administrative review periods. The time required to obtain approvals in other countries
might differ from that required to obtain FDA approval. Marketing approval in one country does not ensure marketing approval in another,
but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in other countries.
The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the United States
as well as other risks. In particular, in many countries outside of the United States, products must receive pricing and reimbursement
approval before the product can be commercialized. Obtaining this approval may require additional studies and data, and can result in
substantial delays in bringing products to market in such countries and such investment may not be justified from a business standpoint
given the market opportunity or level of required investment. For example, we continue to assess the development and regulatory pathway
for JATENZO in the EU and our overall EU strategy in light of our overall portfolio and program priorities. Even if we generate the data
and information we believe may be sufficient to file a marketing authorization application for regulatory approval of JATENZO in a region
or country outside the United States, the relevant regulatory agency may find that we did not meet the requirements for approval,
or even if our application is approved, we may have significant post-approval obligations.
Even if we are able to successfully
develop JATENZO and obtain marketing approval in a country outside the United States, we may not be able to obtain pricing and reimbursement
approvals in such country at acceptable levels or at all, and any pricing and reimbursement approval we may obtain may be subject to onerous
restrictions such as caps or other hurdles or restrictions on reimbursement. Failure to obtain marketing and pricing approval in countries
outside the United States without onerous restrictions or limitations related to pricing, or any delay or other setback in obtaining
such approval, would impair our ability to market our product candidates successfully or at all in such foreign markets. Any such impairment
would reduce the size of our potential market or revenue potential, which could have a material adverse impact on our business, results
of operations and prospects.
Any setback or delay in obtaining
regulatory approval for our product candidates in a country or region outside the United States where we have decided it makes business
sense to proceed or in our ability to commence marketing of our products, if approved, may have a material adverse effect on our business
and prospects.
Recent federal legislation may increase
pressure to reduce prices of certain pharmaceutical products paid for by Medicare, which could materially adversely affect our revenue
and our results of operations.
In the United States,
the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “MMA”), changed the way Medicare covers
and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new
reimbursement methodology based on average sales prices for physician-administered drugs. In addition, this legislation provided
authority for limiting the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion
of federal coverage of drug products, we expect that there will be additional pressure to reduce costs. These cost reduction initiatives
and other provisions of this legislation could decrease the scope of coverage and the price that we receive for any approved products
and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow
Medicare coverage policies and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results
from the MMA may cause a similar reduction in payments from private payors.
In March 2010, Patient
Protection and Affordable Care Act (“ACA”) became law in the United States. The goal of the ACA is to reduce the
cost of healthcare and substantially change the way healthcare is financed by both governmental and private insurers. The ACA, among other
things, increases minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program
to individuals enrolled in Medicaid managed care organizations, establishes annual fees and taxes on manufacturers of certain branded
prescription drugs and biologic products, and creates a new Medicare Part D coverage gap discount program, in which manufacturers must
agree to offer 50% (increased to 70%, effective January 1, 2019, by the Bipartisan Budget Act of 2018) point-of-sale discounts
off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period as a condition for the manufacturer’s
outpatient drugs to be covered under Medicare Part D.
While the U.S. Congress (“Congress”)
has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA, including decreasing the
tax-based shared responsibility payment imposed on certain individuals who fail to maintain qualifying health coverage for all or
part of a year, which is commonly referred to as the “individual mandate,” to $0 effective January 1, 2019 as part of
the TCJA. On December 14, 2018, a U.S. District Court judge in the Northern District of Texas ruled that the individual mandate portion
of the ACA is an essential and inseverable feature of the ACA, and therefore because the mandate was effectively nullified, the remaining
provisions of the ACA are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the Fifth Circuit held the individual
mandate is unconstitutional, but remanded the case to the lower court to reconsider its earlier invalidation of the full law. In March 2020,
the U.S. Supreme Court agreed to hear this case and oral arguments were held on November 10, 2020. The Supreme Court’s decision
in this case is forthcoming. Pending review, the ACA remains in effect, but it is unclear at this time what effect the latest ruling will
have on the ACA long term. Litigation and legislation related to the ACA are likely to continue, with unpredictable and uncertain results.
We will continue to evaluate the effect that the ACA and its possible repeal and replacement has on our business. It is unclear how this
decision and any subsequent appeals and other efforts to repeal and replace the ACA will impact the ACA and our business.
In addition, other legislative
changes have been proposed and adopted in the United States since the ACA was enacted. On August 2, 2011, the Budget Control
Act of 2011 created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending
a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering
the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to
providers of up to 2% per fiscal year, which went into effect on April 1, 2013 and will remain in effect through 2030 unless additional
Congressional action is taken. Pursuant to the CARES Act, as well as subsequent legislation, these reductions have been suspended from
May 1, 2020 through March 31, 2021 due to the COVID-19 pandemic. Proposed legislation, if passed, would extend this suspension
until the end of the pandemic.
Further, some of the provisions
of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. Since
January 2017, President Trump signed two Executive Orders designed to delay the implementation of certain provisions of the ACA or
otherwise circumvent some of the requirements for health insurance mandated by the ACA. One such Executive Order directed federal agencies
with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision
of the ACA that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers,
health insurers, or manufacturers of pharmaceuticals or medical devices. The second Executive Order terminates the cost-sharing subsidies
that reimburse insurers under the ACA. The Trump administration concluded that cost-sharing reduction (“CSR”)
payments to insurance companies required under the ACA have not received necessary appropriations from Congress and announced that it
will discontinue these payments immediately until those appropriations are made. The loss of the CSR payments is expected to increase
premiums on certain policies issued by qualified health plans under the ACA. Several state Attorneys General filed suit to stop the administration
from terminating the subsidies, but their request for a restraining order was denied by a federal judge in California on October 25,
2017. On August 14, 2020, the U.S. Court of Appeals for the Federal Circuit ruled in two separate cases that the federal government
is liable for the full amount of unpaid CSRs for the years preceding and including 2017. For CSR claims made by health insurance companies
for years 2018 and later, further litigation will be required to determine the amounts due, if any. Further, on June 14, 2018, the
U.S. Court of Appeals for the Federal Circuit ruled that the federal government was not required to pay more than $12 billion in
ACA risk corridor payments to third-party payors who argued were owed to them. This decision was appealed to the U.S. Supreme Court,
which on April 27, 2020, reversed the U.S. Court of Appeals for the Federal Circuit’s decision and remanded the case to the
U.S. Court of Federal Claims, concluding the government has an obligation to pay these risk corridor payments under the relevant formula.
To date, at least $6 billion has been paid out to health plans and insurers, and follow-up class action and other litigation
is pending. The viability of the federal and state marketplaces and subsequent impacts on providers, and potentially our business, are
not yet known. The Bipartisan Health Care Stabilization Act of 2017 as well as the follow-on Bipartisan Health Care Stabilization
Act of 2018 were introduced to appropriate funds to stabilize CSR payments; however, the future of this effort is unclear.
There has been increasing legislative
and enforcement interest in the United States with respect to drug pricing practices. Specifically, there have been several recent
U.S. Congressional inquiries and proposed federal and state legislation designed to, among other things, bring more transparency to drug
pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs,
and reform government program reimbursement methodologies for drugs. The Trump administration’s budget proposal for fiscal year
2021 includes a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower
out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. On March 10,
2020, the Trump administration sent “principles” for drug pricing to Congress, calling for legislation that would, among other
things, cap Medicare Part D beneficiary out-of-pocket pharmacy expenses, provide an option to cap Medicare Part D beneficiary monthly
out-of-pocket expenses, and place limits on pharmaceutical price increases. Additionally, the Trump administration previously released
a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase
manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the
list price of their products and reduce the out-of-pocket costs of drug products paid by consumers. The U.S. Department of Health
and Human Services (“HHS”) has already started the process of soliciting feedback on some of these measures and, at
the same time, is immediately implementing others under its existing authority. For example, in May 2019, the U.S. Centers for Medicare &
Medicaid Services (“CMS”) issued a final rule to allow Medicare Advantage Plans the option of using step therapy for
Part B drugs beginning January 1, 2020. This final rule codified CMS’s policy change that was effective January 1, 2019.
On December 27, 2018, the District Court for the District of Columbia invalidated a reimbursement formula change under the 340B drug
pricing program, and CMS subsequently altered the Fiscal Years 2019 and 2018 reimbursement formula on specified covered outpatient drugs
(“SCODs”). The court ruled this change was not an “adjustment” which was within the Secretary’s discretion
to make but was instead a fundamental change in the reimbursement calculation. However, most recently, on July 31, 2020, the U.S.
Court of Appeals for the District of Columbia Circuit overturned the district court’s decision and found that the changes were within
the Secretary’s authority. On September 14, 2020, the plaintiffs-appellees filed a Petition for Rehearing En Banc (i.e.,
before the full court), but was denied on October 16, 2020. The 340B drug pricing program imposes ceilings on prices that drug manufacturers
can charge for medications sold to certain health care facilities. It is unclear how these developments could affect covered hospitals
who might purchase our future products and affect the rates we may charge such facilities for our approved products in the future, if
any.
Further, the Trump administration
previously released a plan to lower drug prices and reduce out of pocket costs of drugs that contained proposals to increase drug manufacturer
competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price
of their products, and reduce the out-of-pocket costs of drug products paid by consumers. On July 24, 2020 and September 13,
2020, President Trump announced several executive orders related to prescription drug pricing that seek to implement several of the administration’s
proposals. The FDA also released a final rule which went into effect on November 30, 2020, providing guidance for states to build
and submit importation plans for drugs from Canada. Under the final rule, States and Indian Tribes, and in certain future circumstances
pharmacists and wholesalers, may submit importation program proposals to the FDA for review and authorization. On September 25, 2020,
CMS stated drugs imported by States under this rule will not be eligible for federal rebates under Section 1927 of the Social Security
Act and manufacturers would not report these drugs for “best price” or Average Manufacturer Price purposes. Since these drugs
are not considered covered outpatient drugs, CMS further stated it will not publish a National Average Drug Acquisition Cost for these
drugs. Separately, the FDA also issued a final guidance document outlining a pathway for manufacturers to obtain an additional National
Drug Code (“NDC”) for an FDA-approved drug that was originally intended to be marketed in a foreign country and
that was authorized for sale in that foreign country.
Further, on November 20,
2020, CMS issued an Interim Final Rule implementing the Most Favored Nation (“MFN”) Model under which Medicare Part
B reimbursement rates will be calculated for certain drugs and biologicals based on the lowest price drug manufacturers receive in Organization
for Economic Cooperation and Development countries with a similar gross domestic product per capita. The MFN Model regulations mandate
participation by identified Part B providers and will apply in all U.S. states and territories for a seven-year period beginning
January 1, 2021 and ending December 31, 2027. The Interim Final Rule has not been implemented and is subject to revision and
challenge. Additionally, on November 20, 2020, HHS finalized a regulation removing safe harbor protection for price reductions from
pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction
is required by law. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor
for certain fixed fee arrangements between pharmacy benefit managers and manufacturers. HHS has already started the process of soliciting
feedback on some of these measures and, at the same time, is immediately implementing others under its existing authority. Although a
number of these measures and other proposed measures will require authorization through additional legislation to become effective, and
the Biden administration may change or reverse executive actions taken by the previous administration, Congress has indicated that it
will continue to seek new legislative measures to control drug costs.
At the state level, legislatures
have increasingly passed legislation and implemented regulations designed to control pharmaceutical product and medical device pricing,
including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure
and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition,
regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products
and medical devices to purchase and which suppliers will be included in their prescription drug and other healthcare programs.
We cannot predict the reform
initiatives that may be adopted in the future or whether initiatives that have been adopted will be repealed or modified. It is unclear
how the Biden administration will prioritize and execute initiatives to contain healthcare costs. The continuing efforts of the government,
insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely
affect:
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the demand for our products and any products for which we
may obtain regulatory approval;
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our ability to set a price that we believe is fair for our
products;
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our ability to obtain coverage and reimbursement approval
for a product;
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our ability to generate revenues and achieve or maintain
profitability; and
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the level of taxes that we are required to pay.
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We expect that changes and
challenges to the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions
in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies, and additional downward pressure
on the price that we receive for our products and any future approved product.
Testosterone (T) is a Schedule III
(non-narcotic) substance under the Controlled Substances Act and any failure to comply with this Act or its state equivalents would have
a negative impact on our business.
Testosterone (T) is regulated
under the federal Controlled Substances Act of 1970 (“CSA”) as a Schedule III (non-narcotic) substance. The CSA and
regulations promulgated by the Drug Enforcement Administration (“DEA”) classify certain substances with a potential
for abuse, known as “controlled substances” in either Schedule I, II, III, IV or V, with Schedule I substances considered
to present the highest risk of abuse and dependence and Schedule V substances the lowest risk. The CSA establishes a closed chain of distribution
for these drugs, and entities or individuals handling controlled substances are subject to DEA regulations relating to manufacturing,
distribution, dispensing, importation and exportation. These regulations include requirements for registration, security, storage, recordkeeping
and reporting. For example, facilities must maintain certain physical security for storing controlled substances and Schedule III drugs
can only be prescribed by an authorized practitioner registered with the DEA and may only be refilled five times within a six-month period
from the date of the original prescription.
Entities must register annually
with the DEA to manufacture, distribute, import and export controlled substances, and entities prescribing, dispensing or conducting research
with controlled substances must register every three years. In addition, the DEA requires entities handling controlled substances to maintain
records and file reports related to transactions involving controlled substances follow specific labeling and packaging requirements,
and provide appropriate security measures to control against diversion of controlled substances. Failure to follow these requirements
can lead to significant civil and criminal penalties and administrative action to revoke a DEA registration. Individual states also have
established controlled substances laws. Though state controlled substances laws and regulations often mirror federal law, because the
states are separate jurisdictions, they may schedule products separately. While some states automatically schedule a drug upon scheduling
by DEA, in other states, scheduling requires a rulemaking or legislative action, which could delay commercialization in every state.
Because of the abuse potential,
products containing controlled substances may generate public controversy. As a result, reports of diversion or abuse of these products
may lead to marketing approvals withdrawn. Moreover, political pressures and adverse publicity could lead to delays in, and increased
expenses for, and limit or restrict, the introduction and marketing of JATENZO.
If coverage and reimbursement for JATENZO
are limited, it may be difficult for us to profitably sell JATENZO.
Market acceptance and sales
of JATENZO will depend, in part, on coverage and reimbursement policies and may be affected by healthcare reform measures. Government
authorities and other third-party payors, such as private health insurers and health maintenance organizations, determine which medications
they will cover and establish reimbursement levels. Cost containment is a primary concern in the U.S. healthcare industry and elsewhere.
Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement
for particular medications. We cannot be sure that coverage and reimbursement will be available for JATENZO and, if reimbursement is available,
what the level of such reimbursement will be. Limitations on coverage and reimbursement may impact the demand for, or the price of, JATENZO.
If coverage is not available or reimbursement is available only at limited levels, we may not be able to successfully commercialize JATENZO.
There may be significant delays
in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the indications for which the
drug is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not
imply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale
and distribution expenses. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and
may only be temporary. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may
be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net
prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by
any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the
United States. Our inability to promptly obtain coverage and profitable reimbursement rates from both government-funded and
private payors for JATENZO could hinder our ability to recoup our investment.
The regulations that govern
marketing approvals, coverage, and reimbursement for new drug products vary widely from country to country. In some foreign countries,
particularly Canada and European countries, the pricing of prescription pharmaceuticals is subject to strict governmental control. In
these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory
approval and product launch. In many countries, the pricing review period begins after marketing or product licensing approval is granted.
In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval
is granted. To obtain favorable coverage and reimbursement for the indications sought or pricing approval in some countries, we may be
required to conduct a clinical trial that compares the cost-effectiveness of JATENZO to other available therapies. If coverage for
JATENZO is unavailable in any country in which coverage and reimbursement are sought, or reimbursement for JATENZO is limited in scope
or amount, or if pricing is set at unsatisfactory levels, our ability to generate revenue from JATENZO will be diminished.
There can be no assurance that
JATENZO will be considered medically reasonable and necessary for a specific indication, that it will be considered cost-effective by
third-party payors, that coverage and an adequate level of reimbursement will be available, or that third-party payors’
reimbursement policies will not adversely affect our ability to sell JATENZO profitably.
Our current and future relationships with
customers and third-party payors in the United States and elsewhere may be subject, directly or indirectly, to applicable anti-kickback,
fraud and abuse, false claims, transparency, health information privacy and security, and other healthcare laws and regulations, which
could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, administrative burdens, and diminished
profits and future earnings.
Healthcare providers, physicians
and third-party payors in the United States and elsewhere will play a primary role in the recommendation and prescription of
JATENZO. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other
healthcare laws and regulations, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act,
which may constrain the business or financial arrangements and relationships through which we market, sell and distribute JATENZO. In
addition, we may be subject to transparency laws and patient privacy regulation by U.S. federal and state governments and by governments
in foreign jurisdictions in which we conduct our business. Applicable federal, state, and foreign healthcare laws and regulations that
may affect our ability to operate include:
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The federal anti-kickback statute, which prohibits,
among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly
(including any kickback, bribe or certain rebate), in cash or in kind, to induce or reward either the referral of an individual for,
or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such
as Medicare and Medicaid. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one
hand, and prescribers, purchasers and formulary managers, among others, on the other. A person or entity does not need to have actual
knowledge of the statute or specific intent to violate it in order to have committed a violation.
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The federal False Claims Act, which imposes criminal and
civil penalties, including those from civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting,
or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to
avoid, decrease, or conceal an obligation to pay money to the federal government. For example, pharmaceutical companies have been prosecuted
under the False Claims Act in connection with their alleged off-label promotion of drugs, purportedly concealing price concessions
in the pricing information submitted to the government for government price reporting purposes, and allegedly providing free product
to customers with the expectation that the customers would bill federal health care programs for the product. In addition, the government
may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes
a false or fraudulent claim for purposes of the False Claims Act.
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The federal Health Insurance Portability and Accountability
Act of 1996 (“HIPAA”), which imposes criminal and civil liability for executing a scheme to defraud any healthcare
benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security
and transmission of individually identifiable health information. Similar to the federal anti-kickback statute, a person or entity
does not need to have actual knowledge of the healthcare fraud statute implemented under HIPAA or specific intent to violate it in order
to have committed a violation.
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HIPAA, as amended by the Health Information Technology for
Economic and Clinical Health Act (“HITECH”) and its implementing regulations, which imposes privacy, security and
breach reporting obligations, including mandatory contractual terms, with respect to safeguarding the privacy and security of individually
identifiable health information upon covered entities subject to the rule, such as health plans, healthcare clearinghouses and healthcare
providers and their respective business associates and independent contractors that perform certain services for them that involve the
use or disclosure of individually identifiable health information on their behalf. HITECH also created new tiers of civil monetary penalties,
amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority
to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and
costs associated with pursuing federal civil actions.
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The federal false statements statute, which prohibits knowingly
and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery
of or payment for healthcare benefits, items or services.
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The federal transparency requirements, sometimes referred
to as the “Sunshine Act”, under the Patient Protection and ACA, which require manufacturers of drugs, devices, biologics
and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report to HHS
information related to physician payments and other transfers of value made to physicians (defined to include doctors, dentists, optometrists,
podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate
family members. Effective January 1, 2022, these reporting obligations will extend to include transfers of value made to certain
non-physician providers such as physician assistants and nurse practitioners.
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Analogous state laws and regulations, such as state anti-kickback and
false claims laws and transparency laws, which may apply to sales or marketing arrangements and claims involving healthcare items or
services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical
companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated
by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other
healthcare providers or marketing expenditures and drug pricing.
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Various federal and state health information and data protection
laws and regulations, and similar types of laws outside the United States, which govern the collection, use, disclosure and protection
of health-related and other personal information by us and our collaborators.
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Efforts to ensure that our
business arrangements with third parties will comply with applicable healthcare laws and regulations could be costly. It is possible that
governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case
law interpreting applicable fraud and abuse or other healthcare laws and regulations. If our operations, including anticipated activities
to be conducted by our sales team, are found to be in violation of any of these laws or any other governmental regulations that may apply
to us, we may be subject to significant civil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment,
exclusion from participation in government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring
of our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found not
to be in compliance with applicable laws, that person or entity may be subject to criminal, civil or administrative sanctions, including
exclusions from participation in government funded healthcare programs.
We could be adversely affected by violations
of the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other worldwide anti-bribery laws.
We are subject to the FCPA,
which prohibits companies and their intermediaries from making payments in violation of law to non-U.S. government officials for the purpose
of obtaining or retaining business or securing any other improper advantage. We have an ongoing relationship with Xianju, a non-U.S. company,
as a third-party supplier of TU and we may commercialize JATENZO outside of the United States in countries where we obtain marketing
approval either alone or under a partnership or co-promotion arrangement with a third party. Our significant reliance on a foreign
supply of TU demands a high degree of vigilance in preventing our employees and consultants from participation in corrupt activity, because
this supplier could be deemed our agent, and we could be held responsible for its actions. The FCPA and similar anti-bribery laws
to which we may be subject are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required
in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation
thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management
distraction and involve significant costs and expenses, including legal fees. We could also suffer severe penalties, including criminal
and civil penalties, disgorgement, and other remedial measures.
Risks Related to Our Industry and Competition
Our market is subject to intense competition.
If we are unable to compete effectively, our opportunity to generate revenue from the sale of JATENZO will be impaired.
The T-replacement therapies
market is highly competitive and dominated by the sale of T-gels and injectable forms of T, which accounted for 95% of all prescriptions
written in the United States for T-replacement therapies in 2020. Our success will depend, in part, on our ability to obtain
and retain an appreciable share of the market. Potential competitors in North America, Europe and elsewhere include major pharmaceutical
companies, specialty pharmaceutical companies, biotechnology firms and other drug discovery organizations. JATENZO or its use may infringe
competitors’ patents, and if any patent infringement suit against us is successful, it could materially impact commercialization
of JATENZO. Competitors may attack our patent portfolio, see Lipocine’s interferences under “Business— Legal Proceedings”
and in the “—Risks Related to Our Intellectual Property” subsection below. Other pharmaceutical companies may
develop oral T-replacement therapies that would compete with JATENZO that do not infringe the claims of our pending patent applications
or other proprietary rights, and these therapies may have competitive advantages over JATENZO. For example, because T and TU are not patented
compounds and are commercially available to third parties, it is possible that competitors may design methods of T or TU administration
that would be outside the scope of the claims of our issued patents and patent applications. This would enable their products to compete
with JATENZO.
T-replacement therapies
currently on the market that would compete with JATENZO, include the following:
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T-gels, such as AndroGel, marketed by AbbVie Inc. (“AbbVie”);
Testim®, marketed by Endo Pharmaceutical (“Endo”); and Fortesta®, marketed by Endo in
the United States;
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transdermal patches, such as Androderm®, marketed
by Allergan Sales, LLC, a subsidiary of AbbVie; buccal patches, such as Striant®, marketed by Endo;
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implanted subcutaneous pellets, such as Testopel®,
marketed by Endo;
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Aveed, a long-acting T-injectable marketed by Endo;
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Xyosted, a sub-cutaneous weekly auto-injector T-therapy marketed
by Antares Pharma, Inc.; and
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Natesto®, an intranasal T-therapy, marketed
by Acerus Pharmaceuticals.
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Several other pharmaceutical
companies have T-replacement therapies, including oral formulations, and other therapies that are either pending approval of an NDA
or in clinical development, which may be approved for marketing in the United States or outside of the United States. Based
on publicly available information, we believe that current therapies in development that would be competitive with JATENZO include:
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TLANDO®, an oral TU formulation developed
by Lipocine, and tentatively approved by the FDA pending the expiration on March 27, 2022 of JATENZO’s three-year Hatch-Waxman exclusivity;
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KYZATREX®, an oral TU formulation as a T-replacement therapy
being developed by Marius Pharmaceuticals with a Prescription Drug User Fee Act (“PDUFA”) date of October 31,
2021. If the FDA rules favorably on KYZATREX, tentative approval would be granted pending the expiration on March 27, 2022 of JATENZO’s
three-year Hatch-Waxman exclusivity;
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a once weekly aromatase inhibitor, for first-line therapy
for the treatment of obese men with hypogonadotropic hypogonadism, which has completed its Phase 2b trials, currently being developed
by Mereo BioPharma Group Ltd; and
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an oral bio-identical testosterone, which has completed
its Phase 2 clinical studies, being developed by TesoRx LLC.
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In addition, Andriol, an oral
TU formulation, has been marketed by Merck & Co, Inc. in Europe or other international markets since the early 1970s, but is
not nor has it ever been approved in the United States.
Many of our potential competitors
have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and
development of drug candidates, obtaining FDA and other marketing approvals of products and the commercialization of those products. Accordingly,
our competitors may be more successful than we may be in obtaining FDA approval for drugs and achieving widespread market acceptance.
Our competitors’ drugs may be more effective, less expensive or more effectively marketed and sold than JATENZO and may render JATENZO
obsolete or non-competitive before we can recover the expenses of developing and commercializing it. We anticipate that we will face
intense and increasing competition as new drugs, both generic and branded, enter the market and advanced technologies become available.
Several companies have obtained approval
for Section 505(b)(2) NDAs that cite existing T-gel products as their listed drugs. The entrance of any generic T-gel into the market
might create downward pricing pressure on all T-replacement therapies and therefore could hurt our business.
Three Section 505(b)(2)
NDAs citing to approved T-gel products have been approved for marketing in the United States. Teva Pharmaceuticals USA (“Teva”)
and Perrigo Israel Pharmaceuticals Ltd (“Perrigo”) have obtained approval from the FDA to market T-gel products
in the United States that are versions of AndroGel 1%. In addition, Upsher-Smith Laboratories, Inc. (“Upsher-Smith”)
received approval to market its T-gel product, a version of Auxilium’s Testim 1%, in the United States. The entrance of
any generic T-gel into the market might cause downward pressure on the pricing of all T-replacement therapies, and which could
negatively affect the level of sales and price at which we can sell JATENZO.
Further, the Creating and Restoring
Equal Access to Equivalent Samples Act (“CREATES Act”) was enacted in 2019 requiring sponsors of approved NDAs to provide
sufficient quantities of product samples on commercially reasonable, market-based terms to entities developing generic drugs. The
law establishes a private right of action allowing developers to sue application holders that refuse to sell them product samples needed
to support their applications. If we are required to provide product samples or allocate additional resources to responding to such requests
or any legal challenges under this law, our business could be adversely impacted.
The introduction of generic
T-gels may also affect the reimbursement policies of government authorities and third-party payors, such as private health insurers
and health maintenance organizations. These organizations determine which medications they will pay for and establish reimbursement levels.
Cost containment is a primary concern in the U.S. healthcare industry and elsewhere. Government authorities and these third-party payors
have attempted to control costs by limiting coverage and the amount of reimbursement for branded medications when there is a generic version
available. If generic T-gels are available in the market, that may create an additional obstacle to the availability of coverage
and reimbursement for JATENZO or lead to reduction in the level of such reimbursement, and our ability to generate revenue could be compromised.
We face potential product liability exposure,
and, if claims are brought against us, we may incur substantial liability.
The use of JATENZO in past
clinical trials and the sale of JATENZO, expose us to the risk of product liability claims. Product liability claims might be brought
against us by patients, healthcare providers or others selling or otherwise coming into contact with JATENZO. If we cannot successfully
defend ourselves against product liability claims, we could incur substantial liabilities. In addition, regardless of merit or eventual
outcome, product liability claims may result in:
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substantial monetary awards to patients from our clinical
trials or other claimants;
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decreased demand for JATENZO;
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damage to our business reputation and exposure to adverse
publicity;
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increased FDA warnings on product labels;
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costs of related litigation;
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distraction of management’s attention from our primary
business;
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the inability to successfully commercialize JATENZO.
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We have obtained product liability
insurance coverage for commercial sales of JATENZO in the United States with a $10.0 million annual aggregate coverage limit.
However, our insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage
is becoming increasingly expensive, and, in the future, we may not be able to maintain or obtain insurance coverage at a reasonable cost
or in sufficient amounts to protect us against losses due to liability. On occasion, large judgments have been awarded in class action
lawsuits based on drugs that had side effects. The cost of any product liability litigation or other proceedings, even if resolved in
our favor, could be substantial. A product liability claim or series of claims brought against us could cause our stock price to decline
and, if we are unsuccessful in defending such a claim or claims and the resulting judgments exceed our insurance coverage, our financial
condition, business and prospects could be materially adversely impacted.
JATENZO is the only product we were commercializing.
If we fail to successfully commercialize JATENZO, we may need to acquire additional product candidates and our business may be impaired.
We have no other compounds
beyond JATENZO in clinical testing, pre-clinical testing, lead optimization or lead identification stages. If we fail to successfully
commercialize JATENZO as a T-replacement therapy, our ability to generate revenue will be impaired and we may need to develop other
sources of revenues. If this occurs, we may seek out opportunities to discover, develop, acquire or license additional promising product
candidates or drug compounds to expand our product candidate pipeline beyond JATENZO; however, this would constitute a significant change
in our strategy and would likely require substantial additional capital. We would also be exposed to numerous additional risks related
to our ability to identify, select and acquire the right product candidates and products on terms that are acceptable to us, and there
is no guarantee that we would be successful in these efforts.
Risks Related to Our Intellectual Property
If we are unable to obtain or protect intellectual
property rights related to JATENZO, we may not be able to compete effectively in our market.
We rely upon a combination
of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to JATENZO. The strength
of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent
applications that we own or in-license may fail to result in issued patents with claims that cover JATENZO in the United States
or in other foreign countries. If this were to occur, early generic competition could be expected against JATENZO. There is no assurance
that all of the potentially relevant prior art relating to our patents and patent applications has been found, which can invalidate a
patent or prevent a patent application from issuing as a patent. In particular, because the active pharmaceutical ingredient in JATENZO
has been on the market as an ingredient in separate products for many years, it is possible that these products have previously been used
off-label in such a manner that such prior usage would affect the validity of our patents or our ability to obtain patents based
on our patent applications. Even if patents do successfully issue, third parties may challenge their validity, enforceability or scope,
which may result in such patents being narrowed, invalidated, or not infringed. Furthermore, even if they are unchallenged, our patents
and patent applications may not adequately protect our intellectual property or prevent others from designing around our claims. If the
patent applications we hold with respect to JATENZO fail to issue, or if the breadth or strength of protection of our patent portfolio
is threatened, it could dissuade companies from partnering with us to commercialize JATENZO. We cannot offer any assurances about which,
if any, patents will issue or whether any issued patents will be found not invalid and not unenforceable or will go unthreatened by third
parties. For several of our patents, Lipocine suggested patent interferences, which can invalidate a patent; two interferences were decided
against us, another is declared and pending, several more were suggested, see below and see “— Legal Proceedings”
subsection below. Further, if we encounter delays in regulatory approvals, the period of time during which we could market JATENZO under
patent protection could be reduced. Since patent applications in the United States and most other countries are confidential for
a period of time after filing, and some remain so until issued, we cannot be certain that we were the first to file any patent application
related to JATENZO. Furthermore, if third parties have filed such patent applications, an interference proceeding in the United States
can be provoked by a third party or instituted by us to determine who was the first to invent any of the subject matter covered by the
patent claims of our applications. The outcome of an interference can invalidate one or both involved patents, and a license may be needed
to practice the claims of the prevailing patent. Such license may not be available on favorable terms.
In addition to the protection
afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not
patentable, processes for which patents are difficult to enforce and any other elements of our drug discovery and development processes
that involve proprietary know-how, information or technology that is not covered by patents. Although we expect all of our employees to
assign their inventions to us, and all of our employees, consultants, advisors and any third parties who have access to our proprietary
know-how, information or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements
have been duly executed or that our trade secrets and other confidential proprietary information will not be disclosed or that competitors
will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Further,
the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States
and Canada. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States
and abroad. If we are unable to prevent material disclosure of the non-patented intellectual property related to our technologies
to third parties, and there is no guarantee that we will have any such enforceable trade secret protection, we may not be able to establish
or maintain a competitive advantage in our market and our ability to achieve profitability could be impaired.
We may not be able to protect our intellectual
property rights throughout the world.
Filing, prosecuting and defending
patents on JATENZO in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some
countries outside the United States can be less extensive than those in the United States. Further, the laws of some foreign
countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. Consequently,
we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling
or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies
in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing
products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products
may compete with JATENZO and our patents or other intellectual property rights may not be effective or sufficient to prevent them from
competing. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States
and abroad. For example, if the issuance to us, in a given country, of a patent covering an invention is not followed by the issuance,
in other countries, of patents covering the same invention, or if any judicial interpretation of the validity, enforceability, or scope
of the claims in, or the written description or enablement in, a patent issued in one country is not similar to the interpretation given
to the corresponding patent issued in another country, our ability to protect our intellectual property in those countries may be limited.
Changes in either patent laws or in interpretations of patent laws in the United States and other countries may materially diminish
the value of our intellectual property or narrow the scope of our patent protection. If we are unable to prevent material disclosure of
the non-patented intellectual property related to our technologies to third parties, and there is no guarantee that we will have
any such enforceable trade secret protection, we may not be able to establish or maintain a competitive advantage in our market, which
could hurt our ability to successfully commercialize JATENZO.
Further, many companies have
encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems
of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual
property protection, particularly those relating to pharmaceutical products, which could make it difficult for us to stop the infringement
of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent
rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business,
could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could
provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies
awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world
may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
Third-party claims of intellectual property
infringement may prevent or delay our development and commercialization efforts.
Our commercial success depends
in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation,
both within and outside the United States, involving patent and other intellectual property rights in the pharmaceutical industries,
including patent infringement lawsuits, interferences, oppositions, and post-grant review, inter partes review and inter party
reexamination proceedings before the U.S. Patent and Trademark Office. Numerous U.S. and foreign issued patents and pending patent applications,
which are owned by third parties, exist in the fields in which we and our collaborators are commercializing JATENZO. As the biotechnology
and pharmaceutical industries expand and more patents are issued, the risk increases that JATENZO may be subject to claims of infringement
of the patent rights of third parties.
Third parties may assert that
we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with
claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of JATENZO. Because
patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued
patents that JATENZO may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies
infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing
process of JATENZO, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents
may be able to block our ability to commercialize JATENZO unless we obtain a license under the applicable patents, or until such patents
expire. Similarly, if any third-party patent were held by a court of competent jurisdiction to cover aspects of our formulations,
processes for manufacture or methods of use, including combination therapy, the holders of any such patent may be able to block our ability
to develop and commercialize JATENZO unless we obtain a license or until such patent expires. In either case, such a license may not be
available on commercially reasonable terms or at all. See, for example, Lipocine’s patent infringement suit filed against us, and
past patent interferences under “Business— Legal Proceedings” below.
Third parties making claims
against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize
JATENZO; see Lipocine’s patent infringement suit filed against us under “Business— Legal Proceedings”
below. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion
of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial
damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties,
pay royalties or redesign our infringing product, which may be impossible or require substantial time and monetary expenditure. We cannot
predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore,
even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization,
and we have done so from time to time. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at
all. In that event, we would be unable to further develop and commercialize JATENZO, which could harm our business significantly. We cannot
provide any assurances that third-party patents do not exist which might be enforced against JATENZO, resulting in either an injunction
prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties or other forms of compensation to third
parties.
We may be involved in lawsuits and proceedings
to protect or enforce our patents, which could be expensive, time consuming and unsuccessful.
Competitors may infringe our
patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming.
In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to
stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse
result in any litigation or other contentious proceedings involving our patents or patent applications could put one or more of our patents
at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
Interference proceedings provoked
by third parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications.
An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing
party. Our business could be harmed if the prevailing party is awarded one or more claims that cover JATENZO and does not offer us a license
on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in
substantial costs and distract our management and other employees. We may not be able to prevent misappropriation of our intellectual
property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.
We have recently been involved
in a number of interference proceedings and an infringement lawsuit with Lipocine regarding JATENZO, which consumed time and resources.
In May 2021, our motion for summary judgment against Lipocine for failure to provide adequate written description of Lipocine’s
asserted patent claims was granted, and we entered into a global settlement agreement with Lipocine that settled all claims, including
the sole pending interference, and provides for payment by Lipocine to us as a settlement fee. For more information regarding the disputes
with Lipocine, see “Business—Legal Proceedings.” There is no guarantee that additional interference or infringement
proceedings will not be filed by other third parties in the future.
Furthermore, because of the
substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential
information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results
of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative,
it could hurt the price of the Common Stock.
Obtaining and maintaining our patent protection
depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent
agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees on
any issued patent are due to be paid to the U.S. Patent and Trademark Office and foreign patent agencies in several stages over the lifetime
of the patent. The U.S. Patent and Trademark Office and various foreign governmental patent agencies require compliance with a number
of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse
can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in
which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent
rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application
include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure
to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering JATENZO, our competitors
might be able to enter the market, which would have a material adverse effect on our business.
We may be subject to claims that our employees,
consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.
We employ individuals who were
previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants
or independent contractors have inadvertently or otherwise used or disclosed confidential information of our employees’ former employers
or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our
patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and if
we are successful, litigation could result in substantial cost and be a distraction to our management and other employees.
Risks Related to General Business, Employee Matters and Managing
Growth
We will need to grow our company, and we
may encounter difficulties in managing this growth, which could disrupt our operations.
We expect to experience significant
growth in the number of employees and the scope of our operations. To manage our anticipated future growth, we must continue to implement
and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified
personnel. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities
and devote a substantial amount of time to managing these growth activities. Due to our limited resources, we may not be able to effectively
manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may
lead to significant costs and may divert financial resources from other projects. Our future financial performance and our ability to
successfully commercialize JATENZO and compete effectively will depend, in part, on our ability to effectively manage any future growth.
If our management is unable to effectively manage our expected growth, our expenses may increase more than expected, our ability to generate
or increase our revenue could be reduced and we may not be able to implement our business strategy.
Our future success depends on our ability
to retain our chief executive officer, chief financial officer and chief commercial officer and to attract, retain and motivate qualified
personnel.
We are highly dependent on
Dr. Robert E. Dudley, our Chief Executive Officer, Richard Peterson, our Chief Financial Officer, Steven A. Bourne, our Chief Administrative
Officer, and Frank Jaeger, our Chief Commercial Officer. We have entered into employment agreements with these individuals, but any of
them may terminate his employment with us at any time. Although we do not have any reason to believe that we may lose the services of
any of these individuals in the foreseeable future, the loss of their services might impede the achievement of our research, development
and commercialization objectives. We rely on consultants and advisors to assist us in formulating our development and commercialization
strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory
contracts with other entities that may limit their availability to us. Recruiting and retaining qualified scientific personnel and sales
and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms
given the competition among numerous pharmaceutical and biotechnology companies for similar personnel.
We may expand through acquisitions of, or
investments in, other companies, each of which may divert our management’s attention, result in additional dilution to our stockholders
and consume resources that are necessary to sustain and grow our business.
An element of our growth strategy
is to expand our product candidate pipeline beyond JATENZO. To pursue this strategy, we will need to acquire androgen and metabolic therapies
for men and women or other complementary products, product candidates or businesses. We also may enter into relationships with other businesses
in order to expand our product offerings, which could involve preferred or exclusive licenses, additional channels of distribution or
discount pricing or investments in other companies.
We have limited resources to
identify and execute the acquisition or in-licensing of third-party products, businesses and technologies. Moreover, we will
face significant competition in seeking to acquire or license promising product candidates or drug compounds. Other companies, including
some with significantly greater financial, marketing and sales resources and more extensive experience in preclinical studies and clinical
trials, obtaining marketing approval and manufacturing and marketing pharmaceutical products, may compete with us for the license or acquisition
of product candidates and drug compounds. If we are unable to acquire or license additional promising product candidates or drug compounds,
we will not be able to expand our product candidate pipeline and our prospects for future growth and our ability to sustain profitability
will continue to be entirely dependent upon the success of JATENZO.
In addition, the process of
proposing, negotiating and implementing these transactions can be time consuming, difficult and expensive, and our ability to close these
transactions may be subject to third-party approvals, such as government regulation, which are beyond our control. Consequently,
we can make no assurance that these transactions, once undertaken and announced, will close.
An acquisition or investment
may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating
the businesses, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired business
choose not to work for us, and we may have difficulty retaining the customers of any acquired business. Acquisitions may also disrupt
our ongoing business, divert our resources and require significant management attention that would otherwise be available for development
of our business. Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure you that the anticipated
benefits of any acquisition or investment would be realized or that we would not be exposed to unknown liabilities. An acquisition could
also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses or the
write-off of goodwill.
Our debt agreements contain restrictions
that limit our flexibility in operating our business.
In March 2020, Legacy
Clarus entered into an indenture and certain collateral agreements which places a lien on our assets and a negative pledge on our intellectual
property. These loan documents contain various covenants that limit our ability to engage in specified types of transactions. These covenants
limit our ability to, among other things:
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sell, transfer, lease or dispose of certain assets;
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encumber or permit liens on certain assets;
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make certain restricted payments, including paying dividends
on, or repurchasing or making distributions with respect to, the Common Stock; and
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enter into certain transactions with affiliates.
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A breach of any of the covenants
under the loan agreements could result in a default under the loan. Upon the occurrence of an event of default under the loan, the lenders
could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit.
If we are unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure such indebtedness.
Risks Related to Ownership of the Common Stock
An active market for our securities may
not develop, which would adversely affect the liquidity and price of our securities.
The price of our securities
may vary significantly due to factors specific to us as well as to general market or economic conditions. Furthermore, an active trading
market for our securities may never develop or, if developed, it may not be sustained. You may be unable to sell your securities unless
a market can be established and sustained.
Nasdaq may delist our securities from trading
on its exchange, which could limit investors’ ability to make transactions in our securities and subject us to additional trading
restrictions.
Our securities are currently
listed on Nasdaq. However, we cannot assure you that our securities will continue to be listed on Nasdaq in the future. In order to continue
listing its securities on Nasdaq, we must maintain certain financial, distribution and stock price levels. If Nasdaq delists our securities
from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect our securities
could be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including:
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a limited availability of market quotations for its securities;
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reduced liquidity for its securities;
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a determination that the Common Stock is a “penny stock,”
which will require brokers trading in the Common Stock to adhere to more stringent rules and possibly result in a reduced level of trading
activity in the secondary trading market for our securities;
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a limited amount of news and analyst coverage; and
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a decreased ability to issue additional securities or obtain
additional financing in the future.
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The Common Stock price may change significantly
and you could lose all or part of your investment as a result.
The trading price of the Common
Stock is likely to be volatile. The stock market recently has experienced extreme volatility. This volatility often has been unrelated
or disproportionate to the operating performance of particular companies. You may not be able to resell your shares of Common Stock at
an attractive price due to a number of factors such as those listed elsewhere in this section and the following:
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results of operations that vary from the expectations of securities
analysts and investors;
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results of operations that vary from those our competitors;
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changes in expectations as to our future financial performance,
including financial estimates and investment recommendations by securities analysts and investors;
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declines in the market prices of stocks generally;
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strategic actions by us or our competitors;
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announcements by us or our competitors of significant contracts,
acquisitions, joint ventures, other strategic relationships or capital commitments;
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any significant change in our management;
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changes in general economic or market conditions or trends
in our industry or markets;
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changes in business or regulatory conditions, including new
laws or regulations or new interpretations of existing laws or regulations applicable to our business;
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future sales of Common Stock or other securities;
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investor perceptions of the investment opportunity associated
with the Common Stock relative to other investment alternatives;
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the public’s response to press releases or other public
announcements by our or third parties, including our filings with the SEC;
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litigation involving our, our industry, or both, or investigations
by regulators into our operations or those of our competitors;
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guidance, if any, that we provide to the public, any changes
in this guidance or our failure to meet this guidance;
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the development and sustainability of an active trading market
for the Common Stock;
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actions by institutional or activist stockholders;
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changes in accounting standards, policies, guidelines, interpretations
or principles; and
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other events or factors, including those resulting from pandemics,
natural disasters, war, acts of terrorism or responses to these events.
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These broad market and industry
fluctuations may adversely affect the market price of the Common Stock, regardless of our actual operating performance. In addition, price
volatility may be greater if the public float and trading volume of the Common Stock is low.
In the past, following periods
of market volatility, stockholders have instituted securities class action litigation. If we are involved in securities litigation,
it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome
of such litigation.
Because there are no current plans to pay
cash dividends on the Common Stock for the foreseeable future, you may not receive any return on investment unless you sell your Common
Stock at a price greater than what you paid for it.
We intend to retain future
earnings, if any, for future operations, expansion and debt repayment and there are no current plans to pay any cash dividends for the
foreseeable future. The declaration, amount and payment of any future dividends on shares of the Common Stock will be at the sole discretion
of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results
of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory
restrictions, implications of the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as
our board of directors may deem relevant. As a result, you may not receive any return on an investment in the Common Stock unless you
sell your Common Stock for a price greater than that which you paid for it.
Our stockholders may experience dilution
in the future.
The percentage of shares of
the Common Stock owned by current stockholders may be diluted in the future because of equity issuances for acquisitions, capital market
transactions or otherwise, including, without limitation, equity awards that our may grant to its directors, officers and employees, exercise
of the Warrants. Such issuances may have a dilutive effect on our earnings per share, which could adversely affect the market price of
the Common Stock.
The Warrants are accounted for as a warrant
liability and will be recorded at fair value upon issuance with changes in fair value each period reported in earnings, which may have
an adverse effect on the market price of the Common Stock.
On April 12, 2021, the
staff of the SEC issued a public statement entitled “Staff Statement on Accounting and Reporting Considerations for Warrants issued
by Special Purpose Acquisition Companies (“SPACs”). In the statement, the SEC staff expressed its view that certain
terms and conditions common to SPAC warrants may result in the classification of these financial instruments as a liability as opposed
to equity. The classification of these financial instruments as a liability would result in the application of derivative liability accounting,
which would entail a quarterly valuation of these liabilities with any change in value required to be reflected in quarterly and annual
financial statements of the issuer. We expect to account for the Warrants as a warrant liability and will record at fair value upon issuance
any changes in fair value each period reported in earnings as determined by us based upon a valuation report obtained from our independent
third-party valuation firm. The impact of changes in fair value on earnings may have an adverse effect on the market price of the Common
Stock.
If securities or industry analysts do not
publish research or reports about our business, if they change their recommendations regarding the Common Stock or if our operating results
do not meet their expectations, the Common Stock price and trading volume could decline.
The trading market for the
Common Stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If
no securities or industry analysts commence coverage of the Company, the trading price for the Common Stock could be negatively impacted.
In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover our downgrade its securities
or publish unfavorable research about our business, or if our operating results do not meet analyst expectations, the trading price of
the Common Stock would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly,
demand for the Common Stock could decrease, which might cause the Common Stock price and trading volume to decline.
Future sales, or the perception of future
sales, by us or our stockholders in the public market could cause the market price for the Common Stock to decline.
The sale of shares of Common
Stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of Common
Stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities
in the future at a time and at a price that we deem appropriate.
All shares currently held by
Blue Water public stockholders and all of the shares issued in the Business Combination to Legacy Clarus securityholders are freely tradable
without registration under the Securities Act, and without restriction by persons other than our “affiliates” (as defined
under Rule 144 under the Securities Act, (“Rule 144”)), including our directors, executive officers and other
affiliates.
In connection with the Merger,
certain Legacy Clarus securityholders and noteholders, who are collectively own approximately 70.0% shares of Common Stock, agreed, subject
to certain exceptions, not to dispose of or hedge any of their shares of Common Stock or securities convertible into or exchangeable for
shares of Common Stock during the period from the Closing Date continuing through the earlier of: (i) the date that is 180 days
from the Closing Date, and (ii) such date on which we complete a liquidation, merger, stock exchange, reorganization or other similar
transaction that results in all of our stockholders having the right to exchange their shares of Common Stock for cash, securities or
other property. See “Related Party Transactions - Lock-up Agreements”.
In addition, the shares of
Common Stock reserved for future issuance under the Clarus Therapeutics Holdings Inc. 2021 Stock Option and Incentive Plan (the “2021
Plan”) and the employee stock purchase plan (“ESPP”) will become eligible for sale in the public market once
those shares are issued, subject to any applicable vesting requirements, lockup agreements and other restrictions imposed by law. We intend
to file one or more registration statements on Form S-8 under the Securities Act to register shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock issued pursuant to the 2021 Plan or the ESPP. Any such Form S-8 registration
statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be
available for sale in the open market.
In the future, we may also
issue securities in connection with investments or acquisitions. The amount of shares of Common Stock issued in connection with an investment
or acquisition could constitute a material portion of the then-outstanding shares of Common Stock. Any issuance of additional securities
in connection with investments or acquisitions may result in additional dilution to our stockholders.
We are an emerging growth company within
the meaning of the Securities Act, and we if we take advantage of certain exemptions from disclosure requirements available to emerging
growth companies, this could make our securities less attractive to investors and may make it more difficult to compare our performance
with other public companies.
We are an “emerging growth
company” within the meaning of the Securities Act, as modified by the JOBS Act. We intend to take advantage of certain exemptions
from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but
not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act,
reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements
of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously
approved. As a result, our stockholders may not have access to certain information they may deem important. We cannot predict whether
investors will find securities issued by us less attractive because we rely on these exemptions. If some investors find those securities
less attractive as a result of its reliance on these exemptions, the trading prices of our securities may be lower than they otherwise
would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.
Further, Section 102(b)(1)
of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until
private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class
of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS
Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth
companies but any such election to opt out is irrevocable. As an emerging growth company, we can adopt the new or revised standard at
the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public
company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition
period difficult or impossible because of the potential differences in accountant standards used.
We will remain an emerging
growth company until the earliest of: (i) the last day of the fiscal year following the fifth anniversary of the closing of the Blue
Water IPO, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion; (iii) the
last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under
the Exchange Act, which would occur if the market value of the Common Stock held by non-affiliates exceeded $700.0 million as
of the last business day of the second fiscal quarter of such year; or (iv) the date on which we have issued more than $1.0 billion
in non-convertible debt securities during the prior three-year period.
We may redeem unexpired Public Warrants
prior to their exercise at a time that is disadvantageous for warrantholders.
We will have the ability to
redeem outstanding Public Warrants at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant,
provided that the last reported sales price of the Common Stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock
dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30 trading-day period ending on the
third trading day prior to the date we send the notice of redemption to the warrant holders. If and when the Public Warrants become redeemable,
we may exercise our redemption right if there is a current registration statement in effect with respect to the shares of Common Stock
underlying such warrants. Redemption of the outstanding Public Warrants could force you to: (i) exercise your warrants and pay the
related exercise price at a time when it may be disadvantageous for you to do so; (ii) sell your warrants at the then-current market
price when you might otherwise wish to hold your warrants; or (iii) accept the nominal redemption price that, at the time the outstanding
Public Warrants are called for redemption, is likely to be substantially less than the market value of your warrants. None of the Placement
Warrants will be redeemable by us for cash so long as they are held by the Sponsor or its permitted transferees.
U.S. federal income tax reform could adversely
affect us and holders of our securities.
On December 22, 2017,
President Trump signed into law H.R. 1, originally known as the “Tax Cuts and Jobs Act,” (the “TCJA”)
which significantly reformed the Code. This legislation, among other things, changes the U.S. federal tax rates, imposes significant additional
limitations on the deductibility of interest, allows the expensing of capital expenditures and puts into effect the migration from a “worldwide”
system of taxation to a territorial system. We continue to examine the impact this tax reform legislation may have on us. The impact of
this tax reform, or of any future administrative guidance interpreting provisions thereof, on holders of our securities is uncertain and
could be adverse. This prospectus does not discuss any such tax legislation or the manner in which it might affect holders of our securities.
We urge holders of our securities to consult with their legal and tax advisors with respect to any such legislation and the potential
tax consequences of their ownership of our securities.
Delaware law and the Certificate of Incorporation
and Bylaws contain certain provisions, including anti-takeover provisions, that limit the ability of stockholders to take certain actions
and could delay or discourage takeover attempts that stockholders may consider favorable.
The Certificate of Incorporation
and Bylaws and the DGCL contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition
deemed undesirable by our board of directors and therefore depress the trading price of the Common Stock. These provisions could also
make it difficult for stockholders to take certain actions, including electing directors who are not nominated by the current members
of our board of directors or taking other corporate actions, including effecting changes in our management. Among other things, the Certificate
of Incorporation and Bylaws include provisions regarding:
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a classified board of directors with three-year staggered
terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;
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opting out of Section 203 of the DGCL to allow us to establish
our own rules governing business combinations with interested parties;
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the ability of our board of directors to issue shares of preferred
stock, including “blank check” preferred stock and to determine the price and other terms of those shares, including preferences
and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
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the limitation of the liability of, and the indemnification
of, our directors and officers;
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the exclusive right of our board of directors to elect a director
to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents
stockholders from being able to fill vacancies on our board of directors;
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the requirement that directors may only be removed from our
board of directors for cause;
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a prohibition on stockholder action by written consent, which
forces stockholder action to be taken at an annual or special meeting of stockholders and could delay the ability of stockholders to
force consideration of a stockholder proposal or to take action, including the removal of directors;
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the requirement that a special meeting of stockholders may
be called only by our board of directors, the chairperson of our board of directors, our chief executive officer or our president (in
the absence of a chief executive officer), which could delay the ability of stockholders to force consideration of a proposal or to take
action, including the removal of directors;
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controlling the procedures for the conduct and scheduling
of board of directors and stockholder meetings;
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the requirement for the affirmative vote of holders of at
least 2/3 of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend,
alter, change or repeal any provision of the Certificate of Incorporation and Bylaws, which could preclude stockholders from bringing
matters before annual or special meetings of stockholders and delay changes in our board of directors and also may inhibit the ability
of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt;
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the ability of our board of directors to amend the bylaws,
which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer
to amend the bylaws to facilitate an unsolicited takeover attempt; and
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advance notice procedures with which stockholders must comply
to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which could
preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in our board of directors
and also may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate
of directors or otherwise attempting to obtain control of the Company.
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These provisions, alone or
together, could delay or prevent hostile takeovers and changes in control or changes in our board of directors or management.
Any provision of the Certificate
of Incorporation and Bylaws or Delaware law that has the effect of delaying or preventing a change in control could limit the opportunity
for stockholders to receive a premium for their shares of our capital stock and could also affect the price that some investors are willing
to pay for Common Stock.
The Certificate of Incorporation and Bylaws
designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between
us and our stockholders, and also provide that the federal district courts will be the exclusive forum for resolving any complaint asserting
a cause of action arising under the Securities Act, each of which could limit the ability of our stockholders to choose the judicial forum
for disputes with us or our directors, officers, or employees.
The Certificate of Incorporation
provides that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative
action or proceeding brought on its behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of its directors,
officers, or other employees to us or our stockholders, (iii) any action arising pursuant to any provision of the DGCL, or the Certificate
of Incorporation or the Bylaws or (iv) any other action asserting a claim that is governed by the internal affairs doctrine shall
be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court
for the District of Delaware), in all cases subject to the court having jurisdiction over indispensable parties named as defendants. The
Certificate of Incorporation also provides that the federal district courts of the United States of America will be the exclusive
forum for resolving any complaint asserting a cause of action arising under the Securities Act. The exclusive forum provision is applicable
to the fullest extent permitted by applicable law, subject to certain exceptions. Section 27 of the Exchange Act creates exclusive
federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations
thereunder. As a result, the exclusive forum provision does not apply to suits brought to enforce any duty or liability created by the
Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. We note, however, that there is uncertainty
as to whether a court would enforce this provision and that investors cannot waive compliance with the federal securities laws and the
rules and regulations thereunder. Section 22 of the Securities Act creates concurrent jurisdiction for state and federal courts over
all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.
Any person or entity purchasing
or otherwise acquiring any interest in any of our securities is deemed to have notice of and consented to this provision. This exclusive-forum provision
may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers,
or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find
the exclusive-forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving
the dispute in other jurisdictions, which could harm our results of operations.
USE
OF PROCEEDS
All of the Common Stock and Warrants offered by
the Selling Securityholders pursuant to this prospectus will be sold by the Selling Securityholders for their respective accounts. We
will not receive any of the proceeds from these sales.
We will receive up to an aggregate of approximately
$105.7 million from the exercise of the Warrants, assuming the exercise in full of all of the Warrants for cash. We expect to use the
net proceeds from the exercise of the Warrants for general corporate purposes. We will have broad discretion over the use of proceeds
from the exercise of the Warrants. There is no assurance that the holders of the Warrants will elect to exercise any or all of such Warrants.
To the extent that the Warrants are exercised on a “cashless basis,” the amount of cash we would receive from the exercise
of the Warrants will decrease.
DETERMINATION
OF OFFERING PRICE
The offering price of the shares of Common Stock
underlying the Warrants offered hereby is determined by reference to the exercise price of the Warrants of $11.50 per share. The
Public Warrants are listed on Nasdaq under the symbol “CRXTW.”
We cannot currently determine the price or prices
at which shares of the Common Stock or Warrants may be sold by the Selling Securityholders under this prospectus.
MARKET
INFORMATION FOR COMMON STOCK AND DIVIDEND POLICY
Market Information
The Common Stock and Public Warrants are currently
listed on the Nasdaq Global Market under the symbols “CRXT” and “CRXTW,” respectively. Prior to the consummation
of the Merger, the Common Stock, units and Public Warrants were listed on the Nasdaq Capital Market under the symbols “BLUW,”
“BLUWU” and “BLUWW,” respectively. We currently do not intend to list the Placement Warrants offered hereby on
any stock exchange or stock market.
As of the Closing Date and immediately following
completion of the Business Combination, we had approximately 21,725,817 shares of Common Stock issued and outstanding held of record by
23 registered holders and approximately 9,195,000 Warrants outstanding held of record by two registered holders. The actual number of
holders of these securities is greater than this number of record holders, as the actual number includes holders who are beneficial owners
whose securities are held in street name by brokers and other nominees. This number of holders of record also does not include holders
whose securities may be held in trust by other entities.
Dividend Policy
We have not paid any cash dividends on the Common
Stock to date. We may retain future earnings, if any, for future operations, expansion and debt repayment and has no current plans to
pay cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion
of our Board of Directors (the “Board”) and will depend on, among other things, our results of operations, financial
condition, cash requirements, contractual restrictions and other factors that the Board may deem relevant. In addition, our ability to
pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur. We do not
anticipate declaring any cash dividends to holders of the Common Stock in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2020, we
did not have any securities authorized for issuance under equity compensation plans. In connection with the Merger, on August 27, 2021,
our stockholders approved the 2021 Plan and the ESPP, each of which became effective immediately upon the Closing.
We intend to file one or more registration statements
on Form S-8 under the Securities Act to register the shares of Common Stock issued or issuable under the 2021 Plan and the ESPP.
Any such Form S-8 registration statement will become effective automatically upon filing. We expect that the initial registration
statement on Form S-8 will cover shares of Common Stock underlying the 2021 Plan and the ESPP. Once these shares are registered,
they can be sold in the public market upon issuance, subject to applicable restrictions.
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following information is only a summary and
should be read in conjunction with Blue Water’s and Legacy Clarus’s financial statements and related notes contained
elsewhere in this prospectus and information discussed under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.” The historical results included below and elsewhere in this prospectus are not indicative of our
future performance.
The following unaudited pro
forma condensed combined financial statements of the Company present the combination of the historical financial information of Blue Water
and Legacy Clarus adjusted to give effect to the Business Combination and the private placement received in the third quarter of 2021.
The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation
S-X.
The unaudited pro forma condensed
combined balance sheet as of June 30, 2021, combines the historical balance sheet of Blue Water and the historical balance sheet of Legacy
Clarus as of June 30, 2021, on a pro forma basis as if the Business Combination and related transactions, summarized below, had been consummated
on June 30, 2021.
The unaudited pro forma condensed
combined statements of operations for the six months ended June 30, 2021, and year ended December 31, 2020, combine the historical statements
of operations of Blue Water and Legacy Clarus for such periods on a pro forma basis as if the Business Combination and related transactions
had been consummated on January 1, 2020, the beginning of the earliest period presented.
The unaudited pro forma condensed
combined financial statements have been developed from and should be read in conjunction with:
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the accompanying notes to the unaudited pro forma condensed combined financial statements;
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the historical unaudited financial statements of Blue Water as of and for the six months ended June 30, 2021, and the historical audited financial statements as of and for the year ended December 31, 2020, and the related notes thereto;
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the historical unaudited financial statements of Legacy Clarus as of and for the six months ended June 30, 2021, and the related notes thereto, and the historical audited financial statements as of and for the year ended December 31, 2020, and the related notes thereto, included in this prospectus; and
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the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information relating to Legacy Clarus and Blue Water included elsewhere in this prospectus.
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The unaudited pro forma
condensed combined financial information has been presented for illustrative purposes only and does not necessarily reflect what our financial
condition or results of operations would have been had the Business Combination, convertible notes issuance and private placement occurred
on the dates indicated. Further, the unaudited pro forma condensed combined financial information also may not be useful in predicting
our future financial condition and results of operations. The actual financial position and results of operations may differ significantly
from the pro forma amounts reflected herein due to a variety of factors. The unaudited transaction accounting adjustments represent management’s
estimates based on information available as of the date of this unaudited pro forma condensed combined financial information and are subject
to change as additional information becomes available and analyses are performed. Assumptions and estimates underlying the unaudited pro
forma adjustments set forth in the unaudited pro forma condensed combined financial statements are described in the accompanying notes.
We believe that our assumptions and methodologies provide a reasonable basis for presenting all the significant effects of the Business
Combination, convertible notes issuance and private placement based on information available to management at this time and that the transaction
accounting adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined
financial information.
Pursuant to the Merger Agreement,
the Business Combination was consummated on September 9, 2021. Upon the closing of the Business Combination, Merger Sub merged with and
into Legacy Clarus, with Legacy Clarus as the surviving company in the Merger. Upon the closing of the Business Combination, Blue Water
changed its name to “Clarus Therapeutics Holdings, Inc.”. The Business Combination was accounted for as a reverse recapitalization,
in which Legacy Clarus issued stock for the net assets of Blue Water, accompanied by a recapitalization. The net assets of Blue Water
are stated at historical cost, with no goodwill or other intangible assets recorded upon closing. Historical operations of the Combined
Entity will be those of Legacy Clarus.
The aggregate consideration
issued or reserved for issuance to the Legacy Clarus securityholders upon the closing of the Merger was 17,895,594 shares of common stock.
The 17,895,594 shares includes an aggregate of 1,770,000 shares of common stock that were issued to the holders of senior secured notes
in connection with the Merger Agreement and additional forbearance and were in exchange for $10.0 million of aggregate principal amount
of non-convertible promissory notes and certain outstanding royalty rights. The senior secured noteholders also received an aggregate
135,000 shares from the Sponsor pursuant to the Share Allocation Agreement. Within the aggregate shares issued to Legacy Clarus securityholders
is also 2,558,705 shares of common stock at $10.00 per share, that were issued to Legacy Clarus equity holders for the private placement
Additional Closing Shares, of which such noteholders provided gross proceeds of $25.0 million, from the date of Merger Agreement
signature through consummation.
The unaudited pro forma condensed
combined financial information herein incorporates the results of Blue Water’s public stockholders having elected to redeem their
Public Shares for cash upon the approval of the Business Combination.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 2021
(in thousands)
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(A)
Legacy
Clarus
Historical
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Private
Placement
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Legacy
Clarus
Pro Forma
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(B)
Blue
Water
Historical
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Transaction
Accounting
Adjustments
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Pro Forma
Combined
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Assets
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Current assets:
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Cash and cash equivalents
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$
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10,278
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$
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7,184
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3(a)
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$
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17,462
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$
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225
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$
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16,908
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3(b)
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$
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34,595
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Accounts receivable, net
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6,229
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6,229
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-
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-
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6,229
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Inventory, net
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9,761
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9,761
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-
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-
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9,761
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Prepaid expenses and other current assets
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1,985
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1,985
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115
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-
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2,100
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Total current assets
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28,253
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7,184
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35,437
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340
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16,908
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52,685
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Property and equipment, net
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73
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73
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-
|
|
|
|
-
|
|
|
|
|
|
73
|
|
|
Investments held in Trust Account
|
|
|
-
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
58,653
|
|
|
|
(58,653
|
)
|
|
3(b)
|
|
|
-
|
|
|
Total assets
|
|
$
|
28,326
|
|
|
$
|
7,184
|
|
|
|
|
$
|
35,510
|
|
|
$
|
58,993
|
|
|
$
|
(41,745
|
)
|
|
|
|
$
|
52,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes payable
|
|
$
|
51,297
|
|
|
|
|
|
|
|
|
$
|
51,297
|
|
|
$
|
-
|
|
|
$
|
(10,000
|
)
|
|
3(d)
|
|
$
|
41,297
|
|
|
Accounts payable
|
|
|
13,463
|
|
|
|
|
|
|
|
|
|
13,463
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
13,581
|
|
|
Accrued expenses
|
|
|
11,002
|
|
|
|
|
|
|
|
|
|
11,002
|
|
|
|
812
|
|
|
|
348
|
|
|
3(c)
|
|
|
12,162
|
|
|
Due to related party
|
|
|
-
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
60
|
|
|
|
-
|
|
|
|
|
|
60
|
|
|
Accrued taxes
|
|
|
-
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
348
|
|
|
|
(348
|
)
|
|
3(c)
|
|
|
-
|
|
|
Deferred revenue
|
|
|
1,048
|
|
|
|
|
|
|
|
|
|
1,048
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
1,048
|
|
|
Total current liabilities
|
|
|
76,810
|
|
|
|
-
|
|
|
|
|
|
76,810
|
|
|
|
1,338
|
|
|
|
(10,000
|
)
|
|
|
|
|
68,148
|
|
|
Deferred underwriting commissions
|
|
|
-
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
2,012
|
|
|
|
(2,012
|
)
|
|
3(b)
|
|
|
-
|
|
|
Derivative warrant liabilities
|
|
|
-
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
7,252
|
|
|
|
-
|
|
|
|
|
|
7,252
|
|
|
Convertible notes payable to related parties
|
|
|
98,130
|
|
|
|
7,184
|
|
|
3(a)
|
|
|
105,314
|
|
|
|
-
|
|
|
|
(105,314
|
)
|
|
3(d)
|
|
|
-
|
|
|
Royalty obligation
|
|
|
10,802
|
|
|
|
|
|
|
|
|
|
10,802
|
|
|
|
-
|
|
|
|
(10,802
|
)
|
|
3(d)
|
|
|
-
|
|
|
Total liabilities
|
|
|
185,742
|
|
|
|
7,184
|
|
|
|
|
|
192,926
|
|
|
|
10,602
|
|
|
|
(128,128
|
)
|
|
|
|
|
75,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock
|
|
|
9,537
|
|
|
|
|
|
|
|
|
|
9,537
|
|
|
|
-
|
|
|
|
(9,537
|
)
|
|
3(d)
|
|
|
-
|
|
|
Series B redeemable convertible preferred stock
|
|
|
15,722
|
|
|
|
|
|
|
|
|
|
15,722
|
|
|
|
-
|
|
|
|
(15,722
|
)
|
|
3(d)
|
|
|
-
|
|
|
Series C redeemable convertible preferred stock
|
|
|
20,859
|
|
|
|
|
|
|
|
|
|
20,859
|
|
|
|
|
|
|
|
(20,859
|
)
|
|
3(d)
|
|
|
-
|
|
|
Series D redeemable convertible preferred stock
|
|
|
151,345
|
|
|
|
|
|
|
|
|
|
151,345
|
|
|
|
-
|
|
|
|
(151,345
|
)
|
|
3(d)
|
|
|
-
|
|
|
Total convertible preferred stock
|
|
|
197,463
|
|
|
|
-
|
|
|
|
|
|
197,463
|
|
|
|
-
|
|
|
|
(197,463
|
)
|
|
|
|
|
-
|
|
|
Common stock subject to redemption
|
|
|
-
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
43,391
|
|
|
|
(43,391
|
)
|
|
3(d)
|
|
|
-
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
3
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
3(d)
|
|
|
-
|
|
|
Class A Common Stock
|
|
|
-
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
3(d)
|
|
|
2
|
|
|
Class B Common Stock
|
|
|
-
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
Additional paid-in capital
|
|
|
4,443
|
|
|
|
|
|
|
|
|
|
4,443
|
|
|
|
2,597
|
|
|
|
291,471
|
|
|
3(d)
|
|
|
298,511
|
|
|
Accumulated deficit
|
|
|
(359,325
|
)
|
|
|
|
|
|
|
|
|
(359,325
|
)
|
|
|
2,403
|
|
|
|
35,767
|
|
|
3(d)
|
|
|
(321,155
|
)
|
|
Total Stockholders’ Equity (Deficit)
|
|
|
(354,879
|
)
|
|
|
-
|
|
|
|
|
|
(354,879
|
)
|
|
|
5,000
|
|
|
|
327,237
|
|
|
|
|
|
(22,642
|
)
|
|
Total Liabilities and Stockholders’ Equity (Deficit)
|
|
$
|
28,326
|
|
|
$
|
7,184
|
|
|
|
|
$
|
35,510
|
|
|
$
|
58,993
|
|
|
$
|
(41,745
|
)
|
|
|
|
$
|
52,758
|
|
See accompanying notes to the unaudited pro
forma condensed combined financial information.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2021
(in thousands, except share and per share data)
|
|
|
(A)
Legacy
Clarus
Historical
|
|
|
(B)
Blue
Water
Historical
|
|
|
Transaction
Accounting
Adjustments
|
|
|
|
|
Pro Forma
Combined
|
|
|
Net product revenue
|
|
$
|
5,109
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
$
|
5,109
|
|
|
Cost of product sales
|
|
|
921
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
921
|
|
|
Gross profit
|
|
|
4,188
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
4,188
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
17,467
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
17,467
|
|
|
General and administrative
|
|
|
8,932
|
|
|
|
1,225
|
|
|
|
175
|
|
|
4(a)
|
|
|
10,332
|
|
|
Research and development
|
|
|
1,817
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
1,817
|
|
|
Other taxes
|
|
|
-
|
|
|
|
175
|
|
|
|
(175
|
)
|
|
4(a)
|
|
|
-
|
|
|
Loss from operations
|
|
|
(24,028
|
)
|
|
|
(1,400
|
)
|
|
|
-
|
|
|
|
|
|
(25,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on marketable securities
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
|
|
3
|
|
|
Change in fair value of derivative warrant liabilities
|
|
|
-
|
|
|
|
9,446
|
|
|
|
-
|
|
|
|
|
|
9,446
|
|
|
Interest expense
|
|
|
(9,517
|
)
|
|
|
-
|
|
|
|
6,005
|
|
|
4(d)
|
|
|
(3,512
|
)
|
|
Total other income (expense), net
|
|
|
(9,517
|
)
|
|
|
9,449
|
|
|
|
6,005
|
|
|
|
|
|
5,937
|
|
|
Net (loss) income
|
|
|
(33,545
|
)
|
|
|
8,049
|
|
|
|
6,005
|
|
|
|
|
|
(19,492
|
)
|
|
Deemed dividend to sponsor
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Accretion of preferred stock
|
|
|
(7,737
|
)
|
|
|
-
|
|
|
|
7,737
|
|
|
4(b)
|
|
|
-
|
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(41,282
|
)
|
|
$
|
8,049
|
|
|
$
|
13,742
|
|
|
|
|
$
|
(19,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding of common stock subject to redemption, basic and diluted
|
|
|
|
|
|
|
3,995,410
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share, common stock subject to redemption
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding -
basic and diluted
|
|
|
2,410,827
|
|
|
|
4,114,324
|
|
|
|
|
|
|
4(c)
|
|
|
21,725,817
|
|
|
Basic and diluted net loss per share available to Sponsor per share, common stock
|
|
$
|
(17.12
|
)
|
|
$
|
1.96
|
|
|
|
|
|
|
4(c)
|
|
$
|
(0.90
|
)
|
See accompanying notes to the unaudited pro
forma condensed combined financial information
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2020
(in thousands, except share and per share data)
|
|
|
(A)
Legacy
Clarus
Historical
|
|
|
(B)
Blue
Water
Historical
|
|
|
Transaction
Accounting
Adjustments
|
|
|
|
|
Pro Forma
Combined
|
|
|
Net product revenue
|
|
$
|
6,369
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
$
|
6,369
|
|
|
Cost of product sales
|
|
|
8,687
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
8,687
|
|
|
Gross loss
|
|
|
(2,318
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(2,318
|
)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
29,515
|
|
|
|
-
|
|
|
|
50
|
|
|
5(f)
|
|
|
29,565
|
|
|
General and administrative
|
|
|
11,937
|
|
|
|
2,978
|
|
|
|
611
|
|
|
5(a)(f)
|
|
|
15,526
|
|
|
Research and development
|
|
|
3,407
|
|
|
|
-
|
|
|
|
70
|
|
|
5(f)
|
|
|
3,477
|
|
|
Other taxes
|
|
|
-
|
|
|
|
172
|
|
|
|
(172
|
)
|
|
5(a)
|
|
|
-
|
|
|
Loss from operations
|
|
|
(47,177
|
)
|
|
|
(3,150
|
)
|
|
|
(559
|
)
|
|
|
|
|
(50,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability and derivative, net
|
|
|
66,891
|
|
|
|
-
|
|
|
|
(66,891
|
)
|
|
5(b)
|
|
|
-
|
|
|
Gain on marketable securities (net) held in Trust Account
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
Change in fair value of derivative warrant liabilities
|
|
|
-
|
|
|
|
(922
|
)
|
|
|
-
|
|
|
5(b)
|
|
|
(922
|
)
|
|
Issuance costs - warrant liabilities
|
|
|
-
|
|
|
|
(646
|
)
|
|
|
-
|
|
|
|
|
|
(646
|
)
|
|
Interest income
|
|
|
25
|
|
|
|
-
|
|
|
|
2,342
|
|
|
5(g)
|
|
|
2,367
|
|
|
Interest expense
|
|
|
(15,394
|
)
|
|
|
-
|
|
|
|
10,091
|
|
|
5(d)
|
|
|
(5,303
|
)
|
|
Total other income (expense), net
|
|
|
51,522
|
|
|
|
(1,568
|
)
|
|
|
(54,458
|
)
|
|
|
|
|
(4,504
|
)
|
|
Net income (loss)
|
|
|
4,345
|
|
|
|
(4,718
|
)
|
|
|
(55,017
|
)
|
|
|
|
|
(55,390
|
)
|
|
Accretion of preferred stock
|
|
|
(14,682
|
)
|
|
|
-
|
|
|
|
14,682
|
|
|
5(c)
|
|
|
-
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(10,337
|
)
|
|
$
|
(4,718
|
)
|
|
$
|
(40,335
|
)
|
|
|
|
$
|
(55,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding of common stock subject to redemption, basic and diluted
|
|
|
|
|
|
|
3,556,309
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share, common stock subject to redemption
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding -
basic and diluted
|
|
|
870,263
|
|
|
|
1,447,732
|
|
|
|
|
|
|
5(e)
|
|
|
21,725,817
|
|
|
Basic and diluted net loss per share available to Sponsor per share, common stock
|
|
$
|
(11.88
|
)
|
|
$
|
(3.26
|
)
|
|
|
|
|
|
5(e)
|
|
$
|
(2.55
|
)
|
See accompanying notes to the unaudited pro
forma condensed combined financial information.
Notes
to Unaudited Pro Forma Combined Financial Statements
Note 1 — Description of the Merger
On September 9, 2021, we consummated
the Business Combination pursuant to the Merger Agreement. Upon the closing of the Business Combination, Merger Sub merged with and into
Legacy Clarus, with Legacy Clarus as the surviving company in the Merger. Upon the closing of the Business Combination, Blue Water changed
its name to Clarus Therapeutics Holdings, Inc.
Pursuant to the terms and conditions
of the Merger Agreement, the aggregate consideration issued or reserved for issuance to Legacy Clarus securityholders upon the closing
of the Merger was 17,895,594 shares of common stock. The 17,895,594 shares includes 1,770,000 shares of common stock, which were
issued to Legacy Clarus’ senior secured noteholders in connection with the Merger Agreement and additional forbearance and were
in exchange for $10.0 million of aggregate principal amount of non-convertible promissory notes and certain outstanding royalty rights.
The senior secured noteholders also received an aggregate 135,000 shares from the Sponsor pursuant to the Share Allocation Agreement.
Within the aggregate shares issued to Legacy Clarus securityholders is also 2,558,705 shares of common stock at $10.00 per share, that
were issued to Legacy Clarus equity holders for the private placement Additional Closing Shares, of which such noteholders provided gross
proceeds of $25.0 million, from the date of Merger Agreement signature through consummation.
The following represents the
aggregate merger consideration issued or reserved for issuance to Clarus securityholders upon the consummation of the Business Combination:
|
(in thousands, except share and per share data)
|
|
Purchase
price
|
|
|
Shares
Issued
|
|
|
Share consideration to Legacy Clarus(a)(b)
|
|
$
|
182,023
|
|
|
|
17,895,594
|
|
|
(a)
|
The value of common stock issued to Legacy Clarus, and its senior secured noteholders included in the consideration is reflected at $10.20 per share, as defined in the Merger Agreement, and the value of the common stock issued related to the private placement (as the Additional Closing Shares, as defined in the Merger Agreement), included in the consideration is reflected at $10.00 per share. Legacy Clarus common stock at $10.20 totals 15,336,892 shares. Private placement shares (Additional Closing Shares) at $10.00 total 2,558,705 shares.
|
|
(b)
|
The total consideration shares issued or issuable above includes 1,905,000 shares issued to Legacy Clarus’ senior secured noteholders. Legacy Clarus shares consideration after the shares issued to the senior secured noteholders was first allocated to Legacy Clarus convertible notes investors and then the remaining to Legacy Clarus Series D Preferred Stock investors and the Legacy Clarus warrantholders. Legacy Clarus’s outstanding common stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and its outstanding and unexercised options and unissued options were cancelled and retired upon consummation of the merger. Pro forma closing shares issued or issuable to Legacy Clarus were determined as follows:
|
|
(in thousands, except share and per share data)
|
|
|
|
|
Base Closing Shares
|
|
|
|
|
Base transaction price
|
|
$
|
198,184
|
|
|
Legacy Clarus Closing Company Indebtedness at a maximum of $43.1 million
|
|
|
(43,125
|
)
|
|
Legacy Clarus Closing Company Cash(d)
|
|
|
—
|
|
|
|
|
$
|
155,059
|
|
|
Divided by
|
|
$
|
10.20
|
|
|
Shares issuable to Legacy Clarus
|
|
|
15,201,889
|
|
|
Transfer of sponsor founder shares per share allocation agreement (e)
|
|
|
135,000
|
|
|
Total shares issuable to Legacy Clarus
|
|
|
15,336,889
|
|
|
|
|
|
|
|
|
Shares issued to Legacy Clarus lenders under Merger Agreement
|
|
|
1,500,000
|
|
|
Shares issued to Legacy Clarus lenders under share allocation agreement (e)
|
|
|
405,000
|
|
|
Shares issued to Legacy Clarus lenders
|
|
|
1,905,000
|
|
|
Shares issued to Legacy Clarus convertible note and Series D investors and reserved for issuance to Legacy Clarus warrantholders
|
|
|
13,431,889
|
|
|
|
|
|
|
|
|
Additional Closing Shares
|
|
|
|
|
|
Principal and interest balance of Additional Convertible Notes(c)
|
|
$
|
25,587
|
|
|
Principal and interest balance of the Additional 2025 Notes(c)
|
|
|
—
|
|
|
|
|
$
|
25,587
|
|
|
Divided by
|
|
$
|
10.00
|
|
|
Shares issued to Legacy Clarus
|
|
|
2,558,705
|
|
|
Total pro forma estimated shares issued or issuable to Legacy Clarus
|
|
|
17,895,594
|
|
|
(c)
|
Pro forma assumption includes private placement financing (Additional Convertible Notes) issued between the execution of the Merger Agreement and consummation.
|
|
(d)
|
Pro forma assumption excludes the closing cash balance for simplicity.
|
|
(e)
|
Under the share allocation agreement, entered by Blue Water and Legacy Clarus dated September 1, 2021, Legacy Clarus’s senior secured noteholders will receive an allocation of 405,000 additional shares upon consummation of the Merger. Of the 405,000 shares, 270,000 was reallocated from the Legacy Clarus equity holders to the senior secured noteholders, and the Blue Water founder transferred the remaining 135,000 from the sponsor/founder shares.
|
The closing allocations were
calculated in accordance with the methodology and procedures set forth in the Merger Agreement and was announced by Blue Water through
the Current Report on Form 8-K filing with the SEC four business days prior to the special meeting of its stockholders.
The following summarizes the
unaudited pro forma common stock outstanding immediately after giving effect to the consummation of the Business Combination transaction:
|
|
|
Common Stock
Outstanding
|
|
|
Stockholder
|
|
%
|
|
|
No. shares
|
|
|
Legacy Clarus (excludes unexercised Legacy Clarus warrants)
|
|
|
82.32
|
%
|
|
|
17,886,348
|
|
|
Public
|
|
|
11.68
|
%
|
|
|
2,536,969
|
|
|
Sponsor (including % of Blue Water’s directors and officers)
|
|
|
6.00
|
%
|
|
|
1,302,500
|
|
|
Total No. Shares Class A common stock
|
|
|
100
|
%
|
|
|
21,725,817
|
|
The foregoing ownership percentages
with respect to the Combined Entity following the Business Combination are based in the assumption that there are no adjustments for the
outstanding Public or Placement warrants issued by Blue Water and no awards were issued under the Equity Incentive Plan and no exercise
of the Legacy Clarus warrants assumed in the Business Combination.
Note 2 — Basis of Presentation
The unaudited pro forma condensed
combined financial information was prepared in accordance with Article 11 of SEC Regulation S-X as amended by the final rule, Release
No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.” The historical financial information
of Blue Water and Legacy Clarus include transaction accounting adjustments to illustrate the estimated effect of the Business Combination,
the convertible notes issuance and the private placement and certain other adjustments to provide relevant information necessary for an
understanding of the combined company upon consummation of the transactions described herein.
Notwithstanding the legal form
of the Business Combination pursuant to the Merger Agreement, the Business Combination is accounted for as a reverse recapitalization
in accordance with U.S. GAAP because Legacy Clarus has been determined to be the accounting acquirer under Financial Accounting Standards
Board’s Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). The determination is
primarily based on the evaluation of the following facts and circumstances taking into consideration the Blue Water redemptions:
|
|
●
|
The pre-combination equity holders of Legacy Clarus hold the majority of voting rights in Combined Entity;
|
|
|
●
|
The largest individual minority stockholder of the Combined Entity is an existing stockholder of Legacy Clarus;
|
|
|
●
|
The pre-combination equity holders of Legacy Clarus have the right to appoint the majority of the directors on the Combined Entity Board;
|
|
|
●
|
Legacy Clarus shall select senior management (executives) of Combined Entity; and
|
|
|
●
|
Operations of Legacy Clarus will comprise the ongoing operations of Combined Entity.
|
Under the reverse recapitalization
model, the Business Combination will be treated as Legacy Clarus issuing equity for the net assets of Blue Water, with no goodwill or
intangible assets recorded.
The unaudited pro forma condensed
combined financial information reflects all Blue Water’s public stockholders that exercised redemption rights with respect to their
public shares. A total of 3,270,531 shares were redeemed for an aggregate redemption value of approximately $33.4 million. The resulting
redemption scenario still provided BLUW with cash at closing of the Business Combination of greater than the minimum requirement of $5.0 million
pursuant to the Merger Agreement.
The Combined Entity expects
to enter into new equity awards with its employees after the consummation of the Business Combination. The terms of these new equity awards
have not been finalized and remain subject to change. Accordingly, no effect has been given to the unaudited pro forma combined financial
information for the new awards.
The unaudited pro forma combined
financial information does not reflect the income tax effects of the transaction accounting adjustments as any change in the deferred
tax balance would be offset by an increase in the valuation allowance given Clarus incurred negative cash flows during the historical
periods presented.
Note 3 — Transaction Accounting
Adjustments to the Unaudited Pro Forma Combined Balance Sheet as of June 30, 2021
The transaction accounting
adjustments included in the unaudited pro forma combined balance sheet as of June 30, 2021, are as follows:
Pro Forma notes
|
|
(A)
|
From the unaudited balance sheet of Legacy Clarus as of June 30, 2021.
|
|
|
(B)
|
From the unaudited balance sheet of Blue Water as of June 30, 2021.
|
Pro Forma adjustment to reflect the proceeds
from the issuance of additional Convertible Notes in March 2021 and Private Placement securities agreement.
|
|
a)
|
Represents the sale of additional issuance private placement shares that converted into shares of the Combined Entity pursuant to the Merger Agreement. Net proceeds from these issuances from execution of the Merger Agreement through consummation totaled $25.0 million.
|
Pro Forma transaction accounting adjustments
|
|
b)
|
Represents the impact of the Business Combination on the cash balance of the Combined Entity. The table below represents the sources and uses of funds as it relates to the Business Combination:
|
|
(in thousands)
|
|
Note
|
|
Pro Forma Cash
|
|
|
Blue Water cash held in Trust Account
|
|
(1)
|
|
$
|
58,653
|
|
|
Payment of redeeming Blue Water Stockholders
|
|
(2)
|
|
|
(33,359
|
)
|
|
Payment of deferred underwriting commissions
|
|
(3)
|
|
|
(2,012
|
)
|
|
Payment of other transaction costs
|
|
(4)
|
|
|
(6,374
|
)
|
|
Excess cash to balance sheet from Business Combination
|
|
|
|
$
|
16,908
|
|
|
(1)
|
Represents the amount of the restricted investments and cash held in the trust account upon consummation of the Business Combination at Closing.
|
|
(2)
|
Represents the amount paid to Blue Water stockholders who exercised redemption rights.
|
|
(3)
|
Represents payment of deferred Blue Water IPO underwriting commissions by Blue Water.
|
|
(4)
|
Represents payment of other Blue Water estimated Business Combination transaction costs.
|
|
|
c)
|
To reclass historical Blue Water accrued taxes to accrued expenses of the Combined Entity.
|
|
|
d)
|
The following table represents the impact of the Business Combination on the number of shares of Blue Water common stock and represents the impact to the total equity impact of the Business Combination including redemptions by Blue Water stockholders:
|
|
|
|
Class A
Common Stock
|
|
|
Class B
Common Stock
|
|
|
Clarus
|
|
|
Additional
paid-in
|
|
|
Accumulated
|
|
|
(in thousands, except share amounts)
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
capital
|
|
|
deficit
|
|
|
Pre-Business Combination – Blue Water stockholders
|
|
|
1,553,480
|
|
|
$
|
—
|
|
|
|
1,437,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,597
|
|
|
$
|
2,403
|
|
|
Pre-Business Combination – Clarus
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
197,463
|
|
|
|
4,443
|
|
|
|
(359,325
|
)
|
|
Conversion of Class B common stock to Class A common stock
|
|
|
1,302,500
|
|
|
|
—
|
|
|
|
(1,302,500
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Transfer of Class B founder shares to Clarus shares (d)
|
|
|
—
|
|
|
|
—
|
|
|
|
(135,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Reclassification of redeemable stock to common stock
|
|
|
4,254,020
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,391
|
|
|
|
—
|
|
|
Less: redemption of redeemable shares
|
|
|
(3,270,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,359
|
)
|
|
|
|
|
|
Clarus Stockholders and cancellation of convertible notes (a) (d)
|
|
|
15,981,348
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
105,312
|
|
|
|
—
|
|
|
Clarus Lenders and extinguishment of certain Clarus senior notes payable and Clarus royalty obligation (d)
|
|
|
1,905,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,431
|
|
|
|
1,371
|
|
|
Cancellation of Clarus stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
207
|
|
|
|
(207
|
)
|
|
Balances after share transactions of Combined Entity
|
|
|
21,725,817
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
197,463
|
|
|
|
142,022
|
|
|
|
(355,758
|
)
|
|
Estimated transaction costs(b)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,374
|
)
|
|
|
—
|
|
|
Elimination of historical accumulated deficit of Blue Water
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,403
|
|
|
|
(2,403
|
)
|
|
Elimination of historical stock of Clarus(c)
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(197,463
|
)
|
|
|
160,457
|
|
|
|
37,006
|
|
|
Post-Business Combination
|
|
|
21,725,817
|
|
|
$
|
2
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
298,511
|
|
|
$
|
(321,155
|
)
|
|
(a)
|
Includes $25.0 million of private placement convertible notes and related accrued interest converting at $10.00 per share into 2,558,705 shares.
|
|
(b)
|
Transaction costs were incurred between June 30, 2021, and the closing of the Business Combination and were all determined to represent costs of the reverse recapitalization.
|
|
(c)
|
Accumulated deficit due to the reversal of accretion on preferred stock dividends due to assumed January 1, 2020, conversion and extinguishment.
|
|
(d)
|
Related to the share allocation agreement, whereby 135,000 shares were transferred from the Blue Water founder to the Legacy Clarus lenders and a reallocation of 270,000 shares from Legacy Clarus stockholders were issued to the Clarus lenders.
|
Note 4 — Transaction Accounting Adjustments
to the Unaudited Pro Forma Combined Statements of Operations for the Six Months Ended June 30, 2021
The transaction accounting
adjustments included in the unaudited pro forma combined statement of operations for the six months ended June 30, 2021, are as follows:
Pro Forma notes
|
|
(A)
|
From the unaudited condensed statements of operations of Legacy Clarus for the six months ended June 30, 2021.
|
|
|
(B)
|
From the unaudited condensed statements of operations of Blue Water for the six months ended June 30, 2021.
|
Pro Forma transaction accounting adjustments
|
|
a)
|
To reclass historical Blue Water franchise tax expense to general and administrative expenses of the Combined Entity.
|
|
|
b)
|
Removal of accretion on preferred stock dividends due to assumed January 1, 2020, conversion and extinguishment.
|
|
|
c)
|
Presentation of the pro forma basic and diluted net loss per share amounts. The unaudited pro forma condensed combined financial information has been prepared to reflect the 3,270,531 shares that were redeemed for an aggregate redemption value of approximately $33.4 million, at a redemption price per share of $10.20. See Note 6, Loss Per Share for additional details.
|
|
|
d)
|
To eliminate interest expense related to Legacy Clarus convertible notes, which will be exchanged for common stock in the Merger.
|
Note 5 — Transaction Accounting
Adjustments to the Unaudited Pro Forma Combined Statements of Operations for the Year Ended December 31, 2020
The transaction accounting
adjustments included in the unaudited pro forma combined statement of operations for the year ended December 31, 2020, are as follows:
Pro Forma notes
|
|
(A)
|
From the audited statements of operations of Legacy Clarus for the year ended December 31, 2020.
|
|
|
(B)
|
From the audited statements of operations of Blue Water for the year ended December 31, 2020.
|
Pro Forma transaction accounting adjustments
|
|
a)
|
To reclass historical Blue Water franchise tax expense to general and administrative expenses of the Combined Entity.
|
|
|
b)
|
To eliminate the gain related to the change in the fair value of derivative liabilities related to Legacy Clarus convertible notes and warrants for Series D preferred stock, which were exchanged for common stock in the Merger. The pro forma figures shown are based on the assumed merger date of January 1, 2020, at which time these instruments (the convertible notes and warrants for 183,438 shares of Series D preferred stock) would have converted into shares of the combined company’s common stock. Subsequently, in July 2021, warrants to purchase 122,292 shares of Series D preferred stock expired unexercised, which is not reflected in these pro forma statements.
|
|
|
c)
|
Removal of accretion on preferred stock dividends due to assumed January 1, 2020, conversion and extinguishment.
|
|
|
d)
|
To eliminate interest expense related to Legacy Clarus convertible notes exchanged for common stock in the Merger.
|
|
|
e)
|
Presentation of the pro forma basic and diluted net loss per share amounts. The unaudited pro forma condensed combined financial information has been prepared to reflect the 3,270,531 shares that were redeemed for an aggregate redemption value of approximately $33.4 million, at a redemption price per share of $10.20. See Note 6, Loss Per Share for additional details.
|
|
|
f)
|
To record cancellation of Legacy Clarus outstanding stock options.
|
|
|
g)
|
To record gain on extinguishment of certain Legacy Clarus senior notes payable and Clarus royalty obligation.
|
Note 6 — Loss Per Share
Net loss per share calculated
using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Business Combination
and private placement, assuming the shares were outstanding since January 1, 2020. As the Business Combination is being reflected as if
it had occurred at the beginning of the periods presented, the calculation of weighted average shares outstanding for basic and diluted
net loss per share assumes that the shares issuable relating to the Business Combination and private placement have been outstanding for
the entire periods presented.
Net loss per share calculated
using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Business Combination,
2021 convertible notes, and private placement, assuming the shares were outstanding since January 1, 2020. As the Business Combination
is being reflected as if it had occurred at the beginning of the periods presented, the calculation of weighted average shares outstanding
for basic and diluted net loss per share assumes that the shares issuable relating to the Business Combination, 2021 convertible notes
and private placement have been outstanding for the entire periods presented. For the 3,270,531 shares redeemed, this calculation was
retroactively adjusted to eliminate such shares for the entire periods.
The unaudited pro forma combined
financial information has been prepared for the six months ended June 30, 2021:
|
Six Months Ended June 30, 2021
|
|
|
|
|
(in thousands, except shares and per share data)
|
|
|
|
|
Pro forma net loss
|
|
$
|
(19,492
|
)
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
21,725,817
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
|
|
Pro Forma weighted average shares calculation – basic and diluted
|
|
|
|
|
|
Blue Water public stockholders
|
|
|
2,536,969
|
|
|
Blue Water Sponsor
|
|
|
1,302,500
|
|
|
Total
|
|
|
3,839,469
|
|
|
Clarus
|
|
|
17,886,348
|
|
|
Pro Forma weighted average shares outstanding – basic and diluted (1)
|
|
|
21,725,817
|
|
|
(1)
|
For the purposes of applying the if-converted method for calculating pro forma earnings per share, it was assumed that all Legacy Clarus Preferred stock was extinguished or converted to common stock. As such, the accretion of historical preferred stock dividends was not included in calculation of basic or diluted loss per share.
|
The unaudited pro forma combined
financial information has been prepared for the year ended December 31, 2020:
|
Year Ended December 31, 2020
|
|
|
|
|
(in thousands, except shares and per share data)
|
|
|
|
|
Pro forma net loss
|
|
$
|
(55,390
|
)
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
21,725,817
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(2.55
|
)
|
|
|
|
|
|
|
|
Pro Forma weighted average shares calculation – basic and diluted
|
|
|
|
|
|
Blue Water public stockholders
|
|
|
2,536,969
|
|
|
Blue Water Sponsor
|
|
|
1,302,500
|
|
|
Total
|
|
|
3,839,469
|
|
|
Legacy Clarus
|
|
|
17,886,348
|
|
|
Pro Forma weighted average shares outstanding – basic and diluted (1)
|
|
|
21,725,817
|
|
|
(1)
|
For the purposes of applying the if-converted method for calculating pro forma earnings per share, it was assumed that all Legacy Clarus Preferred stock was extinguished or converted to common stock. As such, the accretion of historical preferred stock accretion was not included in calculation of basic or diluted loss per share.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis provides information which our management believes is relevant to an assessment and understanding of
our results of operations and financial condition. This discussion and analysis should be read together with the section entitled “Unaudited
Pro Forma Condensed Combined Financial Information” and our financial
statements and notes thereto included elsewhere in this prospectus. In addition
to historical financial information, this discussion contains forward-looking statements based upon our current expectations
that involve risks and uncertainties. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.” Our actual
results could differ materially from such forward-looking statements as a result of various factors, including those set forth
under “Risk Factors” and elsewhere in this prospectus.
Overview
We are a pharmaceutical company
focused on the commercialization of JATENZO, the first and only oral T-replacement, or T-replacement therapy (“TRT”)
of its kind that has received final approval by the FDA. We believe that current users of TRT are not satisfied with their current options
and desire a therapeutic that is safe, effective and more convenient. Our primary goal for JATENZO is for it to become the preferred choice
for TRT among men with hypogonadism — T deficiency accompanied by an associated medical condition. In parallel, our broader
vision is for Clarus to become a profitable pharmaceutical company initially focused on the development and commercialization of T and
metabolic therapies for men and women.
Our corporate objectives include
maximizing the commercial success of JATENZO in the United States and internationally by making it the preferred choice for TRT
for men with hypogonadism, expanding its research and development portfolio with additional metabolic therapies for men and women and
sourcing new technologies through its business development efforts.
We
believe JATENZO offers hypogonadal men and prescribing physicians a safe and effective oral replacement option and has a number of advantages
over the currently approved replacement therapies, including:
CONVENIENT
|
|
●
|
Easy-to-swallow
softgel taken BID with food (twice daily)
|
EFFECTIVE
|
|
●
|
87%
of men achieved T levels in normal range
|
|
|
●
|
Restored
T levels to mid-normal range
|
SAFE
|
|
●
|
Safety
profile consistent with TRT class
|
|
|
●
|
No
liver toxicity — JATENZO bypasses first-pass hepatic metabolism; liver toxicity not
observed in clinical studies of up to 2 years duration.
|
In
March 2019, our first commercial product, JATENZO, was approved by the FDA as a TRT for the treatment of adult men with hypogonadism
due to certain medical conditions. JATENZO is the first oral T therapy approved by the FDA in more than 60 years. JATENZO
is a T-ester prodrug created by the linkage of T with the fatty acid undecanoic acid to form T-undecanoate (“TU”).
Once absorbed, TU, an inactive version of T, is converted by natural enzymes in the body to bioactive T. In February 2020, we commenced
U.S. commercial sales of JATENZO and, as of December 31, 2020, JATENZO was available under health plans representing approximately 61%
of U.S. commercial insured lives. Of these patients, 65% had access to JATENZO without having to try another T product first (e.g., generic
or other branded option). For the three and six months ended June 30, 2021, JATENZO generated net revenues of approximately $2.8 million,
and $5.1 million, respectively, demonstrating consistent prescription and sales growth despite the commercial challenges presented by
the COVID-19 pandemic. In August 2019, the FDA granted 3-year Hatch-Waxman market exclusivity to JATENZO, which prevents the FDA
from granting full market approval to similar new drugs or generic competitors of JATENZO until March 27, 2022.
Our U.S. patent portfolio
on JATENZO currently includes five issued patents expiring between March 2029 and December 2030. The issued U.S. patents contain claims
to both pharmaceutical compositions and methods of treatment using our proprietary pharmaceutical composition and all are listed in the
FDA Orange Book: Approved Drug Products with Therapeutic Equivalence Evaluations. In addition, we have several patent applications pending
in the United States and other countries that, if issued, will cover pharmaceutical compositions, methods of treatment and other features
of JATENZO, and have the potential to extend patent coverage beyond 2030.
We also have issued patents
covering JATENZO in Australia, Canada, China, Costa Rica, Europe, Hong Kong, India, Indonesia, Israel, Japan, Mexico, New Zealand, Philippines,
Russia, Singapore, South Africa and South Korea.
Since the beginning of our
operations in 2004, we have focused primarily on developing and progressing JATENZO through clinical development, organizing and staffing,
research and development activities, raising capital and commercial launch activities. We have one product approved for sale, JATENZO,
as of June 30, 2021. We have funded operations primarily with proceeds from the sale of convertible preferred stock and debt through
convertible and senior secured notes, including a royalty obligation. Through June 30, 2021, we have received gross proceeds of $104.2
million from investors in Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock,
gross proceeds of $81.3 million from investors in our issued convertible debt and gross proceeds of $56.7 million from investors in issued
senior secured notes and related royalty obligation.
In April 2021, upon announcement
of the Merger, our convertible noteholders and senior secured noteholders agreed to provide $25.0 million in additional capital to us
following the contemplation and announcement of the Merger until its close, all of which was received and exchanged for shares of Common
Stock at a price of $10.00 per share at the Effective Time.
Since inception, we have incurred
significant operating losses and have experienced negative operating cash flows. Our net losses were $18.1 million and $33.5 million
for the three and six months ended June 30, 2021. As of June 30, 2021, we had an accumulated deficit of $359.3 million. We expect to
continue to generate operating losses and negative operating cash flows for the foreseeable future if and as we:
|
|
●
|
continue to commercialize JATENZO in the United States
for the treatment of adult males with a deficiency or absence of endogenous T;
|
|
|
●
|
incur sales and marketing costs to support the commercialization
of JATENZO;
|
|
|
●
|
incur contractual manufacturing costs for JATENZO;
|
|
|
●
|
implement post-approval requirements related to JATENZO;
|
|
|
●
|
actively pursue additional indications and line extensions
for JATENZO for the treatment of adult males with a deficiency or absence of endogenous T;
|
|
|
●
|
seek to attract and retain new and existing skilled
personnel;
|
|
|
●
|
invest in measures to protect and expand our intellectual
property;
|
|
|
●
|
seek to discover and develop additional product candidates;
|
|
|
●
|
seek to in-license or acquire additional product candidates
for other medical conditions;
|
|
|
●
|
adapt our regulatory compliance efforts to incorporate
requirements applicable to marketed products;
|
|
|
●
|
maintain, expand and protect our intellectual property
portfolio;
|
|
|
●
|
hire additional clinical, manufacturing and scientific
personnel;
|
|
|
●
|
add operational, financial and management information
systems and personnel, including personnel to support our product development and planned future commercialization efforts;
|
|
|
●
|
create additional infrastructure to support operations
as a public company and incur increased legal, accounting, investor relations and other expenses; and
|
|
|
●
|
experience delays or encounter issues with additional
outbreaks of the pandemic in addition to any of the above.
|
We expect to incur significant
expenses related to developing an internal commercialization capability to support product sales, marketing and distribution. Furthermore,
we now expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor
relations and other expenses that we did not incur as a private company.
As a result, we will need
substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate
significant revenue from product sales, if ever, we expect to finance our operations through a combination of private and public equity
offerings, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions.
To the extent that we raise additional capital through the sale of private or public equity or convertible debt securities, existing
ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect
the rights of our equity holders. Private and public equity offerings and debt financings, if available, may involve agreements that
include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions
or capital expenditures or declaring dividends. If we raise additional funds through collaborations or other strategic transactions with
third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates,
or grant licenses on terms that may not be favorable to us. We may be unable to raise additional funds or enter into such other agreements
or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed,
we may have to significantly delay, scale back or discontinue the commercialization efforts of our product, JATENZO, and/or any product
portfolio expansion.
Because of the numerous risks
and uncertainties associated with being a commercial stage pharmaceutical company and our efforts to grow our business by means of product
and business development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve
or maintain profitability. We began product sales in 2020, and if we fail to become profitable or are unable to sustain profitability
on a continuing basis, we may be unable to continue its operations at planned levels and be forced to reduce or terminate our operations.
We expect to continue to incur
significant and increasing expenses and operating losses for the foreseeable future. These factors raise substantial doubt about our
ability to continue as a going concern. Management believes that our existing cash and cash equivalents of $10.3 million as of June 30,
2021, will not be sufficient to fund our operating expenses and capital expenditure requirements for the next 12 months without additional
capital. See “— Liquidity and Capital Resources.”
COVID-19 Business Update
The business disruptions associated
with the COVID-19 pandemic had a significant negative impact on our financial statements for the six months ended June 30, 2021 and for
the year ended December 31, 2020. Management expects that the public health actions being undertaken to reduce the spread of the virus,
and that will have to be undertaken again in the event of a resurgence of the virus, will create significant disruptions to us with respect
to: (i) the demand for our products, (ii) the ability of our sales representatives to reach healthcare customers, (iii) our
ability to maintain staffing levels to support our operations, (iv) our ability to continue to manufacture certain of our products,
(v) the reliability of our supply chain and (vi) our ability to achieve the financial covenants required by the senior secured
notes agreement. The extent to which the COVID-19 pandemic will impact our business will depend on future developments, which are highly
uncertain and cannot be predicted with confidence, such as the duration of the outbreak, travel restrictions and social distancing in
the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States
and other countries to contain and treat the disease.
We are closely monitoring
the evolving impact of the pandemic on all aspects of our business. We have implemented a number of measures designed to protect the
health and safety of our employees, support its customers and promote business continuity. We are also actively reviewing and implementing
cost-saving measures including discontinuing or delaying all non-essential services and programs and instituting controls on travel,
events, marketing and clinical studies to adapt the business plan for the evolving COVID-19 challenges.
We expect to have an adequate
supply of JATENZO through the remainder of 2021. We are working closely with our third-party manufacturers, distributors and other partners
to manage our supply chain activities and mitigate potential disruptions to product supplies as a result of the COVID-19 pandemic.
Merger
On the Closing Date,
Blue Water, and Merger Sub, consummated the previously announced merger with Legacy Clarus Therapeutics pursuant to the Merger Agreement
in which, subject to the terms and conditions set forth therein Merger Sub merged with and into Legacy Clarus, with Legacy Clarus surviving
as a wholly-owned subsidiary of Blue Water, and with Legacy Clarus’s equity holders and convertible debt holders equity interests
converted into the right to receive shares of Common Stock or else be canceled, retired and terminated without consideration, as provided
in the Merger Agreement. Upon the consummation of the Merger, Blue Water changed its name to “Clarus Therapeutics Holdings, Inc.”
As a result of the Merger,
the Combined Entity operates under the Legacy Clarus management team. Dr. Dudley serves as our Chief Executive Officer and President.
Frank Jaeger, our Chief Commercial Officer, and the architect of AndroGel 1.62%’s sales and marketing efforts that resulted in
annual peak sales of over $1 billion, and will continue to lead commercialization efforts for JATENZO. Mr. Jaeger has built a team with
vast experience in the TRT field. Kimberly Murphy, former VP, Global Vaccines Commercialization (Influenza) at GSK joined became Chairperson
of the Board after the Closing.
In conjunction with the Merger,
Legacy Clarus’ convertible noteholders and senior secured noteholders provided $25.0 million in additional capital to Legacy Clarus
following announcement of the Merger until its closing, all of which plus accrued interest converted into shares of Common Stock at a
price of $10.00 per share at the Effective Time.
At the Effective Time, Legacy
Clarus’ Series D Convertible Notes including principal and interest and the shares of redeemable convertible Series D Preferred
Stock, including accumulated dividends, issued and outstanding immediately prior to the Effective Time converted into shares of Common
Stock, and outstanding warrants to acquire Legacy Clarus shares were assumed in the Merger and became exercisable for an aggregate 9,246
shares of Common Stock. Certain of Legacy Clarus’ senior secured noteholders received an aggregate of 1,905,000 shares of Common
Stock in exchange for $10.0 million reduction in senior secured note debt outstanding at the close of the Merger, certain outstanding
royalty rights and additional forbearance (which includes 135,000 shares received from the Sponsor). All other of Legacy Clarus’
preferred stock, common stock and stock options were cancelled and extinguished at the Effective Time.
Components of Our Results of Operations
Product Revenue
We did not generate any product
revenue from inception until 2020. Our first commercial product, JATENZO, was approved by the FDA as a treatment for adult males
with a deficiency or absence of endogenous testosterone, in March 2019 and became commercially available in February 2020.
Total revenue consists of
net sales of JATENZO. Net sales represent the gross sales of JATENZO less provisions for product sales discounts and allowances. These
provisions include trade allowances, rebates to government and commercial entities, copay costs and other customary sales discounts.
Although we expect net sales to increase over time, the provisions for product sales discounts and allowances may fluctuate based on
the mix of sales to different customer segments and/or changes in accrual estimates. For further discussion of the components of revenue
see “— Critical Accounting Policies and Significant Judgments and Estimates.”
Cost of Product Sales
Cost of product sales includes
manufacturing and distribution costs, the cost of the drug substance, FDA program fees, royalties due to third parties on net product
sales, freight, shipping, handling, storage costs and salaries of employees involved with production. We began capitalizing inventory
upon FDA approval of JATENZO. A portion of the inventory sold during the year ended December 31, 2020 was produced prior to FDA approval
and, therefore, expensed previously as research and development expense in 2019 in the amount of $0.7 million.
We expect that our cost of
product sales will increase moderately in the near term as we ramp up production to meet anticipated demand for JATENZO.
The shelf life of JATENZO
is thirty months from the date of manufacture, with earliest expiration of current inventory expected to be November 2021. Due to
the low rate of inventory turnover generated by our commercial launch efforts for JATENZO during a global pandemic, we recorded a reserve
for inventory obsolescence of $7.8 million in the six months ended June 30, 2020. Absent this charge, the gross profit for the six months
ended June 30, 2020 and the year ended December 31, 2020 was $1.5 million and $5.5 million, respectively. We will continue to assess
obsolescence in future periods as demand for JATENZO and the rate of inventory turnover evolves.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses
consist primarily of commercialization expenses related to JATENZO, commercially launched in February of 2020. Prior to the commercial
launch, we had significantly lower sales and marketing expenses. We anticipate that our sales and marketing expenses will increase in
2021 as we continue to expand our commercialization of JATENZO.
General and Administrative Expenses
General and administrative
expenses consist primarily of employee-related expenses, such as salaries, stock-based compensation, benefits and travel expenses for
personnel in executive, legal, finance and accounting, human resources, and other administrative departments. General and administrative
expenses also consist of office leases, and professional fees, including legal, tax and accounting and consulting fees.
We anticipate that our general
and administrative expenses will increase in the future to support continued commercialization efforts, ongoing and future potential
research and development activities, and increased costs of operating as a public company. These increases will likely include increased
costs related to the hiring of additional personnel and fees paid to outside consultants, lawyers and accountants, among other expenses.
Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated
with maintaining compliance with the requirements of Nasdaq and the SEC, insurance and investor relations costs.
Research and Development Expenses
Research and development expenses
have primarily been limited to clinical trials, and chemistry, manufacturing, and controls (“CMC”), and CMC activities
related to JATENZO. Our research and development costs as incurred, include:
|
|
●
|
salaries, benefits and other related costs, including
stock-based compensation expense, for personnel engaged in research and development functions;
|
|
|
●
|
costs of manufacturing and pharmaceutical development
expense related to JATENZO; and
|
|
|
●
|
costs of outside consultants, including their fees
and related travel expenses engaged in research and development functions.
|
We currently have one product,
JATENZO, and do not currently track internal research and development expenses on an indication-by-indication basis as they primarily
relate to personnel, early research and consumable costs, which are deployed across multiple programs. A significant portion of research
and development costs are external costs, such as fees paid to consultants, central laboratories, contractors, contract manufacturing
organizations, contract research organizations and companies that manufacture clinical trial materials and potential future commercial
supplies. Inventory acquired prior to receipt of the marketing approval of JATENZO was recorded as research and development expense as
incurred. We began capitalizing the costs associated with the production of JATENZO after the FDA approval in March 2019.
Our research and development
expenses are expected to increase in the foreseeable future. Specifically, our costs will increase as we conduct additional clinical
trials for JATENZO and conduct further developmental activities for our research and development pipeline programs.
Total Other Income (Expense), Net
Change in Fair Value of Warrant Liability and Derivative Liability
Change in fair value of warrant
liability relates to the change in value of Legacy Clarus’ liability-classified Series D Preferred Stock warrants and convertible
notes derivative liability, which were recognized in connection with its equity financing and certain borrowing arrangements. Such instruments
no longer require remeasurement at fair value option due to completion of the Merger. As the fair value of Series D convertible notes
and Series D warrants at June 30, 2021 and December 31, 2020 was less than the Series D Preferred Stock issuance price of $4.50, the
fair value of the derivative liability and warrant liability was reduced to zero.
Interest Income
Interest income related to
our operating bank accounts, including money market funds.
Interest Expense
Interest expense related to
our convertible notes, senior secured notes and debt discount amortization.
Results of Operations
Comparison of the three months ended June
30, 2021 and 2020
The following table summarizes
our results of operations for the three months ended June 30, 2021 and 2020 (in thousands):
|
|
|
Three Months
Ended
June 30,
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Net product revenue
|
|
$
|
2,779
|
|
|
$
|
822
|
|
|
$
|
1,957
|
|
|
Cost of product sales
|
|
|
554
|
|
|
|
103
|
|
|
|
451
|
|
|
Gross profit
|
|
|
2,225
|
|
|
|
719
|
|
|
|
1,506
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
9,530
|
|
|
|
9,875
|
|
|
|
(345
|
)
|
|
General and administrative
|
|
|
5,327
|
|
|
|
2,012
|
|
|
|
3,315
|
|
|
Research and development
|
|
|
606
|
|
|
|
429
|
|
|
|
177
|
|
|
Total operating expenses
|
|
|
15,463
|
|
|
|
12,316
|
|
|
|
3,147
|
|
|
Loss from operations
|
|
|
(13,238
|
)
|
|
|
(11,597
|
)
|
|
|
(1,641
|
)
|
|
Other (expense) income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability and derivative, net
|
|
|
—
|
|
|
|
26,462
|
|
|
|
(26,462
|
)
|
|
Interest income
|
|
|
—
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
Interest expense
|
|
|
(4,877
|
)
|
|
|
(4,319
|
)
|
|
|
(558
|
)
|
|
Total other (expense) income, net
|
|
|
(4,877
|
)
|
|
|
22,152
|
|
|
|
(27,029
|
)
|
|
Net (loss) income
|
|
$
|
(18,115
|
)
|
|
$
|
10,555
|
|
|
$
|
(28,670
|
)
|
Net Product Revenue
For the three months ended
June 30, 2021, we recorded $2.8 million of net product revenue, which increased by $2.0 million from $0.8 million for the three months
ended June 30, 2020. The increase in net revenue is related to the timing of when JATENZO became commercially available for sale. We
did not begin commercially selling JATENZO within the United States until February 2020, following FDA approval in March 2019.
Cost of Product Sales
Cost of sales was $0.6 million
for the three months ended June 30, 2021, which increased by $0.5 million, from $0.1 million for the three months ended June 30, 2020.
The increase in cost of sales is related to an increase in revenue.
Sales and Marketing Expenses
Sales and marketing expenses
were $9.5 million for the three months ended June 30, 2021, which decreased by $0.3 million, from $9.9 million for the three months ended
June 30, 2020. The decrease in sales and marketing expenses was primarily attributable to the following:
|
|
●
|
A $0.9 million decrease in outsourced advertising and promotion costs;
|
|
|
●
|
a $0.6 million increase in commercial analytic costs; and
|
|
|
●
|
a $0.1 million decrease in patient assistance costs.
|
General and Administrative Expenses
General and administrative expenses were $5.3 million for the three months
ended June 30, 2021, which increased by $3.3 million, from $2.0 million for the three months ended June 30, 2020. The increase in general
and administrative expenses was primarily attributable to the following:
|
|
●
|
A $1.0 million increase in personnel costs, including stock-based compensation
expense, primarily due to an increase in headcount and external consultants;
|
|
|
●
|
a $2.2 million increase in consulting and professional fees, primarily
due to an increase in legal fees related to patents; and
|
|
|
●
|
a $0.1 million increase in insurance fees, related to directors and
officers insurance.
|
Research and Development Expenses
Research and development expenses were $0.6 million for the three months
ended June 30, 2021, which increased by $0.2 million from $0.4 million for the three months ended June 30, 2020. The increase in research
and development expenses was primarily attributable to the following:
|
|
●
|
A $0.2 million increase in costs related to phase IV studies related
to the development of JATENZO, our lead commercial product.
|
Other (Expense)Income, Net
Total other expense, net was
$4.9 million for the three months ended June 30, 2021, compared to income of $22.2 million for the three months ended June 30, 2020.
The decrease of $27.0 million was primarily related to a $26.5 million decrease in the change in fair value of the warrant liability
and derivative and an increase in interest expense of $0.5 million, related to an increase of $0.2 million in interest incurred with
related parties and an increase of $0.3 in interest incurred with third parties.
Comparison of the six months ended June 30, 2021 and 2020
The following table summarizes
our results of operations for the six months ended June 30, 2021 and 2020 (in thousands):
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Net product revenue
|
|
$
|
5,109
|
|
|
$
|
1,719
|
|
|
$
|
3,390
|
|
|
Cost of product sales
|
|
|
921
|
|
|
|
8,071
|
|
|
|
(7,150
|
)
|
|
Gross profit (loss)
|
|
|
4,188
|
|
|
|
(6,352
|
)
|
|
|
10,540
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
17,467
|
|
|
|
14,824
|
|
|
|
2,643
|
|
|
General and administrative
|
|
|
8,932
|
|
|
|
5,221
|
|
|
|
3,711
|
|
|
Research and development
|
|
|
1,817
|
|
|
|
1,381
|
|
|
|
436
|
|
|
Total operating expenses
|
|
|
28,216
|
|
|
|
21,426
|
|
|
|
6,790
|
|
|
Loss from operations
|
|
|
(24,028
|
)
|
|
|
(27,778
|
)
|
|
|
3,750
|
|
|
Other (expense) income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability and derivative, net
|
|
|
—
|
|
|
|
32,915
|
|
|
|
(32,915
|
)
|
|
Interest income
|
|
|
—
|
|
|
|
23
|
|
|
|
(23
|
)
|
|
Interest expense
|
|
|
(9,517
|
)
|
|
|
(6,499
|
)
|
|
|
(3,018
|
)
|
|
Total other (expense) income, net
|
|
|
(9,517
|
)
|
|
|
26,439
|
|
|
|
(35,956
|
)
|
|
Net (loss)
|
|
$
|
(33,545
|
)
|
|
$
|
(1,339
|
)
|
|
$
|
(32,206
|
)
|
Net Product Revenue
For the six months ended June
30, 2021, we recorded $5.1 million of net product revenue, which increased by $3.4 million from $1.7 million for the six months ended
June 30, 2020. The increase in net revenue is related to the timing of when JATENZO became commercially available for sale. We did not
begin commercially selling JATENZO within the United States until February 2020, following FDA approval in March 2019.
Cost of Product Sales
Cost of sales was $0.9 million
for the six months ended June 30, 2021, which decreased by $7.1 million, from $8.1 million for the six months ended June 30, 2020. The
decrease in cost of sales is related to a reserve for inventory obsolescence of $7.8 million recorded in the six months ended June 30,
2020.
Sales and Marketing Expenses
Sales and marketing expenses
were $17.5 million for the six months ended June 30, 2021, which increased by $2.6 million, from $14.8 million for the six months ended
June 30, 2020. The increase in sales and marketing expenses was primarily attributable to the following:
|
|
●
|
A $1.1 million increase in outsourced advertising and promotion costs;
|
|
|
●
|
a $1.2 million increase in commercial analytic costs;
|
|
|
●
|
a $0.2 million increase in patient assistance costs; and
|
|
|
●
|
a $0.1 million increase in distribution fees.
|
General and Administrative Expenses
General and administrative expenses were $8.9 million for the six months
ended June 30, 2021, which increased by $3.7 million, from $5.2 million for the six months ended June 30, 2020. The increase in general
and administrative expenses was primarily attributable to the following:
|
|
●
|
A $1.6 million increase in personnel costs, including stock-based compensation
expense, primarily due to an increase headcount and external consultants;
|
|
|
●
|
a $1.9 million increase in consulting and professional fees, primarily
due to a increase in legal fees related to patents; and
|
|
|
●
|
a $0.2 million increase in insurance fees, related to directors and
officers insurance.
|
Research and Development Expenses
Research and development expenses were $1.8 million for the six months
ended June 30, 2021, which increased by $0.4 million from $1.4 million for the six months ended June 30, 2020. The increase in research
and development expenses was primarily attributable to the following:
|
|
●
|
A $1.0 million increase in costs related to phase IV studies related
to the development of JATENZO, our lead commercial product.
|
|
|
●
|
a $0.6 million decrease in costs related
to research and development consulting services.
|
Other (Expense) Income, Net
Total other expense, net was
$9.5 million for the six months ended June 30, 2021, compared to income of $26.4 million for the three months ended June 30, 2020.
The decrease of $36.0 million was primarily related to a $32.9 million decrease in the change in fair value of the warrant liability
and derivative and an increase in interest expense of $3.0 million, related to an increase of $0.4 million in interest incurred with
related parties and an increase of $2.6 million in interest incurred with third parties.
Liquidity and Capital Resources
Sources of Liquidity
Since inception, we have incurred
significant operating losses, have experienced negative operating cash flows and have accumulated significant accrued liabilities. Our
net loss was $18.1 million and $33.5 million for the three and six months ended June 30, 2021, respectively. As of June 30, 2021, we
had an accumulated deficit of $359.3 million. We expect to continue to generate operating losses and negative operating cash flows for
the foreseeable future. As a result, even with proceeds from the Merger, we will need substantial additional funding to support our continuing
operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect
to finance our operations through a combination of private and public equity offerings, debt financings or other capital sources, which
may include collaborations with other companies or other strategic transactions.
Merger
On September 9, 2021,
we consummated the previously announced merger with pursuant to the Merger Agreement. In connection with the Merger, Legacy Clarus’
convertible noteholders and senior secured noteholders provided $25.0 million in additional capital following the announcement of the
Merger, all of which along with accrued interest converted to shares of Common Stock at a price of $10.00 per share at the Closing Date.
Together with Blue Water’s cash resources and additional capital, the Combined Entity received gross proceeds from the Merger
(not including the $25.0 million of additional capital) of approximately $25.3 million.
Convertible Promissory Notes
On various dates from 2016 to 2021,
Legacy Clarus entered into note purchase agreements, pursuant to which Legacy Clarus borrowed an aggregate of $81.3 million from related
party investors as of June 30, 2020. The carrying value of all convertible notes as of June 30, 2021 was $98.1 million. In July 2021,
Legacy Clarus entered into additional note purchase agreements pursuant to which it borrowed an aggregate of $3.6 million from existing
investors. All convertible notes had the option to convert into Series D Preferred Stock at an exercise price of $4.50. As contemplated
by the Merger Agreement, as of the Effective Time, these notes are no longer outstanding.
Senior Secured Notes
On March 12, 2020, Legacy Clarus
issued and sold senior secured notes to certain purchasers not related to Legacy Clarus. Gross proceeds from the senior secured notes
were $50.0 million, and Legacy Clarus received $42.7 million in net proceeds after deducting the original issue discount, interest reserve
and transaction expenses.
The senior secured notes,
currently bear interest at a rate of 12.5% per annum, are secured by substantially all of Legacy Clarus’ assets and intellectual
property, and mature in March 2025. The senior secured notes provide for semi-annual payments on March 1 and September 1. Until March
2022, only interest is payable on the notes. Legacy Clarus did not pay interest of approximately $2.9 million due September 1, 2021.
On September 28, 2021, Legacy Clarus and the noteholders entered into Supplemental Indenture No. 3, which supplements the existing indenture,
pursuant to which they agreed to defer the September 1, 2021 interest payment to March 1, 2022, at an increased interest rate of 18.5%.
Pursuant to Supplemental Indenture No. 3, Legacy Clarus also agreed, among other things, to commence a process to refinance, redeem or
other repay all notes outstanding under the indenture.
Beginning in September 1, 2022,
in addition to interest payments, Legacy Clarus is required to make principal payments of $6.0 million on each of September 1, 2022, March
1, 2023, September 1, 2023 and March 1, 2024. Thereafter, in addition to interest payments, Legacy Clarus is required to make principal
payments of $8.0 million on each of September 1, 2024 and March 1, 2025. Additionally, on February 1, 2023, Legacy Clarus is required
to make a payment of principal in the amount of $3.125 million, which is the amount of a PIK note issued May 27, 2021, plus accrued and
unpaid interest in respect of such principal.
As of the Closing Date and
following the completion of the Business Combination, there is approximately $43.125 million of principal (including principal of $3.125
million in respect of the PIK note), plus accrued interest, outstanding under the senior secured notes.
Cash Flows
The following table summarizes
our cash flows for the six months ended June 30, 2021 and 2020 (in thousands):
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Net cash used in operating activities
|
|
|
(21,935
|
)
|
|
|
(23,359
|
)
|
|
Net cash used in investing activities
|
|
|
(20
|
)
|
|
|
(60
|
)
|
|
Net cash provided by financing activities
|
|
|
25,000
|
|
|
|
47,220
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
3,045
|
|
|
$
|
23,801
|
|
Operating Activities
Net cash used in operating
activities was $21.9 million for the six months ended June 30, 2021, reflecting net loss of $33.5 million, offset by a net change of
$1.7 million in net operating assets and non-cash charges of $9.9 million. The non-cash charges primarily consist of non-cash interest
expense on debt financings and the royalty obligation, stock-based compensation expense and depreciation. The change in net operating
assets and liabilities was primarily due to an increase in inventory of $3.9 million, an increase in accounts receivable of $1.8 million,
an increase in prepaid expenses and other current assets of $0.1 million, a decrease in deferred revenue of $0.1 million, partially offset
by an increase in accounts payable of $1.4 million and an increase in accrued expenses of $6.4 million.
Net cash used in operating
activities was $23.4 million for the six months ended June 30, 2020, reflecting a net loss of $1.3 million, offset by a net change of
$4.2 million in net operating assets and non-cash charges of $26.3 million. The non-cash charges primarily consist of the change in fair
value of the warrant liability and derivative liability, non-cash interest expense on debt financings and the royalty obligation, stock-based
compensation expense and depreciation. The change in net operating assets and liabilities was primarily due to an increase in accounts
receivable of $1.0 million, an increase in prepaid expenses and other current assets of $3.7 million, an increase in accrued expenses
of $3.6 million, partially offset by a decrease in inventory of $2.8 million, an increase in accounts payable of $2.3 million an increase
in deferred revenue of $0.2 million.
Investing Activities
During the six months ended
June 30, 2021 and 2020, we used approximately $20,000 and $60,000, respectively, of cash in investing activities for purchases of property
and equipment.
Financing Activities
During the six months ended
June 30, 2021, net cash provided by financing activities was $25.0 million, related to $20.0 million of proceeds from the issuance of
convertible notes payable and $5.0 million of gross proceeds from the issuance of senior notes payable.
During the six months ended
June 30, 2020, net cash provided by financing activities was $47.2 million, primarily related to $49.1 million of gross proceeds received
from the issuance of senior notes and related royalty obligation, and $1.6 million of gross proceeds received from the issuance of convertible
note, partially offset by debt issuance costs paid of $3.5 million.
Funding Requirements
Our primary use of cash is
to fund operating expenses, primarily related to our selling and marketing activities associated with the commercialization of JATENZO
and our research and development activities. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses,
as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses. Until such time, if ever, we can
generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings,
collaborations, strategic alliances and licensing arrangements. Our ability to raise additional capital may be adversely impacted by
potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in
the United States and worldwide resulting from the ongoing COVID-19 pandemic. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, ownership interests of existing stockholders may be diluted, and the terms of these
securities may include liquidation or other preferences that adversely affect our existing stockholders’ rights. Debt financing,
if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring
additional debt, making capital expenditures or declaring dividends.
If funding permits, we would
expect our expenses to increase substantially in connection with its ongoing activities, particularly as we advance the commercialization
of our product JATENZO. In addition, we now expect to incur additional costs associated with operating as a public company, including
significant legal, accounting, investor relations and other expenses that we did not incur as a private company.
Going Concern
We expect as a public entity
post-Merger, that our revenue generated from the sales of JATENZO along with existing cash and cash equivalents of $10.3 million and
proceeds from the Merger will not be sufficient to fund our operating expenses in order to maximize the commercial launch of JATENZO
and capital expenditure requirements for 12 months from through at least 12 months from the date that our condensed financial statements
are available to be issued. Since our inception, we have devoted substantially all our efforts to business planning, clinical development,
commercial planning and raising capital. We have incurred losses since inception and have an accumulated deficit of $359.3 million as
of June 30, 2021, including $101.7 million of cumulative accretion on our Series A Redeemable Convertible Preferred Stock (“Series
A Preferred Stock”), Series B Redeemable Convertible Preferred Stock (“Series B Preferred Stock”), Series
C Redeemable Convertible Preferred Stock (“Series C Preferred Stock”) and Series D Redeemable Convertible Preferred
Stock (“Series D Preferred Stock”) (collectively, “Preferred Stock”), and $99.0 million of cumulative
non-cash interest related to previously issued convertible notes. We are also in forbearance and default on our March 12, 2020 senior
secured notes, as we were unable to maintain at least $10.0 million in cash and cash equivalents as of the last day of each calendar
month beginning December 2020 and were unable to pay the required $3.1 million interest payment due in March 2021.
In addition to the Merger
and the related investment, we plan to seek additional funding through the expansion of our commercial efforts to grow JATENZO and our
operating cash flow, business development efforts to out-license JATENZO internationally, equity financings, debt financings such as
the secured notes, or other capital sources including collaborations with other companies or other strategic arrangements with third
parties. There can be no assurance that these future financing efforts will be successful.
If we are unable to obtain
funding or generate operating cash flow, we will be forced to delay, reduce or eliminate some or all of our product portfolio expansion
or commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations. Although
management continues to pursue these plans, there is no assurance that we will be successful in obtaining sufficient funding on terms
acceptable to us to fund continuing operations, if at all. The terms of any financing may adversely affect the holdings or the rights
of our stockholders.
Working Capital
Because of the numerous risks
and uncertainties associated with research, development and commercialization of JATENZO and our research and development portfolio,
we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could
increase significantly as a result of many factors, including:
|
|
●
|
The costs, timing and ability to manufacture JATENZO;
|
|
|
●
|
the costs of future activities, including product sales, marketing,
manufacturing and distribution of JATENZO;
|
|
|
●
|
the costs of manufacturing commercial-grade product and necessary inventory
to support continued commercial launch;
|
|
|
●
|
the costs of potential milestones related to license agreements;
|
|
|
●
|
the ability to receive additional non-dilutive funding, including grants
from organizations and foundations;
|
|
|
●
|
the revenue from commercial sale of its products;
|
|
|
●
|
the costs of preparing, filing and prosecuting patent applications,
obtaining, maintaining, expanding and enforcing its intellectual property rights and defending intellectual property-related claims;
and
|
|
|
●
|
our ability to establish and maintain collaborations on favorable terms,
if at all.
|
Contractual Obligations and Commitments
The following table summarizes
our contractual obligations as of June 30, 2021, and the effects such obligations are expected to have on our liquidity and cash flow
in future periods (in thousands):
|
Contractual obligation
|
|
Total
|
|
|
Less than
1 year
|
|
|
More than
1 year and
less than 3
|
|
|
More than
3 years and
less than 5
|
|
|
More than
5 years
|
|
|
|
|
|
|
|
Convertible promissory notes
|
|
$
|
78,722
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
78,722
|
|
|
$
|
-
|
|
|
Interest on convertible promissory notes (1)
|
|
|
33,659
|
|
|
|
8,212
|
|
|
|
18,560
|
|
|
|
6,887
|
|
|
|
-
|
|
|
Senior secured notes
|
|
|
58,125
|
|
|
|
-
|
|
|
|
38,125
|
|
|
|
20,000
|
|
|
|
-
|
|
|
Interest on senior secured notes (2)
|
|
|
21,568
|
|
|
|
7,771
|
|
|
|
11,622
|
|
|
|
2,175
|
|
|
|
-
|
|
|
Operating lease obligations (3)
|
|
|
63
|
|
|
|
58
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
Catalent Agreement purchase obligation
|
|
|
13,646
|
|
|
|
3,639
|
|
|
|
7,278
|
|
|
|
2,729
|
|
|
|
-
|
|
|
Pfizer Agreement purchase obligation
|
|
|
4,719
|
|
|
|
1,849
|
|
|
|
2,870
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
210,502
|
|
|
$
|
21,529
|
|
|
$
|
78,460
|
|
|
$
|
110,513
|
|
|
$
|
0
|
|
|
(1)
|
We have outstanding convertible promissory notes of $78.7 million, which
have a stated interest rate of 8% and mature on March 1, 2025.
|
|
(2)
|
We have borrowed $58.1 million through issuing our senior secured notes
that bear interest at 12.5% and mature on March 1, 2025.
|
|
(3)
|
We have an operating lease agreement for our office space.
|
The commitment amounts in
the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including
fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the
contracts.
Purchase Obligations
In July 2009, we entered
into a commercial manufacturing agreement, as amended, with Catalent Pharma Solutions, LLC (the “Catalent Agreement”).
Pursuant to the terms of the Catalent Agreement, we must make minimum annual purchases of JATENZO softgel capsules, through the initial
term, or March 2025. Any shortfall between the minimum annual purchase quantities and actual purchases will be multiplied by a unit
price, as defined in the Catalent Agreement, and paid to Catalent within 30 days of any year-end that the minimum purchase requirement
is not met. We have not made any payments to Catalent as a result of a shortfall in minimum purchase quantities. The Catalent Agreement
renews automatically for two-year periods and either party may terminate the contract upon twelve months, written notice. Purchases under
the Catalent Agreement for the three months ended June 30, 2021 and 2020 were $1.7 million and $0.2 million, respectively. Purchases
under the Catalent Agreement for the six months ended June 30, 2021 and 2020 were $5.1 million and $3.0 million, respectively.
We entered into a product
supply agreement with Pharmacia & Upjohn Company LLC, or Pfizer (the “Pfizer Agreement”), effective January
1, 2021. Pursuant to the terms of the Pfizer Agreement, we must make minimum annual purchases of T-undecanoate equal to approximately
$1.8 million per year, through the initial term, or January 2024. If there is a shortfall between the minimum annual purchase quantities
and actual purchases, the difference between the minimum annual purchase amount and actual purchases will be paid to Pfizer. There were
no purchases under the Pfizer Agreement during the six months ended June 30, 2021.
Lease Commitments
We have entered into operating
leases for rental space in Northbrook, Illinois and Murfreesboro, Tennessee that extend into December 31, 2021 and September 30, 2022,
respectively. The table above includes future minimum lease payments under the non-cancelable lease arrangements.
We enter into contracts in
the normal course of business with clinical trial sites, clinical and commercial supply manufacturers, and other services and products
for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts
and not included in the table above.
Long-Term Debt Commitments
As discussed above and in
Note 7 of our financial statements appearing elsewhere in prospectus, we have both convertible promissory notes and senior secured notes
that are included in the table above.
License Agreement Commitments
In May 2021, we entered
the HavaH Agreement with HavaH Therapeutics (“HavaH”), an Australia-based biopharmaceutical company developing androgen
therapies for inflammatory breast disease and certain forms of breast cancer. Under the HavaH Agreement, we will acquire the development
and commercialization rights for HavaH T+Ai™, to be renamed CLAR-121.
Under the terms of the licensing
agreement, we made an upfront payment of $0.5 million and HavaH may be eligible for up to $10.8 million in potential development and
regulatory milestone payments. Additionally, HavaH would be eligible for royalty payments and up to $30.0 million in potential commercial
milestones. Such royalty payments will be based on total aggregate annual net sales of CLAR-121 in the territory, at a low single digit
percentage rate (when there is no patent protection or regulatory exclusivity) or a low teens percentage rate (where CLAR-121 has patent
protection or regulatory exclusivity). Additionally, such royalties are payable until the later of ten years or the loss of patent protection
or regulatory exclusivity.
In September 2021, we entered
into a licensing agreement with McGill University (“McGill”), Canada’s top ranked medical doctoral university. Under
the agreement, Clarus will develop and commercialize McGill’s proprietary technology designed to treat conditions associated with
CoQ10 deficiencies in humans.
Under the terms of the licensing
agreement, we paid McGill a one-time upfront payment of $350,000, and McGill may be eligible for up to $10.5 million in potential development
and regulatory milestone payments. Additionally, McGill would be eligible for up to $30 million in potential commercial milestone payments.
Critical Accounting Policies and Significant
Judgments and Estimates
There have been no significant
changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” disclosed in our most recent annual financial statements within our Registration Statement on Form
S-4 (Reg. No. 333-256116), filed with the SEC pursuant to Rule 424(b)(3) on July 23, 2021.
Off-Balance Sheet Arrangements
We did not have during the
periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Recently Issued Accounting Pronouncements
See Note 2 to our annual financial
statements appearing in our audited financial statements for the year ended December 31, 2020 included in our final prospectus that forms
part of Blue Water’s Registration Statement on Form S-4 (Reg. No. 333-256116), filed with the SEC pursuant to Rule 424(b)(3) on
July 23, 2021
Qualitative and Quantitative Disclosures about
Market Risks
We are exposed to certain
market risks in the ordinary course of its business. Market risk represents the risk of loss that may impact its financial position due
to adverse changes in financial market prices and rates. Our market risk exposure primarily relates to changes interest rates.
Interest Rate Risk
Our primary exposure to market
risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our
cash equivalents are in the form of money market funds and our long-term debt financings. As of June 30, 2021 and December 31, 2020,
we had cash and cash equivalents of $10.3 million and $7.2 million, respectively. Interest income is sensitive to changes in the general
level of interest rates; however, due to the nature of these investments, an immediate 10% change in interest rates would not have a
material effect on the fair market value of our investment portfolio.
As of June 30, 2021 and December
31, 2020, $139.4 million and $111.3 million, respectively, in aggregate principal amount of our outstanding debt obligations were at
fixed interest rates, representing approximately 100 percent of our total debt, on an amortized cost basis. As of June 30, 2021 and December
31, 2020, our outstanding debt obligations at fixed interest rates were comprised of convertible promissory notes and senior notes.
Emerging Growth Company Status
The Combined Entity is expected
to be an “emerging growth company” as defined in the Jobs Act and may take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies that are not emerging growth companies. The Combined Entity may take advantage
of these exemptions until it is no longer an emerging growth company under Section 107 of the JOBS Act, which provides that an emerging
growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised
accounting standards. The Combined Entity expects to avail itself of the extended transition period and, therefore, while the Combined
Entity is an emerging growth company, it will not be subject to new or revised accounting standards the same time that they become applicable
to other public companies that are not emerging growth companies, unless it chooses to early adopt a new or revised accounting standard.
BUSINESS
Overview
We are a pharmaceutical company
focused on the commercialization of JATENZO, the first and only oral T-replacement, or T-replacement therapy (“TRT”)
of its kind that has received final approval by the FDA. We believe that current users of TRT are not satisfied with their current options
and desire a therapeutic that is safe, effective and more convenient. Our primary goal for JATENZO is for it to become the preferred choice
for TRT among men with hypogonadism — T deficiency accompanied by an associated medical condition. In parallel, our broader
vision is for Clarus to become a profitable pharmaceutical company initially focused on the development and commercialization of T and
metabolic therapies for men and women.
In March 2019, our first
commercial product, JATENZO, was approved by the FDA as a TRT for the treatment of adult men with hypogonadism due to certain medical
conditions. JATENZO is the first oral T therapy approved by the FDA in more than 60 years. JATENZO is a T-ester prodrug created
by the linkage of T with the fatty acid undecanoic acid to form T-undecanoate (“TU”). Once absorbed, TU, an inactive
version of T, is converted by natural enzymes in the body to bioactive T. In February 2020, we commenced U.S. commercial sales of
JATENZO and, as of December 31, 2020, JATENZO was available under health plans, representing approximately 61% of U.S. commercial
insured lives. Of these patients, 65% had access to JATENZO without having to try another T-replacement product first (e.g.,
generic or other branded option). In the year ended December 31, 2020, JATENZO generated net revenues of approximately $6.4 million,
demonstrating consistent month over month prescription growth over the first year of commercialization despite the commercial challenges
presented by the COVID-19 pandemic. In August 2019, the FDA granted 3-year Hatch-Waxman market exclusivity to JATENZO,
which prevents the FDA from granting full market approval to similar new drugs or generic competitors for the protected conditions of
use of JATENZO until March 27, 2022.
T-deficiency is diagnosed
in men by a simple blood test that identifies a T concentration below 300 nanograms per deciliter (“ng/dL”). Common
symptoms identified in the Endocrine Society’s clinical guidelines that suggest testing for T deficiency include reduced sexual activity
and desire, decreased energy, increased body fat and reduced muscle mass, depressed mood and other emotional and physiological issues.
T-deficiency affects approximately 20 million men over the age of 45, according to a study published in the International
Journal of Clinical Practice in 2006. Of this population, about 8 million are diagnosed with hypogonadism, and even fewer,
approximately 2.2 million, actually receive TRT, the standard treatment for hypogonadism. Even with this low treatment rate, the
overall market for TRT grew 7% in 2020 over 2019, despite the COVID-19 pandemic, which followed a 6.6% growth in prescriptions
in the United States in 2019 as compared to 2018. The overall T-replacement therapy market was nearly 8 million prescriptions
in 2020 and has been growing at a 5% compound annual growth rate, according to Symphony Health (Payer/Plan TRx Volume).
Existing therapeutic options
for hypogonadal men, including T-injections (intramuscular and subcutaneous), T-gels, T-patches, T- buccal T-patches and implanted
subcutaneous T-pellets, all suffer from limitations due to their routes of administration and ease of use. Consequently, these TRT options
have low rates of adherence to prescribed dosing regimens. For example, only 31% and 14% of men continued taking T-gel six and twelve
months after commencing therapy, respectively, according to a peer-reviewed study that reviewed enrollment and medical records of
more than 15,000 men with hypogonadism. In addition, according to a survey we commissioned in 2020, 76% of the surveyed men reported that
their needs are not being met by existing T-replacement therapies. This same poll found that 82% of TRT users were interested in
learning about an oral TRT option. We believe that many hypogonadal patients are not satisfied with non-oral therapies due to administration
and other challenges. Thus, they often discontinue their TRT or switch from one option to another in a cyclical search of a TRT that is
acceptable. We believe JATENZO not only provides patients with the convenience of an oral route of administration but also the efficacy
and safety necessary to treat hypogonadism. Although T-injections and T-gels collectively represent 95% of the TRT market, these
products have significant challenges. Injections are painful, yield considerable inter-day T level variability and carry the risk
of pulmonary micro-embolisms (“POMEs”). Gels are messy, pose a significant risk of T transference to the patient’s
partner or children and result in substantial amounts of T entering the environment when patients shower, bathe or swim. Overall, we believe
that JATENZO is more convenient than currently approved T therapies, thus making it more likely that men will adhere to their treatment.
We own patents and pending
applications in the United States and several other countries worldwide having claims covering the formulation and use of JATENZO,
and have been involved in interference proceedings with Lipocine involving a Clarus patent application having claims covering the use
of JATENZO and Lipocine’s TLANDO product. See under the section “—Legal Proceedings”. There is risk that
other infringement or interference proceedings could be declared involving patent or patent application claims covering the formulation
and use of JATENZO. Although we prevailed in our motion on summary judgment in the litigation claims with Lipocine and entered into a
global settlement agreement with Lipocine that includes resolution of the pending interference, additional claims from other third parties
could arise in the future. There is risk that any future litigation and interference proceedings are resolved in a manner that could result
in a material adverse effect on us and our business. There is also risk that other interference proceedings could be declared involving
patent claims that cover JATENZO, which would pose the same risk of potentially needing a license from the patent holder. Two interferences
were previously decided against us, see under the section “Legal Proceedings”. There is risk that the litigation and
interference proceedings may be resolved in a manner that could result in a material adverse effect on us and our business. We have established
a contract sales force of approximately 55 sales representatives to promote JATENZO in the United States. We intend to invest additional
resources to expand our national footprint to approximately 100 targeted sales representatives and to bring this sales force in-house.
Our sales force currently targets high volume prescribing health care providers (“HCPs”) comprised of endocrinologists,
urologists and primary care physicians. We continue to evaluate marketing or co-promotion arrangements to leverage our existing sales
force and provide even broader JATENZO penetration in the U.S. market. We continue to explore potential strategic partnerships to assist
in obtaining marketing approval for and commercialization of JATENZO outside of the United States (particularly in Europe, Asia and
the Middle East). Success in achieving sales of JATENZO outside the United States could be a source of non-dilutive funding.
We are also actively exploring potential business development transactions to expand our portfolio and leverage our existing sales force.
Since the beginning of our
operations in 2004, we have assembled a seasoned management team with significant commercial TRT and large pharmaceutical experience.
Our Founder, President and Chief Executive Officer, Dr. Robert Dudley, has over 30 years of experience in the T-replacement field
and led the discovery, development, regulatory approval and launch of AndroGel, the first T-gel product. He also co-invented JATENZO
and oversaw its development through approval by the FDA. Our senior management team includes industry veterans who have collectively more
than 60 years of experience in the TRT market.
Our Strategy
Our goal is to build a profitable
pharmaceutical company that commercializes products complementary to our lead product, JATENZO. Key elements of our strategy to achieve
this goal include:
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Establish JATENZO as the preferred choice among appropriate
hypogonadal men for T-replacement. We will continue to drive awareness of JATENZO by leveraging the convenience
of JATENZO’s oral administration and will seek to establish JATENZO as the preferred TRT treatment for HCPs and their hypogonadal patients.
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Accelerate the build of our commercial infrastructure to successfully grow the market for JATENZO and launch any additional products we develop or acquire. We will grow our commercial infrastructure and sales force that targets endocrinologists, urologists and PCPs who are high prescribers of TRT.
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Explore additional indications for JATENZO and consider
business development opportunities to grow our pipeline and product portfolio. We plan to use exploratory
trials to guide the development of JATENZO for additional potential indications, including, for example, treatment of hypogonadism associated
female-to-male transgender T therapy and chronic kidney disease. We will also seek to leverage the commercial launch of JATENZO
with our sales organization and commercial infrastructure to develop or acquire the rights to additional complementary products or product
candidates.
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Hypogonadism and the T-Replacement Therapy Market
Hypogonadism or T-Deficiency
Testosterone (T) is a
key male sex hormone and is essential to the development of male growth. It is responsible for promoting growth of muscle mass, increasing
bone density and strength, and stimulating linear growth and bone maturation. In addition, researchers increasingly have identified T
as an important factor in metabolic function and other physiological processes, including the observation that normal levels help maintain
energy levels and an overall sense of well-being in men.
Approximately 20 million
men in the United States between the ages of 45 and 75 years old may have deficient levels of T, defined as circulating T levels
below 300 ng/dL, based upon age-based prevalence rates published in the International Journal of Clinical Practice in 2006 and the
U.S. Census Bureau’s 2012 population estimates.
The Endocrine Society, a professional
medical organization comprised of HCPs with medical expertise in the area of hormones and related medical disorders, has published clinical
guidelines identifying signs and symptoms of hypogonadism, including the following:
There are two types of hypogonadism:
primary, or classical, hypogonadism and secondary hypogonadism.
Primary hypogonadism is caused
by the failure (inability) of the testes to synthesize and secrete T. Causes of primary hypogonadism include Klinefelter’s syndrome, a
condition in which males have an extra X chromosome, testicular tumors, testicular damage, varicocele, which is an abnormal enlargement
of the vein in the scrotum that drains blood from the testicles, disease-associated testicular damage, including that from mumps,
certain systemic diseases, such as renal insufficiency, and exposure to alcohol in chronic excess.
Secondary hypogonadism is caused
by a fault in the hypothalamic-pituitary axis that results in an inadequate gonadotropin signal to the testes to produce T. Secondary
hypogonadism is relatively common among men with diseases such as type-2 diabetes and its common precursor, metabolic syndrome. For
example, approximately 33% and 12% of men with type-2 diabetes and metabolic syndrome, respectively, are hypogonadal, according to
research published in Diabetes Care in 2007 and the Journal of Andrology in 2009. Secondary hypogonadism
is also associated with obesity, chronic heart disease, chronic kidney disease, asthma and chronic obstructive pulmonary disease.
U.S. TRT Market Dynamics %
U.S. sales of T-replacement therapies,
currently the standard treatment for T deficiency, exceeded $1.3 billion in 2020, according to Symphony Health, and almost 8 million
prescriptions for T-replacement therapies are written per year. U.S. sales represent the vast majority of global TRT sales, with
injections representing 36% and gels representing 58% of the U.S. sales dollars in 2020. Injections represent 75% and gels represent 24%
of all U.S. prescriptions written in 2020.
The following graph demonstrates
year-over-year prescription growth in the U.S. TRT market over the last 5 years.
U.S. Annual Prescriptions and Year-over-Year Growth in the TRT Market
We believe there is potential
for continued TRT market expansion. According to a study published in the Archives of Internal Medicine in 2008, only
12% of hypogonadal men, representing less than half of all men diagnosed with hypogonadism, actually receive TRT. Additionally, the overall
TRT market in 2020 grew 7% over 2019, to approximately 8 million prescriptions per year, despite the COVID-19 pandemic.
This followed a 6.6% growth in prescriptions in 2019 as compared to 2018. Our expectation of continued growth and penetration in the TRT
market in the United States is based on a number of factors, including:
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a growing awareness among physicians to diagnose and treat
hypogonadism and willingness by patients to discuss signs and symptoms of their medical condition than in the past;
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recognition and association by HCPs of the association of
hypogonadism with other increasingly prevalent diseases, such as metabolic syndrome, type 2 diabetes, chronic renal disease and chronic
heart disease;
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the ability to easily identify low serum T levels through
a simple blood test; and
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continuing guidance from medical societies (including the
Endocrine Society, American Association of Clinical Endocrinologists and American Urological Association), that clinicians measure serum
T levels of patients if they present with symptoms or signs typically associated with hypogonadism.
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Limitations of Existing Treatments for Hypogonadism
The U.S. TRT market is comprised
primarily of non-oral T treatments, including injections, gels, topical and buccal patches, and implanted subcutaneous pellets. Each
of these products is associated with different T pharmacokinetic profiles which, in turn, can lead to significant intra- and inter-patient variabilities
in circulating T response and associated symptom relief. Furthermore, each TRT delivery route has been associated with user challenges.
For example, the pain of weekly deep muscle injections, skin irritation associated with the T-patch or T-gels, risk of T transference
to women and children by T-gel users, potential anaphylactic reactions observed with a long-acting depot form of TU, thrice-daily administration
of a nasal T preparation, and a surgical procedure for placement of T-pellets. Consequently, there has been relatively poor patient adherence
and significant ‘switching’ from one TRT to another. Missing from the available armamentarium of TRT therapies was an oral
T product that was effective in meeting current T-replacement regulatory standards and one not associated with potentially serious
liver toxicity. Prior to JATENZO’s approval, the only oral T-replacement product approved by FDA (over 60 years ago) was methyltestosterone
— a chemical cousin of T that has been associated with serious liver toxicity and thus has been rarely prescribed. Therefore, when
viewed in the historical context of TRT, we believe JATENZO offers appropriate hypogonadal patients an easy-to-use, safe and effective
TRT option that was not previously available.
Prior to 2000, with the introduction
of a T-gel, T was primarily available through either scrotal or non-scrotal patches, pellets, or injections. T-injections, which
became the dominant mode of administration and remain so today. However, besides having pain at the injection site, intramuscular T products
carry significant risk of POME and polycythemia (i.e., increase in red blood cell count) which requires monitoring by the healthcare provider.
With the introduction of a
T-gel formulation in 2000, topical T administration became desirable because of its ease of use. However, over time common side effects
including itching, irritation and discomfort at the application site became increasingly problematic for patients. Additionally, topical
T-gels place partners and children at risk of T transference (secondary exposure to T when transferred from user to non-user (e.g.,
women and children)). This prompted the FDA to add boxed warnings to the labeling for T-gels relating to T transference. Despite
these limitations, gels have continued to demonstrate significant market penetration.
The other approved TRT therapies
have their own limitations, including gum, nasal and skin irritation and difficulty of administration (e.g., office procedure). As a result,
non-oral TRT products are associated with low rates of patient compliance and adherence. More than 95,000 men change T-replacement therapies
more than once per year. According to a peer-reviewed study published in the Journal of Sexual Medicine in 2013, only 31% and 14%
of patients were still on gel therapy six months and 12 months, respectively, after first dosing, and only about half of those who
discontinued therapy later resumed treatment.
Our Solution — JATENZO
Our first commercial product,
JATENZO, was approved in March 2019 by the FDA for oral TRT use in adult males for conditions associated with a deficiency or absence
of endogenous, or naturally produced, T, including congenital or acquired primary and secondary hypogonadism, with a boxed warning. JATENZO
was the first oral T-medicine approved by the FDA in more than 60 years, the first oral T-prodrug, and the first and only oral
softgel TU TRT.
We believe JATENZO offers hypogonadal
men and prescribing physicians a safe and effective oral replacement option and has a number of advantages over the currently approved
replacement therapies, including:
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Convenient Oral Dosing. JATENZO
as either one or two easy-to-swallow softgels is taken twice daily with a regular meal. We believe oral dosing is preferred by most
patients, is easier to use than other TRTs currently on the market and will ultimately improve the low TRT adherence rates.
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Normalized T Levels. After
dose adjustment (if necessary), 87% of men treated with JATENZO in our clinical trials achieved average serum T levels in the normal
range. In addition, JATENZO improved the classic signs and symptoms associated with hypogonadism, including psychosexual symptoms, body
mass index, fat mass and bone mineral density.
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Avoids Administration Challenges. Unlike
other TRT products, JATENZO is an oral product and as such avoids the challenges, risks and safety issues seen with non-oral products.
JATENZO avoids the risk of T transfer to partners and children that exists with gel treatment; injection site pain, risk of POME and
polycythemia seen with injections, and the gum, nasal and skin irritation and difficulty of administration seen with other TRT products
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Safety Profile. JATENZO’s
overall safety profile is generally consistent with that observed in clinical trials of other FDA approved TRTs. The modest increase
in systolic blood pressure observed in men treated with JATENZO is not unique and has been observed with injectable T and other oral
TU products under development in the United States or marketed outside the U.S. Importantly, JATENZO has not been associated with
liver toxicity in Phase 3 clinical testing that included patients treated with JATENZO for up to two years.
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We commercially launched JATENZO
in the U.S. in February 2020. In the year ended December 31, 2020, JATENZO generated net revenue of approximately $6.4 million.
Despite the COVID-19 pandemic which had a profound effect on our ability to market JATENZO to HCPs, we achieved prescription growth
month-over-month during the first year of our launch as a result of our increasing educational efforts and increasing commercial
payor coverage.
As of December 31, 2020,
JATENZO was available and covered for approximately 61% of all U.S. commercial lives. Over 65% of those covered are not required by the
applicable payor to try a generic or other branded therapy before reimbursing JATENZO. This level coverage is consistent within the class
of approved T-replacement products. We anticipate being able to secure additional payor coverage for JATENZO but there is no guarantee
this will occur.
JATENZO is available in three
capsule strengths for twice daily administration with food. In our pivotal Phase 3 trial of JATENZO, an open-label study designed
to evaluate the efficacy and safety of JATENZO in adult hypogonadal male subjects referred to as the ‘inTUne trial’, JATENZO
was evaluated for safety against Axiron, a then commonly prescribed topical T formulation. A total of 222 hypogonadal men were randomized,
with 166 in the JATENZO group and 56 in the Axiron group. JATENZO achieved the primary endpoint, with 87% of patients treated with JATENZO
achieving an average T level in the normal male range by the end of the trial period and in some cases in as little as seven days. Notably,
a robust dose-titration paradigm was tested and validated such that T responses to JATENZO could be tailored to individual patient
requirements if a dose adjustment was necessary. As shown graphically below, JATENZO also improved classic signs and symptoms associated
with hypogonadism in the inTUne trial, including free (i.e., bioactive) T, psychosexual symptoms, body composition, and bone mineral
density, each as illustrated in the figures below.
The safety profile of JATENZO
was consistent with data generated in two earlier Phase 3 trials and the general safety profiles for TRT products as a therapeutic class.
No liver toxicity was observed. The most common adverse events of JATENZO were headache (5%), increased hematocrit (5%), hypertension
(4%), decreased HDL (3%), and nausea (2%). Each of the treatment-emergent adverse events of an increased hematocrit was considered
by the investigator as mild in intensity. Compared to baseline, mean serum sex hormone binding globulin (SHBG) concentrations declined
significantly in response to JATENZO but remained within the normal range after approximately 3 to 4 months of JATENZO. In parallel,
concentrations of free T increased such that by the end of treatment, mean levels were significantly higher than baseline but still within
the normal range. JATENZO was associated with a modest increase in average systolic blood pressure (BP) of about 3-5 mmHg —
an increase consistent in magnitude with a currently marketed form of injectable testosterone. Because any increase in systolic BP increases
the theoretical risk of an adverse cardiovascular event (e.g., heart attack or stroke), FDA required that JATENZO (as well as an injectable
T product approved in 2018 XYOSTED) to carry a boxed warning about potential increased blood pressure. Due to this risk, the boxed warning
also states that use of JATENZO is only for the treatment of men with hypogonadal conditions associated with structural or genetic etiologies.
We are also required by the FDA to conduct certain post-marketing studies to assess patient understanding of key risks relating to
JATENZO, evaluate adrenal function with chronic JATENZO therapy, and conduct a pediatric study of JATENZO in adolescent hypogonadal patients.
In recent years, the FDA has
mandated changes to all TRT product labeling to define the indicated uses of TRT products more explicitly and to strengthen precautions
and warnings about their use. For example, language about potential cardiovascular risks, including deep vein thrombosis, now appears
in TRT labeling as does a caution against TRT use in men with “age-related hypogonadism”.
We plan to explore additional
potential indications for JATENZO including, for example, treatment of hypogonadal men with chronic kidney disease and as T replacement
in female-to-male transgender patients. We plan to conduct small exploratory Phase 4 studies to confirm our hypotheses that JATENZO
therapy in these patient populations will restore T levels to the normal male range and improve other biomarkers and symptoms associated
with T deficiency. We then expect to conduct Phase 3 studies based on FDA guidance that would potentially result in expanded labeling
indications for JATENZO.
We will also continue to explore
commercial partnerships with outside organizations to maximize the sales and marketing potential for JATENZO. Of particular interest are
establishing marketing partnerships for JATENZO in Europe, Asia and the Middle East.
Additional Product Candidates
We will seek to leverage the
commercial launch of JATENZO with our sales team and commercial infrastructure to develop or acquire rights to additional complementary
products or product candidates. Our business strategy is to identify complementary development and commercialization opportunities that
apply our management expertise, commercial infrastructure and sales force to approved products or product candidates. Our strategy is
to pursue these opportunities both on our own and with industry leading partners. We believe this strategy offers a distinct value to
patients, healthcare providers, pharmaceutical partners and our stockholders.
In May 2021, we entered into
a licensing agreement whereby Clarus will acquire the exclusive worldwide (excluding Australia) development and commercialization rights
for HAVAH T+Ai™ (CLAR-121). CLAR-121 is a proprietary combination of testosterone (T) (natural ligand for the androgen receptor;
AR) and anastrozole (an aromatase inhibitor that blocks T conversion to estradiol) delivered by a subcutaneous implant for treatment of
AR-mediated breast disease that predominantly affects women. Clarus’s initial therapeutic target will be inflammatory periductal
mastitis (PDM) — a painful, often debilitating inflammation of breast tissue. Clarus estimates that the annual total U.S. patient
population of women with PDM is approximately 150,000. Clarus is not aware of any effective pharmaceutical intervention for PDM and intends
to seek FDA Orphan Drug designation for CLAR-121 for use in the treatment of PDM. However, there can be no guarantee that FDA will
grant such designation. In addition to PDM, CLAR-121 may have potential use to treat estrogen receptor-positive (ER+) breast
cancer as the androgen receptor is a tumor suppressor in estrogen receptor — positive breast cancer. Of the approximately 280,000
annual cases of breast cancer in the United States, 80% of these are ER+ and 90% of ER+ breast cancers are also AR+. Significant development
by Clarus will be necessary to demonstrate clinical efficacy and safety and to secure FDA approval for both of these potential uses for
CLAR-121. There is no guarantee such development will be successful and result in FDA approval of CLAR-121 for either condition.
In September 2021, we entered
into a licensing agreement with McGill University (“McGill”), Canada’s top ranked medical doctoral university, whereby
Clarus will develop and commercialize McGill’s proprietary technology to develop potential treatments for rare, endocrine, metabolic,
and neurological conditions associated with primary and secondary CoQ10 (ubiquinone) deficiencies which belong to the wider class of mitochondrial
diseases.
CoQ10 is synthesized in the
inner membrane of mitochondria, a cellular organelle whose primary function is to produce the body’s chemical energy. Deficiencies
of CoQ10 can lead to severe multiple organ dysfunctions that involve the brain, nerves, kidneys, heart, GI tract and muscle. Oral CoQ10
is largely ineffective because it does not result in intracellular uptake of CoQ10. McGill has identified a method to substantially increase
such uptake, thereby forming the basis for a new, and potentially profound, method of addressing deficiencies of CoQ10. There is no guarantee
that such method will be successful.
Mitochondrial diseases are
chronic, genetic diseases that occur when the mitochondria, structures in our body cells that produce energy from oxygen and food, fail
to function properly. Mitochondrial diseases can affect almost any area of the body and can occur at any age, making them often misdiagnosed.
Sales, Marketing and Distribution
We have built a robust internal
commercial organization in the United States to market and sell JATENZO and any additional products we may develop or acquire. We
have also established with a commercial outsource partner a sales force of approximately 55 representatives dedicated solely to promoting
JATENZO in the United States. We intend to invest additional resources to bring our sales force in-house while expanding its
national footprint. Our sales force targets high prescribing endocrinologists, urologists and primary care physicians. We believe that
this approach allows us to achieve broad geographic coverage while connecting with the most valuable targets. In addition, we conduct
direct outreach to hypogonadal men through paid search, social media and programmatic advertising. In April 2020, in connection with
the COVID-19 pandemic, we incorporated digital assets and virtual marketing into our sales force approach, including virtual sales
calls, and we expect to proceed with a hybrid virtual and in-person approach moving forward. We also intend to explore additional
strategies to engage both the patient and the consumer through various direct-to-consumer modalities. The launch of any future products
may require further expansion of our existing sales force.
In addition to developing our
own commercial organization, we continue to evaluate distribution or co-promotion arrangements with established pharmaceutical companies
that have either complimentary product offerings or with established pharmaceutical companies to expand the footprint for JATENZO.
We are considering strategic
partners with demonstrated commercial capabilities to assist in obtaining marketing approval for and commercialization of JATENZO outside
of the United States. We intend to seek approval and launch commercial sales of JATENZO in territories outside of the United States
by establishing additional collaborations with one or more pharmaceutical company collaborators, depending on, among other things, the
applicable indications, the related development costs and our available resources. In May 2014, we entered into an agreement with
CBC SPVI, Ltd. (“C-Bridge”), pursuant to which we and C-Bridge agreed to make commercially reasonable efforts
to jointly develop a plan for the commercial manufacture, marketing, promotion, sale, distribution, and commercial importation and exportation
of JATENZO and any related products in China. As part of this agreement, C-Bridge also purchased convertible promissory notes and
became an investor in our company.
We have contracted with numerous
wholesale distributors, including Cardinal, McKesson Corporation and Amerisource Bergen Corporation, to distribute JATENZO to retail pharmacies.
In addition to shipping our product, these distributors provide inventory and sales reports as well as other services. In exchange for
these services, we pay fees to certain distributors based on a percentage of wholesale acquisition cost. We also plan to explore using
alternative, non-retail channels to distribute JATENZO.
Manufacturing
We have established a comprehensive
supply chain for commercial manufacture of JATENZO capsules. We rely on contract manufacturers to produce the drug substance and drug
product required for our commercial supply and clinical studies. We have qualified two sources of bulk TU, entered into an exclusive manufacturing
relationship for the manufacture of the softgel capsules and engaged with a commercial packager for the production of finished JATENZO
capsules. All lots of drug substance and drug product used for our commercial supply and clinical studies are manufactured, packaged and
labeled under cGMP. The FDA inspects manufacturing facilities periodically, with the frequency based on its assessment of risk. We have
established an internal quality control and quality assurance program, including a set of standard operating procedures and specifications
that we believe is cGMP-compliant.
We expect to continue to rely
on third parties for our manufacturing processes and for the production of all drug substance and drug product used for our commercial
supply and clinical studies of JATENZO and any other product or product candidate we may develop or acquire. We plan to continue to rely
upon contract manufacturers and, potentially, collaboration partners, to manufacture commercial quantities of JATENZO and any other product
we may develop or acquire, if such product is approved in Europe or in territories outside of the United States and Europe.
We have established a comprehensive
supply chain for commercial manufacture of JATENZO capsules. We rely and we expect to continue to rely on third parties for our manufacturing
processes and for the production of all drug substance and drug product used for our commercial supply and clinical studies of JATENZO
and any other product or product candidates we may develop or acquire. We plan to continue to rely upon contract manufacturers and, potentially,
collaboration partners, to manufacture commercial quantities of JATENZO and any other product we may develop or acquire, if such product
is approved in Europe or in territories outside of the United States and Europe.
For the commercialization of
JATENZO, we have:
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qualified two sources of bulk TU, Pfizer and Xianju, both
of which are subject to continuing FDA review and periodic inspection, and entered into a commercial supply agreement with each;
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entered into an exclusive manufacturing agreement with Catalent
for the manufacture of JATENZO softgel capsules; and
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entered into an agreement with a commercial packager for
finished JATENZO capsules.
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In March 2021, we entered into
a supply agreement with Pfizer (the “Pfizer Agreement”), for the bulk supply of TU. We provide Pfizer estimates of
our projected supply requirements. These supply forecasts are binding for an initial period, can be altered by a certain percentage over
a subsequent period and then are used only to assist with Pfizer’s production planning over the final period. We have an obligation to
purchase a minimum amount of TU from Pfizer, subject to an annual maximum, for the first three years of the Pfizer agreement. The price
per kilogram of bulk TU under the Pfizer Agreement is fixed based on the total volume purchased during a calendar year. If Pfizer is unable
to satisfy our delivery requirements, we may purchase more supply needs from an alternative supplier. The term of the Pfizer Agreement
expires in January 2024. The Pfizer Agreement may be terminated by either party without cause upon 18 months’ prior written notice
or upon the other party’s uncured breach of any material obligation. The Pfizer Agreement also contains customary representations and
warranties, indemnification, limitation on liability, assignment, confidentiality and other provisions.
Our January 2014 agreement
with Xianju (the “Xianju Agreement”) similarly requires us to project our bulk TU supply needs for the United States.
Our purchase orders are then bound by each such supply forecast for an initial period, can be altered by a certain percentage over a subsequent
period and then are used only to assist with Xianju’s production planning over such projection’s final period. The price per
kilogram of bulk TU under the Xianju Agreement is fixed based on the total volume purchased in a year; however, Xianju may increase the
price if there are sudden changes in economic circumstances that increase the cost of production or raw materials. In addition, Xianju
may request each year that the parties renegotiate the agreed upon prices from the previous year. The Xianju Agreement had an initial
term of seven years and automatically renewed for two consecutive three-year terms unless either party gives notice of non-renewal no
later than six months prior to the expiration of any initial or renewal term. The Xianju Agreement is also terminable by either party
upon the other party’s bankruptcy, uncured material breach or for any changes in law or regulations that would render it impossible
for a party to perform its material obligations. In the event of either non-renewal or termination, however, Xianju will continue
to supply us with bulk TU on the terms of the Xianju Agreement for up to 18 months. The Xianju Agreement also contains customary
representations and warranties, indemnification, limitation on liability, assignment and confidentiality provisions, as well as provisions
with respect to quality control and manufacturing procedures.
The JATENZO formulation is
encapsulated in a softgel form. We have chosen Catalent, a third-party manufacturer, to produce clinical trial supplies and commercial
quantities of JATENZO softgel capsules. JATENZO softgel capsules come in 158 mg TU, 198 mg TU, and 237 mg TU forms. We have entered into
a manufacturing agreement with Catalent (the “Catalent Agreement”), which remains in effect until March 2025,
six years following the date on which the FDA approved Catalent as a manufacturer of JATENZO, and automatically renews for successive
two-year periods, if not terminated one year prior to the expiration of the initial term or any then-current renewal term. Either
we or Catalent may terminate the Catalent Agreement upon the other party’s bankruptcy, uncured material breach or upon 24 months’
prior written notice for convenience. In addition, Catalent may terminate the Catalent Agreement or cease performing its obligations if
we fail to pay amounts within ten days of being due. We are required to purchase a minimum quantity of JATENZO softgel capsules, and we
are required to pay to Catalent an annual commercial occupancy fee and an annual product maintenance fee. The unit price of capsules under
the Catalent Agreement is determined based on batch size and the total volume shipped in a year. The price may be increased annually based
on a market price index. The Catalent Agreement contains customary representations and warranties, indemnification, limitation on liability,
assignment and confidentiality provisions.
We, along with our contract
manufacturers, are subject to extensive governmental regulations, including requirements that our products be manufactured, packaged and
labeled in conformity with current cGMP. The cGMP requirements govern quality control of the manufacturing process and documentation policies
and procedures. The FDA typically inspects manufacturing facilities every two years. We have established an internal quality control and
quality assurance program, including a set of standard operating procedures and specifications that we believe is cGMP-compliant.
Third Party Reimbursement and Pricing
In the United States and
elsewhere, sales of pharmaceutical products to consumers depend to a significant degree on the availability of coverage and reimbursement
by third-party payors, such as government and private insurance plans. Third-party payors increasingly are challenging the prices
charged for medical products and services and implementing other cost containment mechanisms. This is especially true in markets where
generic options exist. It is, and will be, time consuming and expensive for us to go through the process of maintaining or seeking reimbursement
for our products from Medicaid, Medicare and commercial payors. Our products and those of our partners may not be considered cost effective,
and coverage and reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis,
potentially resulting in contract changes with these major payors.
Third-party payors often
utilize a tiered reimbursement system, which may adversely affect demand for our products by placing them in a more expensive patient
co-payment tier. Additionally, third party payors may require step edits or prior authorizations. We cannot be certain that our products
will successfully be placed on the list of drugs covered by particular health plan formularies or in a more preferential position on their
formularies. Third-party payors are currently demanding, and will most likely continue to demand, more aggressive pricing and rebates
for favorable formulary placement. Some U.S. states have also created Medicaid preferred drug lists and include drugs on those lists only
when the manufacturers agree to pay a supplemental rebate. If our products are not included on these preferred drug lists, they may be
subject to prior authorization. Physicians may not be inclined to prescribe JATENZO to their Medicaid patients, and even if they do prescribe
it, Medicaid may not authorize payment, thereby diminishing the potential market for our products in this market segment.
Currently, most of our prescriptions
are open access, and we have negotiated agreements with several pharmacy benefits managers, including Express Scripts. We offer a co-pay assistance
program to patients for JATENZO under which patients covered by commercial pharmacy benefit plans receive discounts on their prescriptions.
Our JATENZO GO Co-pay Assistance Program provides financial support to most commercially insured patients to assist with out-of-pocket costs
of JATENZO, such that most commercial covered patients will pay $0 for their prescription.
Similarly, in order to ensure
coverage by Medicare Part D and commercial pharmacy benefit plans, we participate in certain rebate programs, which provide discounted
prescriptions to qualified insured patients. Under these rebate programs, we pay a rebate to the third-party administrator of the
program. We also provide discounts to authorized users of the Federal Supply Schedule (“FSS”) of the General Services
Administration under an FSS contract negotiated by the Department of Veterans Affairs, including discounts mandated by the Veterans Health
Care Act, discounted prescriptions to DoD’s Tricare retail pharmacy program, and discounts to federal grantees and safety net providers
referred to as covered entities pursuant to our pharmaceutical pricing agreement with HHS and the 340B drug discount program, which is
required as a condition of Medicaid coverage. Government agencies ordering under the FSS and covered entities purchase products from the
wholesale distributors at the discounted price, and the wholesale distributors then charge back the difference between the current wholesale
acquisition cost and the price the entity paid for the product.
Patents and Proprietary Rights
Our success will depend, in
part, on our ability to obtain and protect our proprietary rights in the United States and in other countries. To do so, we will
continue to rely on patents, trademarks, trade secrets, and confidentiality and other agreements to protect our proprietary rights. We
intend to seek patent protection whenever appropriate for any product candidates, including methods for their manufacture and use, and
related technology we develop or acquire in the future.
We have been building and continue
to expand our intellectual property portfolio relating to JATENZO. We strive to protect and enhance the proprietary technologies that
we believe are important to our business and seek patent protection, where appropriate, in the United States and internationally
for compositions related to JATENZO, its methods of use and any other inventions that are important to the development of our business.
Our policy is to actively seek to protect our proprietary position by, among other things, filing patent applications in the United States
and abroad, including Europe and other major countries when appropriate, relating to proprietary technologies that are important to the
development of our business.
However, patent protection
may not afford us with complete protection against competitors who seek to circumvent our patents. We cannot be sure that patents will
be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future,
nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful
in protecting our technology. There is also the risk, however, that third parties have patents or may obtain patents having claims that
also cover JATENZO. Lipocine asserted use of JATENZO infringes its patents, and has attacked patents and applications in our portfolio
by patent interferences, see “— Legal Proceedings” subsection below.
Our success will depend significantly
on our ability to obtain and maintain patent and other proprietary protection for the technologies, inventions, know-how and products
we consider important to our business, defend our patents, preserve the confidentiality of our trade secrets and operate our business
without infringing the patents and proprietary rights of third parties.
Our U.S. patent portfolio on
JATENZO currently includes five issued patents: U.S. Patent No. 8,241,664, which expires March 2029; U.S. Patent No. 8,492,369,
which expires December 2030, as well as U.S. Patent Nos. 8,778,916, 10,543,219 and 10,617,696, each of which expires in April 2030.
The issued U.S. patents contain claims to both pharmaceutical compositions and methods of treatment using our proprietary pharmaceutical
composition and all are listed in the FDA Orange Book: Approved Drug Products with Therapeutic Equivalence Evaluations. In addition, we
have several patent applications pending in the United States and other countries that, if issued, will cover pharmaceutical compositions,
methods of treatment and other features of JATENZO, and have the potential to extend patent coverage beyond 2030.
We also have issued patents
covering JATENZO in Australia, Canada, China, Costa Rica, Europe, Hong Kong, India, Indonesia, Israel, Japan, Mexico, New Zealand,
Philippines, Russia, Singapore, South Africa and South Korea.
Our portfolio also contains
pending applications around the world, including in the United States, Brazil, Canada and Europe. These patent applications, if they
were to issue, have the potential to extend the patent coverage beyond 2030.
We solely own all the issued
patents and the pending patent applications in our JATENZO patent portfolio. However, one of our applications having claims covering JATENZO
is presently the subject of an interference proceeding and there is risk that the U.S. Patent and Trademark Office could declare other
interference proceedings involving patent claims that cover JATENZO as discussed in more detail in “— Legal Proceedings”
below.
TU, the active pharmaceutical
ingredient in JATENZO, as well as its use for treating hypogonadism, are well known in this field. Accordingly, The TU active ingredient,
standing alone, is not protected by any third party patents, although there are third party patents with claims that are alleged to cover
use of TU in treating hypogonadism and the use of JATENZO as discussed in more detail in “— Legal Proceedings”
below.
Competition
There are several approved
T-replacement therapies on the market, as well as several therapies under review by the FDA. The TRT market is highly competitive,
and our future success will depend on our ability to capture market share from currently approved therapies most notably injections and
gels, the continued expansion of the TRT market, and our ability to operate freely with regard to or to preclude from competing against
us several competitors who have also develop oral TU products, including Lipocine which has received tentative approval from the FDA and
has alleged that JATENZO infringes certain Lipocine patents, as described in “— Legal Proceedings” below.
Injectables
Injectable T-esters (e.g.,
T-enanthate; T-cypionate) continue to represent the majority of the prescriptions in the TRT market. Over 5.9 million prescriptions
were written for T injectables (75% of all TRT prescriptions and 36% of U.S. sales) in 2020. T-injectables are predominantly given
as T-cypionate (95% of all injections) and T-enanthate (1% of all injections). Injectables have experienced significant prescription
growth in the U.S. market due to overall market demand for TRT and due to their generic availability and low cost. These men receive an
injection every two to three weeks, most often intramuscularly, instead of applying a daily administration of other products. We believe
physicians and their hypogonadal patients perceive the primary downsides of injections to be pain at injection site and risk for POME
and polycythemia (excess concentration of red blood cells). Additionally, injecting T weekly or bi-weekly is associated with wide
fluctuations in serum T levels between treatment cycles. For example, in many men limit of normal on day 1 of the injection, which may
lead to undesirable side effects. Conversely, T levels often fall into the hypogonadal range before it is time for the next injection
which leads to a return of undesirable symptoms.
Gels
Gels represent the second largest
segment within the TRT market. Over 1.9 million prescriptions were written for gels in 2020 and represented 58% of U.S. sales in
2020. The gel-based T replacement products that are currently available include AbbVie’s AndroGel®, and Endo’s
Testim® and Fortesta® along with their respective authorized generics as well as generic equivalents
of each version.
The FDA has granted a therapeutic
equivalence (“TE”) rating of AB to “generic” versions of approved products which have been approved via
a 505(b)(2) NDA. In July 2014, the FDA granted the AB rating to Perrigo’s 1% T-gel drug product (NDA 203098) approved
in January 2013, and a BX rating to Teva’s 1% gel drug product (NDA 202763) approved in February 2012. Each are versions
of AbbVie’s AndroGel 1.0% and employed 505(b)(2) submissions citing AndroGel as their reference listed drugs (“RLD”).
Teva’s version was found not to be bioequivalent to AndroGel, hence the BX rating. Upsher-Smith Laboratories also received
approval for a version of Endo’s Testim (Vogelxo™; NDA 204399) in June 2014 using the same pathway. In January of 2015,
the FDA determined that Vogelxo™ is therapeutically equivalent to Testim and received an AB rating. In August 2015, the FDA
granted AB rating to Perrigo’s 1.62% T-gel drug product (NDA 204268) which also received FDA approval in August 2015.
Eli Lilly and Acrux’s Axiron had patent expiry in February 2017. On July 6, 2017, Acrux confirmed that a generic version
of Axiron® Topical Solution, 30 mg/1.5 mL (T-Topical Solution, 30 mg/1.5 mL) has been launched in the United States
by Perrigo Company plc. Acrux also confirmed the availability of an authorized generic version of Axiron in the United States, through
a marketing and distribution agreement between Lilly and a leading authorized generics company.
Other Current T-Delivery Methods
JATENZO also competes with
other TRT products such as a nasal T-gel, auto-injectable subcutaneous T, buccal T and topical T-patches, and implantable subcutaneous
T-pellets.
Transdermal T-patches include
Allergan’s Androderm®. An intramuscular depot form of TU also exists in branded form as Aveed® by
Endo. Additionally, Endo markets the buccal TRT Striant® and the Testopel® implantable T-pellets,
which it acquired from Auxilium in 2015. Antares Pharma, Inc. markets a sub-cutaneous weekly auto-injector T therapy, Xyosted™.
Aytu BioScience Inc. markets an intranasal T therapy, Natesto®, which it licensed from Acerus Pharmaceuticals in 2016.
Other T-Products in Development
We are aware of a number of
products in clinical development that, if approved by the FDA, would compete with JATENZO.
Lipocine has developed an oral
TU formulation, TLANDO®. The FDA has granted tentative market approval to TLANDO for use as a TRT in adult males for conditions
associated with a deficiency or absence of endogenous T, specifically congenital or acquired primary and secondary hypogonadism. In granting
tentative approval, the FDA has concluded that TLANDO has met all required quality, safety and efficacy standards necessary for approval,
but TLANDO has not received final approval and is not eligible for final approval and marketing in the United States until the expiration
of JATENZO’s exclusivity period which expires on March 27, 2022. Like JATENZO and XYOSTED, we expect TLANDO to also carry a
boxed warning about the potential for increased blood pressure since this was observed in clinical trials conducted by Lipocine. The FDA
has also required Lipocine to conduct certain post-marketing studies to assess patient understanding of key risks relating to TLANDO
and evaluate adrenal function with chronic TLANDO therapy, and conduct a pediatric study.
Marius Pharmaceuticals has
developed an oral T-undecanoate under the name of KYZATREX® as a TRT for the treatment of primary and secondary
hypogonadism in adult men. The product was submitted to the FDA on January 5, 2021 with an expected PDUFA action date on October 31,
2021. Should KYZATREX meet all of the required quality, safety, and efficacy standards necessary for approval, we believe it will not
receive a final approval or be eligible to receive final approval or marketing in the United States until the expiration, on March 27,
2022, of our Hatch-Waxman 3-year exclusivity period with respect to JATENZO. We expect KYZATREX labeling to carry boxed warning
regarding the potential for increased blood pressure. We also believe that the FDA will require Marius Pharmaceuticals to assess patient
understanding of key risks relating to KYZATREX, evaluate adrenal function with chronic KYZATREX therapy and conduct a pediatric study.
Mereo BioPharma Group Ltd.
is currently developing BGS649, a once weekly aromatase inhibitor, for first-line therapy for the treatment of obese men with hypogonadotropic
hypogonadism. BGS649 has completed Phase 2b testing.
TesoRx Pharma LLC is developing
an oral ‘bio-identical’ testosterone, TSX-002, for the treatment of Constitutional Delay of Growth and Puberty. Phase 2 clinical
studies have been completed. TesoRx is also developing a potential once-daily oral TU product candidate, TSX-049, as TRT for hypogonadal
in men.
Government Regulation
The FDA and comparable regulatory
agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture
and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development
activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, packaging, recordkeeping, tracking,
approval, import, export, distribution, advertising and promotion of our products.
U.S. Government Regulation of Drug Products
In the United States,
the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act (the “FDCA”) and its implementing regulations.
The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes
and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements
at any time during the product development process, approval process or after approval, may subject an applicant to a variety of administrative
or judicial sanctions, such as the FDA’s refusal to approve a pending NDA, withdrawal of an approval, imposition of a clinical hold,
issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions,
fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties.
The process required by the
FDA before product candidates may be marketed in the United States generally involves the following:
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nonclinical laboratory and animal tests that must be conducted
in accordance with Good Laboratory Practices;
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submission to the FDA of an Investigational New Drug (“IND”),
which must become effective before clinical trials may begin;
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approval by an independent institutional review board (“IRB”)
for each clinical site or centrally before each trial may be initiated;
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adequate and well controlled human clinical trials to establish
the safety and efficacy of the proposed product candidate for its intended use, performed in accordance with good clinical practices
(“GCPs”);
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submission to the FDA of an NDA and payment of user fees;
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satisfactory completion of an FDA advisory committee review,
if applicable;
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pre-approval inspection of manufacturing facilities
and selected clinical investigators for their compliance with cGMP and GCP;
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satisfactory completion of FDA audits of clinical trial sites
to assure compliance with GCPs and the integrity of the clinical data; and
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FDA review and approval of an NDA to permit commercial marketing
for particular indications for use.
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Preclinical Studies
Preclinical studies include
laboratory evaluation of drug substance chemistry, pharmacology, toxicity and drug product formulation, as well as animal studies to assess
potential safety and efficacy. Prior to commencing the first clinical trial with a product candidate, a sponsor must submit the results
of the preclinical tests and preclinical literature, together with manufacturing information, analytical data and any available clinical
data or literature, among other required information, to the FDA as part of an IND. Some preclinical studies may continue even after the
IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time
period, raises safety concerns or questions about the conduct of the clinical trial and imposes a clinical hold. In such a case, the IND
sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not
result in FDA authorization to commence a clinical trial.
Clinical Trials
Clinical trials involve the
administration of the investigational new drug to human subjects under the supervision of qualified investigators in accordance with GCP
requirements. A separate submission to the existing IND must be made for each successive clinical trial conducted during product development,
as well as amendments to previously submitted clinical trials. Further, an independent IRB for each institution participating in the clinical
trial must review and approve the plan for any clinical trial, its informed consent form and other communications to study subjects before
the clinical trial commences at that site. The IRB must continue to oversee the clinical trial while it is being conducted, including
any changes to the study plans.
Regulatory authorities, an
IRB or the sponsor may suspend or discontinue a clinical trial at any time on various grounds, including a finding that the subjects are
being exposed to an unacceptable health risk, the clinical trial is not being conducted in accordance with the FDA’s or the IRB’s
requirements or if the drug has been associated with unexpected serious harm to subjects. Some studies also include a data safety monitoring
board, which receives special access to unblinded data during the clinical trial and may advise the sponsor to halt the clinical trial
if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy.
Human clinical trials are typically
conducted in three sequential phases that may be combined or overlap.
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Phase 1 — Studies are initially conducted to test the
product candidate for safety, dosage tolerance, structure-activity relationships, mechanism of action, absorption, metabolism, distribution
and excretion in healthy volunteers or subjects with the target disease or condition. If possible, Phase 1 clinical trials may also be
used to gain an initial indication of product effectiveness.
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Phase 2 — Controlled studies are conducted with groups
of subjects with a specified disease or condition to provide enough data to evaluate the preliminary efficacy, optimal dosages and dosing
schedule and expanded evidence of safety. Multiple Phase 2 clinical trials may be conducted to obtain information prior to beginning
larger and more expansive Phase 3 clinical trials.
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Phase 3 — These clinical trials are generally undertaken
in larger subject populations to provide statistically significant evidence of clinical efficacy and to further test for safety in an
expanded subject population at multiple clinical trial sites. These clinical trials are intended to establish the overall risk/benefit
ratio of the product and provide an adequate basis for product labeling. These clinical trials may be done at trial sites outside the
United States as long as the global sites are also representative of the U.S. population and the conduct of the study at global
sites comports with FDA regulations and guidance, such as compliance with GCPs. In most cases, FDA requires two adequate and well-controlled Phase
3 clinical trials to demonstrate the efficacy of the drug. A single trial may be sufficient in rare instances, including (1) where
the study is a large multicenter trial demonstrating internal consistency and a statistically very persuasive finding of a clinically
meaningful effect on mortality, irreversible morbidity or prevention of a disease with a potentially serious outcome and confirmation
of the result in a second trial would be practically or ethically impossible or (2) when in conjunction with other confirmatory
evidence.
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The FDA may require, or companies
may pursue, additional clinical trials after a product is approved. These so-called Phase 4 trials may be made a condition to be
satisfied after approval. The results of Phase 4 trials can confirm the effectiveness of a product candidate and can provide important
safety information.
Clinical trials must be conducted
under the supervision of qualified investigators in accordance with GCP requirements, which include the requirements that all research
subjects provide their informed consent in writing for their participation in any clinical trial and the review and approval of the study
by an IRB. Investigators must also provide information to the clinical trial sponsors to allow the sponsors to make specified financial
disclosures to the FDA. Clinical trials are conducted under protocols detailing, among other things, the objectives of the trial, the
trial procedures, the parameters to be used in monitoring safety and the efficacy criteria to be evaluated and a statistical analysis
plan. Information about some clinical trials, including a description of the trial and trial results, must be submitted within specific
timeframes to the U.S. National Institutes of Health for public dissemination on its ClinicalTrials.gov website. Progress reports detailing
the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur.
The manufacture of investigational
drugs for the conduct of human clinical trials is subject to cGMP requirements. Investigational drugs and active pharmaceutical ingredients
imported into the United States are also subject to regulation by the FDA relating to their labeling and distribution. Further, the
export of investigational drug products outside of the United States is subject to regulatory requirements of the receiving country,
as well as U.S. export requirements under the FDCA. Progress reports detailing the results of the clinical trials must be submitted at
least annually to the FDA and the IRB and more frequently if serious adverse effects occur.
Concurrent with clinical trials,
companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics
of the product candidate, as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP
requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among
other things, must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate
packaging must be selected and tested, and stability studies must be conducted to demonstrate that the product candidate does not undergo
unacceptable deterioration over its shelf life.
Orphan Drug Designation
Under the Orphan Drug Act,
the FDA may designate a drug product as an “orphan drug” if it is intended to treat a rare disease or condition (generally
meaning that it affects fewer than 200,000 individuals in the United States or more in cases in which there is no reasonable expectation
that the cost of developing and making a drug product available in the United States for treatment of the disease or condition will be
recovered from sales of the product). A company must request orphan product designation before submitting an NDA. If the request is granted,
the FDA will disclose the identity of the therapeutic agent and its potential use. Orphan product designation does not convey any advantage
in or shorten the duration of the regulatory review and approval process.
If a product with orphan status
receives the first FDA approval for the disease or condition for which it has such designation or for a select indication or use within
the rare disease or condition for which it was designated, the product generally will be receiving orphan product exclusivity. Orphan
product exclusivity means that the FDA may not approve any other applications for the same product for the same indication for seven years,
except in certain limited circumstances. If a drug or drug product designated as an orphan product ultimately receives marketing approval
for an indication broader than what was designated in its orphan product application, it may not be entitled to exclusivity. Orphan exclusivity
will not bar approval of another product under certain circumstances, including if a subsequent product with the same active ingredient
for the same indication is shown to be clinically superior to the approved product on the basis of greater efficacy or safety or providing
a major contribution to patient care, or if the company with orphan drug exclusivity is not able to meet market demand. Further, the FDA
may approve more than one product for the same orphan indication or disease as long as the products contain different active ingredients.
Moreover, competitors may receive approval of different products for the indication for which the orphan product has exclusivity or obtain
approval for the same product but for a different indication for which the orphan product has exclusivity.
Special FDA Expedited Review and Approval Programs
The FDA has various programs,
including fast track designation, breakthrough therapy designation, orphan drug designation, accelerated approval and priority review,
which are intended to expedite or simplify the process for the development and FDA review of drugs that are intended for the treatment
of serious or life threatening diseases or conditions and demonstrate the potential to address unmet medical needs. The purpose of these
programs is to provide important new drugs to patients earlier than under standard FDA review procedures.
Under the fast track program,
the sponsor of a new drug candidate may request that FDA designate the drug candidate for a specific indication as a fast track drug concurrent
with, or after, the filing of the IND for the drug candidate. To be eligible for a fast track designation, the FDA must determine, based
on the request of a sponsor, that a product is intended to treat a serious or life threatening disease or condition and demonstrates the
potential to address an unmet medical need. The FDA will determine that a product will fill an unmet medical need if it will provide a
therapy where none exists or provide a therapy that may be potentially superior to existing therapy based on efficacy or safety factors.
Fast track designation provides additional opportunities for interaction with the FDA’s review team and may allow for rolling review
of NDA components before the completed application is submitted, if the sponsor provides a schedule for the submission of the sections
of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable and the sponsor pays any required
user fees upon submission of the first section of the NDA. However, the FDA’s time period goal for reviewing an application does
not begin until the last section of the NDA is submitted. The FDA may decide to rescind the fast track designation if it determines that
the qualifying criteria no longer apply.
In addition, a sponsor can
request breakthrough therapy designation for a drug if it is intended, alone or in combination with one or more other drugs, to treat
a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial
improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early
in clinical development. Drugs designated as breakthrough therapies are eligible for intensive guidance from the FDA on an efficient drug
development program, organizational commitment to the development and review of the product, including involvement of senior managers,
and, like fast track products, are also eligible for rolling review of the NDA. Both fast track and breakthrough therapy products may
be eligible for accelerated approval and/or priority review, if relevant criteria are met.
Under the FDA’s accelerated
approval regulations, the FDA may approve a drug for a serious or life threatening illness that provides meaningful therapeutic benefit
to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical
endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible
morbidity or mortality or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability
or lack of alternative treatments. A drug candidate approved on this basis is subject to rigorous post marketing compliance requirements,
including the completion of Phase 4 or post approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct
required post approval studies or confirm a clinical benefit during post marketing studies will allow the FDA to withdraw the drug from
the market on an expedited basis. All promotional materials for drug candidates approved under accelerated approval regulations are subject
to prior review by the FDA.
Once an NDA is submitted for
a product intended to treat a serious condition, the FDA may assign a priority review designation if FDA determines that the product,
if approved, would provide a significant improvement in safety or effectiveness. A priority review means that the goal for the FDA to
review an application is six months, rather than the standard review of ten months under the Prescription Drug User Fee Act (“PDUFA”)
goals. Under the current PDUFA performance goals, these six-and ten-month review periods are measured from the 60-day filing
date rather than the receipt date for NDAs for new molecular entities, which typically adds approximately two months to the timeline for
review from the date of submission.
Even if a product qualifies
for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide
that the time period for FDA review or approval will not be shortened. In addition, the manufacturer of an investigational drug for a
serious or life-threatening disease is required to make available, such as by posting on its website, its policy on responding to
requests for expanded access. Furthermore, fast track designation, breakthrough therapy designation, accelerated approval and priority
review do not change the standards for approval and may not ultimately expedite the development or approval process.
NDA Submission and Review by the FDA
Assuming successful completion
of the required clinical and preclinical testing, among other items, the results of product development, including chemistry, manufacture
and controls, nonclinical studies and clinical trials are submitted to the FDA, along with proposed labeling, as part of an NDA. The submission
of an NDA requires payment of a substantial user fee to the FDA. This user fee must be paid at the time of the first submission of the
application, even if the application is being submitted on a rolling basis. Fee waivers or reductions are available in some circumstances.
In addition, under the Pediatric
Research Equity Act, an NDA or supplement to an NDA for a new active ingredient, indication, dosage form, dosage regimen or route of administration
must contain data that are adequate to assess the safety and efficacy of the drug for the claimed indications in all relevant pediatric
subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective.
The FDA may, on its own initiative
or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for
use in adults or full or partial waivers from the pediatric data requirements.
Once the FDA receives an application,
it has 60 days to review the NDA to determine if it is substantially complete to permit a substantive review, before it files the
application. Once the submission is filed by the FDA, the FDA begins an in-depth review of the NDA. Under the goals agreed to by
the FDA under PDUFA, the FDA has set the review goal of 10 months from the 60-day filing date to complete its initial review
of a standard NDA for a new molecular entity, or NME, and make a decision on the application. For priority review applications, the FDA
has set the review goal of reviewing NME NDAs within six months of the 60-day filing date. Such deadlines are referred to as the
PDUFA date. The PDUFA date is only a goal and the FDA does not always meet its PDUFA dates. The review process and the PDUFA date may
also be extended if the FDA requests or the NDA sponsor otherwise provides certain additional information or clarification regarding the
submission during the review period that amends the original application.
The FDA reviews applications
to determine, among other things, whether a product is safe and effective for its intended use and whether the manufacturing controls
are adequate to assure and preserve the product’s identity, strength, quality and purity. Before approving an NDA, the FDA will
inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that
the manufacturing processes and facilities, including contract manufacturers and subcontracts, are in compliance with cGMP requirements
and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the
FDA will typically inspect one or more clinical trial sites to assure compliance with GCPs.
The FDA must refer applications
for drugs that contain active ingredients, including any ester or salt of the active ingredients, that have not previously been approved
by the FDA to an advisory committee or provide in an action letter a summary of the reasons for not referring it to an advisory committee.
The FDA may also refer drugs which present difficult questions of safety, purity or potency to an advisory committee. An advisory committee
is typically a panel that includes clinicians and other experts who review, evaluate and make a recommendation as to whether the application
should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such
recommendations carefully when making decisions.
Once the FDA’s review
of the application is complete, the FDA will issue either a Complete Response Letter (“CRL”) or approval letter. A
CRL indicates that the review cycle of the application is complete and the application is not ready for approval. A CRL generally contains
a statement of specific deficiencies and provides recommendations for securing approval of the NDA. These recommendations may include
additional clinical or preclinical testing or other information or analyses in order for the FDA to reconsider the application in the
future. Even with the submission of additional information, the FDA ultimately may decide that the application does not satisfy the regulatory
criteria for approval. If, or when the deficiencies have been met to the FDA’s satisfaction, the FDA will issue an approval letter.
An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.
The FDA may delay or refuse
approval of an NDA if applicable regulatory criteria are not satisfied, require additional testing or information, require post-marketing testing
and surveillance to monitor safety or efficacy of a product and/or impose other conditions, including distribution restrictions or other
risk management mechanisms. For example, the FDA may require a REMS as a condition of approval or following approval to mitigate any identified
or suspected serious risks and ensure safe use of the drug. The FDA may prevent or limit further marketing of a product or impose additional
post-marketing requirements, based on the results of post-marketing studies or surveillance programs. After approval, some types
of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject
to further testing requirements, FDA notification and FDA review and approval. Further, should new safety information arise, additional
testing, product labeling or FDA notification may be required.
If regulatory approval of a
product is granted, such approval may entail limitations on the indicated uses for which such product may be marketed or may include contraindications,
warnings or precautions in the product labeling. The FDA may require certain contraindications and serious warnings to be placed in a
box at the beginning of the labeling to highlight the information for prescribers, particularly those contraindications and warnings that
may lead to death or serious injury. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing regulatory
standards is not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require Phase 4 post-marketing studies
to monitor the effect of approved products and may limit further marketing of the product based on the results of these post-marketing studies.
U.S. Post-Approval Requirements
Any products manufactured or
distributed pursuant to FDA approvals are subject to continuing regulation by the FDA, including periodic reporting, product sampling
and distribution, advertising, promotion, drug shortage reporting, compliance with any post-approval requirements imposed as a conditional
of approval such as Phase 4 clinical trials, REMS and surveillance, recordkeeping and reporting requirements, including adverse experiences.
After approval, most changes
to the approved product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There also
are continuing, annual program fee requirements for approved products. Drug manufacturers and their subcontractors are required to register
their establishments with the FDA and certain state agencies and to list their drug products and are subject to periodic announced and
unannounced inspections by the FDA and these state agencies for compliance with cGMPs and other requirements, which impose procedural
and documentation requirements.
Changes to the manufacturing
process are strictly regulated and often require prior FDA approval or notification before being implemented. FDA regulations also require
investigation and correction of any deviations from cGMPs and specifications and impose reporting and documentation requirements upon
the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend
time, money and effort in the area of production and quality control to maintain cGMP compliance.
Later discovery of previously
unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or
failure to comply with regulatory requirements, may result in withdrawal of marketing approval, mandatory revisions to the approved labeling
to add new safety information or other limitations, imposition of post-market studies or clinical trials to assess new safety risks
or imposition of distribution or other restrictions under a REMS program, among other consequences.
The FDA closely regulates the
marketing and promotion of drugs. A company can make only those claims relating to safety and efficacy that are consistent with the FDA
approved labeling. Physicians, in their independent professional medical judgment, may prescribe legally available products for uses that
are not described in the product’s labeling and that differ from those tested in clinical trials and approved by the FDA. However,
manufacturers and third parties acting on their behalf are prohibited from marketing or promoting drugs in a manner inconsistent with
the approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses
and a company that is found to have improperly promoted off-label uses may be subject to significant liability.
Failure to comply with any
of the FDA’s requirements could result in significant adverse enforcement actions. These include a variety of administrative or
judicial sanctions, such as refusal to approve pending applications, license suspension or revocation, withdrawal of an approval, imposition
of a clinical hold or termination of clinical trials, warning letters, untitled letters, modification of promotional materials or labeling,
product recalls, product seizures or detentions, refusal to allow imports or exports, total or partial suspension of production or distribution,
debarment, injunctions, fines, consent decrees, corporate integrity agreements, refusals of government contracts and new orders under
existing contracts, exclusion from participation in federal and state healthcare programs, restitution, disgorgement or civil or criminal
penalties, including fines and imprisonment. It is also possible that failure to comply with the FDA’s requirements relating to
the promotion of prescription drugs may lead to investigations alleging violations of federal and state healthcare fraud and abuse and
other laws, as well as state consumer protection laws. Any of these sanctions could result in adverse publicity, among other adverse consequences.
U.S. Marketing Exclusivity
The FDA provides periods of
non-patent regulatory exclusivity, which provides the holder of an approved NDA limited protection from new competition in the marketplace
for the pharmaceutical innovation represented by its approved drug for a period of three or five years following the FDA’s approval
of the NDA. Five years of exclusivity are available to new chemical entities (“NCEs”). An NCE is a drug that contains
no active moiety that has been approved by the FDA in any other NDA. An active moiety is the molecule or ion, excluding those appended
portions of the molecule that cause the drug to be an ester, salt, including a salt with hydrogen or coordination bonds or other noncovalent
bonds not involving the sharing of electron pairs between atoms, derivatives, such as a complex (i.e., formed by the chemical interaction
of two compounds), chelate (i.e., a chemical compound) or clathrate (i.e., a polymer framework that traps molecules) of the molecule,
responsible for the therapeutic activity of the drug substance. During the exclusivity period, the FDA may not accept for review or approve
an Abbreviated New Drug Application (“ANDA”) or a 505(b)(2) NDA submitted by another company that contains the previously
approved active moiety. An ANDA or 505(b)(2) application, however, may be submitted one year before NCE exclusivity expires if a Paragraph
IV certification is filed.
Three years of exclusivity
are available for an application for a drug product containing a previously approved active moiety. To qualify for such exclusivity the
NDA applicant must conduct or sponsor a new clinical investigation that FDA determines is essential to the approval of the application.
Three-year exclusivity prevents the approval of an ANDA or a 505(b)(2) NDA for a drug product containing the same active moiety for
the protected conditions of approval. The scope of any three-year exclusivity granted by the FDA is determined on a case-by-case basis
and depends on several factors, including the FDA’s analysis of the scope of the new clinical investigations essential to approval
conducted or sponsored by the applicant. JATENZO was awarded 3-year new product marketing exclusivity by the FDA. This exclusivity
expires on March 27, 2022.
A drug can also obtain pediatric
market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent
terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on
the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study. We
may be able to provide data supporting the use of JATENZO in a pediatric population if invited to do so by the FDA. If we do so, and this
data is deemed acceptable by the FDA, we may receive an additional six-month extension of any unexpired exclusivity and an additional
six-month regulatory exclusivity that the FDA recognizes at the end of a patent term.
Controlled Substances
The CSA and its implementing
regulations establish a “closed system” of regulations for controlled substances. The CSA imposes registration, security,
recordkeeping and reporting, storage, manufacturing, distribution, importation and other requirements under the oversight of the DEA.
The DEA is the federal agency responsible for regulating controlled substances, and requires those individuals or entities that manufacture,
import, export, distribute, research, or dispense controlled substances to comply with the regulatory requirements in order to prevent
the diversion of controlled substances to illicit channels of commerce.
The DEA categorizes controlled
substances into one of five schedules — Schedule I, II, III, IV or V — with varying qualifications for listing in each schedule.
Schedule I substances by definition have a high potential for abuse, have no currently accepted medical use in treatment in the United
States and lack accepted safety for use under medical supervision. Pharmaceutical products having a currently accepted medical use that
are otherwise approved for marketing may be listed as Schedule II, III, IV or V substances, with Schedule II substances presenting the
highest potential for abuse and physical or psychological dependence, and Schedule V substances presenting the lowest relative potential
for abuse and dependence.
Facilities that manufacture,
distribute, import or export any controlled substance must register annually with the DEA. The DEA registration is specific to the particular
location, activity(ies) and controlled substance schedule(s).
The DEA inspects all manufacturing
facilities to review security, recordkeeping, reporting and handling prior to issuing a controlled substance registration. The specific
security requirements vary by the type of business activity and the schedule and quantity of controlled substances handled. Required security
measures commonly include background checks on employees and physical control of controlled substances through storage in approved vaults,
safes and cages, and through use of alarm systems and surveillance cameras. Once registered, manufacturing facilities must maintain records
documenting the manufacture, receipt and distribution of all controlled substances. Manufacturers must submit periodic reports to the
DEA of the distribution of Schedule I and II controlled substances, Schedule III narcotic substances, and other designated substances.
Registrants must also report any controlled substance thefts or significant losses, and must obtain authorization to destroy or dispose
of controlled substances.
The states also maintain separate
controlled substance laws and regulations, including licensing, recordkeeping, security, distribution, and dispensing requirements. State
authorities, including boards of pharmacy, regulate use of controlled substances in each state. Failure to maintain compliance with applicable
requirements, particularly as manifested in the loss or diversion of controlled substances, can result in enforcement action that could
have a material adverse effect on our business, operations and financial condition. The DEA may seek civil penalties, refuse to renew
necessary registrations, or initiate proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal
prosecution.
Regulation outside the United States
We will be subject to similar
foreign laws and regulations concerning the development of our product candidates outside of the United States.
Other Healthcare Laws
Healthcare providers, physicians
and third-party payors will play a primary role in the recommendation and prescription of any products for which we obtain marketing
approval. Our business operations and any current or future arrangements with third-party payors, healthcare providers and physicians
may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial
arrangements and relationships through which we develop, market, sell and distribute any drugs for which we obtain marketing approval.
In the United States, these laws include, without limitation, state and federal anti-kickback, false claims, physician transparency
and patient data privacy and security laws and regulations, including but not limited to those described below.
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The federal Anti-Kickback Statute, which prohibits,
among other things, persons and entities from knowingly and willfully soliciting, offering, paying, receiving or providing any remuneration
(including any kickback, bride or certain rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward
or in return for, either the referral of an individual for, or the purchase order or recommendation of, any good or service, for which
payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid; a person or entity need not
have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation.
On November December 20, 2020, the HHS Office of Inspector General (“OIG”) finalized published further modifications
to the federal Anti-Kickback Statute. Under the final rules, OIG added safe harbor protections under the Anti-Kickback Statute
for certain coordinated care and value-based arrangements among clinicians, providers, and others. These rule (with exceptions)
became effective January 19, 2021.
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Pursuant to an order entered by the U.S.
District Court for the District of Columbia, the portion of the rule eliminating safe harbor protection for certain rebates related to
the sale or purchase of a pharmaceutical product from a manufacturer to a plan sponsor under Medicare Part D has been delayed to January 1,
2023. Implementation of this change and new safe harbors for point-of-sale reductions in price for prescription pharmaceutical products
and pharmacy benefit manager service fees are currently under review by the Biden administration and may be amended or repealed;
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The federal civil and criminal false claims laws, including
the civil False Claims Act (“FCA”), which prohibit individuals or entities from, among other things, knowingly presenting
or causing to be presented, to the federal government, claims for payment or approval that are false, fictitious or fraudulent; knowingly
making, using or causing to be made or used a false statement or record material to a false or fraudulent claim or obligation to pay
or transmit money or property to the federal government; or knowingly concealing or knowingly and improperly avoiding or decreasing an
obligation to pay money to the federal government. Manufacturers can be held liable under the FCA even when they do not submit claims
directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims. In addition, the
government may assert that a claim that includes items or services resulting from a violation of the federal Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the FCA. The FCA also permits a private individual acting as a “whistleblower”
to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery;
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The federal civil monetary penalties laws, which impose civil
fines for, among other things, the offering or transfer or remuneration to a Medicare or state healthcare program beneficiary if the
person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier
of services reimbursable by Medicare or a state health care program, unless an exception applies;
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HIPAA, which imposes criminal and civil liability for knowingly
and willfully executing a scheme or attempting to execute a scheme, to defraud any healthcare benefit program, including private payors,
knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a
healthcare offense or falsifying, concealing or covering up a material fact or making any materially false statements in connection with
the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or
entity need not have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
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HIPAA, as amended by HITECH, and their respective implementing
regulations, which imposes, among other things, specified requirements on covered entities and their business associates relating to
the privacy and security of individually identifiable health information including mandatory contractual terms and required implementation
of technical safeguards of such information. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and
criminal penalties directly applicable to business associates in some cases, and gave state attorneys general new authority to file civil
actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated
with pursuing federal civil actions;
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The Physician Payments Sunshine Act, enacted as part of the
Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the
“ACA”) which imposed new annual reporting requirements for certain manufacturers of drugs, devices, biologics and
medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, for certain
payments and “transfers of value” provided to physicians (defined to include doctors, dentists, optometrists, podiatrists
and chiropractors) and teaching hospitals, as well as ownership and investment interests held by such physicians and their immediate
family members. In addition, many states also require reporting of payments or other transfers of value, many of which differ from
each other in significant ways, are often not pre-empted and may have a more prohibitive effect than the Physician Payments Sunshine
Act, thus further complicating compliance efforts. Effective January 1, 2022, these reporting obligations will extend to include
transfers of value made and investment and ownership interested held in the previous year to certain non-physician providers such
as physician assistants and nurse practitioners; and
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Analogous state and foreign laws and regulations, such as
state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items
or services reimbursed by non-governmental third-party-payors, including private insurers, and may be broader in scope than their
federal equivalents; state and foreign laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary
compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that
may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to drug pricing
and payments and other transfers of value to physicians and other healthcare providers and restrict marketing practices or require disclosure
of marketing expenditures and pricing information; state and local laws that require the registration of pharmaceutical sales representatives;
state and foreign laws that govern the privacy and security of health information in some circumstances. These data privacy and security
laws may differ from each other in significant ways and often are not pre-empted by HIPAA, which may complicate compliance efforts.
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In addition, pharmaceutical
manufacturers may also be subject to federal and state consumer protection and unfair competition laws and regulations, which broadly
regulate marketplace activities and that potentially harm consumers.
The distribution of drugs and
biological products is subject to additional requirements and regulations, including extensive record-keeping, licensing, storage and
security requirements intended to prevent the unauthorized sale of pharmaceutical products.
The full scope and enforcement
of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform. Federal and state enforcement
bodies have continued to increase their scrutiny of interactions between healthcare companies and healthcare providers, which has led
to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. It is possible that governmental
authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law involving
applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws
or any other related governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative
penalties, damages, fines, individual imprisonment, disgorgement, exclusion from government funded healthcare programs, such as Medicare
and Medicaid, reputational harm, additional oversight and reporting obligations if we become subject to a corporate integrity agreement
or similar settlement to resolve allegations of non-compliance with these laws and the curtailment or restructuring of our operations.
If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance
with applicable laws, they may be subject to similar actions, penalties and sanctions. Ensuring business arrangements comply with applicable
healthcare laws, as well as responding to possible investigations by government authorities, can be time- and resource-consuming and
can divert a company’s attention from its business.
Coverage and Reimbursement
In the United States and
markets in other countries, patients who are prescribed treatments for their conditions and providers performing the prescribed services
generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Thus, even if a product candidate
is approved, sales of the product will depend, in part, on the extent to which third-party payors, including government health programs
in the United States such as Medicare and Medicaid, commercial health insurers and managed care organizations, provide coverage and
establish adequate reimbursement levels for, the product. In the United States, no uniform policy of coverage and reimbursement for
drug products exists among third-party payors. Therefore, coverage and reimbursement for drug products can differ significantly from
payor to payor. The process for determining whether a third-party payor will provide coverage for a product may be separate from
the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors
are increasingly challenging the prices charged, examining the medical necessity and reviewing the cost-effectiveness of medical
products and services and imposing controls to manage costs. Third-party payors may limit coverage to specific products on an approved
list, also known as a formulary, which might not include all of the approved products for a particular indication.
In order to secure coverage
and reimbursement for any product that might be approved for sale, a company may need to conduct expensive pharmacoeconomic studies in
order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA
or other comparable regulatory approvals. Additionally, companies may also need to provide discounts to purchasers, private health plans
or government healthcare programs. Nonetheless, product candidates may not be considered medically necessary or cost effective. A decision
by a third-party payor not to cover a product could reduce physician utilization once the product is approved and have a material
adverse effect on sales, our operations and financial condition. Additionally, a third-party payor’s decision to provide coverage
for a product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide
coverage for a product does not assure that other payors will also provide coverage and reimbursement for the product and the level of
coverage and reimbursement can differ significantly from payor to payor.
The containment of healthcare
costs has become a priority of federal, state and foreign governments and the prices of products have been a focus in this effort. At
the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical product
pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure
and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Governments
have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement
and requirements for substitution of generic products. Adoption of price controls and cost-containment measures and adoption of more
restrictive policies in jurisdictions with existing controls and measures, could further limit a company’s revenue generated from
the sale of any approved products. Coverage policies and third-party payor reimbursement rates may change at any time. Even if favorable
coverage and reimbursement status is attained for one or more products for which a company or its collaborators receive regulatory approval,
less favorable coverage policies and reimbursement rates may be implemented in the future.
Healthcare Reform
In the United States and
some foreign jurisdictions, there have been, and likely will continue to be, a number of legislative and regulatory changes and proposed
changes regarding the healthcare system directed at broadening the availability of healthcare, improving the quality of healthcare and
containing or lowering the cost of healthcare. For example, in March 2010, Congress enacted the ACA, which, among other things, included
changes to the coverage and payment for products under government health care programs. The ACA included provisions of importance to our
potential product candidate that:
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created an annual, nondeductible fee on any entity that manufactures
or imports specified branded prescription drugs and biologic products, apportioned among these entities according to their market share
in certain government healthcare programs;
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expanded eligibility criteria for Medicaid programs by, among
other things, allowing states to offer Medicaid coverage to certain individuals with income at or below 133% of the federal poverty level,
thereby potentially increasing a manufacturer’s Medicaid rebate liability;
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expanded manufacturers’ rebate liability under the
Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and generic drugs and revising the definition of “average
manufacturer price,” (“AMP”) for calculating and reporting Medicaid drug rebates on outpatient prescription
drug prices;
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addressed a new methodology by which rebates owed by manufacturers
under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;
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expanded the types of entities eligible for the 340B drug
discount program;
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established the Medicare Part D coverage gap discount program
by requiring manufacturers to provide point-of-sale-discounts off the negotiated price of applicable brand drugs to eligible beneficiaries
during their coverage gap period as a condition for the manufacturers’ outpatient drugs to be covered under Medicare Part D; and
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created a Patient-Centered Outcomes Research Institute
to oversee, identify priorities in and conduct comparative clinical effectiveness research, along with funding for such research.
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Since its enactment, there
have been numerous judicial, administrative, executive, and legislative challenges to certain aspects of the ACA, and we expect there
will be additional challenges and amendments to the ACA in the future. Various portions of the ACA are currently undergoing legal and
constitutional challenges in the United States Supreme Court and members of Congress have introduced several pieces of legislation
aimed at significantly revising or repealing the ACA. The United States Supreme Court is expected to rule on a legal challenge to
the constitutionality of the ACA in 2021. The implementation of the ACA is ongoing, the law appears likely to continue the downward pressure
on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs. Litigation
and legislation related to the ACA are likely to continue, with unpredictable and uncertain results.
Other legislative changes have
been proposed and adopted in the United States since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among
other things, included aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013
and, due to subsequent legislative amendments to the statute, will remain in effect through 2030 unless additional Congressional action
is taken. These reductions have been suspended from May 1, 2020 through December 31, 2020 due to the COVID-19 pandemic.
The Consolidated Appropriations Act of 2021, extended the suspension period to March 31, 2021. An Act to Prevent Across-the-Board Direct
Spending Cuts, and for Other Purposes, signed into law on April 14, 2021, has extended the suspension period to December 31,
2021. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare
payments to several providers, including hospitals, imaging centers and cancer treatment centers and increased the statute of limitations
period for the government to recover overpayments to providers from three to five years.
Moreover, payment methodologies
may be subject to changes in healthcare legislation and regulatory initiatives. For example, CMS may develop new payment and delivery
models, such as bundled payment models. In addition, recently there has been heightened governmental scrutiny over the manner in which
manufacturers set prices for their commercial products, which has resulted in several Congressional inquiries and proposed and enacted
state and federal legislation designed to, among other things, bring more transparency to product pricing, review the relationship between
pricing and manufacturer patient programs and reform government program reimbursement methodologies for pharmaceutical products. For example,
at the federal level, the previous administration’s budget proposal for fiscal year 2021 included a $135 billion allowance
to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs for patients
and increase patient access to lower-cost generic and biosimilar drugs. On March 10, 2020, the previous administration sent
“principles” for drug pricing to Congress, calling for legislation that would, among other things, cap Medicare Part D beneficiary
out-of-pocket pharmacy expenses, provide an option to cap Medicare Part D beneficiary monthly out-of-pocket expenses and place
limits on pharmaceutical price increases. Further, the previous administration previously released a “Blueprint” to lower
drug prices and reduce out of pocket costs of drugs that contained proposals to increase drug manufacturer competition, increase the negotiating
power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of
pocket costs of drug products paid by consumers. HHS has solicited feedback on some of these measures and has implemented others under
its existing authority. For example, in May 2019, CMS issued a final rule to allow Medicare Advantage Plans the option of using step
therapy, a type of prior authorization, for Part B drugs beginning January 1, 2020. This final rule codified CMS’s policy change,
which was effective as of January 1, 2019. Although a number of these and other measures may require additional authorization to
become effective, Congress and the Biden administration have each indicated that they will continue to seek new legislative and/or administrative
measures to control drug costs. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction
in payments from private payors. In addition, individual states in the United States have also increasingly passed legislation and
implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts,
restrictions on certain product access and marketing cost disclosure and transparency measures and, in some cases, designed to encourage
importation from other countries and bulk purchasing. In addition, it is possible that additional governmental action is taken to address
the COVID-19 pandemic. For example, on April 18, 2020, CMS announced that qualified health plan issuers under the ACA may
suspend activities related to the collection and reporting of quality data that would have otherwise been reported between May and June 2020
given the challenges healthcare providers are facing responding to the ongoing COVID-19 pandemic.
On May 30, 2018, the Right
to Try Act was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational
new drug products that have completed a Phase 1 clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances,
eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded
access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of
the Right to Try Act.
Outside the United States,
ensuring coverage and adequate payment for a product also involves challenges. Pricing of prescription pharmaceuticals is subject to government
control in many countries. Pricing negotiations with government authorities can extend well beyond the receipt of regulatory approval
for a product and may require a clinical trial that compares the cost-effectiveness of a product to other available therapies. The
conduct of such a clinical trial could be expensive and result in delays in commercialization.
The Hatch-Waxman Amendments to the FDC Act
Orange Book Listing
In seeking approval for a drug
through an NDA, applicants are required to list with the FDA information on each patent whose claims cover the applicant’s drug product,
drug substance, or an approved method of using the drug. Upon approval of a drug, information on each of the patents listed in the application
for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange
Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an ANDA. Generally,
an ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed
drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug. Other than the requirement
for bioequivalence testing, ANDA applicants are not required to conduct, or submit results of, pre-clinical or clinical tests to
prove the safety or effectiveness of their drug product. Drugs approved in this way are commonly referred to as “generic equivalents”
to the listed drug and can often be substituted by pharmacists under prescriptions written for the original listed drug.
The ANDA applicant is required
to certify to the FDA concerning any patent information listed in the Orange Book for the approved product. Specifically, the applicant
must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the
listed patent has not expired but will expire on a particular date and approval is sought after patent expiration; (iv) the listed
patent is invalid or will not be infringed by the proposed ANDA product or (v) that there are no relevant patents. The ANDA applicant
may also elect to submit a section viii statement certifying that its proposed ANDA label does not contain (or carves out) any language
regarding the patented method-of-use rather than certify to a listed method-of-use patent. If the ANDA applicant does not challenge
the listed patents, the ANDA will not be approved until all the listed patents claiming the referenced product have expired.
A certification that the new
product will not infringe the already approved product’s listed patents, or that such patents are invalid or unenforceable, is called
a Paragraph IV certification. If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send
notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA
and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing
of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the FDA from
approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit, or a decision in the infringement
case that is favorable to the ANDA applicant.
The ANDA also will not be finally
approved until any applicable non-patent exclusivity listed in the Orange Book for the referenced product has expired. Drugs listed
in the Orange Book can also be cited by Section 505(b)(2) NDA applicants who must make relevant patent certifications as described above
for ANDA applicants.
To date, no Paragraph IV certification
has been filed relative to JATENZO.
Non-Patent Exclusivities
JATENZO was awarded 3-year new
product marketing exclusivity by the FDA. This exclusivity expires on March 27, 2022.
In the United States,
FDA-approved products also may be eligible for 6-month pediatric exclusivity which could extend not only any unexpired non-patent exclusivities,
but also the effective term of an Orange Book-listed patent, provided the FDA decides to award pediatric exclusivity on a date that
is not less than nine months prior to the expiration of any patent or non-patent exclusivity. We may be able to provide data supporting
the use of JATENZO in a pediatric population if invited to do so by the FDA. If we do so, and this data is deemed acceptable by the FDA,
we may receive an additional six-month extension of any unexpired exclusivity and an additional six-month regulatory exclusivity
that the FDA recognizes at the end of a patent term.
Employees
As of June 30, 2021, we
had 16 full-time employees. Two of our employees have Ph.D. degrees and one is an M.D. Three of our employees hold M.B.A.s. None
of our employees is represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our
employees to be good.
Facilities
We lease our office spaces,
which consist of 2,728 square feet located at 555 Skokie Boulevard, Suite 340, Northbrook, Illinois and 1,130 square feet located at 745
South Church Street, Suite 407, Mufreesboro, Tennessee. Our Northbrook, Illinois lease expires December 31, 2021 and our Mufreesboro,
Tennessee lease expires September 2022. We believe our current office space is sufficient to meet our needs until the expiration of our
lease and we expect to have additional space reserved sufficient to meet our needs prior to this expiration.
Legal Proceedings
On April 2, 2019, an action
for patent infringement was filed against us by Lipocine in the U.S. District Court for the District of Delaware. The lawsuit (Civil Action
No. 19-622) sought a declaratory judgement of infringement under 35 U.S.C. § 271(a)-(c) arising from our intent to market and sell
JATENZO, based on the FDA’s approval of JATENZO in March 2019. Lipocine alleged that we infringed certain claims in each of four
U.S. Patents: U.S. Patent No. 9,034,858, U.S. Patent No. 9,205,057, U.S. Patent No. 9,480,690 and U.S. Patent No. 9,757,390. Lipocine
sought reasonable royalty monetary damages, pre-judgment interest, post-judgment interest, attorneys’ fees, costs and
disbursements and injunctive relief.
Clarus asserted defenses of
noninfringement, invalidity under 35 U.S.C. §§ 103 and 112, as well as counterclaims of inequitable conduct, patent misuse and
exceptional case. Clarus’s motion for summary judgment of invalidity under Section 112 was argued on January 15, 2021, and
was granted on May 25, 2021, the decision finding all asserted claims invalid for failure to satisfy the written description requirement.
On June 15, 2021, Clarus requested the Court to schedule a bench trial on Clarus’s counterclaims of inequitable conduct, patent
misuse, and exceptional case at the earliest practicable date, pursuant to the Court’s invitation to make such a request. Subsequently,
on July 13, 2021, Clarus and Lipocine entered into a global settlement agreement that settled all claims between the parties, including
the interference matter (described below) and the pending Clarus counterclaims against Lipocine, and provides for a payment by Lipocine
to Clarus of a $4.0 million settlement fee payable as follows: $2.5 million upfront, $1.0 million within 12 months,
and the remainder within two years. This joint stipulation for dismissal was filed, and ordered by the Court on July 15, 2021, thereby
terminating this lawsuit.
On January 4, 2021, an
interference (No. 106,128) was declared by the U.S. Patent and Trademark Office between our U.S. Patent Application No. 16/656,178 and
Lipocine’s U.S. Patent Application No. 16/818,779. This proceeding (Interference No. 106,128 (DK)) is currently pending. The claims
at issue in the interference cover uses of JATENZO and TLANDO. The involved Lipocine patent application, however, contains claims we believe
cover the use of TLANDO and not JATENZO nor its FDA-approved use. We believe that we would not need a license from Lipocine, nor
that we would be liable for any damages, based solely on the outcome of the pending interference, as we do not believe the involved Lipocine
patent application claims in this interference cover JATENZO or its FDA-approved use. Moreover, Lipocine has filed a request for
entry of an adverse judgment in this interference pursuant to the global settlement agreement, described above. As part of this request
for judgment, Clarus has filed a copy of the settlement agreement with the USPTO with a request that the settlement agreement not be made
available to the public in accordance with relevant statutes and USPTO regulations. The Clarus application is expected to proceed to issuance
following Lipocine’s request for adverse judgment.
There is also risk that other
interference proceedings could be declared that involve Lipocine patent applications and/or patents and claims that cover JATENZO and/or
its use. And while two interferences were previously decided against us, Lipocine has not tried to assert patent claims issued to it as
a result of prevailing in those interferences against us, and we believe these claims do not cover JATENZO. In the event our beliefs turn
out to be incorrect, or future declared interferences involving claims that cover JATENZO are not resolved in our favor, we may need to
obtain a license from Lipocine. Such a license may not be available or may be available only on terms not favorable to us. This could
also have a material adverse effect on us.
The litigation and interference
are also expensive and consume significant time and resources.
MANAGEMENT
Executive
Officers, Key Employees and Board of Directors
Our
directors and executive officers and their ages as of September 28, 2021 are listed below:
Executive
Officers
|
Name
|
|
Age
|
|
Position
|
|
Robert
E. Dudley, Ph.D.
|
|
66
|
|
Chief
Executive Officer, President and Chairman of the Board
|
|
Richard
Peterson
|
|
53
|
|
Chief
Financial Officer
|
|
Steven
A. Bourne
|
|
59
|
|
Chief
Administrative Officer, Secretary and Treasurer
|
|
Frank
Jaeger
|
|
51
|
|
Chief
Commercial Officer
|
Non-Management
Directors
|
Name
|
|
Age
|
|
Position
|
|
John
Amory
|
|
54
|
|
Director
|
|
Elizabeth
A. Cermak
|
|
63
|
|
Director
|
|
Joseph
Hernandez
|
|
49
|
|
Director
|
|
Kimberly
Murphy
|
|
58
|
|
Chairman
of the Board
|
|
Mark
A. Prygocki, Sr
|
|
55
|
|
Director
|
|
Alex
Zisson
|
|
52
|
|
Director
|
Executive
Officers
Robert
E. Dudley, Ph.D. has served as our President, Chief Executive Officer and Director since the Closing Date. Prior thereto,
he served as Legacy Clarus’s Chief Executive Officer, President and Chairman of the board of directors from February 2004
through the Closing Date. Prior to that, from 2001 to 2003, he served as President and Chief Executive Officer and a member of the board
of directors of Anagen Therapeutics, Inc., a private biopharmaceutical company. From 1994 to 1999, he held several senior level
executive positions at Unimed Pharmaceuticals, Inc. (“Unimed”), a public company acquired by Solvay Pharmaceuticals
in 1999, and from 1999 to 2001 he served as Unimed’s President and Chief Executive Officer and was a member of its board of directors,
during which time Unimed received FDA approval for and launched AndroGel. Dr. Dudley received a B.S. in Biology from Pepperdine
University, Seaver College, an M.S. in Biology from University of New Mexico, and a Ph.D., with honors, in Pharmacology and Toxicology
from the University of Kansas School of Medicine. Dr. Dudley is also a board-certified toxicologist. We believe Dr. Dudley’s
experience as a scientist with a leading role in commercializing the market leading T-replacement therapy, coupled with an insider’s
perspective his role as our Chief Executive Officer brings to board discussions, provide him with the qualifications and skills to serve
on the Board.
Richard Peterson
has served as our Chief Financial Officer since the Closing Date. Prior thereto, he served as Legacy Clarus’s Chief Financial Officer
from February 2021 through the Closing Date. Prior to joining Legacy Clarus, Mr. Peterson served as Chief Financial Officer
for several clinical stage biopharmaceutical companies, most recently at Botanix Pharmaceutical, Ltd. (ASX:BOT) (from August 2019 to
May 2020). Prior to this role, Mr. Peterson served as Chief Financial Officer at Dermavant Sciences Inc. (from March 2018 to February
2019), Sienna Biopharmaceuticals, Inc., a biopharmaceutical company (Nasdaq:SNNA) (“Sienna”) (from March 2017
to March 2018), and Novan, Inc. (Nasdaq:NOVN) (“Novan”) (from September 2015 to March 2017). Mr. Peterson
also served as Chief Financial Officer of Medicis Pharmaceutical Corporation (“Medicis”), a commercial pharmaceutical
company from June 1995 to December 2012. Under Mr. Peterson’s leadership, Novan and Sienna completed successful initial public
offerings. While at Medicis, he played an integral role in guiding the company’s tremendous growth, which resulted in its acquisition
for $2.6 billion by Valeant Pharmaceuticals International. Mr. Peterson began his career with PricewaterhouseCoopers, after
receiving a degree in accountancy from Arizona State University.
Steven
A. Bourne has served our Chief Administrative Officer and Secretary since the Closing Date. Prior thereto, he served as Legacy
Clarus’s Chief Administrative Officer beginning February 2021 and as its Secretary and Treasurer from February 2004,
in each case through the Closing Date. He previously served as Legacy Clarus’s Chief Financial Officer from February 2004
to February 2021. Prior to that, from 2002 to 2003, he served as Chief Financial Officer, Secretary and Treasurer at Anagen Therapeutics,
Inc., a private biopharmaceutical company. Further, Mr. Bourne served as Controller, Secretary and Treasurer of Aksys, Ltd., a public
medical device company, from 1996 to 2001. Mr. Bourne received a B.S. in Accounting from Miami University and is a Certified Public
Accountant.
Frank
Jaeger has served as our Chief Commercial Officer since the Closing Date. Prior thereto, he served as Legacy Clarus’ Chief
Commercial Officer from September 2019 through the Closing Date. Mr. Jaeger is responsible for all commercial matters of sales,
marketing, commercial operations and market access for JATENZO. Prior to his joining Legacy Clarus, Mr. Jaeger served as the Regional
Sales Director at AbbVie Inc. (NYSE:ABBV) from January 2014 to August 2019, where he was responsible for sales of AndroGel
and Synthroid for the West Region in the Metabolics division. Mr. Jaeger received a B.A. in Psychology and an M.A. in Clinical Psychology
from the University of Illinois at Chicago and he received a M.B.A. from the Lake Forest Graduate School of Management.
Key
Employees
Jay
Newmark, M.D. has served as our Chief Medical Officer since the Closing Date. Prior thereto, he served as Legacy Clarus’s
Chief Medical Officer from December 2019 through the Closing Date. Prior to joining Legacy Clarus, Dr. Newmark was an independent
urologist in private practice for 16 years, establishing himself as a leading voice in men’s health. Dr. Newmark served
as Senior Director of Medical Affairs (Medical Diagnostics) at Genomic health from April 2018 to August 2019 and Senior Director of Medical
Affairs (Medical Diagnostics) at OPKO Health (Nasdaq:OPK) from to August 2014 to April 2018, and has worked closely with both commercial
development organizations and academic researchers to design clinical trial protocols and co-author publications in oncology and
urology. Dr. Newmark received his M.D. from the University of Michigan Medical School and completed his residency in urology at
The Johns Hopkins Hospital. Dr. Newmark also holds an M.B.A. from the University of Chicago.
James
Holloway has served as our Senior Vice President of Manufacturing and Supply since the Closing Date. Prior thereto, he served
as Legacy Clarus’s Vice President of Manufacturing and Supply from October 2019 through the Closing Date. Mr. Holloway has
extensive experience in pharmaceutical manufacturing operations. Prior to joining Clarus, Mr. Holloway served at CareFusion (now
BD Medical) (NYSE: BDX) (March 2011 to May 2018), and previously also held roles at Boehringer Ingelheim, Pfizer, Catalent, Cardinal
Health and DSM Pharmaceuticals, Mr. Holloway received a B.S. and M.Sc. in organic chemistry from Fisk University.
Non-Management
Directors
John
A. Amory, M.D., M.P.H, M.Sc. joined the Board in connection with the Closing of the Business Combination. Since July 2011,
Dr. Amory has served as a Professor of Medicine at the University of Washington in Seattle. Prior to this role, he served as a member
of the faculty of the University of Washington since 1997. Dr. Amory has published more than 154 peer-reviewed papers
in the field of male reproduction and his areas of research include male infertility, testosterone deficiency and the development of
novel male contraceptives. Dr. Amory earned his M.D. from the University of California — San Francisco and both his M.P.H.
and M.Sc. (pharmaceutics) from the University of Washington. We believe Dr. Amory’s knowledge and expertise in the industry provide
him with the qualifications and skills to serve on the Board.
Elizabeth
A. Cermak joined the Board in connection with the Closing of the Business Combination, and served as a member of Legacy Clarus’s
board of directors from July 2014 through the Closing. Ms. Cermak also serves on the board of directors of Moleculin Biotech, Inc.
(Nasdaq: MBRX) and the board of directors of QUE Oncology, a private company. She has also served on the board of directors of SteadyMed
Therapeutics (Nasdaq: STDY) from 2015 to 2018, a public company acquired by United Therapeutics. From 2009 to 2013, Ms. Cermak was
the Chief Commercial Officer and Executive Vice President at POZEN, now Aralez Pharmaceuticals. As Chief Commercial Officer at POZEN,
Ms. Cermak developed the commercial strategy and launch plans for the Company’s first self-marketed product, and signed licensing
deals with Johnson & Johnson, Desitin, and Sanofi. Prior to joining POZEN, Ms. Cermak worked at Johnson & Johnson
for 25 years, serving most recently as World-Wide Vice President Personal Products Franchise and Vice President Professional
Sales & Marketing. Ms. Cermak received a B.A. in accounting and Spanish from Franklin & Marshall College and an
M.B.A. from Drexel University. We believe Ms. Cermak’s robust business experience, with a focus in life science companies,
including public companies, provides her with the qualifications and skills to serve on the Board.
Joseph Hernandez,
has served on the Board since founding Blue Water, and prior to the Closing, served as Blue Water’s Chairman and Chief Executive
Officer. Mr. Hernandez is an entrepreneurial leader with over 25 years of experience in the healthcare field. He has a background
in company creation, early-stage technology development, as well as private and public market financing. He brings leadership to
the team, backed by a strong educational foundation in biology, medicine, molecular genetics, microbiology, epidemiology, marketing,
and finance. Over the course of his career, he has founded or led eight entrepreneurial companies in cutting edge areas of healthcare
and pharmaceuticals. After years of building his career at Merck & Co. (NYSE:MRK) from to December 1998 to January 2001
and Digene (acquired by Qiagen (NYSE:QGEN)) from 2005 to 2009, Mr. Hernandez founded and became the President and CEO of Innovative
Biosensors from 2004 to 2009. Later, Mr. Hernandez served as the Founder and Chairman of Microlin Bio Inc. from August 2013
to January 2017 and as Chairman of the Board of Ember Therapeutics (OTCMKTS:EMBT) from April 2014 to January 2019. He
was also the Chairman of Sydys Corporation from May 2016 to January 2019. In 2018, Mr. Hernandez founded Blue Water Vaccines,
an early-stage biotechnology company focused on manufacturing a universal influenza vaccine in partnership with the University of
Oxford in England. He has served as Chairman of Blue Water Vaccines, Inc. since January 2019. Most recently, in January 2020,
he founded and in May 2020 sold Noachis Terra, Inc. (acquired by Oragenics (NYSE:OGEN)) a company developing a vaccine for COVID-19.
Mr. Hernandez brings experience in managing and interacting with diverse cultures, high level executives, and elected officials, to the
team. Mr. Hernandez received a B.S. in Neuroscience, M.S. in Molecular Genetics and Microbiology from the University of Florida
and a MBA from the University of Florida, and is currently pursuing a MSc in Chronic Disease Epidemiology and Biostatistics from Yale
University. We believe he is well qualified to serve on the Board due to his extensive biotech entrepreneurship and early-stage technology
development experience in the healthcare industry.
Kimberly
Murphy, joined the Board in connection with Blue Water’s IPO and was appointed Chairman upon Closing of the Business Combination.
Ms. Murphy has more than 25 years of experience at leading pharmaceutical companies including Novartis (NYSE:NVS) and Merck &
Co (NYSE:MRK). In her distinguished career at Merck, she rose through various public affairs and business roles to leadership positions
as Region Marketer for U.S. Commercial Operations, U.S. Marketing Leader for Adult Vaccines and Director of the HPV/Gardasil Franchise.
Most recently, Ms. Murphy served as the Vice President and Global Vaccines Commercialization Leader, Influenza Franchise, at GlaxoSmithKline
(NYSE:GSK). Ms. Murphy was with GSK from 2011 through 2019, serving as VP of US Vaccines Customer Strategy from October 2012
to June 2014, then VP of the North America Vaccines Integration Planning from June 2014 to May 2015, followed by VP and
Global Marketing Head for the Shingles Vaccines from May 2015 to February 2016, before transitioning to the Global Vaccines
Commercialization Leader for the Influenza Franchise. Kim has Board and Advisory experience that includes serving on the boards of Oragenics,
Inc. (NYSE: OGEN) and Blue Water Vaccines, Inc., as well as the GSK Representative to the Biotechnology Industry Organization’s
Biodefense Advisory Council, and on the St. Joseph’s University Pharmaceutical & Healthcare Marketing MBA Program’s
Advisory Board. Ms. Murphy received a B.A. in English from Old Dominion University, a M.B.A. in Marketing from St. Joseph’s
University, and the Marketing Excellence Program from the Wharton School of University of Pennsylvania. We believe Ms. Murphy is well
qualified to serve on the Board due to her extensive experience in the healthcare industry.
Mark
A. Prygocki, Sr. joined the Board in connection with the Closing of the Business Combination, and served as a member of Legacy
Clarus’s board of directors from July 2014 through Closing. From January 2017 until January 2020, he served as President,
Chief Executive Officer and a member of the Board of Directors of Illustris Pharmaceuticals, Inc., (“Illustris”) a
privately held bio-development company. Prior to joining Illustris, Mr. Prygocki worked at Medicis for more than 20 years
and served most recently at Medicis as President from 2010 to 2012. Prior to that, Mr. Prygocki held several senior-level positions
at Medicis, including Chief Operating Officer, Executive Vice President, and Chief Financial Officer and Treasurer. Since 2012, Mr. Prygocki
has served as a consultant to the pharmaceutical and retail industries through his consulting company. Mr. Prygocki’s previous
experience includes work at Citigroup, an investment banking firm, in the regulatory reporting division and several years in the audit
department of Ernst & Young, LLP. Mr. Prygocki currently serves on the board of directors of Verrica Pharmaceuticals, Inc.
(Nasdaq: VRCA), since 2018 and is Chairman of its audit committee. Mr. Prygocki also served on the board of directors of Revance
Therapeutics, Inc. within the last five years. He is certified by the American Institute of Certified Public Accountants. Mr. Prygocki
serves on the board of Whispering Hope Ranch Foundation, a non-profit organization that assists children with special needs. Mr. Prygocki
holds a B.A. in accounting from Pace University. We believe Mr. Prygocki’s operating experience and financial expertise in
the life science companies provides him with the qualifications and skills to serve on the Board.
Alex
Zisson joined the Board in connection with the Closing of the Business Combination, and served as a member of Legacy Clarus’s
board of directors from February 2004 through Closing. Since January 2016, Mr. Zisson has been a Managing Director at
H.I.G. BioHealth Partners, focusing on pharmaceuticals, genetics, drug delivery and specialty pharma and biotechnology. Prior to this
role, from 2002 to 2016, he served as a Venture Investor and Partner at Thomas, McNerney, where he focused on investment opportunities
in the life sciences sector. Prior to that, Mr. Zisson spent 11 years in the research department at Hambrecht & Quist,
an investment bank (and its successor firms Chase H&Q and JPMorgan H&Q), from 1991 to 2002, including serving as Managing Director
from 1997 to 2002 and as the firm’s Health Care Strategist following the merger of Chase H&Q and JPMorgan. Mr. Zisson also serves
on the board of directors of a number of private companies, including Leiters Pharmacy, Neurana Pharmaceuticals, Taconic Biosciences
and BioVectra Inc. Mr. Zisson received an A.B. in History from Brown University. We believe Mr. Zisson’s experience as a healthcare
strategist combined with his experience in investing in life science companies provides him with the qualifications and skills to serve
on the Board.
Composition
of Our Board of Directors
The
Board consists of seven members, including our President and Chief Executive Officer. In accordance with the Certificate of Incorporation,
the Board is divided into three classes, Classes I, II and III, each to serve a three year term, except for the initial term after the
Closing, for which the Class I directors will be up for reelection at the first annual meeting of stockholders occurring after the Closing,
and for which the Class II directors will be up for reelection at the second annual meeting of stockholders occurring after the Closing.
At each annual general meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the
time of election and qualification until the third annual meeting following the election. Directors will not be able to be removed during
their term except for cause, and then only by the affirmative vote of the holders of not less than two thirds (2/3) of the outstanding
shares of capital stock then entitled to vote at an election of directors. The directors are divided among the three classes as follows:
|
|
●
|
the
Class I directors are Alex Zisson and John Amory, and their terms will expire at the annual
meeting of stockholders to be held in 2022;
|
|
|
●
|
the
Class II directors are Mark Prygocki and Elizabeth Cermak, and their terms will expire at
the annual meeting of stockholders to be held in 2023; and
|
|
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●
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the
Class III directors are Robert Dudley, Kimberly Murphy and Joseph Hernandez, and their terms
will expire at the annual meeting of stockholders to be held in 2024.
|
We
expect that any additional directorships resulting from an increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of one-third of the directors. The division of the Board into three classes
with staggered three-year terms may delay or prevent a change of our management or a change in control.
Director
Independence
Each
of the directors on the Board, other than Dr. Dudley, qualify as independent directors, as defined under the listing rules of The Nasdaq
Stock Market LLC (the “Nasdaq listing rules”), and the Board consists of a majority of “independent directors,”
as defined under the rules of the SEC and Nasdaq listing rules relating to director independence requirements. In addition, we are subject
to the rules of the SEC and Nasdaq relating to the membership, qualifications and operations of the audit committee, as discussed below.
Family
Relationships
There
are no family relationships among any of the directors and executive officers.
Committees
of Our Board of Directors
Effective
upon the consummation of the Merger, the Board reconstituted the membership of its standing committees, which are governed by the Certificate
of Incorporation that complies with the applicable requirements of current Nasdaq listing rules. We intend to comply with future requirements
to the extent they are applicable to us. Copies of the amended and restated charters for each committee are available on the investor
relations portion of our website, at www.clarustherapeutics.com. The Board may establish other committees as it deems necessary
or appropriate from time to time.
Audit
Committee
The
audit committee of the Board consists of Elizabeth Cermak, Joseph Hernandez and Mark Prygocki. Our Board has determined each member is
independent under the Nasdaq listing rules and Rule 10A-3(b)(1) under the Exchange Act. The chairperson of the audit committee is
Mr. Prygocki. Mr. Prygocki also qualifies as an “audit committee financial expert” as such term is defined in Item 407(d)(5)
of Regulation S-K and possesses financial sophistication, as defined under the Nasdaq listing rules.
The
primary purpose of the audit committee is to discharge the responsibilities of the board of directors with respect to our accounting,
financial, and other reporting and internal control practices and to oversee our independent registered accounting firm. Specific responsibilities
of our audit committee include:
|
|
●
|
selecting
a qualified firm to serve as the independent registered public accounting firm to audit our
financial statements;
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|
|
●
|
helping
to ensure the independence and performance of the independent registered public accounting
firm;
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●
|
discussing
the scope and results of the audit with the independent registered public accounting firm,
and reviewing, with management and the independent accountants, our interim and year-end operating
results;
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●
|
developing
procedures for employees to submit concerns anonymously about questionable accounting or
audit matters;
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●
|
reviewing
policies on risk assessment and risk management;
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●
|
reviewing
related party transactions;
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●
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obtaining
and reviewing a report by the independent registered public accounting firm at least annually,
that describes our internal quality-control procedures, any material issues with such
procedures, and any steps taken to deal with such issues when required by applicable law;
and
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●
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approving
(or, as permitted, pre-approving) all audit and all permissible non-audit service to
be performed by the independent registered public accounting firm.
|
Compensation
Committee
The
compensation committee of the Board consists of Joseph Hernandez, Kimberly Murphy and Alex Zisson. Our Board has determined each member
is a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act. The chairperson
of the compensation committee is Mr. Zisson. The primary purpose of the compensation committee is to discharge the responsibilities
of the board of directors to oversee its compensation policies, plans and programs and to review and determine the compensation to be
paid to its executive officers, directors and other senior management, as appropriate.
Specific
responsibilities of the compensation committee include:
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●
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reviewing
and approving on an annual basis the corporate goals and objectives relevant to the Chief
Executive Officer’s compensation, evaluating the Chief Executive Officer’s performance
in light of such goals and objectives and determining and approving the remuneration (if
any) of the Chief Executive Officer based on such evaluation;
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●
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reviewing
and approving the compensation of the other executive officers;
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●
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reviewing
and recommending to the Board the compensation of the directors;
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●
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reviewing
our executive compensation policies and plans;
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●
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reviewing
and approving, or recommending that the Board approve, incentive compensation and equity
plans, severance agreements, change-of-control protections and any other compensatory
arrangements for the executive officers and other senior management, as appropriate;
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●
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administering
our incentive compensation equity-based incentive plans;
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●
|
selecting
independent compensation consultants and assessing whether there are any conflicts of interest
with any of the committee’s compensation advisors;
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●
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assisting
management in complying with this prospectus statement and annual report disclosure requirements;
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●
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if
required, producing a report on executive compensation to be included in the annual proxy
statement;
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●
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reviewing
and establishing general policies relating to compensation and benefits of our employees;
and
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●
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reviewing
our overall compensation philosophy.
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Nominating
and Corporate Governance Committee
The
nominating and corporate governance committee of the Board consists of John Amory, Elizabeth Cermak and Kimberly Murphy. Our Board determined
each member is independent under the Nasdaq listing rules. The chairperson of the nominating and corporate governance committee is Ms.
Cermak.
Specific
responsibilities of the nominating and corporate governance committee include:
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●
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identifying,
evaluating and selecting, or recommending that the Board approve, nominees for election to
the Combined Entity’s board of directors;
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●
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evaluating
the performance of the Board and of individual directors;
|
|
|
●
|
reviewing
developments in corporate governance practices;
|
|
|
●
|
evaluating
the adequacy of our corporate governance practices and reporting;
|
|
|
●
|
reviewing
management succession plans; and
|
|
|
●
|
developing
and making recommendations to the Board regarding corporate governance guidelines and matters.
|
Code
of Business Conduct and Ethics
We
have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors, including those officers
responsible for financial reporting. The Code of Business Conduct and Ethics is available on our website at https://clarustherapeutics.com/.
Information contained on or accessible through such website is not a part of this prospectus, and the inclusion of the website address
in this prospectus is an inactive textual reference only. We intend to disclose any amendments to the Code of Business Conduct and Ethics,
or any waivers of its requirements, on our website to the extent required by the applicable rules and exchange requirements.
Compensation
Committee Interlocks and Insider Participation
No
member of our compensation committee has ever been an officer or employee of either company. None of our executive officers serve, or
have served during the last year, as a member of the board of directors, compensation committee, or other board committee performing
equivalent functions of any other entity that has one or more executive officers serving as one of our directors or on either company’s
compensation committee.
Role
of Our Board of Directors in Risk Oversight
One
of the key functions of our Board is informed oversight of our risk management process. The Board does not have a standing risk management
committee, but rather administers this oversight function directly through the Board as a whole, as well as through its various standing
committees that address risks inherent in their respective areas of oversight. In particular, the Board is responsible for monitoring
and assessing strategic risk exposure and its audit committee is responsible for considering and discussing our major financial risk
exposures and the steps our management will take to monitor and control such exposures, including guidelines and policies to govern the
process by which risk assessment and management is undertaken. Our audit committee also monitors compliance with legal and regulatory
requirements. Our compensation committee assesses and monitors whether our compensation plans, policies and programs comply with applicable
legal and regulatory requirements.
DIRECTOR
COMPENSATION
During
fiscal year 2020, Legacy Clarus did not provide any compensation to its non-employee directors who were associated with Thomas,
McNerney & Partners, H.I.G. BioHealth Partners and C-Bridge Capital Partners, LLC for their services on its board of directors.
While Legacy Clarus did not have a formal non-employee director compensation program prior to the Business Combination, Ms. Cermak
and Mr. Prygocki each received an annual cash retainer of $30,000, paid on a quarterly basis.
2020
Director Compensation Table
The
following table presents the total compensation for each person who served as a non-employee director of Legacy Clarus during fiscal
year 2020. Dr. Dudley, our President and Chief Executive Officer, did not receive any additional compensation from Legacy Clarus
for his services on Legacy Clarus’ board of directors. The compensation received by Dr. Dudley is set forth in “Executive
Compensation—2020 Summary Compensation Table.”
|
Name
|
|
Fees
Earned or
Paid in Cash
($)
|
|
|
Option
Awards
($)(1)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|
Alex Zisson(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Elizabeth Cermak(3)
|
|
|
30,000
|
|
|
|
32,740
|
|
|
|
—
|
|
|
|
62,740
|
|
|
Mark A. Prygocki(4)
|
|
|
16,250
|
(5)
|
|
|
479,109
|
|
|
|
131,162
|
(6)
|
|
|
626,521
|
|
|
|
(1)
|
The
amounts reported represent the aggregate grant date fair value of the stock option awards
granted to Legacy Clarus’ non-employee directors during 2020, calculated in accordance
with FASB ASC Topic 718. Such grant date fair values do not take into account any estimated
forfeitures. The assumptions used in calculating the grant date fair value of the stock option
awards reported in this column are set forth in note 10 of Legacy Clarus’ audited financial
statements included elsewhere in this prospectus. The amounts reported in this column reflect
the accounting cost for these stock option awards and do not correspond to the actual economic
value that may be received by our non-employee directors upon the exercise of the stock
option awards or any sale of the underlying shares of Legacy Clarus common stock.
|
|
|
(2)
|
As
of December 31, 2020, Mr. Zisson did not hold any outstanding awards.
|
|
|
(3)
|
As
of December 31, 2020, Ms. Cermak held stock options to purchase a total of 121,520 shares
of Legacy Clarus common stock.
|
|
|
(4)
|
As
of December 31, 2020, Mr. Prygocki held stock options to purchase a total of 475,781 shares
of Legacy Clarus common stock.
|
|
|
(5)
|
Mr. Prygocki
was appointed, temporarily, as an Executive Director of the board of directors of Legacy
Clarus on July 15, 2020 and ceased to receive any cash retainer for board services as of
such date and until such time that he no longer held the Executive Director position. Mr.
Prygocki’s role as Executive Director ceased on May 15, 2021.
|
|
|
(6)
|
Represents
amounts paid to Mr. Prygocki for service as a Legacy Clarus non-employee director, consisting
of the $128,125 in cash compensation and $3,037 for medical insurance premiums. In connection
with Mr. Prygocki’s appointment as an Executive Director, Legacy Clarus’
board approved the following compensation to Mr. Prygocki: (i) a cash payment in an
amount equal to 70% of Legacy Clarus’s Chief Executive Officer’s salary, payable
on a monthly basis, if Mr. Prygocki is not eligible for and has not elected coverage
under Legacy Clarus’ healthcare plans, (ii) a cash payment amount equal to 60% of Legacy
Clarus’s Chief Executive Officer’s salary, payable on a monthly basis, if Mr. Prygocki
is eligible for and has elected coverage under Legacy Clarus’ healthcare plans, and
(iii) eligibility to receive an annual bonus in an amount of up to 60% of Legacy Clarus’s
Chief Executive Officer’s bonus, contingent upon achievement of certain performance
measures as determined by Legacy Clarus’ board of directors in its sole discretion
|
We
intend to adopt a non-employee director compensation policy that will be designed to align compensation with our business objectives
and the creation of stockholder value, while enabling us to attract, retain, incentivize and reward directors who contribute to the long-term success
of the company.
Under
the contemplated policy, our non-employee directors are expected to be eligible to receive cash retainers (which will be prorated
for partial years of service) and equity awards.
The
aggregate amount of compensation, including both equity compensation and cash compensation, paid to any non-employee director in
a calendar year will not exceed $1,000,000 in the first calendar year such individual becomes a non-employee director and $650,000
in any other calendar year.
We
will reimburse all reasonable out-of-pocket expenses incurred by non-employee directors in attending meetings of the board
of directors and committees thereof. Employee directors will receive no additional compensation for their service as a director.
EXECUTIVE
COMPENSATION
This
section discusses the material components of the executive compensation program offered to (1) Legacy Clarus’ principal executive
officer and (2) Legacy Clarus’ two next most highly compensated executive officers who earned more than $100,000 during the fiscal
year ended December 31, 2020 and were serving as executive officers as of such date. Such executive officers consist of the following
persons, referred to herein as our named executive officers (the “NEOs”):
|
|
●
|
Robert
E. Dudley, Ph.D., President and Chief Executive Officer
|
|
|
●
|
Steven
A. Bourne, Chief Administrative Officer
|
|
|
●
|
Frank
A. Jaeger, Chief Commercial Officer
|
2020
Summary Compensation Table
The
following table presents information regarding the total compensation awarded to and earned by our named executive officers for services
rendered to Legacy Clarus in all capacities in fiscal year ended December 31, 2020, or Fiscal Year 2020.
2020
Summary Compensation Table
The
following table presents all of the compensation awarded to or earned by or paid to the NEOs during the year ended December 31, 2020.
|
Name and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Option Awards
($)(1)
|
|
|
Nonequity
Incentive Plan
Compensation ($)(2)
|
|
|
Total
($)
|
|
Robert E. Dudley
President and Chief Executive
Officer
|
|
2020
|
|
|
|
410,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
147,600
|
|
|
|
557,600
|
|
Steven A. Bourne
Chief Administrative Officer
|
|
2020
|
|
|
|
325,000
|
|
|
|
—
|
|
|
|
—
|
(5)
|
|
|
85,830
|
|
|
|
410,830
|
|
Frank A. Jaeger
Chief Commercial Officer
|
|
2020
|
|
|
|
325,000
|
|
|
|
—
|
|
|
|
24,500
|
|
|
|
89,234
|
|
|
|
438,734
|
|
|
|
(1)
|
The
amounts reported represent the aggregate grant date fair value of the stock option awards
granted to the NEO during 2020, calculated in accordance with FASB ASC Topic 718. Such grant
date fair values do not take into account any estimated forfeitures. The assumptions used
in calculating the grant date fair value of the stock option awards reported in this column
are set forth in Note 10 of Legacy Clarus’ audited financial statements included elsewhere
in this prospectus. The amounts reported in this column reflect the accounting cost for these
stock option awards and do not correspond to the actual economic value that may be received
by our named executive officers upon the exercise of the stock option awards or any sale
of the underlying shares of Legacy Clarus common stock.
|
|
|
(2)
|
Reflects amounts earned in Fiscal Year 2020. Bonuses were paid in August
2021.
|
Narrative
Disclosure to the Summary Compensation Table
2020
Base Salaries
Each
of the NEOs is paid a base salary commensurate with his skill set, experience, performance, role and responsibilities. For Fiscal Year
2020, the base salaries for Dr. Dudley and Messrs. Bourne and Jaeger were $410,000, $325,000 and $325,000, respectively.
Annual
Cash Bonuses
During the year ended December 31,
2020, each NEO was eligible to earn an annual discretionary bonus based on the achievement of corporate and individual objectives. For
the year ended December 31, 2020, the earned annual bonuses for Dr. Dudley and Messrs. Bourne and Jaeger were $147,600, $85,830 and
$89,234, respectively. These amounts were paid in August 2021.
Equity
Incentive Plan
Prior
to the Merger, Legacy Clarus sponsored the Clarus Therapeutics, Inc. 2014 Stock Option and Incentive Plan (as amended from time to time,
the “2014 Plan”), pursuant to which it granted option awards to certain service providers of Legacy Clarus, including
our NEOs. During the fiscal year ended December 31, 2020, Legacy Clarus granted a stock option to purchase 350,000 shares of
Legacy Clarus common stock under the 2014 Plan to Mr. Jaeger. These awards are described in more detail in the “Outstanding
Equity Awards at 2020 Fiscal Year-End” table.
Base
Salaries
The
annual base salaries of our named executive officers are generally determined, approved and reviewed periodically by our compensation
committee in order to compensate our named executive officers for their satisfactory performance of duties to our company. Annual base
salaries are intended to provide a fixed component of compensation to our named executive officers, reflecting their skill sets, experience,
roles and responsibilities. Base salaries for our named executive officers have generally been set at levels deemed necessary to attract
and retain individuals with superior talent.
|
Name
|
|
2020 Base
Salary
($)
|
|
|
2021 Base
Salary*
($)
|
|
|
Robert E. Dudley
|
|
|
410,000
|
|
|
|
609,000
|
|
|
Steven A. Bourne
|
|
|
325,000
|
|
|
|
348,000
|
|
|
Frank A. Jaeger
|
|
|
325,000
|
|
|
|
400,000
|
|
|
*
|
2021 Base Salary is effective as of September 9, 2021.
|
Agreements
with Our Named Executive Officers
In
connection with the Business Combination, Legacy Clarus entered into new employment agreements with our executive officers effective
as of September 9, 2021 (which superseded each executive officer’s prior employment or offer letter agreement with Legacy Clarus):
Robert E. Dudley, Ph.D. (Chief Executive Officer and President), Richard Peterson (Chief Financial Officer), Steven A. Bourne, CPA (Chief
Administrative Officer) and Frank A. Jaeger (Chief Commercial Officer). Each employment agreement provides for an indefinite employment
term that may be terminated in accordance with the terms and conditions of the employment agreement, and sets forth the executive officer’s
annual base salary and annual cash performance-based bonus with a target of a certain percentage of base salary based on the achievement
of certain performance objectives as determined by the compensation committee of the board of directors of Clarus. Each employment agreement
also provides for severance benefits upon a termination of employment without “cause” or by the executive officer for “good
reason” (each as defined in the employment agreements), including (i) a pro-rata annual bonus for the year of termination (based
on actual performance), (ii) a certain number of months of base salary (18 months for Dr. Dudley and 12 months for each of Messrs. Peterson,
Jaeger and Bourne), payable in installments over the applicable severance period (or in the event such termination occurs on or following
a “change in control” (as defined in the employment agreements), payable in a lump sum following such termination), and (iii)
payment of the employer-portion of COBRA premiums during the applicable severance prior (or until the executive officer becomes eligible
to receive health benefits as a result of subsequent employment or service during the severance period, if earlier). Each employment
agreement also contains certain restrictive covenants, including non-competition, non-solicitation, and confidentiality covenants.
Outstanding
Equity Awards at 2020 Fiscal Year-End
The
following table sets forth information concerning outstanding equity awards held by each of our NEOs as of December 31, 2020.
|
|
|
|
|
|
|
Option
awards(1)
|
|
|
Stock
awards
|
|
|
Name
|
|
Grant
date
|
|
Vesting
commencement
date
|
|
Number
of
securities
underlying
unexercised
options (#)
exercisable
|
|
|
Number
of
securities
underlying
unexercised
options (#)
unexercisable
|
|
|
Option
exercise
price
($)
|
|
|
Option
expiration
date
|
|
Number
of shares
or units
of stock
that
have
not
vested
(#)
|
|
|
Market
value of
shares
or units
of stock
that
have
not
vested
($)
|
|
|
Equity
incentive
plan
awards:
number of
unearned
shares,
units or
other
rights
that
have not
vested
(#)
|
|
|
Equity
incentive
plan
awards:
market or
payout
value of
unearned
shares,
units or
other rights
that have
not vested
($)(3)
|
|
|
Robert E. Dudley
|
|
9/9/2011(1)
|
|
9/9/2011
|
|
|
570,000
|
|
|
|
—
|
|
|
|
0.99
|
|
|
9/9/2021
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
1/22/2015(2)
|
|
1/22/2015
|
|
|
58,823
|
(3)
|
|
|
—
|
|
|
|
2.93
|
|
|
1/22/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/2/2016(2)
|
|
6/2/2016
|
|
|
128,000
|
(3)
|
|
|
—
|
|
|
|
1.32
|
|
|
6/2/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/17/2017(2)
|
|
7/17/2017
|
|
|
125,525
|
(4)
|
|
|
21,431
|
(4)
|
|
|
2.14
|
|
|
7/17/2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/15/2017(2)
|
|
12/15/2017
|
|
|
129,000
|
(4)
|
|
|
43,000
|
(4)
|
|
|
2.13
|
|
|
12/15/2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven A. Bourne
|
|
9/9/2011(1)
|
|
9/9/2011
|
|
|
95,000
|
(3)
|
|
|
—
|
|
|
|
0.99
|
|
|
9/9/2021
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
1/22/2015(2)
|
|
1/22/2015
|
|
|
31,512
|
(3)
|
|
|
—
|
|
|
|
2.93
|
|
|
1/22/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/2/2016(2)
|
|
6/2/2016
|
|
|
80,000
|
(3)
|
|
|
—
|
|
|
|
1.32
|
|
|
6/2/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/17/2017(2)
|
|
7/17/2017
|
|
|
55,521
|
(4)
|
|
|
9,479
|
(4)
|
|
|
2.14
|
|
|
7/17/2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/15/2017(2)
|
|
12/15/2017
|
|
|
73,125
|
(4)
|
|
|
24,375
|
(4)
|
|
|
2.13
|
|
|
12/15/2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank A. Jaeger
|
|
12/18/2020(2)
|
|
9/23/2019
|
|
|
109,375
|
(4)
|
|
|
240,375
|
(4)
|
|
|
2.69
|
|
|
12/18/2030
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1)
|
This
equity award was granted under and is subject to the terms of the Legacy Clarus 2004 Stock Incentive Plan (the “2004 Plan”),
as well as certain acceleration of vesting rights under the NEO’s employment agreement or offer letter, as applicable. This equity
award was cancelled and extinguished at the Closing.
|
|
|
(2)
|
This
equity award was granted under and is subject to the terms of the Legacy Clarus 2014 Plan, as well as certain acceleration of vesting
rights under the NEO’s employment agreement or offer letter, as applicable. This equity award was cancelled and extinguished at
the Closing.
|
|
|
(3)
|
This
grant was fully vested on December 31, 2020.
|
|
|
(4)
|
¼
of the shares subject to this stock option vest on the one year anniversary of the vesting commencement date, and 1/48 of the shares
subject to the stock option vest on a monthly basis thereafter, in each case, subject to the NEO’s continued service relationship
through each applicable vesting date.
|
Other
Compensation and Benefits
We
provide benefits to our NEOs on the same basis as provided to all of our employees, including health, dental and vision insurance; life
insurance; accidental death and dismemberment insurance; disability insurance; and a tax-qualified Section 401(k) plan for which
no match by us is provided. We do not maintain any executive-specific benefit or executive perquisite programs.
We
provide a tax-qualified Section 401(k) plan for all employees, including the named executive officers. We do not provide a match
for participants’ elective contributions to the 401(k) plan, nor do we provide to employees, including our named executive officers,
any other retirement benefits, including but not limited to tax-qualified defined benefit plans, supplemental executive retirement plans
and nonqualified defined contribution plans.
2021
Equity Incentive Plan
Overview
Our
board unanimously adopted the Clarus Therapeutics Holdings, Inc. 2021 Stock Option and Incentive Plan and the stockholders approved its
adoption on August 27, 2021 (the “2021 Plan Effective Date”).
The
2021 Plan allows us to make equity and equity-based incentive awards to officers, employees, directors and consultants. The Board
anticipates that providing such persons with a direct stake in the Company will assure a closer alignment of the interests of such individuals
with us and our stockholders, thereby stimulating their efforts on our behalf and strengthening their desire to remain with the Company.
Our
Board reserved 3.475 million shares of Common Stock for the issuance of awards under the 2021 Plan (the “Initial Limit”).
The 2021 Plan provides that the number of shares reserved and available for issuance under the 2021 Plan will automatically increase
each January 1, beginning on January 1, 2022, by 4% of the outstanding number of shares of Common Stock on the immediately
preceding December 31, or such lesser amount as determined by the plan administrator (the “Annual Increase”).
This limit is subject to adjustment in the event of a reorganization, recapitalization, reclassification, stock split, stock dividend,
reverse stock split or other similar change in the Company’s capitalization. The maximum aggregate number of shares of Common Stock
that may be issued upon exercise of incentive stock options under the 2021 Plan shall not exceed the Initial Limit cumulatively increased
on January 1, 2022 and on each January 1 thereafter by the lesser of the Annual Increase or 3.475 million shares of Common Stock.
Shares underlying any awards under the 2021 Plan that are forfeited, cancelled, held back upon exercise of an option or settlement of
an award to cover the exercise price or tax withholding, satisfied without the issuance of stock or otherwise terminated (other than
by exercise) will be added back to the shares available for issuance under the 2021 Plan and, to the extent permitted under Section 422
of the Code and the regulations promulgated thereunder, the shares that may be issued as incentive stock options.
The
2021 Plan contains a limitation whereby the value of all awards under the 2021 Plan and all other cash compensation paid by the Company
to any non-employee director may not exceed $1,000,000 for the first calendar year a non-employee director is initially appointed
to our Board, and $650,000 in any other calendar year.
The
2021 Plan is administered by the compensation committee of the Board, the Board or such other similar committee pursuant to the terms
of the 2021 Plan. The plan administrator, which initially is the compensation committee of the Board, has full power to select, from
among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants,
and to determine the specific terms and conditions of each award, subject to the provisions of the 2021 Plan. The plan administrator
may delegate to a committee consisting of one or more officers of the Company, including our Chief Executive Officer, the authority to
award to individuals who are not subject to the reporting and other provisions of Section 16 of the Exchange Act and not members
of the delegated committee, subject to certain limitations and guidelines.
Persons eligible to participate
in the 2021 Plan are officers, employees, non-employee directors and consultants of the Company and its subsidiaries as selected
from time to time by the plan administrator in its discretion. As of the date of this prospectus, approximately 24 individuals are eligible
to participate in the 2021 Plan, which includes approximately six officers, 12 employees who are not officers, six non-employee directors,
and zero consultants.
The
2021 Plan permits the granting of both options to purchase Common Stock intended to qualify as incentive stock options under Section 422
of the Code and options that do not so qualify. Options granted under the 2021 Plan will be non-qualified options if they fail to
qualify as incentive stock options or exceed the annual limit on incentive stock options. Incentive stock options may only be granted
to employees of the Company and its subsidiaries. Non-qualified options may be granted to any persons eligible to receive awards
under the 2021 Plan. The option exercise price of each option will be determined by the plan administrator but generally may not be less
than 100% of the fair market value of the Common Stock on the date of grant or, in the case of an incentive stock option granted to a
ten percent stockholder, 110% of such share’s fair market value. The term of each option will be fixed by the plan administrator
and may not exceed ten years from the date of grant. The plan administrator will determine at what time or times each option may be exercised,
including the ability to accelerate the vesting of such options.
Upon
exercise of options, the option exercise price must be paid in full either in cash, by certified or bank check or other instrument acceptable
to the plan administrator or by delivery (or attestation to the ownership) of shares of Common Stock that are beneficially owned by the
optionee free of restrictions or were purchased in the open market. Subject to applicable law, the exercise price may also be delivered
by a broker pursuant to irrevocable instructions to the broker from the optionee. In addition, the plan administrator may permit non-qualified options
to be exercised using a “net exercise” arrangement that reduces the number of shares issued to the optionee by the largest
whole number of shares with fair market value that does not exceed the aggregate exercise price.
The
plan administrator may award stock appreciation rights subject to such conditions and restrictions as it may determine. Stock appreciation
rights entitle the recipient to shares of Common Stock, or cash, equal to the value of the appreciation in the Company’s stock
price over the exercise price. The exercise price generally may not be less than 100% of the fair market value of Common Stock on the
date of grant. The term of each stock appreciation right will be fixed by the plan administrator and may not exceed ten years from the
date of grant. The plan administrator will determine at what time or times each stock appreciation right may be exercised, including
the ability to accelerate the vesting of such stock appreciation rights.
The
plan administrator may award restricted shares of Common Stock and restricted stock units to participants subject to such conditions
and restrictions as it may determine. These conditions and restrictions may include the achievement of certain performance goals and/or
continued employment with the Company through a specified vesting period. The plan administrator may also grant shares of Common Stock
that are free from any restrictions under the 2021 Plan. Unrestricted stock may be granted to participants in recognition of past services
or for other valid consideration and may be issued in lieu of cash compensation due to such participant. The plan administrator may grant
dividend equivalent rights to participants that entitle the recipient to receive credits for dividends that would be paid if the recipient
had held a specified number of shares of Common Stock.
The
plan administrator may grant cash-based awards under the 2021 Plan to participants, subject to the achievement of certain performance
goals, including continued employment with the Company.
The
2021 Plan requires the plan administrator to make appropriate adjustments to the number of shares of common stock that are subject to
the 2021 Plan, to certain limits in the 2021 Plan, and to any outstanding awards to reflect stock dividends, stock splits, extraordinary
cash dividends and similar events.
The
2021 Plan provides that upon the effectiveness of a “sale event,” as defined in the 2021 Plan, an acquirer or successor entity
may assume, continue or substitute for the outstanding awards under the 2021 Plan. To the extent that awards granted under the 2021 Plan
are not assumed or continued or substituted by the successor entity, all awards granted under the 2021 Plan shall terminate and in such
case except as may be otherwise provided in the relevant award certificate, all awards with time-based vesting conditions or restrictions
shall become fully vested and exercisable or nonforfeitable as of the effective time of the sale event, and all awards with conditions
and restrictions relating to the attainment of performance goals may become vested and exercisable or nonforfeitable in connection with
a sale event in the plan administrator’s discretion or to the extent specified in the relevant award certificate. In the event
of such termination, individuals holding options and stock appreciation rights will, for each such award, either (a) receive a payment
in cash or in kind for each share subject to such award that is exercisable in an amount equal to the per share cash consideration payable
to stockholders in the sale event less the applicable per share exercise price (provided that, in the case of an option or stock appreciation
right with an exercise price equal to or greater than the per share cash consideration payable to stockholders in the sale event, such
option or stock appreciation right shall be cancelled for no consideration) or (b) be permitted to exercise such options and stock
appreciation rights (to the extent exercisable) within a specified period of time prior to the sale event. The plan administrator shall
also have the option (in its sole discretion) to make or provide for a payment, in cash or in kind, to the grantees holding other awards
in an amount equal to the per share cash consideration payable to stockholders in the sale event multiplied by the number of vested shares
under such awards.
Participants
in the 2021 Plan are responsible for the payment of any federal, state or local taxes that the Company or its subsidiaries are required
by law to withhold upon the exercise of options or stock appreciation rights or vesting of other awards. The plan administrator may cause
any tax withholding obligation of the Company or its subsidiaries to be satisfied, in whole or in part, by the applicable entity withholding
from shares of Common Stock to be issued pursuant to an award a number of shares with an aggregate fair market value that would satisfy
the withholding amount due. The plan administrator may also require any tax withholding obligation of Company or its subsidiaries to
be satisfied, in whole or in part, by an arrangement whereby a certain number of shares issued pursuant to any award are immediately
sold and proceeds from such sale are remitted to the Company or its subsidiaries in an amount that would satisfy the withholding amount
due.
The
2021 Plan generally does not allow for the transfer or assignment of awards, other than by will or by the laws of descent and distribution
or pursuant to a domestic relations order; however, the plan administrator may permit the transfer of non-qualified stock options
by gift to an immediate family member, to trusts for the benefit of family members, or to partnerships in which such family members are
the only partners.
The
plan administrator may amend or discontinue the 2021 Plan and the plan administrator may amend or cancel outstanding awards for purposes
of satisfying changes in law or any other lawful purpose, but no such action may materially and adversely affect rights under an award
without the holder’s consent. Certain amendments to the 2021 Plan will require the approval of our stockholders. The plan administrator
is specifically authorized to exercise its discretion to reduce the exercise price of outstanding options or stock appreciation rights,
effect the repricing of such awards through cancellation and re-grants or cancel such awards in exchange for cash or other awards.
No
awards may be granted under the 2021 Plan after the date that is ten years from the 2021 Plan Effective Date. No awards under the 2021
Plan have been made prior to the date of this prospectus.
Certain
United States Federal Income Tax Aspects
The
following is a summary of the principal U.S. federal income tax consequences of certain transactions under the 2021 Plan. It does not
describe all federal tax consequences under the 2021 Plan, nor does it describe state or local tax consequences.
Incentive
Stock Options. No taxable income is generally realized by the optionee upon the grant or exercise of an incentive
stock option. If shares of the Company’s common stock issued to an optionee pursuant to the exercise of an incentive stock option
are sold or transferred after two years from the date of grant and after one year from the date of exercise, then generally (i) upon
sale of such shares, any amount realized in excess of the option exercise price (the amount paid for the shares) will be taxed to the
optionee as a long-term capital gain, and any loss sustained will be a long-term capital loss, and (ii) neither the Company
nor its subsidiaries will be entitled to any deduction for federal income tax purposes; provided that such incentive stock option otherwise
meets all of the technical requirements of an incentive stock option. The exercise of an incentive stock option will give rise to an
item of tax preference that may result in alternative minimum tax liability for the optionee.
If
shares of the Company’s common stock acquired upon the exercise of an incentive stock option are disposed of prior to the expiration
of the two-year and one-year holding periods described above (a “disqualifying disposition”), generally (i) the
optionee will realize ordinary income in the year of disposition in an amount equal to the excess (if any) of the fair market value of
the shares of the Company’s common stock at exercise (or, if less, the amount realized on a sale of such shares of the Company’s
common stock) over the option price thereof, and (ii) the Company or its subsidiaries will be entitled to deduct such amount. Special
rules will apply where all or a portion of the exercise price of the incentive stock option is paid by tendering shares of the Company’s
common stock.
If
an incentive stock option is exercised at a time when it no longer qualifies for the tax treatment described above, the option is treated
as a non-qualified option. Generally, an incentive stock option will not be eligible for the tax treatment described above if it
is exercised more than three months following termination of employment (or one year in the case of termination of employment by reason
of disability). In the case of termination of employment by reason of death, the three-month rule does not apply.
No
income is generally realized by the optionee at the time a non-qualified option is granted. Generally (i) at exercise, ordinary
income is realized by the optionee in an amount equal to the difference between the option exercise price and the fair market value of
the shares of the Company’s common stock on the date of exercise, and we receive a tax deduction for the same amount, and (ii) at
disposition, appreciation or depreciation after the date of exercise is treated as either short-term or long-term capital gain
or loss depending on how long the shares of the Company’s common stock have been held. Special rules will apply where all or a
portion of the exercise price of the non-qualified option is paid by tendering shares of the Company’s common stock. Upon
exercise, the optionee will also be subject to Social Security taxes on the excess of the fair market value over the exercise price of
the option.
For
all other awards under the 2021 Plan, either the Company or its subsidiaries generally will be entitled to a tax deduction in connection
with other awards under the 2021 Plan in an amount equal to the ordinary income realized by the participant at the time the participant
recognizes such income. Participants typically are subject to income tax and recognize such tax at the time that an award is exercised,
vests or becomes non-forfeitable, unless the award provides for deferred settlement.
The
vesting of any portion of an award that is accelerated due to the occurrence of a change in control (such as a sale event) may cause
all or a portion of the payments with respect to such accelerated awards to be treated as “parachute payments” as defined
in the Code. Any such parachute payments may be non-deductible to either the Company or its subsidiaries, in whole or in part, and
may subject the recipient to a non-deductible 20% federal excise tax on all or a portion of such payment (in addition to other taxes
ordinarily payable).
New
Plan Benefits
No
awards have been previously granted under the 2021 Plan and no awards have been granted that are contingent on stockholder approval of
the 2021 Plan. The awards that are to be granted to any participant or group of participants are indeterminable at the date of this prospectus
because participation and the types of awards that may be granted under the 2021 Plan are subject to the discretion of the plan administrator.
Consequently, no new plan benefits table is included in this prospectus.
Employee
Stock Purchase Plan
Our
Board unanimously adopted the Clarus Therapeutics Holdings, Inc. 2021 Employee Stock Purchase Plan and the stockholders approved its
adoption on August 27, 2021. We believe that the ESPP benefits us by providing employees with an opportunity to acquire shares of the
Company’s Common Stock and will enable us to attract, retain and motivate valued employees.
A
total of 347,500 shares of Common Stock, representing 1% of the fully diluted outstanding shares of Common Stock immediately following
consummation of the Merger, are reserved and authorized for issuance under the ESPP.
Summary
of the Material Provisions of the ESPP
The
following description of certain provisions of the ESPP is intended to be a summary only.
An
aggregate of 347,500 shares is reserved and available for issuance under the ESPP. The ESPP provides that the number of shares reserved
and available for issuance under the plan will automatically increase each January 1, beginning on January 1, 2022, by the
lesser of 347,500 shares of Common Stock, 1.0% of the outstanding number of shares of the Common Stock on the immediately preceding December 31,
or such lesser amount as determined by the plan administrator. If our capital structure changes because of a stock dividend, subdivision
of outstanding shares or similar event, the number of shares that can be issued under the ESPP will be appropriately adjusted.
The
ESPP will be administered by the person or persons appointed by the Board. Initially, the Compensation Committee of the Board will administer
the plan and has full authority to make, administer and interpret such rules and regulations regarding the ESPP as it deems advisable.
Any
employee of the Company or one of its subsidiaries that has been designated to participate in the ESPP is eligible to participate in
the ESPP so long as the employee is customarily employed for more than 20 hours a week. No person who owns or holds, or as a result of
participation in the ESPP would own or hold, Common Stock or options to purchase Common Stock, that together equal to 5% or more of total
combined voting power or value of all classes of stock of the Company or any parent or subsidiary is entitled to participate in the ESPP.
No employee may exercise an option granted under the ESPP that permits the employee to purchase Common Stock having a value of more than
$25,000 (determined using the fair market value of the stock at the time such option is granted) in any calendar year.
Participation in the ESPP
is limited to eligible employees who authorize payroll deductions equal to a whole percentage of base pay to the ESPP. Employees may
authorize payroll deductions, with a minimum of 1% of base pay and a maximum of 15% of base pay. As of the date of this prospectus, there
are currently approximately 18 employees who are eligible to participate in the ESPP. Once an employee becomes a participant in the ESPP,
that employee will automatically participate in successive offering periods, as described below, until such time as that employee withdraws
from the ESPP, becomes ineligible to participate in the ESPP, or his or her employment ceases.
Unless
otherwise determined by the compensation committee, each offering of Common Stock under the ESPP will be for a period of six months,
which we refer to as an “offering period.” The first offering period under the ESPP will begin and end on such date or dates
as determined by the administrator. Offerings under the ESPP will generally begin on the first business day occurring on or after each
November 1 and May 1 and will end on the last business day occurring on or before the following December 31 and June 30, respectively.
Shares are purchased on the last business day of each offering period, with that day being referred to as an “exercise date.”
The plan administrator may establish different offering periods or exercise dates under the ESPP.
On
the exercise date of each offering period, the employee is deemed to have exercised the option, at the exercise price for the lowest
of (i) a number of shares of Common Stock determined by dividing such employee’s accumulated payroll deductions or contributions
on such exercise date by the exercise price; (ii) a number of shares of Common Stock determined by dividing $25,000 by the fair market
value of the Common Stock on the first day of the offering; or (iii) such lesser number as established by the plan administrator in advance
of the offering. The exercise price is equal to the lesser of (i) 85% the fair market value per share of Common Stock on the first day
of the offering period or (ii) 85% of the fair market value per share of Common Stock on the exercise date.
In
general, if an employee is no longer a participant on an exercise date, the employee’s option will be automatically terminated,
and the amount of the employee’s accumulated payroll deductions will be refunded.
Except
as may be permitted by the plan administrator in advance of an offering, a participant may not increase or decrease the amount of his
or her payroll deductions during any offering period but may increase or decrease his or her payroll deduction with respect to the next
offering period by filing a new enrollment form within the period beginning 15 business days before the first day of such offering period
and ending on the day prior to the first day of such offering period. A participant may withdraw from an offering period at any time
without affecting his or her eligibility to participate in future offering periods. If a participant withdraws from an offering period,
that participant may not again participate in the same offering period, but may enroll in subsequent offering periods. An employee’s
withdrawal will be effective as of the beginning of the next payroll period immediately following the date that the plan administrator
receives the employee’s written notice of withdrawal under the ESPP.
In
the case of and subject to the consummation of a “sale event,” the plan administrator, in its discretion, and on such terms
and conditions as it deems appropriate, is hereby authorized to take any one or more of the following actions under the ESPP or with
respect to any right under the ESPP or to facilitate such transactions or events: (a) to provide for either (i) termination of any outstanding
option in exchange for an amount of cash, if any, equal to the amount that would have been obtained upon the exercise of such option
had such option been currently exercisable or (ii) the replacement of such outstanding option with other options or property selected
by the plan administrator in its sole discretion; (b) to provide that the outstanding options under the ESPP shall be assumed by the
successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for similar options covering the stock
of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of
shares and prices; (c) to make adjustments in the number and type of shares of Common Stock (or other securities or property) subject
to outstanding options under the ESPP and/or in the terms and conditions of outstanding options and options that may be granted in the
future; (d) to provide that the offering with respect to which an option relates will be shortened by setting a new exercise date on
which such offering will end; and (e) to provide that all outstanding options shall terminate without being exercised and all amounts
in the accounts of participants shall be promptly refunded.
The
ESPP will automatically terminate on the 10-year anniversary of the ESPP effective date. The Board may, in its discretion, at any
time, terminate or amend the ESPP.
New
Plan Benefits
Since
participation in the ESPP is voluntary, the benefits or amounts that will be received by or allocated to any individual or group of individuals
under the ESPP in the future are not determinable and no awards have been granted that are contingent on stockholder approval of the
ESPP.
Summary
of Federal Income Tax Consequences
The
following is only a summary of the effect of the U.S. income tax laws and regulations upon an employee and us with respect to an employee’s
participation in the ESPP. This summary does not purport to be a complete description of all federal tax implications of participation
in the ESPP, nor does it discuss the income tax laws of any municipality, state or foreign country in which a participant may reside
or otherwise be subject to tax.
The
ESPP is intended to comply with Section 423 of the Code. A participant in the ESPP generally recognizes no taxable income either as a
result of participation in the ESPP or upon exercise of an option to purchase shares of Common Stock under the terms of the ESPP.
If
a participant disposes of shares purchased upon exercise of an option granted under the ESPP within two years from the first day of the
applicable offering period or within one year from the exercise date, which we refer to as a “disqualifying disposition,”
the participant will generally realize ordinary income in the year of that disposition equal to the amount by which the fair market value
of the shares on the date the shares were purchased exceeds the purchase price. The amount of ordinary income will be added to the participant’s
basis in the shares, and any additional gain or resulting loss recognized on the disposition of the shares will be a capital gain or
loss. A capital gain or loss will generally be long-term if the participant’s holding period is more than 12 months,
or short-term if the participant’s holding period is 12 months or less.
If
the participant disposes of shares purchased upon exercise of an option granted under the ESPP at least two years after the first day
of the applicable offering period and at least one year after the exercise date, the participant will realize ordinary income in the
year of disposition equal to the lesser of (1) the excess of the fair market value of the shares at the time the option was granted over
the amount paid and (2) the excess of the amount actually received for the Common Stock over the amount paid. The amount of any ordinary
income will be added to the participant’s basis in the shares, and any additional gain recognized upon the disposition after that
basis adjustment will be a long-term capital gain. If the fair market value of the shares on the date of disposition is less than
the exercise price, there will be no ordinary income and any loss recognized will be a long-term capital loss.
The
Company or its subsidiaries will generally be entitled to a tax deduction in the year of a disqualifying disposition equal to the amount
of ordinary income recognized by the participant as a result of that disposition. In all other cases, neither the Company nor its subsidiaries
will be allowed a deduction.
Limitations
of Liability and Indemnification Matters
The
Certificate of Incorporation eliminates our directors’ liability for monetary damages to the fullest extent permitted by applicable
law. The DGCL provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary
duties as directors, except for liability:
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any
breach of the director’s duty of loyalty to the corporation or its stockholders;
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any
act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
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unlawful
payments of dividends or unlawful stock repurchases or redemptions; or
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any
transaction from which the director derived an improper personal benefit.
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If
the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability
of our directors will be eliminated or limited to the fullest extent permitted by the DGCL, as so amended.
We
maintain a directors’ and officers’ insurance policy pursuant to which our directors and officers are insured against liability
for actions taken in their capacities as directors and officers. Finally, the Certificate of Incorporation prohibits any retroactive
changes to the rights or protections or increase the liability of any director in effect at the time of the alleged occurrence of any
act or omission to act giving rise to liability or indemnification.
In
addition, we have entered into separate indemnification agreements with our directors and officers. These agreements, among other things,
require us to indemnify our directors and officers for certain expenses, including attorneys’ fees, judgments, fines and settlement
amounts incurred by a director or officer in any action or proceeding arising out of their services as one of our directors or officers
or any other company or enterprise to which the person provides services at our request. We believe these provisions in the Certificate
of Incorporation are necessary to attract and retain qualified persons as directors and officers.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Amended
and Restated Registration Rights Agreement
In
connection with the Closing, we entered into the Registration Rights Agreement (the “Registration Rights Agreement”)
with certain persons and entities holding securities of Clarus and certain persons and entities receiving Common Stock pursuant to the
Merger Agreement.
Pursuant
to the Registration Rights Agreement, we have an obligation to file a registration statement under the Securities Act covering the resale
of (i) shares of Common Stock held by the Sponsor or issuable to the Sponsor upon conversion or exercise of other Company securities
held by it, and (ii) shares of Common Stock issuable to the Legacy Clarus securityholders party thereto in the Merger. Either the
Sponsor or a majority of the Legacy Clarus securityholders party to the Registration Rights Agreement holding registrable securities
are entitled to make a written demand for registration under the Securities Act of all or part of their registrable securities. Subject
to certain exceptions, if at any time we propose to file a registration statement under the Securities Act with respect to our securities,
under the Registration Rights Agreement we are required to give notice to the other parties thereto as to the proposed filing and offer
them the opportunity to register the sale of such number of registrable securities as they may request in writing. The Registration Rights
Agreement will terminate upon the earlier of (i) the fifth anniversary of the date of the Registration Rights Agreement or (ii) the date
as of which (A) all of the Registrable Securities (as defined therein) have been sold pursuant to a Registration Statement (but in no
event prior to the applicable period referred to in Section 4(a)(3) of the Securities Act and Rule 174 thereunder (or any successor rule
promulgated thereafter by the SEC)) or (B) the holders of all Registrable Securities are permitted to sell the Registrable Securities
under Rule 144 (or any similar provision) under the Securities Act without limitation on the amount of securities sold or the manner
of sale; provided.
Stockholder
Lock-Up Agreements
In
connection with the Closing, we entered into Lock-Up Agreements with certain significant Legacy Clarus stockholders (each, a “Stockholder
Lock-Up Agreement”). Pursuant to the Stockholder Lock-Up Agreements, each Legacy Clarus stockholder party thereto
agreed not to, during the period commencing from the Closing and ending 180 days after the date of the Closing (subject to early
release if we consummate a liquidation, merger, capital stock, reorganization exchange or other similar transaction with an unaffiliated
third party that results in all of our stockholders having the right to exchange their equity holdings for cash, securities or other
property): (x) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any restricted securities, (y) enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the restricted securities, or (z) publicly disclose the intention to
do any of the foregoing, whether any such transaction described in clauses (x), (y) or (z) above is to be settled by delivery
of restricted securities or other securities, in cash or otherwise (in each case, subject to certain limited permitted transfers where
the recipient takes the shares subject to the restrictions in the Stockholder Lock-Up Agreement).
Lender
Lock-Up Agreements
In
connection with the Closing, we entered into Lock-Up Agreements with certain Legacy Clarus noteholders (the “Lenders”)
(each, a “Lender Lock-Up Agreement”). Pursuant to the Lender Lock-Up Agreements, each Lender party thereto
agreed not to, during the period commencing from the Closing and ending 180 days after the date of the Closing (subject to early
release if we consummate a liquidation, merger, capital stock, reorganization exchange or other similar transaction with an unaffiliated
third party that results in all of the stockholders having the right to exchange their equity holdings for cash, securities or other
property): (x) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any restricted securities, (y) enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the restricted securities, or (z) publicly disclose the intention to
do any of the foregoing, whether any such transaction described in clauses (x), (y) or (z) above is to be settled by delivery
of restricted securities or other securities, in cash or otherwise (in each case, subject to certain limited permitted transfers where
the recipient takes the shares subject to the restrictions in the Lender Lock-Up Agreement). However, during the second half of
the lock-up period (the “Leak-Out Period”), each Lender is able to engage in limited transfers of restricted
securities that would otherwise be prohibited by the lock-up, up to a daily maximum volume based on the number of restricted securities
held by such Lender at the commencement of the Leak-Out Period prorated to the number of trading days in the Leak-Out Period,
with the ability to cumulate unused daily volume limits over a maximum period of five trading days.
Legacy
Clarus Support Agreements
Simultaneously
with the execution of the Merger Agreement, Blue Water and Legacy Clarus entered into support agreements (the “Clarus Support Agreements”)
with certain significant stockholders of Legacy Clarus holding in the aggregate approximately 70.0% of Legacy Clarus’s outstanding
capital stock. Pursuant to the Clarus Support Agreement, each such stockholder agreed, among other things, to vote all of its shares
of Legacy Clarus stock in favor of the Merger Agreement and related transactions and to otherwise take certain other actions in support
of the Merger Agreement and related transactions and the other matters submitted to Legacy Clarus stockholders for their approval, and
provide a proxy to Blue Water to vote such Legacy Clarus stock accordingly. The Clarus Support Agreement prevents transfers of the Clarus
stock held by such stockholder between the date of the Clarus Support Agreement and the date of the Closing, except for certain permitted
transfers where the recipient also agrees to comply with the Clarus Support Agreement.
Sponsor
Support Agreement
Simultaneously
with the execution of the Merger Agreement, Blue Water and Legacy Clarus entered into a support agreement (the “Sponsor Support
Agreement”) with the Sponsor. Under the Sponsor Support Agreement, the Sponsor agreed that it would abide by its undertakings
in that certain letter agreement dated December 15, 2020, by and among Blue Water and its officers, its directors and the Sponsor
filed as Exhibit 10.1 to Blue Water’s Current Report on Form 8-K filed with the SEC on December 21, 2020 (the “Insider
Letter”), including voting its Blue Water shares in favor of the Merger Agreement and the Business Combination and not redeeming
such shares in connection with the Merger, and that in the event of a transfer of its shares permitted under the Insider Letter, the
Sponsor ensures that the transferee agrees to be bound by the restrictions in the Sponsor Support Agreement. The Sponsor also agreed
in connection with the Merger to waive its anti-dilution right pursuant to Article IV, Section 4.3(b)(ii) of the
Blue Water Charter. Blue Water undertook to enforce the Sponsor’s obligations under the Insider Letter.
Blue
Water Related Person Transactions
Founder
Shares
On
June 30, 2020, Blue Water issued an aggregate of 1,437,500 Founder Shares to the Sponsor for an aggregate purchase price of $25,000
in cash, or approximately $0.017 per share. The number of Founder Shares issued was determined based on the expectation that such Founder
Shares would represent 20% of the outstanding shares upon completion of the Blue Water IPO. The Founder Shares (including the Class A
common stock issuable upon exercise thereof) may not, subject to certain limited exceptions, be transferred, assigned or sold by the
holder.
Placement
Warrants
On
December 17, 2020, the Sponsor purchased an aggregate of 3,445,000 Placement Warrants for a purchase price of $1.00 per warrant,
for an aggregate purchase price of $3,445,000, in a placement that occurred simultaneously with the closing of the Blue Water IPO. Each
Placement Warrant entitles the holder thereof to purchase one share of Common Stock at a price of $11.50 per share. The Placement Warrants
(including the common stock issuable upon exercise thereof) may not, subject to certain limited exceptions, be transferred, assigned
or sold by the holder.
Administrative
Support Services
Commencing
December 2020, we paid the Sponsor a total of $10,000 per month for office space, utilities and secretarial and administrative support.
Upon completion of the Merger, Blue Water ceased paying these monthly fees.
Related
Party Loans
Prior
to the consummation of the Blue Water IPO, the Sponsor loaned us approximately $157,000 under an unsecured promissory note, which were
used for a portion of the expenses of the IPO. The loan was non-interest bearing and unsecured and was repaid in full on December 17,
2020 out of the offering proceeds that were allocated to the payment of offering expenses (other than underwriting commissions).
Legacy
Clarus Related Person Transactions
Other
than compensation arrangements, the following is a summary of the transactions and series of similar transactions since January 1,
2018, or any currently proposed transactions, to which Legacy Clarus was a participant or will be a participant, in which:
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the
amounts involved exceeded or will exceed $120,000; and
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any
of Legacy Clarus’s directors, executive officers or holders of more than 5% of Legacy Clarus’s voting securities, or any
member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest.
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Sales
and Purchases of Securities
2018
Note Financings
On
February 13, 2018, Legacy Clarus entered into a note purchase agreement (the “February Notes”) pursuant to which
its existing investors committed to purchase convertible promissory notes.
On
August 16, 2018, Legacy Clarus entered into a note purchase agreement (the “August Notes”, and together with
the February Notes, the “Notes”), pursuant to which its existing investors committed to purchase convertible promissory
notes. The August Notes were amended on June 7, 2019, March 17, 2021 and April 26, 2021 to allow for subsequent closings
and certain mandatory conversion rights.
The
Notes are subject to certain mandatory conversion rights such that if the conditions are met, the Notes shall convert to Mandatory Conversion
Stock (as defined in the August Notes). Further, in the event of a SPAC Transaction (as defined in the August Notes), if the August Notes
have not been previously converted, the note holder will receive the number of shares of common stock of the SPAC Acquirer (as defined
in the August Notes) equal to the quotient obtained by dividing (A) the outstanding principal balance of the August Note and any
interest accrued and unpaid as of immediately prior to the SPAC Transaction by (B) (i) if the August Notes was issued prior to April 2021,
$10.20, or (ii) if the August Notes were issued in or after April 2021, $10.00.
The
following table summarizes the aggregate participation in the Notes beginning January 1, 2018 by any of Clarus’s directors,
executive officers, holders of more than 5% of Clarus’s voting securities, or any member of the immediate family of the foregoing
persons.
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Name and Date of Issuance
|
|
Aggregate Principal
|
|
|
February Notes
|
|
|
|
|
February 13, 2018
|
|
|
|
|
Entities affiliated with Thomas, McNerney & Partners(1)
|
|
$
|
1,654,756.18
|
|
|
Entities affiliated with H.I.G. BioVentures(2)
|
|
$
|
783,554.49
|
|
|
CBC SPVI Ltd(3)
|
|
$
|
876,618.82
|
|
|
|
|
|
|
|
|
August Notes
|
|
|
|
|
|
Initial 2018 Closing
|
|
|
|
|
|
Entities affiliated with Thomas, McNerney & Partners(1)
|
|
$
|
1,946,771.98
|
|
|
Entities affiliated with H.I.G. BioVentures(2)
|
|
$
|
1,727,269.09
|
|
|
CBC SPVI Ltd(3)
|
|
$
|
1,031,316.26
|
|
|
First Subsequent 2019 Closing
|
|
|
|
|
|
Entities affiliated with Thomas, McNerney & Partners(1)
|
|
$
|
3,893,543.96
|
|
|
Entities affiliated with H.I.G. BioVentures(2)
|
|
$
|
3,454,538.18
|
|
|
CBC SPVI Ltd(3)
|
|
$
|
2,062,632.52
|
|
|
Second Subsequent 2019 Closing
|
|
|
|
|
|
Entities affiliated with Thomas, McNerney & Partners(1)
|
|
$
|
1,946,774.98
|
|
|
Entities affiliated with H.I.G. BioVentures(2)
|
|
$
|
1,727,269.09
|
|
|
CBC SPVI Ltd(3)
|
|
$
|
1,031,316.52
|
|
|
Third Subsequent 2019 Closing
|
|
|
|
|
|
Entities affiliated with Thomas, McNerney & Partners(1)
|
|
$
|
1,946,774.98
|
|
|
Entities affiliated with H.I.G. BioVentures(2)
|
|
$
|
1,727,269.09
|
|
|
CBC SPVI Ltd(3)
|
|
$
|
1,031,316.26
|
|
|
First Subsequent 2021 Closing
|
|
|
|
|
|
Entities affiliated with Thomas, McNerney & Partners(1)
|
|
$
|
2,920,157.98
|
|
|
Entities affiliated with H.I.G. BioVentures(2)
|
|
$
|
2,590,903.63
|
|
|
CBC SPVI Ltd(3)
|
|
$
|
1,546,974.38
|
|
|
Second Subsequent 2021 Closing
|
|
|
|
|
|
Entities affiliated with Thomas, McNerney & Partners(1)
|
|
$
|
2,133,681.77
|
|
|
Entities affiliated with H.I.G. BioVentures(2)
|
|
$
|
1,413,053.83
|
|
|
CBC SPVI Ltd(3)
|
|
$
|
1,130,333.05
|
|
|
Third Subsequent 2021 Closing
|
|
|
|
|
|
Entities affiliated with Thomas, McNerney & Partners(1)
|
|
$
|
1,160,295.79
|
|
|
Entities affiliated with H.I.G. BioVentures(2)
|
|
$
|
549,419.29
|
|
|
CBC SPVI Ltd(3)
|
|
$
|
614,674.90
|
|
|
|
(1)
|
James
E. Thomas is a partner at Thomas, McNerney & Partners and was a member of Legacy Clarus’s board of directors.
|
|
|
|
|
|
|
(2)
|
Bruce
C. Robertson, Ph.D. and Alex Zisson are managing directors at H.I.G. BioHealth Partners and were members of Legacy Clarus’s board
of directors. Alex Zisson is a member of the Board.
|
|
|
|
|
|
|
(3)
|
Mengjiao
Jiang is a managing partner at C-Bridge Capital Partners and was a member of Legacy Clarus’s board of directors.
|
Indemnification
Agreements
Legacy
Clarus entered into indemnification agreements with each of its directors. These agreements, among other things, required Legacy Clarus
to indemnify each director to the fullest extent permitted by Delaware law, including indemnification of expenses such as attorneys’
fees, judgments, fines and settlement amounts incurred by the director or executive officer in any action or proceeding, including any
action or proceeding by or in right of Legacy Clarus, arising out of the person’s services as a director.
In
connection with the Business Combination, we entered into new agreements to indemnify our directors and executive officers. These agreements
require us to indemnify these individuals for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts
reasonably incurred by such person in any action or proceeding, including any action by or in our right, on account of any services undertaken
by such person on our behalf or that person’s status as a member of our board of directors to the maximum extent allowed under
Delaware law.
Policies
for Approval of Related Person Transactions
We
have adopted a written related person transaction policy that sets forth the following policies and procedures for the review and approval
or ratification of related person transactions.
A
“Related Person Transaction” is any transaction involving over $120,000 in which the Company is a participant and a Related
Person has a direct or indirect material interest; provided, however, that if the Company is a “smaller reporting company”
such threshold shall be the lesser of (x) $120,000 or (y) 1% of the average of the Company’s total assets at year-end for the last two
completed fiscal years. A “Related Person” means:
|
|
●
|
any
director or executive officer of the Company;
|
|
|
●
|
security
holders known to the Company to beneficially own more than 5% of any class of the Company’s
voting securities, and
|
|
|
●
|
any
immediate family member of any of the foregoing persons, which means any child, stepchild,
parent, stepparent, spouse, sibling, mother-in-law, father-in-law, daughter-in-law, brother-in-law or
sister-in-law of a director, officer or a beneficial owner of more than 5% of its voting
stock, and any person (other than a tenant or employee) sharing the household of such director,
officer or beneficial owner of more than 5% of its voting stock.
|
We have designed these policies
and procedures to minimize potential conflicts of interest arising from any dealings it may have with its affiliates and to provide appropriate
procedures for the disclosure of any real or potential conflicts of interest that may exist from time to time. Specifically, pursuant
to its charter, the audit committee of our Board will have the responsibility to review related party transactions.
Employment
Arrangements
We
have entered into employment arrangements with each of our executive officers. In 2020, Legacy Clarus’s board of directors requested
an expansion of board duties in turn for compensation with one of its current directors. For more information regarding these agreements
with Clarus’s executive officers and directors, please see “Executive Compensation — Employment Agreements with
Our Named Executive Officers” of this prospectus.
PRINCIPAL
SECURITYHOLDERS
The
following table sets forth information known to us regarding the beneficial ownership of the Common Stock immediately as of September
9, 2021, by:
|
|
●
|
each
person who is known by us to be the beneficial owner of more than 5% of the outstanding shares of the Common Stock;
|
|
|
●
|
each
current named executive officer and director of the Company; and
|
|
|
●
|
all
current executive officers and directors of the Company, as a group.
|
Beneficial
ownership is determined according to the rules of the SEC, which generally provides that a person has beneficial ownership of a security
if he, she or it possesses sole or shared voting or investment power over that security, including options and Warrants that are currently
exercisable or exercisable within 60 days.
The
beneficial ownership percentages set forth in the table below are based on 21,725,817 shares of Common Stock issued and outstanding as
of the Closing Date and do not take into account the issuance of any shares of Common Stock upon the exercise of Warrants that remain
outstanding.
Unless
otherwise noted in the footnotes to the following table, and subject to applicable community property laws, the persons and entities
named in the table have sole voting and investment power with respect to their beneficially owned Common Stock.
|
Name and Address of Beneficial Owner
|
|
Number
of Shares
|
|
|
Percentage of
Outstanding
Shares
|
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
Kimberly Murphy
|
|
|
—
|
|
|
|
—
|
|
|
Joseph Hernandez(4)
|
|
|
1,302,500
|
|
|
|
6.0
|
%
|
|
Robert E. Dudley
|
|
|
4,566
|
|
|
|
*
|
|
|
Elizabeth A. Cermak
|
|
|
—
|
|
|
|
—
|
|
|
Mark A. Prygocki, Sr
|
|
|
—
|
|
|
|
—
|
|
|
Alex Zisson(1)
|
|
|
—
|
|
|
|
—
|
%
|
|
John Amory
|
|
|
—
|
|
|
|
—
|
|
|
Richard Peterson
|
|
|
—
|
|
|
|
—
|
|
|
Frank Jaeger
|
|
|
—
|
|
|
|
—
|
|
|
Steve Bourne
|
|
|
1,305
|
|
|
|
*
|
|
|
All directors and executive officers as a group (10 individuals)
|
|
|
7,000,752
|
|
|
|
32.2
|
%
|
|
Five Percent Holders:
|
|
|
|
|
|
|
|
|
|
Entities affiliated with H.I.G. BioVentures(1)
|
|
|
5,692,381
|
|
|
|
26.2
|
%
|
|
Entities affiliated with Thomas, McNerney & Partners(2)
|
|
|
5,498,571
|
|
|
|
25.3
|
%
|
|
CBC SPVI Ltd.(3)
|
|
|
3,602,287
|
|
|
|
16.6
|
%
|
|
Blue Water Sponsor LLC (4)
|
|
|
1,302,500
|
|
|
|
6.0
|
%
|
|
Entities affiliated with Bracebridge Capital, LLC(5)
|
|
|
2,229,855
|
|
|
|
10.3
|
%
|
|
|
(1)
|
Consists
of (i) 2,731,094 shares of Common Stock directly held by H.I.G. Ventures — Clarus, LLC, (ii) (ii) 2,470,756 shares of Common Stock
directly held by H.I.G. Bio — Clarus II, L.P., and (iii) 490,531 shares of Common Stock directly held by H.I.G. Bio — Clarus
I, L.P. Alex Zisson, a member of the Board, is a managing director of H.I.G. Capital LLC, but does not share voting and investment power
with respect to the shares directly held by H.I.G. Ventures — Clarus, LLC, H.I.G. Bio — Clarus II, L.P., and H.I.G. Bio —
Clarus I, L.P., and disclaims beneficial ownership of such shares except to the extent of any pecuniary interest therein. Those three
entities are owned by private funds advised by H.I.G. Capital, LLC, an SEC registered investment advisor, and its affiliates. The address
for all entities and individuals affiliated with H.I.G. BioVentures is 1450 Brickell Ave., Suite 3100, Miami, FL 33131.
|
|
|
(2)
|
Consists
of (i) 2,436,725 shares of Common Stock directly held by Thomas, McNerney & Partners, L.P., or TMP, (ii) 3,020,674 shares of Common
Stock directly held by Thomas, McNerney & Partners II, L.P., or TMP II, (iii) 8,383 shares of Common Stock directly held by TMP Nominee,
LLC, or TMP Nominee (iv) 19,970 shares of Common Stock held by TMP Nominee II, LLC or TMP Nominee II, (v) 1,706 shares of Common Stock
directly held by TMP Associates, L.P., or TMP Associates and (vi) 11,113 shares of Common Stock directly held by TMP Associates II. L.P.
or, TMP Associates II. TMP GP, the general partner of TMP, TMP II, TMP Associates and TMP Associates II, has voting and dispositive power
over the shares held by TMP, TMP II, TMP Associates and TMP Associates II. In addition, each of TMP Nominee and TMP Nominee II has entered
into an agreement that it shall vote and dispose of securities in the same manner as directed by TMP GP with respect to the shares held
by TMP and TMP Associates and as directed by TMP GP II with respect to shares held by TMP II and TMP Associates II. James Thomas is manager
of TMP GP and TMP GP II, and of TMP Nominee and TMP Nominee II. He disclaims beneficial ownership of the shares owned by TMP, TMP II,
TMP Nominee, TMP Nominee II, TMP Associates and TMP Associates II. The address for all entities and individuals affiliated with Thomas,
McNerney is c/o Thomas, McNerney & Partners, L.P., 12527 Central Avenue NE, #297, Minneapolis, MN 55434.
|
|
|
|
|
|
|
(3)
|
Shares
of Common Stock are directly held by CBC SPVI Ltd. The address for CBC SPVI Ltd. is Suites 3306-3307, Two Exchange Square, 8 Connaught
Place, Central, Hong Kong.
|
|
|
|
|
|
|
(4)
|
Joseph
Hernandez, a member of the Board, is the managing member of Blue Water Sponsor LLC, and as such may be deemed to have sole voting and
investment discretion with respect to the securities held by Blue Water Sponsor LLC.
|
|
|
|
|
|
|
(5)
|
Represents
shares of Common Stock held by FFI Fund Ltd., FYI Ltd. and Olifant Fund, Ltd. (collectively, the “Bracebridge Funds”).
Bracebridge Capital, LLC (the “Bracebridge Investment Manager”) is the investment manager of each of the Bracebridge Funds,
and has the authority to vote and dispose of all of the shares reflected herein. The business address of the Bracebridge Funds and the
Bracebridge Investment Manager is 888 Boylston St., Suite 1500, Boston, MA 02199.
|
SELLING
SECURITYHOLDERS
Certain
of the Selling Securityholders acquired the Placement Warrants and shares of Common Stock from us in private offerings pursuant to exemptions
from registration under Section 4(a)(2) of the Securities Act in connection with a private placement concurrent with Blue Water’s
IPO. Pursuant to the Registration Rights Agreement and the Warrant Agreement, we agreed to file a registration statement with the SEC
for the purposes of registering for resale (i) the Placement Warrants (and the shares of Common Stock that may be issued upon exercise
of the Placement Warrants), and (ii) the shares of Common Stock issued to the Selling Securityholders pursuant to the Merger Agreement.
Except
as set forth in the footnotes below, the following table sets forth, based on written representations from the Selling Securityholders,
certain information as of September 9, 2021 regarding the beneficial ownership of Common Stock and Warrants by the Selling Securityholders
and the shares of Common Stock and Warrants being offered by the Selling Securityholders. The applicable percentage ownership of Common
Stock is based on approximately shares of Common Stock outstanding as of September 9, 2021. Information with respect to shares of Common
Stock and Placement Warrants owned beneficially after the offering assumes the sale of all of the shares of Common Stock and Placement
Warrants offered and no other purchases or sales of Common Stock or Placement Warrants. The Selling Securityholders may offer and sell
some, all or none of their shares of Common Stock or Placement Warrants, as applicable.
We
have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe,
based on the information furnished to us, that the Selling Securityholders have sole voting and investment power with respect to all
shares of Common Stock and Warrants that they beneficially own, subject to applicable community property laws. Except as otherwise described
below, based on the information provided to us by the Selling Securityholders, no Selling Securityholder is a broker-dealer or an
affiliate of a broker-dealer.
Up
to 5,750,000 shares of Common Stock issuable upon exercise of the Public Warrants are not included in the table below, unless specifically
indicated in the footnotes therein.
|
Name of Selling Securityholder
|
|
Number of Shares of Common Stock Beneficially Owned
|
|
|
Warrants Beneficially Owned Prior to Offering
|
|
|
Number of Shares of Common Stock Being Offered
|
|
|
Number of Warrants Being Offered
|
|
|
Shares of Common Stock Beneficially Owned After the Offered Shares of Common Stock are Sold
|
|
|
Warrants Beneficially Owned After the Offered Warrants are Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Percent
|
|
|
Number
|
|
|
Percent
|
|
|
Thomas, McNerney & Partners, L.P (1)
|
|
|
2,436,725
|
|
|
|
—
|
|
|
|
2,436,725
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
TMP Associates, L.P. (1)
|
|
|
1,706
|
|
|
|
—
|
|
|
|
1,706
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
%
|
|
TMP Nominee, LLC (1)
|
|
|
8,383
|
|
|
|
—
|
|
|
|
8,383
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Thomas, McNerney & Partners II, L.P (1)
|
|
|
3,020,674
|
|
|
|
—
|
|
|
|
3,020,674
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
TMP Associates II, L.P. (1)
|
|
|
11,113
|
|
|
|
—
|
|
|
|
11,113
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
TMP Nominee II, LLC (1)
|
|
|
19,970
|
|
|
|
—
|
|
|
|
19,970
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
H.I.G. Ventures - Clarus, LLC (2)
|
|
|
2,731,094
|
|
|
|
—
|
|
|
|
2,731,094
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
H.I.G. Bio - Clarus I, L.P. (2)
|
|
|
490,531
|
|
|
|
—
|
|
|
|
490,531
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
H.I.G. Bio - Clarus II, L.P. (2)
|
|
|
2,470,756
|
|
|
|
—
|
|
|
|
2,470,756
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
CBC SPVI Ltd (3)
|
|
|
3,602,287
|
|
|
|
—
|
|
|
|
3,602,287
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Robert E. Dudley, Ph.D. (4)
|
|
|
4,566
|
|
|
|
—
|
|
|
|
4,566
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Steven A. Bourne (5)
|
|
|
1,305
|
|
|
|
—
|
|
|
|
1,305
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Blue Water Sponsor LLC (6)
|
|
|
1,302,500
|
|
|
|
3,445,000
|
|
|
|
1,302,500
|
|
|
|
3,445,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
FFI Fund Ltd (7)
|
|
|
1,627,795
|
|
|
|
—
|
|
|
|
78,840
|
|
|
|
—
|
|
|
|
1,548,955
|
|
|
|
7.1
|
%
|
|
|
—
|
|
|
|
—
|
|
|
FYI Ltd. (7)
|
|
|
312,179
|
|
|
|
—
|
|
|
|
15,120
|
|
|
|
—
|
|
|
|
297,059
|
|
|
|
1.4
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Olifant Fund, Ltd. (7)
|
|
|
289,881
|
|
|
|
—
|
|
|
|
14,040
|
|
|
|
—
|
|
|
|
275,841
|
|
|
|
1.3
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Nineteen77 Capital Solutions A LP (8)
|
|
|
507,292
|
|
|
|
—
|
|
|
|
24,570
|
|
|
|
—
|
|
|
|
482,722
|
|
|
|
2.2
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Bermudez Mutuari Ltd. (9)
|
|
|
50,171
|
|
|
|
—
|
|
|
|
2,430
|
|
|
|
—
|
|
|
|
47,741
|
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1)
|
Consists
of (i) 2,436,725 shares of Common Stock directly held, and registered for sale, by Thomas, McNerney & Partners, L.P., or TMP,
(ii) 3,020,674 shares of Common Stock directly held by Thomas, McNerney & Partners II, L.P., or TMP II, (iii) 8,383 shares of
Common Stock directly held, and registered for sale, by TMP Nominee, LLC, or TMP Nominee (iv) 19,970 shares of Common Stock held, and
registered for sale, by TMP Nominee II, LLC or TMP Nominee II, (v) 1,706 shares of Common Stock directly held, and registered for sale,
by TMP Associates, L.P., or TMP Associates and (vi) 11,113 shares of Common Stock directly held, and registered for sale, by TMP Associates
II. L.P. or, TMP Associates II. TMP GP, the general partner of TMP, TMP II, TMP Associates and TMP Associates II, has voting and dispositive
power over the shares held by TMP, TMP II, TMP Associates and TMP Associates II. In addition, each of TMP Nominee and TMP Nominee
II has entered into an agreement that it shall vote and dispose of securities in the same manner as directed by TMP GP with respect to
the shares held by TMP and TMP Associates and as directed by TMP GP II with respect to shares held by TMP II and TMP Associates II. James
Thomas is manager of TMP GP and TMP GP II, and of TMP Nominee and TMP Nominee II and has the power to vote or dispose of the securities
owned by TMP, TMP II, TMP Nominee, TMP Nominee II, TMP Associates and TMP Associates II. Mr. Thomas was a member of Legacy Clarus’s board
of directors.
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(2)
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Consists of (i) 2,731,094 shares of Common Stock directly held by H.I.G.
Ventures — Clarus, LLC, (ii) (ii) 2,470,756 shares of Common Stock directly held by H.I.G. Bio — Clarus II, L.P., and (iii)
490,531 shares of Common Stock directly held by H.I.G. Bio — Clarus I, L.P. H.I.G.-GPII, Inc. ("H.I.G. GP") is the general
partner of each of H.I.G. Bio — Clarus II, L.P., and H.I.G. Bio — Clarus I, L.P. and is the manager of H.I.G. Ventures —
Clarus, LLC (together with H.I.G. Bio — Clarus II, L.P., and H.I.G. Bio — Clarus I, L.P. , the “H.I.G. Entities”)
and has sole voting and investment control over the shares owned by the H.I.G. Entities. Anthony Tamer and Sami Mnaymneh are the sole
shareholders of H.I.G. GP and may be deemed to share beneficial ownership of the shares held by the H.I.G. Entities. Alex Zisson, a member
of the Board, is a managing director of H.I.G. Capital LLC and Bruce Robertson, a managing director of H.I.G. Capital LLC was a member
of Legacy Clarus’s board of directors.
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(3)
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Wei
Fu has the power to vote or dispose of the securities held by CBC SPV I Ltd. Mengjiao Jiang, a managing director of CBC group, which
controls CBC SPV I Ltd. was a member of Legacy Clarus’s board of directors.
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(4)
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Dr.
Dudley is our Chief Executive Officer and a member of our board of directors.
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(5)
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Mr.
Bourne is our Chief Administrative Officer.
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(6)
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The securities are held
directly by Blue Water Sponsor LLC. Joseph Hernandez, a member of the Board, is the managing member of Blue Water Sponsor LLC, and
as such may be deemed to have sole voting and investment discretion with respect to the securities held by Blue Water Sponsor LLC.
Mr. Hernandez served as the chief executive officer and chairman of the board of directors of Blue Water Acquisition Corp.,
the Company’s predecessor.
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(7)
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Bracebridge
Capital, LLC (the “Bracebridge Investment Manager”) is the investment manager of each of FFI Fund Ltd., FYI Ltd. and Olifant
Fund, Ltd. (collectively, the “Bracebridge Funds”) and has the authority to vote and dispose of all of the shares reflected
herein.
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(8)
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The
securities reported are held by Nineteen77 Capital Solutions A LP (the “O’Connor Client”). Kevin Russell, the chief
investment officer of UBS O’Connor LLC, the investment manager of the O’Connor Client, has voting and/or investment control
over the shares of common stock held by the O’Connor Client. Kevin Russell disclaims beneficial ownership of the securities reported
herein for purposes of Section 16 of the Securities and Exchange Act of 1934, as amended, except as to such extent of his pecuniary interest
in the securities.
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(9)
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The
securities reported are held by Bermudez Mutuari Ltd. (the “O’Connor Client”). Kevin Russell, the chief investment
officer of UBS O’Connor LLC, the investment manager of the O’Connor Client, has voting and/or investment control over the
shares of common stock held by the O’Connor Client. Kevin Russell disclaims beneficial ownership of the securities reported herein
for purposes of Section 16 of the Securities and Exchange Act of 1934, as amended, except as to such extent of his pecuniary interest
in the securities.
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DESCRIPTION
OF SECURITIES
The
following summary of the material terms of our securities is not intended to be a complete summary of the rights and preferences of such
securities, and is qualified by reference to the Certificate of Incorporation, the Bylaws and the Warrant-related documents described
herein, which are exhibits to the registration statement of which this prospectus is a part. We urge you to read each of the Certificate
of Incorporation, the Bylaws and the Warrant-related documents described herein in their entirety for a complete description of the rights
and preferences of our securities.
Authorized
and Outstanding Stock
The
Certificate of Incorporation authorizes the issuance of 135,000,000 shares, consisting of 125,000,000 shares of common stock, $0.0001
par value per share and 10,000,000 shares of preferred stock, $0.0001 par value per share.
As
of September 9, 2021, there were 21,725,817 shares of Common Stock outstanding and no shares of preferred stock outstanding.
Common
Stock
Holders
of common stock are entitled to one vote for each share of Common Stock held of record by such holder on all matters on which stockholders
are generally entitled to vote; provided, that, except as otherwise required by law, holders of Common Stock shall not be entitled to
vote on any amendment to the Certificate of Incorporation that relates solely to the terms of one or more outstanding series of preferred
stock if the holders of such affected series of preferred stock are entitled, either separately or together with the holders of one or
more other such series of preferred stock, to vote thereon pursuant to the Certificate of Incorporation or the DGCL. There is no cumulative
voting. Our stockholders are entitled to receive ratable dividends when, as and if declared by the board of directors out of funds legally
available therefor.
Holders
of Common Stock have no preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to
the Common Stock. If we liquidate, dissolve or wind up, our stockholders are entitled to share ratably in all assets remaining available
for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference
over Common Stock.
Preferred
Stock
The
Certificate of Incorporation provides that shares of preferred stock may be issued from time to time in one or more series. The Board
is authorized to fix the voting rights, if any, designations, powers, preferences, the relative, participating, optional or other special
rights and any qualifications, limitations and restrictions, applicable to the shares of each series.
Warrants
Public
Warrants
Each
Public Warrant entitles the registered holder to purchase one share of Common Stock at a price of $11.50 per share, subject to adjustment
as discussed below, at any time commencing 30 days after the Closing. The Public Warrants will expire five years after the Closing
of the Business Combination, at 5:00 p.m., New York City time, or earlier upon redemption or liquidation.
We
will not be obligated to deliver any shares of Common Stock pursuant to the exercise of a Public Warrant and will have no obligation
to settle such warrant exercise unless a registration statement under the Securities Act with respect to the shares of Common Stock underlying
the warrants is then effective and a prospectus relating thereto is current, subject to our satisfying our obligations described below
with respect to registration. No warrant will be exercisable and we will not be obligated to issue shares of Common Stock upon exercise
of a warrant unless the Common Stock issuable upon such warrant exercise has been registered, qualified or deemed to be exempt under
the securities laws of the state of residence of the registered holder of the warrants. In the event that the conditions in the two immediately
preceding sentences are not satisfied with respect to a Public Warrant, the holder of such warrant will not be entitled to exercise such
warrant and such warrant may have no value and expire worthless. In no event will we be required to net cash settle any warrant.
We
have agreed that as soon as practicable, but in no event later than 15 business days after the Closing, we will use our best efforts
to file with the SEC a registration statement covering the shares of Common Stock issuable upon exercise of the warrants, to cause such
registration statement to become effective and to maintain a current prospectus relating to those shares of Common Stock until the warrants
expire or are redeemed, as specified in the warrant agreement. If a registration statement covering the shares of Common Stock issuable
upon exercise of the warrants is not effective by the 60th business day after the Closing of the Business Combination,
warrantholders may, until such time as there is an effective registration statement and during any period when we will have failed to
maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9)
of the Securities Act or another exemption. Notwithstanding the foregoing, if a registration statement covering Common Stock issuable
upon exercise of the warrants is not effective within a specified period following the Closing of the Business Combination, warrant holders
may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective
registration statement, exercise warrants on a cashless basis pursuant to the exemption provided by Section 3(a)(9) of the Securities
Act of 1933, as amended, or the Securities Act, provided that such exemption is available. If that exemption, or another exemption, is
not available, holders will not be able to exercise their warrants on a cashless basis.
Once
the Public Warrants become exercisable, we may call the warrants for redemption:
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in
whole and not in part;
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at
a price of $0.01 per warrant;
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upon
not less than 30 days’ prior written notice of redemption to each warrantholder; and
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if,
and only if, the reported last sale price of the Common Stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock
dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending three
business days before we send the notice of redemption to the warrantholders.
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If
and when the Public Warrants become redeemable by us, we may not exercise our redemption right if the issuance of shares of common stock
upon exercise of the warrants is not exempt from registration or qualification under applicable state blue sky laws or we are unable
to effect such registration or qualification.
We
have established the last of the redemption criteria discussed above to prevent a redemption call unless there is at the time of the
call a significant premium to the warrant exercise price. If the foregoing conditions are satisfied and we issue a notice of redemption
of the Public Warrants, each warrantholder will be entitled to exercise its warrant prior to the scheduled redemption date. However,
the price of the Common Stock may fall below the $18.00 redemption trigger price (as adjusted for stock splits, stock dividends, reorganizations,
recapitalizations and the like) as well as the $11.50 warrant exercise price after the redemption notice is issued.
If
we call the Public Warrants for redemption as described above, our management will have the option to require any holder that wishes
to exercise its warrant to do so on a “cashless basis.” In determining whether to require all holders to exercise their warrants
on a “cashless basis,” our management will consider, among other factors, our cash position, the number of warrants that
are outstanding and the dilutive effect on our stockholders of issuing the maximum number of shares of Common Stock issuable upon the
exercise of our warrants. If our management takes advantage of this option, all holders of Public Warrants would pay the exercise price
by surrendering their warrants for that number of shares of Common Stock equal to the quotient obtained by dividing (x) the product
of the number of shares of Common Stock underlying the warrants, multiplied by the difference between the exercise price of the warrants
and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall
mean the average reported last sale price of the Common Stock for the 10 trading days ending on the third trading day prior to the date
on which the notice of redemption is sent to the holders of warrants. If our management takes advantage of this option, the notice of
redemption will contain the information necessary to calculate the number of shares of Common Stock to be received upon exercise of the
Public Warrants, including the “fair market value” in such case. Requiring a cashless exercise in this manner will reduce
the number of shares to be issued and thereby lessen the dilutive effect of a warrant redemption. We believe this feature is an attractive
option to us if we do not need the cash from the exercise of the warrants after the Closing. If we call our Public Warrants for redemption
and our management does not take advantage of this option, the Sponsor and its permitted transferees would still be entitled to exercise
their Placement Warrants for cash or on a cashless basis using the same formula described above that other warrantholders would have
been required to use had all warrantholders been required to exercise their warrants on a cashless basis, as described in more detail
below.
A
holder of a Public Warrant may notify us in writing in the event it elects to be subject to a requirement that such holder will not have
the right to exercise such warrant, to the extent that after giving effect to such exercise, such person (together with such person’s
affiliates), to the warrant agent’s actual knowledge, would beneficially own in excess of 4.9% or 9.8% (or such other amount as
a holder may specify) of the shares of Common Stock outstanding immediately after giving effect to such exercise.
If
the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock, or by a split-up of
shares of Common Stock or other similar event, then, on the effective date of such stock dividend, split-up or similar event, the
number of shares of Common Stock issuable on exercise of each Public Warrant will be increased in proportion to such increase in the
outstanding shares of Common Stock. A rights offering to holders of Common Stock entitling holders to purchase shares of Common Stock
at a price less than the fair market value will be deemed a stock dividend of a number of shares of Common Stock equal to the product
of (i) the number of shares of Common Stock actually sold in such rights offering (or issuable under any other equity securities
sold in such rights offering that are convertible into or exercisable for Common Stock) and (ii) one (1) minus the quotient
of (x) the price per share of Common Stock paid in such rights offering divided by (y) the fair market value. For these purposes
(i) if the rights offering is for securities convertible into or exercisable for Common Stock, in determining the price payable
for Common Stock, there will be taken into account any consideration received for such rights, as well as any additional amount payable
upon exercise or conversion and (ii) fair market value means the volume weighted average price of Common Stock as reported during
the ten (10) trading day period ending on the trading day prior to the first date on which the shares of Common Stock trade on the applicable
exchange or in the applicable market, regular way, without the right to receive such rights.
In
addition, if we, at any time while the Public Warrants are outstanding and unexpired, pay a dividend or make a distribution in cash,
securities or other assets to the holders of New Blue Water common stock on account of such shares of Common Stock (or other shares of
our capital stock into which the warrants are convertible), other than (a) as described above, (b) certain ordinary cash dividends,
(c) to satisfy the redemption rights of the holders of Common Stock in connection with the Closing of the Business Combination,
(d) to satisfy the redemption rights of the holders of New Blue Water common stock in connection with an Extension Rea stockholder
vote to amend the Blue Water Charter (i) for an Extension or (ii) with respect to any other provision relating to stockholders’
rights or pre-initial business combination activity, or (e) in connection with the redemption of our public shares upon our
failure to complete our initial business combination, then the warrant exercise price will be decreased, effective immediately after
the effective date of such event, by the amount of cash and/or the fair market value of any securities or other assets paid on each share
of Common Stock in respect of such event.
If
the number of outstanding shares of Common Stock is decreased by a consolidation, combination, reverse stock split or reclassification
of shares of Common Stock other similar event, then, on the effective date of such consolidation, combination, reverse stock split, reclassification
or similar event, the number of shares of Common Stock issuable on exercise of each Public Warrant will be decreased in proportion to
such decrease in outstanding shares of Common Stock.
Whenever
the number of shares of Common Stock purchasable upon the exercise of the Public Warrants is adjusted, as described above, the warrant
exercise price will be adjusted by multiplying the warrant exercise price immediately prior to such adjustment by a fraction (x) the
numerator of which will be the number of shares of Common Stock purchasable upon the exercise of the warrants immediately prior to such
adjustment, and (y) the denominator of which will be the number of shares of Common Stock so purchasable immediately thereafter.
In
case of any reclassification or reorganization of the outstanding shares of Common Stock (other than those described above or that solely
affects the par value of such shares of Common Stock), or in the case of any merger or consolidation of us with or into another corporation
(other than a consolidation or merger in which we are the continuing corporation and that does not result in any reclassification or
reorganization of our outstanding shares of Common Stock), or in the case of any sale or conveyance to another corporation or entity
of the assets or other property of us as an entirety or substantially as an entirety in connection with which we are dissolved, the holders
of the Public Warrants will thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified
in the warrants and in lieu of the shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the
rights represented thereby, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such
reclassification, reorganization, merger or consolidation, or upon a dissolution following any such sale or transfer, that the holder
of the warrants would have received if such holder had exercised their warrants immediately prior to such event. If less than 70% of
the consideration receivable by the holders of Common Stock in such a transaction is payable in the form of Common Stock in the successor
entity that is listed for trading on a national securities exchange or is quoted in an established over-the-counter market, or is
to be so listed for trading or quoted immediately following such event, and if the registered holder of the warrant properly exercises
the warrant within thirty days following public disclosure of such transaction, the warrant exercise price will be reduced as specified
in the warrant agreement based on the Black-Scholes value (as defined in the warrant agreement) of the warrant. The purpose of such
exercise price reduction is to provide additional value to holders of the warrants when an extraordinary transaction occurs during the
exercise period of the warrants pursuant to which the holders of the warrants otherwise do not receive the full potential value of the
warrants in order to determine and realize the option value component of the warrant. This formula is to compensate the warrant holder
for the loss of the option value portion of the warrant due to the requirement that the warrant holder exercise the warrant within 30 days
of the event. The Black-Scholes model is an accepted pricing model for estimating fair market value where no quoted market price
for an instrument is available.
The
Public Warrants and the Placement Warrants were issued in registered form under a warrant agreement between Continental Stock Transfer &
Trust Company, as warrant agent, and Blue Water. A copy of the warrant agreement has been publicly filed with the SEC. The warrant agreement
provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective
provision, but requires the approval by the holders of at least 65% of the then outstanding Public Warrants to make any change that adversely
affects the interests of the registered holders of Public Warrants.
The
Public Warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant
agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full
payment of the exercise price (or on a cashless basis, if applicable), by certified or official bank check payable to us, for the number
of warrants being exercised. The warrantholders do not have the rights or privileges of holders of Common Stock and any voting rights
until they exercise their warrants and receive shares of Common Stock. After the issuance of shares of Common Stock upon exercise of
the warrants, each holder will be entitled to one (1) vote for each share held of record on all matters to be voted on by stockholders.
No
fractional shares will be issued upon exercise of the Public Warrants. If, upon exercise of the warrants, a holder would be entitled
to receive a fractional interest in a share, we will, upon exercise, round down to the nearest whole number of shares of Common Stock
to be issued to the warrantholder.
Placement
Warrants
Except
as described below, the Placement Warrants have terms and provisions that are identical to those of the Public Warrants, including as
to exercise price, exercisability and exercise period. The Placement Warrants (including the Common Stock issuable upon exercise of the
Placement Warrants) are not transferable, assignable or salable until 30 days after the Closing (except, among certain other limited
exceptions to our officers and directors and other persons or entities affiliated with the Sponsor) and they will not be redeemable by
us so long as they are held by the Sponsor or its permitted transferees. The Sponsor, or its permitted transferees, has the option to
exercise the Placement Warrants on a cashless basis. If the Placement Warrants are held by holders other than the Sponsor or its permitted
transferees, the Placement Warrants will be subject to the same terms and conditions as the Public Warrants, and among other matters,
be redeemable by us and exercisable by the holders on the same basis as the Public Warrants.
If
holders of the Placement Warrants elect to exercise them on a cashless basis, they would pay the exercise price by surrendering their
warrants for that number of shares of Common Stock equal to the quotient obtained by dividing (x) the product of the number of shares
of Common Stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair
market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported
last sale price of the Common Stock for the 10 trading days ending on the third trading day prior to the date on which the notice of
warrant exercise is sent to the warrant agent.
Dividends
We
have not paid any cash dividends on the Common Stock to date and do not intend to pay cash dividends. The payment of cash dividends in
the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial conditions and will be
within the discretion of the Board at such time. Further, our ability to declare dividends may be limited by restrictive covenants we
may agree to in connection with our indebtedness.
Rule 144
Pursuant
to Rule 144, a person who has beneficially owned restricted shares of Common Stock or warrants for at least six months would be
entitled to sell their securities provided that (i) such person is not deemed to have been one of our affiliates at the time of,
or at any time during the three months preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting requirements
for at least three months before the sale and have filed all required reports under Section 13 or 15(d) of the Exchange Act during
the 12 months (or such shorter period as we were required to file reports) preceding the sale.
Persons
who have beneficially owned restricted shares of Common Stock or warrants for at least six months but who are our affiliates at
the time of, or at any time during the three months preceding, a sale, would be subject to additional restrictions, by which such
person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of:
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1%
of the total number of shares of common stock then outstanding; or
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the
average weekly reported trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144
with respect to the sale.
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Sales
by our affiliates under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of
current public information about us.
Restrictions
on the Use of Rule 144 by Shell Companies or Former Shell Companies
Rule 144
is not available for the resale of securities initially issued by shell companies (other than business combination related shell companies)
or issuers that have been at any time previously a shell company. However, Rule 144 also includes an important exception to this
prohibition if the following conditions are met:
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the
issuer of the securities that was formerly a shell company has ceased to be a shell company;
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the
issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;
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the
issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding 12
months (or such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and
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at
least one year has elapsed from the time that the issuer filed current Form 10 type information with the SEC reflecting its status
as an entity that is not a shell company.
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As
of the date of this prospectus, there are 21,725,817 shares of Common Stock issued and outstanding. Of these shares, 2,479,469 shares
originally sold in the Blue Water IPO are freely tradable without restriction or further registration under the Securities Act, except
for any shares purchased by one of our affiliates within the meaning of Rule 144 under the Securities Act. All of the 1,437,500
Founder Shares, 57,500 Placement Shares and 3,445,000 Placement Warrants are restricted securities under Rule 144 because they were
issued in private transactions not involving a public offering.
As
of the date of this prospectus, there are 9,195,000 Warrants to purchase Common Stock outstanding, consisting of 5,750,000 Public
Warrants originally sold as part of units in the IPO and 3,445,000 Placement Warrants sold in the Private Placement. We have agreed to
use best efforts to file a registration statement with respect to the common stock issuable upon exercise of the Public Warrants. See
the section entitled “— Registration Rights” below for additional information. At the Effective Time, certain
outstanding warrants of Legacy Clarus also became exercisable for an aggregate 9,246 shares of Common Stock.
Anti-Takeover
Provisions
Certificate
of Incorporation and Bylaws
Among
other things, the Certificate of Incorporation the By-laws:
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permit
the Board to issue up to 10,000,000 shares of preferred stock, with any rights, preferences
and privileges as they may designate, including the right to approve an acquisition or other
change of control;
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provide
that the authorized number of directors may be changed only by resolution of our Board;
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provide
that, subject to the rights of any series of preferred stock to elect directors, directors
may be removed only with cause by the holders of not less than two thirds (2/3) of all of
our then-outstanding shares of the capital stock entitled to vote generally at an election
of directors;
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provide
that, subject to the rights of any series of preferred stock to fill director vacancies,
all director vacancies, including newly created directorships, may, except as otherwise required
by law, be filled by the affirmative vote of a majority of directors then in office, even
if less than a quorum;
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provide
that stockholders seeking to present proposals before a meeting of stockholders or to nominate
candidates for election as directors at a meeting of stockholders must provide advance notice
in writing, and also specify requirements as to the form and content of a stockholder’s
notice;
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provide
that Special Meetings of our stockholders may be called our Board pursuant to a resolution
adopted by a majority of the total number of authorized directors;
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provide
that our Board will be divided into three classes of directors, with the classes to be as
nearly equal as possible, and with the directors serving three-year terms, therefore making
it more difficult for stockholders to change the composition of our board of directors; and
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not
provide for cumulative voting rights, therefore allowing the holders of a majority of the
shares of common stock entitled to vote in any election of directors to elect all of the
directors standing for election, if they should so choose.
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The
combination of these provisions will make it more difficult for the existing stockholders to replace the Board well as for another party
to obtain control of the Company by replacing the Board. Because the Board has the power to retain and discharge its officers, these
provisions could also make it more difficult for existing stockholders or another party to effect a change in management. In addition,
the authorization of undesignated preferred stock makes it possible for the Board to issue preferred stock with voting or other rights
or preferences that could impede the success of any attempt to change our control. These provisions are intended to enhance the likelihood
of continued stability in the composition of the Board and its policies and to discourage coercive takeover practices and inadequate
takeover bids. These provisions are also designed to reduce our vulnerability to hostile takeovers and to discourage certain tactics
that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for
our shares and may have the effect of delaying changes in our control or management. As a consequence, these provisions may also inhibit
fluctuations in the market price of our stock.
Delaware
Anti-Takeover Law
We
have opted out of Section 203 of the DGCL. Section 203 of the DGCL prohibits a Delaware corporation from engaging in a “business
combination” with an “interested stockholder” (i.e., a stockholder owning 15% or more of company’s voting
stock) for three years following the time that the “interested stockholder” becomes such, subject to certain exceptions.
Limitations
on Liability and Indemnification of Officers and Directors
The
Certificate of Incorporation limits the liability of our directors to the fullest extent permitted by the DGCL, and the Bylaws provide
that we will indemnify them to the fullest extent permitted by such law. We have entered and expect to continue to enter into agreements
to indemnify our directors, executive officers and other employees as determined by our board of directors. Under the terms of such indemnification
agreements, we are required to indemnify each of our directors and officers, to the fullest extent permitted by the laws of the state
of Delaware, if the basis of the indemnitee’s involvement was by reason of the fact that the indemnitee is or was a director or
officer of the Company or any of its subsidiaries or was serving at our request in an official capacity for another entity. We must indemnify
our officers and directors against all reasonable fees, expenses, charges and other costs of any type or nature whatsoever, including
any and all expenses and obligations paid or incurred in connection with investigating, defending, being a witness in, participating
in (including on appeal), or preparing to defend, be a witness or participate in any completed, actual, pending or threatened action,
suit, claim or proceeding, whether civil, criminal, administrative or investigative, or establishing or enforcing a right to indemnification
under the indemnification agreement. The indemnification agreements also require us, if so requested, to advance within 30 days of such
request all reasonable fees, expenses, charges and other costs that such director or officer incurred, provided that such person will
return any such advance if it is ultimately determined that such person is not entitled to indemnification by us. Any claims for indemnification
by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount
of money available to us.
Exclusive
Jurisdiction of Certain Actions
The
Bylaws require, to the fullest extent permitted by law, unless we consent in writing to the selection of an alternative forum, that derivative
actions brought in our name, actions against directors, officers and employees for breach of fiduciary duty, actions asserting a claim
arising pursuant to any provision of the DGCL or the Certificate of Incorporation or the Bylaws, actions to interpret, apply, enforce
or determine the validity of the Certificate of Incorporation or the Bylaws and actions asserting a claim against us governed by the
internal affairs doctrine may be brought only in the Court of Chancery in the State of Delaware and, if brought outside of Delaware,
the stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s counsel. Although
we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits
to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.
In
addition, the Bylaws require that, unless we consent in writing to the selection of an alternative forum, the federal district courts
of the United States of America shall be the sole and exclusive forum for resolving any action asserting a claim arising under the Securities
Act.
Lock-Up Restrictions
Certain of our stockholders
holding 16,371,610 shares of Common Stock are subject to restrictions on transfer until March 8, 2022.
Listing
of Securities
The
Common Stock and Public Warrants are listed on the Nasdaq Global Market under the symbols “CRXT” and “CRXTW”,
respectively.
Transfer
Agent and Warrant Agent
The
transfer agent for the Common Stock and warrant agent for the Warrants is Continental Stock Transfer & Trust Company.
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The
following is a discussion of certain material U.S. federal income tax consequences of the acquisition, ownership and disposition of our
shares of common stock, which we refer to as our securities. This discussion applies only to securities that are held as capital assets
for U.S. federal income tax purposes and is applicable only to holders who are receiving our securities in this offering.
This
discussion is a summary only and does not describe all of the tax consequences that may be relevant to you in light of your particular
circumstances, including but not limited to the alternative minimum tax, the Medicare tax on certain investment income and the different
consequences that may apply if you are subject to special rules that apply to certain types of investors (such as the effects of Section 451
of the Code), including but not limited to:
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financial
institutions or financial services entities;
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governments
or agencies or instrumentalities thereof;
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regulated
investment companies;
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real
estate investment trusts;
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expatriates
or former long-term residents of the United States;
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persons
that actually or constructively own five percent or more of our voting shares;
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dealers
or traders subject to a mark-to-market method of accounting with respect to the securities;
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persons
holding the securities as part of a “straddle,” hedge, integrated transaction
or similar transaction;
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U.S. holders (as defined below) whose functional currency is not the U.S. dollar;
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partnerships
or other pass-through entities for U.S. federal income tax purposes and any beneficial owners
of such entities; and
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This
discussion is based on the Code, and administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations
as of the date hereof, which are subject to change, possibly on a retroactive basis, and changes to any of which subsequent to the date
of this prospectus may affect the tax consequences described herein. This discussion does not address any aspect of state, local or non-U.S.
taxation, or any U.S. federal taxes other than income taxes (such as gift and estate taxes).
We
have not sought, and will not seek, a ruling from the IRS as to any U.S. federal income tax consequence described herein. The IRS may
disagree with the discussion herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future
legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this
discussion. You are urged to consult your tax advisor with respect to the application of U.S. federal tax laws to your particular situation,
as well as any tax consequences arising under the laws of any state, local or foreign jurisdiction.
This
discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold our securities through
such entities. If a partnership (or other entity or arrangement classified as a partnership or other pass-through entity for United States
federal income tax purposes) is the beneficial owner of our securities, the United States federal income tax treatment of a partner or
member in the partnership or other pass-through entity generally will depend on the status of the partner or member and the activities
of the partnership or other pass-through entity. If you are a partner or member of a partnership or other pass-through entity holding
our securities, we urge you to consult your own tax advisor.
THIS
DISCUSSION IS ONLY A SUMMARY OF CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS ASSOCIATED WITH THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF OUR SECURITIES. EACH PROSPECTIVE INVESTOR IN OUR SECURITIES IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE
PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR SECURITIES, INCLUDING THE APPLICABILITY
AND EFFECT OF ANY UNITED STATES FEDERAL NON-INCOME, STATE, LOCAL, AND NON-U.S. TAX LAWS.
U.S.
Holders
This
section applies to you if you are a “U.S. holder.” A U.S. holder is a beneficial owner of our shares of common stock who
or that is, for U.S. federal income tax purposes:
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an
individual who is a citizen or resident of the United States;
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a
corporation (or other entity taxable as a corporation) organized in or under the laws of the United States, any state thereof or
the District of Columbia; or
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an
estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
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a
trust, if (i) a court within the United States is able to exercise primary supervision over the administration of the trust
and one or more U.S. persons (as defined in the Code) have authority to control all substantial decisions of the trust or (ii) it
has a valid election in effect under Treasury Regulations to be treated as a U.S. person.
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Taxation
of Distributions. If we pay distributions in cash or other property (other than certain distributions of our stock or rights to acquire
our stock) to U.S. holders of shares of our common stock, such distributions generally will constitute dividends for U.S. federal income
tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles.
Distributions in excess of current and accumulated earnings and profits will constitute a return of capital that will be applied against
and reduce (but not below zero) the U.S. holder’s adjusted tax basis in our common stock. Any remaining excess will be treated
as gain realized on the sale or other disposition of the common stock and will be treated as described under “—U.S. Holders—Gain
or Loss on Sale, Taxable Exchange or Other Taxable Disposition of common stock” below.
Dividends
we pay to a U.S. holder that is a taxable corporation generally will qualify for the dividends received deduction if the requisite holding
period is satisfied. With certain exceptions (including, but not limited to, dividends treated as investment income for purposes of investment
interest deduction limitations), and provided certain holding period requirements are met, dividends we pay to a non-corporate U.S. holder
may constitute “qualified dividends” that will be subject to tax at the maximum tax rate accorded to long-term capital gains.
If the holding period requirements are not satisfied, then a corporation may not be able to qualify for the dividends received deduction
and would have taxable income equal to the entire dividend amount, and non-corporate holders may be subject to tax on such dividend at
regular ordinary income tax rates instead of the preferential rate that applies to qualified dividend income.
Gain
or Loss on Sale, Taxable Exchange or Other Taxable Disposition of common stock. Upon a sale or other taxable disposition of our common
stock, a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and
the U.S. holder’s adjusted tax basis in the common stock. Any such capital gain or loss generally will be long-term capital gain
or loss if the U.S. holder’s holding period for the common stock so disposed of exceeds one year. If the holding period requirements
are not satisfied, any gain on a sale or taxable disposition of the shares would be subject to short-term capital gain treatment and
would be taxed at regular ordinary income tax rates. Long-term capital gains recognized by non-corporate U.S. holders will be eligible
to be taxed at reduced rates. The deductibility of capital losses is subject to limitations.
Generally,
the amount of gain or loss recognized by a U.S. holder is an amount equal to the difference between (i) the sum of the amount of
cash and the fair market value of any property received in such disposition and (ii) the U.S. holder’s adjusted tax basis
in its common stock so disposed of. A U.S. holder’s adjusted tax basis in its common stock generally will equal the U.S. holder’s
acquisition cost for the common stock or less, in the case of a share of common stock, any prior distributions treated as a return of
capital. In the case of any shares of common stock originally acquired as part of an investment unit, the acquisition cost for the share
of common stock that were part of such unit would equal an allocable portion of the acquisition cost of the unit based on the relative
fair market values of the components of the unit at the time of acquisition.
Information
Reporting and Backup Withholding. In general, information reporting requirements may apply to dividends paid to a U.S. holder and
to the proceeds of the sale or other disposition of our shares of common stock, unless the U.S. holder is an exempt recipient. Backup
withholding may apply to such payments if the U.S. holder fails to provide a taxpayer identification number, a certification of exempt
status or has been notified by the IRS that it is subject to backup withholding (and such notification has not been withdrawn).
Any
amounts withheld under the backup withholding rules generally should be allowed as a refund or a credit against a U.S. holder’s
U.S. federal income tax liability provided the required information is timely furnished to the IRS.
Non-U.S.
Holders
This
section applies to you if you are a “Non-U.S. holder.” As used herein, the term “Non-U.S. holder” means a beneficial
owner of our common stock who or that is for U.S. federal income tax purposes:
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a
non-resident alien individual (other than certain former citizens and residents of the U.S. subject to U.S. tax as expatriates);
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a
foreign corporation or
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an
estate or trust that is not a U.S. holder;
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but
generally does not include an individual who is present in the U.S. for 183 days or more in the taxable year of disposition. If you are
such an individual, you should consult your tax advisor regarding the U.S. federal income tax consequences of the acquisition, ownership
or sale or other disposition of our securities.
Taxation
of Distributions. In general, any distributions we make to a Non-U.S. holder of shares of our common stock, to the extent paid out
of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles), will constitute dividends
for U.S. federal income tax purposes and, provided such dividends are not effectively connected with the Non-U.S. holder’s conduct
of a trade or business within the United States, we will be required to withhold tax from the gross amount of the dividend at a rate
of 30%, unless such Non-U.S. holder is eligible for a reduced rate of withholding tax under an applicable income tax treaty and provides
proper certification of its eligibility for such reduced rate (usually on an IRS Form W-8BEN or W-8BEN-E). Any distribution not constituting
a dividend will be treated first as reducing (but not below zero) the Non-U.S. holder’s adjusted tax basis in its shares of our
common stock and, to the extent such distribution exceeds the Non-U.S. holder’s adjusted tax basis, as gain realized from the sale
or other disposition of the common stock, which will be treated as described under “Non-U.S. Holders—Gain on Sale, Taxable
Exchange or Other Taxable Disposition of common stock” below.
The
withholding tax does not apply to dividends paid to a Non-U.S. holder who provides a Form W-8ECI, certifying that the dividends are effectively
connected with the Non-U.S. holder’s conduct of a trade or business within the United States. Instead, the effectively connected
dividends will be subject to regular U.S. income tax as if the Non-U.S. holder were a U.S. resident, subject to an applicable income
tax treaty providing otherwise. A Non-U.S. corporation receiving effectively connected dividends may also be subject to an additional
“branch profits tax” imposed at a rate of 30% (or a lower treaty rate).
Gain
on Sale, Taxable Exchange or Other Taxable Disposition of common stock. A Non-U.S. holder generally will not be subject to U.S. federal
income or withholding tax in respect of gain recognized on a sale, taxable exchange or other taxable disposition of our common stock,
unless:
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the
gain is effectively connected with the conduct of a trade or business by the Non-U.S. holder within the United States (and, under
certain income tax treaties, is attributable to a United States permanent establishment or fixed base maintained by the Non-U.S.
holder); or
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we
are or have been a “U.S. real property holding corporation” for U.S. federal income tax purposes at any time during the
shorter of the five-year period ending on the date of disposition or the period that the Non-U.S. holder held our common stock, and,
in the case where shares of our common stock are regularly traded on an established securities market, the Non-U.S. holder has owned,
directly or constructively, more than 5% of our common stock at any time within the shorter of the five-year period preceding the
disposition or such Non-U.S. holder’s holding period for the shares of our common stock. There can be no assurance that our
common stock will be treated as regularly traded on an established securities market for this purpose.
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Unless
an applicable treaty provides otherwise, gain described in the first bullet point above will be subject to tax at generally applicable
U.S. federal income tax rates as if the Non-U.S. holder were a U.S. resident. Any gains described in the first bullet point above of
a Non-U.S. holder that is a foreign corporation may also be subject to an additional “branch profits tax” at a 30% rate (or
lower treaty rate).
If
the second bullet point above applies to a Non-U.S. holder, gain recognized by such holder on the sale, exchange or other disposition
of our common stock will be subject to tax at generally applicable U.S. federal income tax rates.
Information
Reporting and Backup Withholding. Information returns will be filed with the IRS in connection with payments of dividends and the
proceeds from a sale or other disposition of our shares of common stock. A Non-U.S. holder may have to comply with certification procedures
to establish that it is not a United States person in order to avoid information reporting and backup withholding requirements. The certification
procedures required to claim a reduced rate of withholding under a treaty will satisfy the certification requirements necessary to avoid
the backup withholding as well. The amount of any backup withholding from a payment to a Non-U.S. holder will be allowed as a credit
against such holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information
is timely furnished to the IRS.
FATCA
Withholding Taxes. Provisions commonly referred to as “FATCA” impose withholding of 30% on payments of dividends (including
constructive dividends) on our common stock to “foreign financial institutions” (which is broadly defined for this purpose
and in general includes investment vehicles) and certain other Non-U.S. entities unless various U.S. information reporting and due diligence
requirements (generally relating to ownership by U.S. persons of interests in or accounts with those entities) have been satisfied by,
or an exemption applies to, the payee (typically certified as to by the delivery of a properly completed IRS Form W-8BEN-E). Foreign
financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be
subject to different rules. Under certain circumstances, a Non-U.S. holder might be eligible for refunds or credits of such withholding
taxes, and a Non-U.S. holder might be required to file a U.S. federal income tax return to claim such refunds or credits. Prospective
investors should consult their tax advisers regarding the effects of FATCA on their investment in our securities.
PLAN
OF DISTRIBUTION
We are registering the issuance
by us of (i) up to 3,445,000 shares of Common Stock that are issuable upon the exercise of the Placement Warrants by the holders
thereof and (ii) up to 5,750,000 shares of Common Stock that are issuable upon the exercise of the Public Warrants by the
holders thereof. We are also registering the resale by the Selling Securityholders or their permitted transferees from time to time of
(i) up to 19,816,610 shares of Common Stock and (ii) up to 3,445,000 Placement Warrants.
We
are required to pay all fees and expenses incident to the registration of the securities to be offered and sold pursuant to this prospectus.
The Selling Securityholders will bear all commissions and discounts, if any, attributable to their sale of securities.
We
will not receive any of the proceeds from the sale of the securities by the Selling Securityholders. We will receive proceeds from Warrants
exercised in the event that such Warrants are exercised for cash. The aggregate proceeds to the Selling Securityholders will be the purchase
price of the securities less any discounts and commissions borne by the Selling Securityholders.
The
shares of Common Stock beneficially owned by the Selling Securityholders covered by this prospectus may be offered and sold from time
to time by the Selling Securityholders. The term “Selling Securityholders” includes donees, pledgees, transferees or other
successors in interest selling securities received after the date of this prospectus from a Selling Securityholder as a gift, pledge,
partnership distribution or other transfer. The Selling Securityholders will act independently of us in making decisions with respect
to the timing, manner and size of each sale. Such sales may be made on one or more exchanges or in the over-the-counter market or
otherwise, at prices and under terms then prevailing or at prices related to the then current market price or in negotiated transactions.
The Selling Securityholders may sell their securities by one or more of, or a combination of, the following methods:
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purchases
by a broker-dealer as principal and resale by such broker-dealer for its own account pursuant to this prospectus;
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ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
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block
trades in which the broker-dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
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an
over-the-counter distribution in accordance with the rules of Nasdaq;
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through
trading plans entered into by a Selling Securityholder pursuant to Rule 10b5-1 under the Exchange Act, that are in place at
the time of an offering pursuant to this prospectus and any applicable prospectus supplement hereto that provide for periodic sales of
their securities on the basis of parameters described in such trading plans;
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distribution
to employees, members, limited partners or stockholders of the Selling Securityholders; through the writing or settlement of options
or other hedging transaction, whether through an options exchange or otherwise;
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by
pledge to secured debts and other obligations;
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delayed
delivery arrangements;
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to
or through underwriters or broker-dealers;
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in
“at the market” offerings, as defined in Rule 415 under the Securities Act, at negotiated prices, at prices prevailing
at the time of sale or at prices related to such prevailing market prices, including sales made directly on a national securities exchange
or sales made through a market maker other than on an exchange or other similar offerings through sales agents;
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in
privately negotiated transactions;
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in
options transactions;
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through
a combination of any of the above methods of sale; or
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any
other method permitted pursuant to applicable law.
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In
addition, any securities that qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this
prospectus.
To
the extent required, this prospectus may be amended or supplemented from time to time to describe a specific plan of distribution. In
connection with distributions of the securities or otherwise, the Selling Securityholders may enter into hedging transactions with broker-dealers
or other financial institutions. In connection with such transactions, broker-dealers or other financial institutions may engage in short
sales of the securities in the course of hedging the positions they assume with Selling Securityholders. The Selling Securityholders
may also sell the securities short and redeliver the securities to close out such short positions. The Selling Securityholders may also
enter into option or other transactions with broker-dealers or other financial institutions which require the delivery to such broker-dealer
or other financial institution of securities offered by this prospectus, which securities such broker-dealer or other financial institution
may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). The Selling Securityholders may also
pledge securities to a broker-dealer or other financial institution, and, upon a default, such broker- dealer or other financial institution,
may effect sales of the pledged securities pursuant to this prospectus (as supplemented or amended to reflect such transaction).
In
effecting sales, broker-dealers or agents engaged by the Selling Securityholders may arrange for other broker-dealers to participate.
Broker-dealers or agents may receive commissions, discounts or concessions from the Selling Securityholders in amounts to be negotiated
immediately prior to the sale.
In
offering the securities covered by this prospectus, the Selling Securityholders and any broker-dealers who execute sales for the
Selling Securityholders may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such
sales. Any profits realized by the Selling Securityholders and the compensation of any broker-dealer may be deemed to be underwriting
discounts and commissions.
In
order to comply with the securities laws of certain states, if applicable, the securities must be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the securities may not be sold unless they have been registered
or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is
complied with.
We
have advised the Selling Securityholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales
of securities in the market and to the activities of the Selling Securityholders and their affiliates. In addition, we will make copies
of this prospectus available to the Selling Securityholders for the purpose of satisfying the prospectus delivery requirements of the
Securities Act. The Selling Securityholders may indemnify any broker-dealer that participates in transactions involving the sale
of the securities against certain liabilities, including liabilities arising under the Securities Act.
At
the time a particular offer of securities is made, if required, a prospectus supplement will be distributed that will set forth the number
of securities being offered and the terms of the offering, including the name of any underwriter, dealer or agent, the purchase price
paid by any underwriter, any discount, commission and other item constituting compensation, any discount, commission or concession allowed
or reallowed or paid to any dealer, and the proposed selling price to the public.
A
holder of Warrants may exercise its Warrants in accordance with the Warrant Agreement on or before the expiration date set forth therein
by surrendering, at the office of the Warrant Agent, Continental Stock Transfer & Trust Company, the certificate evidencing
such Warrant, with the form of election to purchase set forth thereon, properly completed and duly executed, accompanied by full payment
of the exercise price and any and all applicable taxes due in connection with the exercise of the Warrant, subject to any applicable
provisions relating to cashless exercises in accordance with the Warrant Agreement.
A
Selling Securityholder that is an entity may elect to make an in-kind distribution of Common Stock or Warrants to its members, partners
or stockholders pursuant to the registration statement of which this prospectus is a part by delivering a prospectus. To the extent that
such members, partners or stockholders are not affiliates of ours, such members, partners or stockholders would thereby receive freely
tradable Common Stock or Warrants pursuant to the distribution through a registration statement.
LEGAL
MATTERS
The
validity of any securities offered by this prospectus will be passed upon for us by Goodwin Procter LLP.
EXPERTS
The
audited financial statements of Blue Water Acquisition Corp. included in this prospectus and elsewhere in the registration statement
have been so included in reliance upon the report, which includes an explanatory paragraph about the existence of substantial doubt concerning
Blue Water’s ability to continue as a going concern, of Marcum LLP, an independent registered public accounting firm, appearing
elsewhere herein and are included in reliance on such report given upon the authority of such firm as experts in auditing and accounting.
The financial statements of
Clarus Therapeutics, Inc. as of December 31, 2020 and 2019 and for each of the years in the two-year period ended December 31,
2020 included in this prospectus of Clarus Therapeutics Holdings, Inc. have been audited by RSM US LLP, an independent registered public
accounting firm, as stated in their report thereon which report expresses an unqualified opinion and includes an explanatory paragraph
relating to going concern, and included in this prospectus and registration statement in reliance upon such report and upon the authority
of such firm as experts in accounting and auditing.
CHANGE
IN AUDITOR
On
September 10, 2021, the audit committee of the Board approved a resolution appointing RSM US LLP (“RSM”) as the Company’s
independent registered public accounting firm to audit the Company’s financial statements for the fiscal year ended December 31,
2021, and Marcum LLP (“Marcum”) was dismissed from its role as the Company’s independent registered public accounting
firm.
Marcum’s
report on the Company’s financial statements for the fiscal year ended December 31, 2020 and the period from May 22, 2020 (inception)
to December 31, 2020 did not contain an adverse opinion or a disclaimer of opinion, nor was either report qualified or modified as to
uncertainty, audit scope or accounting principles except for an explanatory paragraph in such report regarding substantial doubt about
the registrant’s ability to continue as a going concern.
At
no point during the fiscal year ended December 31, 2020 and the subsequent interim period through September 10, 2021 were there any (i)
disagreements with Marcum on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure,
which disagreement(s), if not resolved to the satisfaction of Marcum, would have caused it to make reference to the subject matter of
the disagreement(s) in connection with its report, or (ii) “reportable events” as that term is defined in Item 304(a)(1)(v)
of Regulation S-K, other than as noted above regarding the registrant’s ability to continue as a going concern.
We
provided Marcum with a copy of the foregoing disclosure and requested that Marcum furnish the Company with a letter addressed to the
SEC stating whether or not it agrees with the statements made herein, each as required by applicable SEC rules. A copy of Marcum’s
letter to the SEC is filed as Exhibit 16.1 to the Company’s Current Report on Form 8-K filed on September 15, 2021.
During
the fiscal year ended December 31, 2020 and the subsequent interim period through date of this prospectus, the Company did not consult
with RSM regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
WHERE
YOU CAN FIND MORE INFORMATION
We
are required to file annual, quarterly and current reports, proxy statements and other information with the SEC as required by the Exchange
Act. We have also filed a registration statement on Form S-1, including exhibits, under the Securities Act, with respect to the common
stock offered by this prospectus. This prospectus is part of the registration statement, but does not contain all of the information
included in the registration statement or the exhibits. You can read our SEC filings, including this prospectus, over the Internet at
the SEC’s website at http://www.sec.gov.
Our
website address is www.clarustherapeutics.com. Through our website, we make available, free of charge, the following documents
as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC, including our annual reports on
Form 10-K; our proxy statements for our annual and special stockholder meetings; our quarterly reports on Form 10-Q; our current
reports on Form 8-K and reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after such material is electronically filed with, or furnished to, the SEC. The information contained on, or that may be
accessed through, our website is not a part of, and is not incorporated into, this prospectus.
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NTD: To be reviewed by auditors.
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INDEX TO FINANCIAL STATEMENTS
BLUE WATER ACQUISITION CORP.
CLARUS THERAPEUTICS,
INC.
BLUE WATER ACQUISITION CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30,
2021
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December 31,
2020
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|
|
|
(unaudited)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
224,535
|
|
|
$
|
655,371
|
|
|
Prepaid expenses
|
|
|
115,420
|
|
|
|
168,141
|
|
|
Total Current Assets
|
|
|
339,955
|
|
|
|
823,512
|
|
|
Investments held in Trust Account
|
|
|
58,652,957
|
|
|
|
58,650,048
|
|
|
Total Assets
|
|
$
|
58,992,912
|
|
|
$
|
59,473,560
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
117,913
|
|
|
$
|
178,645
|
|
|
Accrued expenses
|
|
|
812,302
|
|
|
|
70,000
|
|
|
Due to related party
|
|
|
60,000
|
|
|
|
-
|
|
|
Accrued franchise and other taxes
|
|
|
347,290
|
|
|
|
172,200
|
|
|
Total current liabilities
|
|
|
1,337,505
|
|
|
|
420,845
|
|
|
Deferred underwriting commissions
|
|
|
2,012,500
|
|
|
|
2,012,500
|
|
|
Derivative warrant liabilities
|
|
|
7,251,895
|
|
|
|
16,698,635
|
|
|
Total Liabilities
|
|
|
10,601,900
|
|
|
|
19,131,980
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
Class A common stock, $0.0001 par value; 4,254,020 and 3,464,860 shares subject to possible redemption at $10.20 per share at June 30, 2021 and December 31, 2020, respectively
|
|
|
43,391,004
|
|
|
|
35,341,572
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Class A common stock, $0.0001 par value; 50,000,000 shares authorized; 1,553,480 and 2,343,640 shares issued and outstanding (excluding 4,254,020 and 3,464,860 shares subject to possible redemption) at June 30, 2021 and December 31, 2020, respectively
|
|
|
155
|
|
|
|
234
|
|
|
Class B common stock, $0.0001 par value; 2,000,000 shares authorized; 1,437,500 shares issued and outstanding
|
|
|
144
|
|
|
|
144
|
|
|
Additional paid-in capital
|
|
|
2,597,293
|
|
|
|
9,717,651
|
|
|
Retained earnings (accumulated deficit)
|
|
|
2,402,416
|
|
|
|
(4,718,021
|
)
|
|
Total stockholders’ equity
|
|
|
5,000,008
|
|
|
|
5,000,008
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
58,992,912
|
|
|
$
|
59,473,560
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
BLUE WATER ACQUISITION CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2021 AND FOR THE PERIOD MAY 22, 2020 (INCEPTION) THROUGH JUNE 30, 2020
|
|
|
For the three months ended
June 30,
2021
|
|
|
For the six months ended
June 30,
2021
|
|
|
For the period from
May 22,
2020
(inception) through
June 30,
2020
|
|
|
General and administrative expenses
|
|
$
|
807,093
|
|
|
$
|
1,225,127
|
|
|
$
|
761
|
|
|
Franchise and other taxes
|
|
|
87,545
|
|
|
|
175,090
|
|
|
|
-
|
|
|
Loss from operations
|
|
|
(894,638
|
)
|
|
|
(1,400,217
|
)
|
|
|
(761
|
)
|
|
Change in fair value of derivative warrant liabilities
|
|
|
(1,704,140
|
)
|
|
|
9,446,740
|
|
|
|
-
|
|
|
Gain on marketable securities (net), and dividends held in Trust Account
|
|
|
1,463
|
|
|
|
2,909
|
|
|
|
-
|
|
|
Net (loss) income
|
|
$
|
(2,597,315
|
)
|
|
$
|
8,049,432
|
|
|
$
|
(761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding of common stock subject to redemption, basic and diluted
|
|
|
4,508,659
|
|
|
|
3,995,410
|
|
|
|
-
|
|
|
Basic and diluted net income per share, common stock subject to redemption
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Weighted average shares outstanding of common stock, basic and diluted
|
|
|
4,456,306
|
|
|
|
4,114,324
|
|
|
|
1,250,000
|
|
|
Basic and diluted net (loss) income per share, common stock
|
|
$
|
(0.58
|
)
|
|
$
|
1.96
|
|
|
$
|
-
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
BLUE WATER ACQUISITION CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2021 AND FOR THE PERIOD MAY 22, 2020 (INCEPTION) THROUGH JUNE 30, 2020
For the Three and Six Months Ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Earnings /
|
|
|
Total
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Equity
|
|
|
Balance - December 31, 2020
|
|
|
2,342,640
|
|
|
$
|
234
|
|
|
|
1,437,500
|
|
|
$
|
144
|
|
|
$
|
9,717,651
|
|
|
$
|
(4,718,021
|
)
|
|
$
|
5,000,008
|
|
|
Common stock subject to possible redemption
|
|
|
(1,043,799
|
)
|
|
|
(104
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,717,651
|
)
|
|
|
(928,995
|
)
|
|
|
(10,646,750
|
)
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,646,747
|
|
|
|
10,646,747
|
|
|
Balance - March 31, 2021 (unaudited)
|
|
|
1,298,841
|
|
|
$
|
130
|
|
|
|
1,437,500
|
|
|
$
|
144
|
|
|
$
|
-
|
|
|
$
|
4,999,731
|
|
|
$
|
5,000,005
|
|
|
Common stock subject to possible redemption
|
|
|
254,639
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,597,293
|
|
|
|
-
|
|
|
|
2,597,318
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,597,315
|
)
|
|
|
(2,597,315
|
)
|
|
Balance - June 30, 2021 (unaudited)
|
|
|
1,553,480
|
|
|
$
|
155
|
|
|
|
1,437,500
|
|
|
$
|
144
|
|
|
$
|
2,597,293
|
|
|
$
|
2,402,416
|
|
|
$
|
5,000,008
|
|
For the Period from May 22, 2020 (Inception) through June 30,
2020
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance - May 22, 2020 (inception)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Issuance of Class B common stock to related party
|
|
|
-
|
|
|
|
-
|
|
|
|
1,437,500
|
|
|
|
144
|
|
|
|
24,856
|
|
|
|
-
|
|
|
|
25,000
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(761
|
)
|
|
|
(761
|
)
|
|
Balance - June 30, 2020 (unaudited)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,437,500
|
|
|
$
|
144
|
|
|
$
|
24,856
|
|
|
$
|
(761
|
)
|
|
$
|
24,239
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
BLUE WATER ACQUISITION CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND FOR
THE PERIOD MAY 22, 2020 (INCEPTION) THROUGH JUNE 30, 2020
|
|
|
For the six months ended
June 30,
2021
|
|
|
For the period from
May 22,
2020
(inception) through
June 30,
2020
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,049,432
|
|
|
$
|
(761
|
)
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative warranty liabilities
|
|
|
(9,446,740
|
)
|
|
|
-
|
|
|
Gain on marketable securities (net), and dividends held in Trust Account
|
|
|
(2,909
|
)
|
|
|
-
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
52,721
|
|
|
|
-
|
|
|
Accounts payable
|
|
|
(40,132
|
)
|
|
|
761
|
|
|
Accrued expenses
|
|
|
742,302
|
|
|
|
-
|
|
|
Due to related party
|
|
|
60,000
|
|
|
|
-
|
|
|
Accrued franchise and other taxes
|
|
|
175,090
|
|
|
|
-
|
|
|
Net cash used in operating activities
|
|
|
(410,236
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
Offering costs paid
|
|
|
(20,600
|
)
|
|
|
-
|
|
|
Net cash used in financing activities
|
|
|
(20,600
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(430,836
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash - beginning of the period
|
|
|
655,371
|
|
|
|
-
|
|
|
Cash - end of the period
|
|
$
|
224,535
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash activities:
|
|
|
|
|
|
|
|
|
|
Change in value of common stock subject to possible redemption
|
|
$
|
8,049,432
|
|
|
$
|
-
|
|
|
Deferred offering costs paid by related party in exchange for issuance of Class B common stock
|
|
$
|
-
|
|
|
$
|
25,000
|
|
|
Deferred offering costs included in accrued expenses
|
|
$
|
-
|
|
|
$
|
25,000
|
|
|
Deferred offering costs paid by related party through note payable
|
|
$
|
-
|
|
|
$
|
12,500
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
BLUE WATER ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1—Description of Organization, Business
Operations and Basis of Presentation
Blue Water Acquisition Corp.,
including its consolidated subsidiary, (the “Company”) is a blank check company incorporated in Delaware on May 22, 2020.
The Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization
or similar business combination with one or more businesses (the “Business Combination”). The Company is an emerging growth
company and, as such, the Company is subject to all of the risks associated with emerging growth companies. On April 27, 2021, Blue Water
Merger Sub Corp., a Delaware corporation and a wholly-owned subsidiary of the Company was formed.
As of June 30, 2021, the
Company had not commenced any operations. All activity for the period from May 22, 2020 (inception) through June 30, 2021 relates
to the Company’s formation and the initial public offering (the “Initial Public Offering”) described below. The Company
will not generate any operating revenues until after the completion of its initial Business Combination, at the earliest. The Company
will generate non-operating income in the form of interest income on cash and cash equivalents from the proceeds derived
from the Initial Public Offering. The Company has selected December 31 as its fiscal year end.
The Company’s sponsor
is Blue Water Sponsor LLC, a Delaware limited liability company (the “Sponsor”). The registration statement for the Company’s
Initial Public Offering was declared effective on December 15, 2020. On December 17, 2020, the Company consummated its Initial
Public Offering of 5,750,000 units (the “Units” and, with respect to the Class A Common Stock included in the
Units being offered, the “Public Shares”), including 750,000 additional Units to cover over-allotments (the “Over-Allotment
Units”), at $10.00 per Unit, generating gross proceeds of $57.5 million, and incurring offering costs of approximately
$3.7 million, of which approximately $2.0 million was for deferred underwriting commissions (Note 5).
Simultaneously with the closing
of the Initial Public Offering, the Company consummated the private placement (“Private Placement”) of 3,445,000 warrants
(each, a “Private Placement Warrant” and collectively, the “Private Placement Warrants”) at a price of $1.00 per
Private Placement Warrant to the Sponsor, generating proceeds of approximately $3.4 million (Note 4).
Upon the closing of the Initial
Public Offering and the Private Placement, approximately $58.7 million ($10.20 per Unit) of the net proceeds of the Initial
Public Offering and certain of the proceeds of the Private Placement was held in a trust account (“Trust Account”)
located in the United States with Continental Stock Transfer & Trust Company acting as trustee, and will be invested only in
U.S. “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act having a maturity of 185
days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act 1940,
as amended (the “Investment Company Act”), which invest only in direct U.S. government treasury obligations, as determined
by the Company, until the earlier of: (i) the completion of a Business Combination and (ii) the distribution of the Trust Account
as described below.
The Company’s management
has broad discretion with respect to the specific application of the net proceeds of the Initial Public Offering and the sale of Private
Placement Warrants, although substantially all of the net proceeds are intended to be applied generally toward consummating a Business
Combination. There is no assurance that the Company will be able to complete a Business Combination successfully. The Company must complete
one or more initial Business Combinations having an aggregate fair market value of at least 80% of the net assets held in the Trust
Account (excluding the deferred underwriting commissions and taxes payable and interest previously released for working capital purposes
on the income earned on the Trust Account) at the time of the agreement to enter into the initial Business Combination. However, the Company
will only complete a Business Combination if the post-transaction company owns or acquires 50% or more of the voting securities
of the target or otherwise acquires a controlling interest in the target sufficient for it not to be required to register as an investment
company under the Investment Company Act.
The Company will provide
the holders (the “Public Stockholders”) of the Public Shares with the opportunity to redeem all or a portion of their Public
Shares upon the completion of a Business Combination either (i) in connection with a stockholder meeting called to approve the
Business Combination or (ii) by means of a tender offer. The decision as to whether the Company will seek stockholder approval of
a Business Combination or conduct a tender offer will be made by the Company, solely in its discretion. The Public Stockholders will be
entitled to redeem their Public Shares for a pro rata portion of the amount then held in the Trust Account (initially anticipated to be
$10.20 per Public Share). The per-share amount to be distributed to Public Stockholders who redeem their Public Shares
will not be reduced by the deferred underwriting commissions the Company will pay to the underwriters (as discussed in Note 5). These
Public Shares are recorded at a redemption value and classified as temporary equity upon the completion of the Initial Public Offering
in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”)
Topic 480 “Distinguishing Liabilities from Equity” (“ASC 480”). The Company will proceed with a Business Combination
if a majority of the shares voted are voted in favor of the Business Combination. The Company will not redeem the Public Shares in an
amount that would cause its net tangible assets to be less than $5,000,001. If a stockholder vote is not required by law and the Company
does not decide to hold a stockholder vote for business or other legal reasons, the Company will, pursuant to its Certificate of Incorporation
(the “Certificate of Incorporation”), conduct the redemptions pursuant to the tender offer rules of the U.S. Securities and
Exchange Commission (“SEC”) and file tender offer documents with the SEC prior to completing a Business Combination. If, however,
stockholder approval of the transaction is required by law, or the Company decides to obtain stockholder approval for business or legal
reasons, the Company will offer to redeem shares in conjunction with a proxy solicitation pursuant to the proxy rules and not pursuant
to the tender offer rules. Additionally, each public stockholder may elect to redeem their Public Shares irrespective of whether they
vote for or against the proposed transaction. If the Company seeks stockholder approval in connection with a Business Combination, the
initial stockholders (as defined below) agreed to vote their Founder Shares (as defined below in Note 4) and any Public Shares purchased
during or after the Initial Public Offering in favor of a Business Combination. In addition, the initial stockholders agreed to waive
their redemption rights with respect to their Founder Shares and Public Shares in connection with the completion of a Business Combination.
The Certificate of Incorporation
provided that a Public Stockholder, together with any affiliate of such stockholder or any other person with whom such stockholder is
acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)), will be restricted from redeeming its shares with respect to more than an aggregate of 15% or more
of the Public Shares, without the prior consent of the Company.
The Sponsor and the Company’s
officers and directors (the “initial stockholders”) agreed not to propose an amendment to the Certificate of Incorporation
to modify the substance or timing of the Company’s obligation to redeem 100% of the Public Shares if the Company does not complete
a Business Combination within the Combination Period (as defined below) or with respect to any other material provisions relating to stockholders’
rights or pre-initial Business Combination activity, unless the Company provides the Public Stockholders with the opportunity
to redeem their Public Shares in conjunction with any such amendment.
The Company will have up
to 12 months from the closing of the Initial Public Offering, or December 17, 2021, (or up to 18 months from the consummation
of the Initial Public Offering, or June 17, 2022, if the Company extends the period of time to consummate a Business Combination) (the
“Combination Period”) to complete a Business Combination. In order to extend the time available for the Company to consummate
a Business Combination, the Sponsor or its affiliate or designees must deposit into the Trust Account $575,000 ($0.10 per Public Share),
on or prior to the date of the applicable deadline, for each three-month extension.
If the Company is unable
to complete a Business Combination within the Combination Period, the Company will (i) cease all operations except for the purpose of
winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the Public Shares, at a per-share price,
payable in cash, equal to the aggregate amount then on deposit in the Trust Account including interest earned on the funds held in the
Trust Account and not previously released to the Company for working capital purposes or to pay its taxes (less up to $50,000 of
interest to pay dissolution expenses), divided by the number of then outstanding Public Shares, which redemption will completely extinguish
Public Stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), subject
to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining stockholders
and the board of directors, dissolve and liquidate, subject in each case to the Company’s obligations under Delaware law to provide
for claims of creditors and the requirements of other applicable law.
The initial stockholders
agreed to waive their rights to liquidating distributions from the Trust Account with respect to the Founder Shares if the Company fails
to complete a Business Combination within the Combination Period. However, if the initial stockholders acquire Public Shares in or after
the Initial Public Offering, they will be entitled to liquidating distributions from the Trust Account with respect to such Public Shares
if the Company fails to complete a Business Combination within the Combination Period. The underwriters agreed to waive their rights to
the deferred underwriting commission (see Note 5) held in the Trust Account in the event the Company does not complete a Business Combination
within the Combination Period and, in such event, such amounts will be included with the other funds held in the Trust Account that will
be available to fund the redemption of the Public Shares. In the event of such distribution, it is possible that the per share value
of the residual assets remaining available for distribution (including Trust Account assets) will be only $10.20. In order to protect
the amounts held in the Trust Account, the Sponsor has agreed to be liable to the Company if and to the extent any claims by a third party
(except for the Company’s independent registered public accounting firm) for services rendered or products sold to the Company,
or a prospective target business with which the Company has entered into a letter of intent, confidentiality or other similar agreement
or business combination agreement (a “Target”), reduce the amount of funds in the Trust Account to below the lesser of (i)
$10.20 per Public Share and (ii) the actual amount per Public Share held in the Trust Account as of the date of the liquidation of
the Trust Account, if less than $10.20 per Public Share due to reductions in the value of the trust assets, less taxes payable, provided
that such liability will not apply to any claims by a third party or Target that executed a waiver of any and all rights to the monies
held in the Trust Account (whether or not such waiver is enforceable) not will it apply to any claims under the Company’s indemnity
of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the “Securities Act”). The Company will seek to reduce the possibility that the Sponsor will have to indemnify
the Trust Account due to claims of creditors by endeavoring to have all vendors, service providers, prospective target businesses or other
entities with which the Company does business, execute agreements with the Company waiving any right, title, interest or claim of any
kind in or to monies held in the Trust Account.
Going Concern
As of June 30, 2021, the
Company had approximately $225,000 in cash and working capital deficit of approximately $650,000.
The Company’s liquidity
needs prior to the consummation of the Initial Public Offering were satisfied through the payment $25,000 from the Sponsor to cover
certain offering costs on behalf of the Company in exchange for issuance of the Founders Shares (as defined in Note 4), and a loan from
the Sponsor of approximately $157,000 under the Note (as defined in Note 4). The Company repaid the Note in full on December 17,
2020. Subsequent to the consummation of the Initial Public Offering, the Company’s liquidity has been satisfied through the net
proceeds from the consummation of the Initial Public Offering and the Private Placement held outside of the Trust Account.
In connection with the Company’s
assessment of going concern considerations in accordance with FASB ASC Topic 205-40, “Basis of Presentation – Going Concern,”
management has determined that the anticipated cash requirements in the next twelve months raise substantial doubt about the Company’s
ability to continue as a going concern until the earlier of the consummation of the Business Combination or the date the Company is required
to liquidate, June 17, 2022. The unaudited condensed consolidated financial statements do not include any adjustment that might be necessary
if the Company is unable to continue as a going concern.
COVID-19 Impact
Management is currently evaluating
the impact of the COVID-19 pandemic on the industry and has concluded that while it is reasonably possible that the virus could have
a negative effect on the Company’s financial position, results of its operations and/or search for a target company, the specific
impact is not readily determinable as of the date of these unaudited condensed consolidated financial statements. The unaudited condensed
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted
in the United States (“U.S. GAAP”) for interim financial information and Article 8 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal
accruals) considered for a fair presentation have been included. Operating results for the three and six months ended June 30, 2021 are
not necessarily indicative of the results that may be expected for the year ended December 31, 2021.
The accompanying consolidated
financial statements comprise the Company and its wholly-owned subsidiary. As of June 30, 2021 and for the three and six month
ended June 30, 2021, the wholly-owned subsidiary has had no activity.
Emerging Growth Company
The Company is an “emerging
growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of
2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable
to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the
independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure
obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding
a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1)
of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until
private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class
of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS
Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that
apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected not to opt out of such
extended transition period, which means that when a standard is issued or revised and it has different application dates for public or
private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt
the new or revised standard. This may make comparison of the Company’s financial statements with another public company that is
neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult
or impossible because of the potential differences in accounting standards used.
Proposed Business Combination
On April 27, 2021, the Company
entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Blue Water Merger Sub Corp., a Delaware corporation
(the “Merger Sub”) and wholly-owned subsidiary of the Company, and Clarus Therapeutics, Inc. a Delaware corporation (“Clarus”).
Pursuant to the Merger Agreement,
subject to the terms and conditions set forth therein, upon the consummation of the transactions contemplated by the Merger Agreement
(the “Closing”), Merger Sub will merge with and into Clarus (the “Merger” and, together with the other transactions
contemplated by the Merger Agreement, the “Transactions”), with Clarus continuing as the surviving corporation in the Merger
and a wholly-owned subsidiary of the Company. In the Merger, based on existing Clarus share preference and convertible debtholder rights, (i)
certain shares of Clarus preferred stock issued and outstanding immediately prior to the effective time of the Merger (the “Effective
Time”) will be canceled and converted into the right to receive a portion of the Merger Consideration (as defined below), (ii) all
other shares of Clarus capital stock, and all outstanding options under the Company’s equity incentive plan to purchase any capital
stock that have not been exercised prior to the Effective Time, will be canceled, retired and terminated without any consideration or
any liability to Clarus with respect thereto, and (iii) certain convertible and non-convertible promissory notes of the Company outstanding
as of the Closing will be canceled and converted into, or exchanged for, the right to receive a portion of the Merger Consideration.
The aggregate merger consideration
to be paid pursuant to the Merger Agreement to Clarus securityholders as of immediately prior to the Effective Time (“Clarus Securityholders”)
will be a number of shares of Company Class A Common Stock equal to (the “Merger Consideration”): (A) (i) $198,184,295.43,
plus (or minus) the estimated indebtedness of Clarus as of the Closing, net of its cash and cash equivalents (“Closing Net Indebtedness”),
divided by (ii) $10.20. minus 1,500,000 shares of Company Class A Common Stock (the “2025 Note Exchange Shares”) issuable
to the holders of certain non-convertible promissory notes of Clarus in exchange for $10 million of the aggregate principal amount of
such notes and other amendments to the terms of the remaining indebtedness pursuant to the Transaction Support Agreement; plus (B) the
2025 Note Exchange Shares, plus (C) (i) the outstanding balance (principal and interest) at Closing of certain convertible and non-convertible
promissory notes of Clarus issued between signing of the Merger Agreement and Closing, divided by (ii) $10.00, other than any such non-convertible
promissory notes that the Company elects in its discretion to pay off at Closing. The Merger Consideration to be paid to Clarus Securityholders
will be paid solely by the delivery of new shares of Company Class A Common Stock. The Closing Net Indebtedness (and the resulting Merger
Consideration) is based solely on estimates determined shortly prior to the Closing and is not subject to any post-Closing true-up or
adjustment. The Merger Consideration will be allocated among Clarus Securityholders as determined by Clarus shortly prior to the Closing
based on existing share preference and convertible debtholder rights.
Note 2—Summary of Significant Accounting
Policies
Use of Estimates
The preparation of the unaudited
condensed consolidated financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the balance sheet. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all
short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company had no cash
equivalents as of June 30, 2021 and December 31, 2020 in its operating cash account.
Investments Held in Trust Account
Upon the closing of the Initial
Public Offering and the Private Placement, $58.7 million of the net proceeds of the sale of the Units in the Initial Public
Offering and the Private Placement were placed in the Trust Account and invested in money market funds meeting certain conditions
under Rule 2a-7 promulgated under the Investment Company Act which invest only in direct U.S. government treasury obligations.
All of the Company’s investments held in the Trust Account are classified as trading securities. Trading securities are presented
on the unaudited condensed consolidated balance sheet at fair value at the end of each reporting period. Gains and losses resulting from
the change in fair value of these securities is included in net gain on investments, dividends and interest held in Trust Account in the
accompanying statement of operations. The estimated fair values of investments held in the Trust Account are determined using available
market information.
Concentration of Credit Risk
Financial instruments that
potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which, at times,
may exceed the Federal Depository Insurance Coverage limit of $250,000, and investments held in Trust Account. As of June 30, 2021, the
Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.
Fair Value of Financial Instruments
The fair value of the Company’s
assets and liabilities, which qualify as financial instruments under the FASB ASC Topic 820, “Fair Value Measurements” approximates
the carrying amounts represented in the unaudited condensed consolidated balance sheet.
Fair Value Measurements
Fair value is defined as
the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants
at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority
to unobservable inputs (Level 3 measurements). These tiers include:
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Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
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●
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Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
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●
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Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
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In some circumstances, the
inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair
value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the
fair value measurement.
Derivative warrant liabilities
The Company does not use
derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial
instruments, including issued stock purchase warrants, to determine if such instruments are liabilities, derivatives or contain features
that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815 Derivatives and Hedging, (“ASC 815”).
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed
at the end of each reporting period.
The warrants issued in the
Initial Public Offering (the “Public Warrants”) and the Private Placement Warrants are recognized as derivative liabilities
in accordance with ASC 815. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts the instruments
to fair value at each reporting period. The liabilities are subject to re-measurement at each balance sheet date until exercised, and
any change in fair value is recognized in the Company’s statement of operations. The fair value of warrants issued in connection
with the Initial Public Offering were initially measured at fair value using a Monte Carlo simulation model and have subsequently been
measured based on the listed market price of such warrants. The fair value of the Private Placement warrants have been estimated using
a modified Monte Carlo simulation model at inception and subsequently at each measurement date using the Black-Scholes model.
Offering Costs Associated with the Initial
Public Offering
Offering costs consist of
legal, accounting, underwriting fees and other costs incurred that were directly related to the Initial Public Offering and were charged
to stockholders’ equity or written off to the statement of operations upon the completion of the Initial Public Offering. The portion
of the offering costs related to the issuance of the public and private warrants was written off to the statement of operations as a financing
costs – warrant liabilities.
Class A Common Stock Subject to Possible
Redemption
The Company accounts for
its Class A Common Stock subject to possible redemption in accordance with the guidance in FASB ASC Topic 480 “Distinguishing
Liabilities from Equity.” Class A Common Stock subject to mandatory redemption (if any) is classified as liability instruments
and are measured at fair value. Conditionally redeemable Class A Common Stock (including Class A Common Stock that features
redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not
solely within the Company’s control) are classified as temporary equity. At all other times, Class A Common Stock is classified
as stockholders’ equity. The Company’s Class A Common Stock feature certain redemption rights that are considered to be outside
of the Company’s control and subject to the occurrence of uncertain future events. Accordingly, at June 30, 2021 and December 31,
2020, 4,254,020 and 3,464,860 shares of Class A Common Stock, respectively, subject to possible redemption is
presented at redemption value as temporary equity, outside of the stockholders’ equity section of the Company’s unaudited
condensed consolidated balance sheet.
Income Taxes
The Company follows the asset
and liability method of accounting for income taxes under FASB ASC Topic 740, “Income Taxes.” Deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment
date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. As of
June 30, 2021, the Company has aggregate deferred tax assets of approximately $4,100,000 and has recognized a full valuation allowance
against the deferred tax assets.
FASB ASC Topic 740 prescribes
a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained
upon examination by taxing authorities. There were no unrecognized tax benefits as of June 30, 2021. The Company recognizes accrued interest
and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties
as of June 30, 2021. The Company is currently not aware of any issues under review that could result in significant payments, accruals
or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.
Net Income (Loss) Per Ordinary Share
Net income (loss) per share
is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. The Company
has not considered the effect of the warrants sold in the Public Offering and Private Placement to purchase an aggregate of 9,195,000 shares
in the calculation of diluted loss per share, since the exercise of the warrants are contingent upon the occurrence of future events and
the inclusion of such warrants would be ant- dilutive.
The Company’s statement
of operations includes a presentation of income (loss) per share for Redeemable Class A Common Stock in a manner similar to the two-class
method of income (loss) per share. Net income per common share, basic and diluted, for Redeemable Class A Common Stock is calculated by
dividing the proportionate share of income or loss on marketable securities held by the Trust Account, net of applicable franchise and
income taxes, by the weighted average number of Common stock subject to possible redemption outstanding since original issuance.
Net income per share, basic
and diluted, for Non-Redeemable Class A and Class B Common Stock is calculated by dividing the net loss, adjusted for income or loss on
marketable securities attributable to Redeemable Class A Common Stock, by the weighted average number of non-redeemable common stock outstanding
for the period.
Non-Redeemable Class A and
Class B Common Stock includes Founder Shares and non-redeemable shares of common stock as these shares do not have any redemption features.
Non-Redeemable Class A and Class B Common Stock participates in the income or loss on marketable securities based on non-redeemable common
stock shares’ proportionate interest.
Accordingly, basic and diluted
income per common share is calculated as follows for the three and six months ended June 30, 2021:
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For the
three months
ended
June 30,
2021
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For the
six months
ended
June 30,
2021
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For the
period
from
May 22,
2020
(inception)
through
June 30,
2020
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Class A Common stock subject to possible redemption
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|
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|
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Numerator: Earnings allocable to Common stock subject to possible redemption
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|
|
|
|
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|
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Income from investments held in Trust Account
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$
|
1,082
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|
|
$
|
2,152
|
|
|
$
|
-
|
|
|
Less: Company’s portion available to be withdrawn to pay taxes
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(1,082
|
)
|
|
|
(2,152
|
)
|
|
|
-
|
|
|
Net income attributable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Denominator: Weighted average Class A common stock subject to possible redemption
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|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
|
|
4,508,659
|
|
|
|
3,995,410
|
|
|
|
-
|
|
|
Basic and diluted net income per share
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Redeemable Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Net (Loss) income minus Net Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,597,315
|
)
|
|
$
|
8,049,432
|
|
|
$
|
(761
|
)
|
|
Net income allocable to Class A common stock subject to possible redemption
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Non-redeemable net (loss) income
|
|
$
|
(2,597,315
|
)
|
|
$
|
8,049,432
|
|
|
$
|
(761
|
)
|
|
Denominator: weighted average Non-redeemable common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding, Non-redeemable common stock
|
|
|
4,456,306
|
|
|
|
4,114,324
|
|
|
|
1,250,000
|
|
|
Basic and diluted net income per share, Non-redeemable common stock
|
|
$
|
(0.58
|
)
|
|
$
|
1.96
|
|
|
$
|
-
|
|
Recent Accounting Standards
In August 2020, the FASB
issued Accounting Standards Update (“ASU”) No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments
and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies accounting for convertible instruments
by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required
for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation
in certain areas. The Company adopted ASU 2020-06 on January 1, 2021. Adoption of the ASU did not impact the Company’s financial
position, results of operations or cash flows.
The Company’s management
does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, that would have a
material effect on the Company’s condensed consolidated financial statements.
Note 3—Initial Public Offering
On December 17, 2020,
the Company consummated its Initial Public Offering of 5,750,000 Units, including 750,000 Over-Allotment Units,
at $10.00 per Unit, generating gross proceeds of $57.5 million, and incurring offering costs of approximately $3.7 million,
of which approximately $2.0 million was for deferred underwriting commissions.
Each Unit consists of one
share of Class A Common Stock, and one redeemable warrant (each, a “Public Warrant”). Each Public Warrant entitles
the holder to purchase one share of Class A Common Stock at a price of $11.50 per share, subject to adjustment (see Note 6).
Note 4—Related Party Transactions
Founder Shares
On June 30, 2020, the Sponsor
purchased 1,437,500 shares of the Company’s Class B common stock, par value $0.0001 per share, (the “Founder
Shares”) for an aggregate price of $25,000. The initial stockholders agreed to forfeit up to 187,500 Founder Shares to
the extent that the over-allotment option was not exercised in full by the underwriters, so that the Founder Shares would represent 20%
of the Company’s issued and outstanding shares after the Initial Public Offering (excluding the Representative Shares as defined
below). The underwriter exercised its over-allotment option in full on December 17, 2020; thus, the 187,500 Founder Shares were
no longer subject to forfeiture.
The initial stockholders
agreed, subject to limited exceptions, not to transfer, assign or sell any of the Founder Shares until the earlier to occur of: (A) 180
days after the completion of the initial Business Combination or (B) subsequent to the initial Business Combination, the date on which
the Company completes a liquidation, merger, capital stock exchange or other similar transaction that results in all of the Public Stockholders
having the right to exchange their shares of common stock for cash, securities or other property. Any permitted transferees will be subject
to the same restrictions and other agreements of our initial stockholders with respect to any Founder Shares.
Private Placement Warrants
Simultaneously with the closing
of the Initial Public Offering, the Company consummated the Private Placement of 3,445,000 Private Placement Warrants at a price
of $1.00 per Private Placement Warrant to the Sponsor, generating proceeds of approximately $3.4 million. The initial fair value
of the Private Placement Warrants was estimated to be $1.849 per warrant, determined using a binomial Monte-Carlo simulation. Key inputs
to the simulation are disclosed in Note 9, below. The excess initial fair value of $0.849 per warrant above the Sponsor’s purchase
price aggregated approximately $2.9 million, which was attributed as one-time compensation to the Sponsor and recognized in general and
administrative expenses in the statement of operations.
Each Private Placement Warrant
is exercisable for one share of Class A Common Stock at a price of $11.50 per share. A portion of the proceeds from the
sale of the Private Placement Warrants to the Sponsor was added to the proceeds from the Initial Public Offering held in the Trust Account.
If the Company does not complete a Business Combination within the Combination Period, the Private Placement Warrants will expire worthless.
The Private Placement Warrants will be non-redeemable for cash and exercisable on a cashless basis so long as they are
held by the Sponsor or their permitted transferees.
The Sponsor and the Company’s
officers and directors agreed, subject to limited exceptions, not to transfer, assign or sell any of their Private Placement Warrants
until the completion of the initial Business Combination.
Related Party Loans
On June 30, 2020, as
amended on October 20, 2020, an affiliate of the Sponsor agreed to loan the Company an aggregate of up to $300,000 to cover
expenses related to the Initial Public Offering pursuant to a promissory note (the “Note”). This loan was non-interest bearing and
payable upon the completion of the Initial Public Offering. The Company borrowed approximately $157,000 under the Note and fully
repaid the Note on December 17, 2020.
In addition, in order
to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of
the Company’s officers and directors may, but are not obligated to, loan the Company funds as may be required (“Working
Capital Loans”). If the Company completes a Business Combination, the Company would repay the Working Capital Loans out of the
proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans would be repaid only out of funds held
outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of proceeds held
outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the
Working Capital Loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination or, at the
lenders’ discretion, up to $1.5 million of such Working Capital Loans may be convertible into warrants of the post
Business Combination entity at a price of $1.00 per warrant. The warrants would be identical to the Private Placement Warrants.
Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and no written agreements exist
with respect to such loans. To date, the Company had no borrowings under the Working Capital Loans.
As discussed in Note 1,
the Company may extend the period of time to consummate a Business Combination up to two times, each by an additional three months (for
a total of 18 months to complete a Business Combination). In order to extend the time available for the Company to consummate
a Business Combination, the Sponsor or its affiliates or designees must deposit into the Trust Account $500,000, or $575,000 if the underwriters’
over-allotment option is exercised in full ($0.10 per Public Share in either case), on or prior to the date of the applicable deadline,
for each three-month extension (each, an “Extension Loan”). Any such payments would be made in the form of a non-interest bearing,
unsecured promissory note. Such notes would either be paid upon consummation of a Business Combination, or, at the relevant insiders’
discretion, converted upon consummation of a Business Combination into additional Private Warrants at a price of $1.00 per Private Placement
Warrant. The Sponsor and its affiliates or designees are not obligated to fund the Trust Account to extend the time for the Company
to complete a Business Combination.
Administrative Services Agreement
Commencing on the date that
the Company’s securities were first listed on Nasdaq until the earlier of the Company’s consummation of a Business Combination
or the Company’s liquidation, the Company agreed to pay the Sponsor a total of $10,000 per month for office space, administrative
and support services. The Company incurred approximately $30,000 and $60,000 in expenses in connection with such services during
the three and six months ended June 30, 2021 as reflected in the accompanying statement of operations. As of June 30, 2021, the Company
had $60,000 in due to related party in connection with such services.
Note 5—Commitments & Contingencies
Registration Rights
The holders of Founder Shares,
Private Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans and Extension Loans, if any, (and
any shares of Class A Common Stock issuable upon the exercise of the Private Placement Warrants and warrants that may be issued upon
conversion of Working Capital Loans and Extension Loans and upon conversion of the Founder Shares) were entitled to registration rights
pursuant to a registration rights agreement signed upon the consummation of the Initial Public Offering. These holders were entitled to
certain demand and “piggyback” registration rights. The Company will bear the expenses incurred in connection with the filing
of any such registration statements.
Underwriting Agreement
The underwriters were entitled
to underwriting discounts of: (i) two percent (2.0%) of the gross proceeds of the Initial Public Offering, or approximately $1.2 million
in the aggregate, paid upon the closing of the Initial Public Offering; (ii) one percent (1.0%) of the gross proceeds of the Initial Public
Offering issued in the form of Class A Common Stock (the “Representative Shares”), or 57,500 Class A Common Stock, at the
closing of the Initial Public Offering; (iii) upon the consummation of a Business Combination, a deferred underwriting discount of three
and a half percent (3.5%) of the gross proceeds of the Initial Public Offering, or approximately $2.0 million in the aggregate. The
deferred fee will become payable to the underwriters from the amounts held in the Trust Account solely in the event that the Company completes
a Business Combination, subject to the terms of the underwriting agreement.
Right of First Refusal
The Company granted the underwriters
a right of first refusal to act as lead-left book running manager for any and all future private or public equity, equity-linked,
convertible and debt offerings as well as exclusive strategic advisor in connection with any subsequent merger or acquisition during such
period, or any successor to or any subsidiary of the Company for a period of 16 months from the closing of a Business Combination.
Note 6—Derivative Warrant Liabilities
The Public Warrants will
become exercisable on the later of (a) the completion of a Business Combination or (b) 12 months from the closing of the Initial
Public Offering; provided in each case that the Company has an effective registration statement under the Securities Act covering the
shares of Class A Common Stock issuable upon exercise of the Public Warrants and a current prospectus relating to them is available
(or the Company permits holders to exercise their Public Warrants on a cashless basis and such cashless exercise is exempt from registration
under the Securities Act). The Company has agreed that as soon as practicable, but in no event later than 15 business days after the closing
of the initial Business Combination, the Company will use its best efforts to file with the SEC and have an effective registration statement
covering the shares of Class A Common Stock issuable upon exercise of the warrants and to maintain a current prospectus relating
to those shares of Class A Common Stock until the warrants expire or are redeemed. If a registration statement covering the Class A
Common Stock issuable upon exercise of the warrants is not effective by the 60th business day after the closing of the initial Business
Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company
will have failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with
Section 3(a)(9) of the Securities Act or another exemption. Notwithstanding the above, if the Company’s shares of Class A
Common Stock are at the time of any exercise of a warrant not listed on a national securities exchange such that they satisfy the definition
of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders
of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the
Securities Act and, in the event the Company so elect, it will not be required to file or maintain in effect a registration statement,
and in the event the Company does not so elect, it will use our best efforts to register or qualify the shares under applicable blue sky
laws to the extent an exemption is not available.
The warrants have an exercise
price of $11.50 per share, subject to adjustments, and will expire five years after the completion of a Business Combination or earlier
upon redemption or liquidation. In addition, if (x) the Company issues additional shares of Class A Common Stock or equity-linked securities
for capital raising purposes in connection with the closing of the initial Business Combination at an issue price or effective issue price
of less than $9.20 per share of Class A common stock (with such issue price or effective issue price to be determined in good faith
by the board of directors and, in the case of any such issuance to the Sponsor or its affiliates, without taking into account any Founder
Shares held by the Sponsor or such affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y) the
aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available
for the funding of the initial Business Combination on the date of the consummation of the initial Business Combination (net of redemptions),
and (z) the volume weighted average trading price of the Class A common stock during the 20 trading day period starting on the trading
day prior to the day on which the Company consummates its initial Business Combination (such price, the “Market Value”) is
below $9.20 per share, then the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of
the greater of the Market Value and the Newly Issued Price, and the $18.00 per share redemption trigger price described below will
be adjusted (to the nearest cent) to be equal to 180% of the greater of the Market Value and the Newly Issued Price.
The Private Placement Warrants
are identical to the Public Warrants, except that the Private Placement Warrants and the shares of Class A Common Stock issuable
upon exercise of the Private Placement Warrants will not be transferable, assignable or salable until the completion of a Business Combination,
subject to certain limited exceptions. Additionally, the Private Placement Warrants will be non-redeemable so long as they
are held by the Sponsor or their permitted transferees. If the Private Placement Warrants are held by someone other than the Sponsor or
their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same
basis as the Public Warrants.
Once the warrants become
exercisable, the Company may redeem the outstanding warrants for cash (except as described herein with respect to the Private Placement
Warrants):
|
|
●
|
at a price of $0.01 per warrant;
|
|
|
●
|
upon a minimum of 30 days’ prior written notice of redemption; and
|
|
|
●
|
if and only if, the last sale price of Class A Common Stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders.
|
If the Company calls the
Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do
so on a “cashless basis,” as described in the warrant agreement.
In no event will the Company
be required to net cash settle any warrant. If the Company is unable to complete a Business Combination within the Combination Period
and the Company liquidates the funds held in the Trust Account, holders of warrants will not receive any of such funds with respect to
their warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with the respect
to such warrants. Accordingly, the warrants may expire worthless
Note 7—Stockholders’ Equity
Class A Common
Stock — The Company is authorized to issue 50,000,000 shares of Class A Common Stock with a par value
of $0.0001 per share. As of June 30, 2021 and December 31, 2020, there were 5,807,500 shares of Class A common
stock issued or outstanding, including 4,254,020 and 3,464,860 shares of Class A Common Stock subject to possible
redemption, respectively.
Class B Common
Stock — The Company is authorized to issue 2,000,000 shares of Class B Common Stock with a par value
of $0.0001 per share. On June 30, 2020, the Company issued 1,437,500 shares of Class B Common Stock to the Sponsor.
Of these, up to 187,500 shares of Class B Common Stock were subject to forfeiture to the Company by the initial stockholders
for no consideration to the extent that the underwriters’ over-allotment option was not exercised in full or in part, so that
the initial stockholders would collectively own 20% of the Company’s issued and outstanding Common Stock after the Initial
Public Offering (excluding the Representative Shares). The underwriter exercised its over-allotment option in full on December 17, 2020;
thus, the 187,500 Founder Shares were no longer subject to forfeiture. As of June 30, 2021 and December 31, 2020, there
were 1,437,500 shares of Class B Common Stock issued or outstanding.
Common stockholders of record
are entitled to one vote for each share held on all matters to be voted on by stockholders. Holders of record of the Class A Common Stock
and holders of record of the Class B Common Stock will vote together as a single class on all matters submitted to a vote of the stockholders,
with each share of Common Stock entitling the holder to one vote except as required by law.
The Class B Common Stock
will automatically convert into Class A Common Stock at the closing of the initial Business Combination on a one-for-one basis,
subject to adjustment for stock splits, stock dividends, reorganizations, recapitalizations and the like, and subject to further adjustment
as provided herein. In the case that additional shares of Class A Common Stock or equity-linked securities are issued or deemed
issued in connection with the initial Business Combination, the number of shares of Class A Common Stock issuable upon conversion of all
Founder Shares will equal, in the aggregate, on an as-converted basis, 20% of the sum of the total number of all shares of common
stock outstanding upon the completion of the Initial Public Offering, plus the total number of shares of Class A Common Stock issued,
or deemed issued or issuable upon conversion or exercise of any equity-linked securities or rights issued or deemed issued, by the
Company in connection with or in relation to the consummation of the initial Business Combination, excluding the Representative Shares
and any shares of Class A Common Stock or equity-linked securities exercisable for or convertible into shares of Class A Common Stock
issued, or to be issued, to any seller in the initial Business Combination and any private placement-equivalent warrants issued to
the Sponsor, officers or directors upon conversion of Working Capital Loans; provided that such conversion of Founder Shares will never
occur on a less than one for one basis.
Preferred Stock —
The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.0001 per share, with such designations,
voting and other rights and preferences as may be determined from time to time by the Company’s board of directors. As of June 30,
2021 and December 31, 2020, there were no shares of preferred stock issued or outstanding.
Note 8—Fair Value Measurements
The following table presents
information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2021
and December 31, 2020 and indicates the fair value hierarchy of the valuation techniques that the Company utilized to determine such fair
value:
June 30, 2021
|
Description
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Other
Unobservable
Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Investments held in Trust Account
|
|
$
|
58,652,957
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrant liabilities - public warrants
|
|
$
|
4,082,500
|
|
|
|
|
|
|
|
|
|
|
Derivative warrant liabilities - private warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,169,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Description
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Other
Unobservable Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Investments held in Trust Account
|
|
$
|
58,650,048
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liabilities – public warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,005,000
|
|
|
Warrant Liabilities – private warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,693,635
|
|
Transfers to/from Levels
1, 2, and 3 are recognized at the beginning of the reporting period. The estimated fair value of the Public Warrants transferred from
a Level 3 measurement to a Level 1 fair value measurement in February 2021, upon trading of the Public Warrants in an active market. There
were no other transfers between levels for the six months ended June 30, 2021.
Level 1 assets include investments
in U.S. Treasury securities and money market funds that invest solely in U.S. Treasury securities. The Company uses inputs such as actual
trade data, benchmark yields, quoted market prices from dealers or brokers, and other similar sources to determine the fair value of its
investments.
The initial fair value of
the Public Warrants issued in connection with the Public Offering and the fair value of the Private Placement Warrants have been estimated
using a Monte-Carlo simulation. The fair value of the Public Warrants has subsequently been determined using listed prices in an active
market for such warrants. The changes in fair value are recognized in the statement of operations. For the three and six months ended
June 30, 2021, the Company recognized a charge to the statement of operations resulting from the change in the fair value of liabilities
of a loss of $1.7 million and income of $9.4 million, respectively, presented as change in fair value of derivative warrant
liabilities on the accompanying statement of operations.
The change in the level 3
fair value of the derivative warrant liabilities for the three and six months ended June 30, 2021 is summarized as follows:
|
|
|
|
|
|
Warrant liabilities at December 31, 2020
|
|
$
|
16,698,635
|
|
|
Change in fair value of warrant liabilities
|
|
|
(11,150,880
|
)
|
|
Transfer to level 1
|
|
|
(3,277,500
|
)
|
|
Warrant liabilities at March 31, 2021
|
|
$
|
2,270,255
|
|
|
Change in fair value of warrant liabilities
|
|
|
899,140
|
|
|
Warrant liabilities at June 30, 2021
|
|
$
|
3,169,395
|
|
The estimated fair value
of the Public Warrants, prior to being traded in an active market, and of the Private Placement Warrants is determined using Level 3 inputs.
Inherent in a Monte Carlo simulation are assumptions related to expected stock-price volatility, expected life, risk-free interest rate
and dividend yield. The Company estimates the volatility of its Common Stock based on historical volatility of select peer companies that
matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve
on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed
to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates
remaining at zero.
The following table provides
quantitative information regarding Level 3 fair value measurements inputs as their measurement dates:
|
|
|
As of
June 30,
2021
|
|
|
As of
December 31,
2020
|
|
|
Strike price
|
|
$
|
11.50
|
|
|
$
|
11.50
|
|
|
Contractual term (years)
|
|
|
5.0
|
|
|
|
5.8
|
|
|
Volatility
|
|
|
6.00
|
%
|
|
|
10.00
|
%
|
|
Risk-free interest rate
|
|
|
1.00
|
%
|
|
|
0.48
|
%
|
|
Dividend yield (per share)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Note 9—Subsequent Events
The Company evaluates subsequent
events and transactions that occur after the balance sheet date up to the date that the financial statements were issued. Based upon this
review, the Company did not identify subsequent events that would have required adjustment or disclosure in the consolidated financial
statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the Stockholders and Board of Directors of
Blue
Water Acquisition Corp.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheet of Blue Water Acquisition Corp. (the “Company”) as of December 31, 2020, the
related statements of operations, changes in stockholders’ equity and cash flows for the period from May 22, 2020 (inception) through
December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of
its operations and its cash flows for the period from May 22, 2020 (inception) through December 31, 2020, in conformity with accounting
principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company’s anticipated
cash requirements in the next twelve months raise substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit,
we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides
a reasonable basis for our opinion.
/s/
Marcum llp
Marcum
llp
We
have served as the Company’s auditor since 2020.
New
York, NY
May
6, 2021
BLUE
WATER ACQUISITION CORP.
BALANCE
SHEET
December
31, 2020
|
Assets:
|
|
|
|
|
Current
assets
|
|
|
|
|
Cash
|
|
$
|
655,371
|
|
|
Prepaid
expenses
|
|
|
168,141
|
|
|
Total
Current Assets
|
|
|
823,512
|
|
|
Investments
held in Trust Account
|
|
|
58,650,048
|
|
|
Total
Assets
|
|
$
|
59,473,560
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity:
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
178,645
|
|
|
Accrued
expenses
|
|
|
70,000
|
|
|
Accrued
taxes
|
|
|
172,200
|
|
|
Total
current liabilities
|
|
|
420,845
|
|
|
Deferred
underwriting commissions
|
|
|
2,012,500
|
|
|
Derivative
warrant liabilities
|
|
|
16,698,635
|
|
|
Total
Liabilities
|
|
|
19,131,980
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
Class
A common stock, $0.0001 par value; 3,464,860 shares subject to possible redemption at $10.20 per share
|
|
|
35,341,572
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
Preferred
stock, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding
|
|
|
-
|
|
|
Class
A common stock, $0.0001 par value; 50,000,000 shares authorized; 2,342,640 shares issued and outstanding (excluding 3,464,860 shares
subject to possible redemption)
|
|
|
234
|
|
|
Class
B common stock, $0.0001 par value; 2,000,000 shares authorized; 1,437,500 shares issued and outstanding
|
|
|
144
|
|
|
Additional
paid-in capital
|
|
|
9,717,651
|
|
|
Accumulated
deficit
|
|
|
(4,718,021
|
)
|
|
Total
stockholders’ equity
|
|
|
5,000,008
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
59,473,560
|
|
The
accompanying notes are an integral part of these financial statements.
BLUE
WATER ACQUISITION CORP.
STATEMENT
OF OPERATIONS
FOR
THE PERIOD FROM MAY 22, 2020 (INCEPTION) THROUGH DECEMBER 31, 2020
|
General
and administrative expenses
|
|
$
|
2,978,263
|
|
|
Other
taxes
|
|
|
172,200
|
|
|
Loss
from operations
|
|
|
(3,150,463
|
)
|
|
Gain
on marketable securities held in Trust Account
|
|
|
48
|
|
|
Issuance
costs – warrant liabilities
|
|
|
(645,776
|
)
|
|
Change
in fair value of derivative warrant liabilities
|
|
|
(921,830
|
)
|
|
Net
loss available to Sponsor
|
|
$
|
(4,718,021
|
)
|
|
|
|
|
|
|
|
Weighted
average shares outstanding of common stock subject to redemption, basic and diluted
|
|
|
3,556,309
|
|
|
Basic
and diluted net income per share, common stock subject to redemption
|
|
$
|
-
|
|
|
Weighted
average shares outstanding of common stock, basic and diluted
|
|
|
1,447,732
|
|
|
Basic
and diluted net loss available to Sponsor per share, common stock
|
|
$
|
(3.26
|
)
|
The
accompanying notes are an integral part of these financial statements.
BLUE
WATER ACQUISITION CORP.
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE PERIOD FROM MAY 22, 2020 (INCEPTION) THROUGH DECEMBER 31, 2020
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance
- May 22, 2020 (inception)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Issuance
of Class B common stock to related party
|
|
|
-
|
|
|
|
-
|
|
|
|
1,437,500
|
|
|
|
144
|
|
|
|
24,856
|
|
|
|
-
|
|
|
|
25,000
|
|
|
Sale
of units in initial public offering, gross
|
|
|
5,750,000
|
|
|
|
575
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,029,425
|
|
|
|
-
|
|
|
|
48,093,000
|
|
|
Offering
costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,058,399
|
)
|
|
|
-
|
|
|
|
(3,058,399
|
)
|
|
Issuance
of Class A common stock to the underwriters
|
|
|
57,500
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Common
stock subject to possible redemption
|
|
|
(3,464,860
|
)
|
|
|
(347
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(35,341,225
|
)
|
|
|
-
|
|
|
|
(35,341,572
|
)
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,718,021
|
)
|
|
|
(4,718,021
|
)
|
|
Balance
- December 31, 2020
|
|
|
2,342,640
|
|
|
$
|
234
|
|
|
|
1,437,500
|
|
|
$
|
144
|
|
|
$
|
9,717,651
|
|
|
$
|
(4,718,021
|
)
|
|
$
|
5,000,008
|
|
The
accompanying notes are an integral part of these financial statements.
BLUE
WATER ACQUISITION CORP.
STATEMENT
OF CASH FLOWS
FOR
THE PERIOD FROM MAY 22, 2020 (INCEPTION) THROUGH DECEMBER 31, 2020
|
Cash Flows from Operating Activities:
|
|
|
|
|
Net loss
|
|
$
|
(4,718,021
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
General and administrative expenses paid by related party through note payable
|
|
|
36,280
|
|
|
Compensation cost from issuance of derivative warrant liabilities – private warrants
|
|
|
2,924,805
|
|
|
Gain on marketable securities held in Trust Account
|
|
|
(48
|
)
|
|
Change in fair value of derivative warrant liabilities
|
|
|
921,830
|
|
|
Issuance costs – warrant liabilities
|
|
|
645,776
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Prepaid expenses
|
|
|
(168,141
|
)
|
|
Accounts payable
|
|
|
157,210
|
|
|
Accrued taxes
|
|
|
172,200
|
|
|
Net cash used in operating activities
|
|
|
(28,109
|
)
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
Cash deposited in Trust Account
|
|
|
(58,650,000
|
)
|
|
Net cash used in investing activities
|
|
|
(58,650,000
|
)
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
Repayment of note payable to related party
|
|
|
(157,480
|
)
|
|
Proceeds received from initial public offering, gross
|
|
|
57,500,000
|
|
|
Proceeds received from private placement
|
|
|
3,445,000
|
|
|
Offering costs paid
|
|
|
(1,454,040
|
)
|
|
Net cash provided by financing activities
|
|
|
59,333,480
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
655,371
|
|
|
Cash - beginning of the period
|
|
|
-
|
|
|
Cash - end of the period
|
|
$
|
655,371
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash activities:
|
|
|
|
|
|
Offering costs paid by related party in exchange for issuance of Class B common stock
|
|
$
|
25,000
|
|
|
Offering costs included in accounts payable
|
|
$
|
21,435
|
|
|
Offering costs included in accrued expenses
|
|
$
|
70,000
|
|
|
Offering costs paid by related party through note payable
|
|
$
|
121,200
|
|
|
Deferred underwriting commissions in connection with the initial public offering
|
|
$
|
2,012,500
|
|
|
Initial value of common stock subject to possible redemption
|
|
$
|
36,340,978
|
|
|
Change in value of common stock subject to possible redemption
|
|
$
|
(999,406
|
)
|
|
Issuance of Class A common stock to the underwriters
|
|
$
|
6
|
|
The
accompanying notes are an integral part of these financial statements.
BLUE
WATER ACQUISITION CORP.
NOTES
TO THESE FINANCIAL STATEMENTS
Note
1 — Description of Organization, Business Operations and Basis of Presentation
Blue
Water Acquisition Corp. (the “Company”) is a blank check company incorporated in Delaware on May 22, 2020. The
Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization
or similar business combination with one or more businesses (the “Business Combination”). The Company is an emerging
growth company and, as such, the Company is subject to all of the risks associated with emerging growth companies.
As
of December 31, 2020, the Company had not commenced any operations. All activity for the period from May 22, 2020 (inception)
through December 31, 2020 relates to the Company’s formation and the initial public offering (the “Initial Public
Offering”) described below. The Company will not generate any operating revenues until after the completion of its initial
Business Combination, at the earliest. The Company will generate non-operating income in the form of interest income
on cash and cash equivalents from the proceeds derived from the Initial Public Offering. The Company has selected December 31
as its fiscal year end.
The
Company’s sponsor is Blue Water Sponsor LLC, a Delaware limited liability company (the “Sponsor”). The
registration statement for the Company’s Initial Public Offering was declared effective on December 15, 2020. On December
17, 2020, the Company consummated its Initial Public Offering of 5,750,000 units (the “Units” and,
with respect to the Class A common stock included in the Units being offered, the “Public Shares”), including 750,000 additional
Units to cover over-allotments (the “Over-Allotment Units”), at $10.00 per Unit, generating gross proceeds of $57.5 million,
and incurring offering costs of approximately $3.7 million, of which approximately $2.0 million was for deferred underwriting
commissions (Note 5).
Simultaneously
with the closing of the Initial Public Offering, the Company consummated the private placement (“Private Placement”)
of 3,445,000 warrants (each, a “Private Placement Warrant” and collectively, the “Private Placement
Warrants”) at a price of $1.00 per Private Placement Warrant to the Sponsor, generating proceeds of approximately $3.4 million
(Note 4).
Upon
the closing of the Initial Public Offering and the Private Placement, approximately $58.7 million ($10.20 per Unit) of
the net proceeds of the Initial Public Offering and certain of the proceeds of the Private Placement was held in a trust
account (“Trust Account”) located in the United States with Continental Stock Transfer & Trust Company acting
as trustee, and will be invested only in U.S. “government securities” within the meaning of Section 2(a)(16) of the
Investment Company Act having a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated
under the Investment Company Act 1940, as amended (the “Investment Company Act”), which invest only in direct U.S.
government treasury obligations, as determined by the Company, until the earlier of: (i) the completion of a Business Combination
and (ii) the distribution of the Trust Account as described below.
The
Company’s management has broad discretion with respect to the specific application of the net proceeds of the Initial Public
Offering and the sale of Private Placement Warrants, although substantially all of the net proceeds are intended to be applied
generally toward consummating a Business Combination. There is no assurance that the Company will be able to complete a Business
Combination successfully. The Company must complete one or more initial Business Combinations having an aggregate fair market
value of at least 80% of the net assets held in the Trust Account (excluding the deferred underwriting commissions and taxes payable
and interest previously released for working capital purposes on the income earned on the Trust Account) at the time of the agreement
to enter into the initial Business Combination. However, the Company will only complete a Business Combination if the post-transaction company
owns or acquires 50% or more of the voting securities of the target or otherwise acquires a controlling interest in the target
sufficient for it not to be required to register as an investment company under the Investment Company Act.
The
Company will provide the holders (the “Public Stockholders”) of the Public Shares with the opportunity to redeem all
or a portion of their Public Shares upon the completion of a Business Combination either (i) in connection with a stockholder
meeting called to approve the Business Combination or (ii) by means of a tender offer. The decision as to whether the Company
will seek stockholder approval of a Business Combination or conduct a tender offer will be made by the Company, solely in its
discretion. The Public Stockholders will be entitled to redeem their Public Shares for a pro rata portion of the amount then held
in the Trust Account (initially anticipated to be $10.20 per Public Share). The per-share amount to be distributed
to Public Stockholders who redeem their Public Shares will not be reduced by the deferred underwriting commissions the Company
will pay to the underwriters (as discussed in Note 5). These Public Shares are recorded at a redemption value and classified as
temporary equity upon the completion of the Initial Public Offering in accordance with the Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.”
The Company will proceed with a Business Combination if a majority of the shares voted are voted in favor of the Business Combination.
The Company will not redeem the Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001.
If a stockholder vote is not required by law and the Company does not decide to hold a stockholder vote for business or other
legal reasons, the Company will, pursuant to its Certificate of Incorporation (the “Certificate of Incorporation”),
conduct the redemptions pursuant to the tender offer rules of the U.S. Securities and Exchange Commission (“SEC”)
and file tender offer documents with the SEC prior to completing a Business Combination. If, however, stockholder approval of
the transaction is required by law, or the Company decides to obtain stockholder approval for business or legal reasons, the Company
will offer to redeem shares in conjunction with a proxy solicitation pursuant to the proxy rules and not pursuant to the tender
offer rules. Additionally, each public stockholder may elect to redeem their Public Shares irrespective of whether they vote for
or against the proposed transaction. If the Company seeks stockholder approval in connection with a Business Combination, the
initial stockholders (as defined below) agreed to vote their Founder Shares (as defined below in Note 4) and any Public Shares
purchased during or after the Initial Public Offering in favor of a Business Combination. In addition, the initial stockholders
agreed to waive their redemption rights with respect to their Founder Shares and Public Shares in connection with the completion
of a Business Combination.
The
Certificate of Incorporation provided that a Public Stockholder, together with any affiliate of such stockholder or any other
person with whom such stockholder is acting in concert or as a “group” (as defined under Section 13 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)), will be restricted from redeeming its shares with respect
to more than an aggregate of 15% or more of the Public Shares, without the prior consent of the Company.
The
Sponsor and the Company’s officers and directors (the “initial stockholders”) agreed not to propose an amendment
to the Certificate of Incorporation to modify the substance or timing of the Company’s obligation to redeem 100% of the
Public Shares if the Company does not complete a Business Combination within the Combination Period (as defined below) or with
respect to any other material provisions relating to stockholders’ rights or pre-initial Business Combination
activity, unless the Company provides the Public Stockholders with the opportunity to redeem their Public Shares in conjunction
with any such amendment.
The
Company will have up to 12 months from the closing of the Initial Public Offering, or December 17, 2021, (or up to 18 months
from the consummation of the Initial Public Offering, or June 17, 2022, if the Company extends the period of time to consummate
a Business Combination) (the “Combination Period”) to complete a Business Combination. In order to extend the time
available for the Company to consummate a Business Combination, the Sponsor or its affiliate or designees must deposit into the
Trust Account $575,000 ($0.10 per Public Share), on or prior to the date of the applicable deadline, for each three-month extension.
If
the Company is unable to complete a Business Combination within the Combination Period, the Company will (i) cease all operations
except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter,
redeem the Public Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust
Account including interest earned on the funds held in the Trust Account and not previously released to the Company for working
capital purposes or to pay its taxes (less up to $50,000 of interest to pay dissolution expenses), divided by the number of then
outstanding Public Shares, which redemption will completely extinguish Public Stockholders’ rights as stockholders (including
the right to receive further liquidating distributions, if any), subject to applicable law, and (iii) as promptly as reasonably
possible following such redemption, subject to the approval of the remaining stockholders and the board of directors, dissolve
and liquidate, subject in each case to the Company’s obligations under Delaware law to provide for claims of creditors and
the requirements of other applicable law.
The
initial stockholders agreed to waive their rights to liquidating distributions from the Trust Account with respect to the Founder
Shares if the Company fails to complete a Business Combination within the Combination Period. However, if the initial stockholders
acquire Public Shares in or after the Initial Public Offering, they will be entitled to liquidating distributions from the Trust
Account with respect to such Public Shares if the Company fails to complete a Business Combination within the Combination Period.
The underwriters agreed to waive their rights to the deferred underwriting commission (see Note 5) held in the Trust Account in
the event the Company does not complete a Business Combination within in the Combination Period and, in such event, such amounts
will be included with the other funds held in the Trust Account that will be available to fund the redemption of the Public Shares.
In the event of such distribution, it is possible that the per share value of the residual assets remaining available for distribution
(including Trust Account assets) will be only $10.20. In order to protect the amounts held in the Trust Account, the Sponsor has
agreed to be liable to the Company if and to the extent any claims by a third party (except for the Company’s independent
registered public accounting firm) for services rendered or products sold to the Company, or a prospective target business with
which the Company has entered into a letter of intent, confidentiality or other similar agreement or business combination agreement
(a “Target”), reduce the amount of funds in the Trust Account to below the lesser of (i) $10.20 per Public Share and
(ii) the actual amount per Public Share held in the Trust Account as of the date of the liquidation of the Trust Account,
if less than $10.20 per Public Share due to reductions in the value of the trust assets, less taxes payable, provided that such
liability will not apply to any claims by a third party or Target that executed a waiver of any and all rights to the monies held
in the Trust Account (whether or not such waiver is enforceable) not will it apply to any claims under the Company’s indemnity
of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under the Securities Act
of 1933, as amended (the “Securities Act”). The Company will seek to reduce the possibility that the Sponsor will
have to indemnify the Trust Account due to claims of creditors by endeavoring to have all vendors, service providers, prospective
target businesses or other entities with which the Company does business, execute agreements with the Company waiving any right,
title, interest or claim of any kind in or to monies held in the Trust Account.
Going Concern
As of December 31, 2020, the
Company had approximately $655,000 in cash, and working capital of approximately $575,000.
The
Company’s liquidity needs prior to the consummation of the Initial Public Offering were satisfied through the payment $25,000
from the Sponsor to cover certain offering costs on behalf of the Company in exchange for issuance of the Founders Shares (as
defined in Note 4), and a loan from the Sponsor of approximately $157,000 under the Note (as defined in Note 4). The
Company repaid the Note in full on December 17, 2020. Subsequent to the consummation of the Initial Public Offering, the Company’s
liquidity has been satisfied through the net proceeds from the consummation of the Initial Public Offering and the Private Placement
held outside of the Trust Account.
In
connection with the Company’s assessment of going concern considerations in accordance with FASB ASC Topic 205-40, “Basis
of Presentation – Going Concern,” management has determined that the anticipated cash requirements in the next twelve months
raise substantial about the Company’s ability to continue as a going concern until the earlier of the consummation of the Business
Combination or the date the Company is required to liquidate, June 17, 2022. The financial statements do not include any adjustment that
might be necessary if the Company is unable to continue as a going concern.
COVID-19
Impact
Management
is currently evaluating the impact of the COVID-19 pandemic on the industry and has concluded that while it is reasonably
possible that the virus could have a negative effect on the Company’s financial position, results of its operations and/or
search for a target company, the specific impact is not readily determinable as of the date of these financial statements. The
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis
of Presentation
The
accompanying financial statements are presented in U.S. dollars in conformity with accounting principles generally accepted in
the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the SEC.
Emerging
Growth Company
The
Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the
Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not emerging growth companies including,
but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements
of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic
reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation
and stockholder approval of any golden parachute payments not previously approved.
Further,
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial
accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared
effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised
financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition
period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable.
The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised
and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt
the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s
financial statements with another public company that is neither an emerging growth company nor an emerging growth company that
has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting
standards used.
Note
2—Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of the financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the balance sheet. Actual results could differ from those estimates.
Cash
and Cash Equivalents
The Company considers all
short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company had no cash
equivalents as of December 31, 2020 in its operating cash account.
Investments
Held in Trust Account
Upon
the closing of the Initial Public Offering and the Private Placement, $58.7 million of the net proceeds of the sale
of the Units in the Initial Public Offering and the Private Placement were placed in the Trust Account and invested in money
market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act which invest only
in direct U.S. government treasury obligations. All of the Company’s investments held in the Trust Account are classified
as trading securities. Trading securities are presented on the balance sheet at fair value at the end of each reporting period. Gains and losses resulting from the change in fair value of these securities is included in net gain on investments, dividends and interest
held in Trust Account in the accompanying statement of operations. The estimated fair values of investments held in the Trust Account
are determined using available market information.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution,
which, at times, may exceed the Federal Depository Insurance Coverage limit of $250,000, and investments held in Trust Account.
As of December 31, 2020, the Company has not experienced losses on these accounts and management believes the Company is not exposed
to significant risks on such accounts.
Fair
Value of Financial Instruments
Fair value is defined as the price that would be received for sale
of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes
a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
These tiers include:
|
|
●
|
Level 1, defined as observable inputs such as quoted prices
for identical instruments in active markets;
|
|
|
●
|
Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices
for identical or similar instruments in markets that are not active; and
|
|
|
●
|
Level 3, defined as unobservable inputs in which little or
no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques
in which one or more significant inputs or significant value drivers are unobservable.
|
In some circumstances, the inputs used to measure fair value might
be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its
entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
As of December 31,
2020, the carrying values of cash, prepaid expenses, accounts payable and accrued liabilities approximate their fair values due to
the short-term nature of the instruments. As of December 31, 2020, the Company’s portfolio of investments held in the Trust
Account is comprised entirely of investments in money market funds that invest in U.S. government securities.
Derivative warrant liabilities
The Company does not use
derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial
instruments, including issued stock purchase warrants, to determine if such instruments are liabilities, derivatives or contain features
that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815 Derivatives and Hedging, ASC 815-15. The classification of
derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of
each reporting period.
The Company accounts for
its 9,195,000 common stock warrants issued in connection with its Initial Public Offering (5,750,000) and Private Placement (3,445,000)
as derivative warrant liabilities in accordance with ASC 815-40. Accordingly, the Company recognizes the warrant instruments as liabilities
at fair value and adjusts the instruments to fair value at each reporting period. The liabilities are subject to re-measurement at each
balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations. The fair
value of warrants issued by the Company in connection with the Public Offering and Private Placement has been estimated using Monte-Carlo
simulations at each measurement date
Offering
Costs Associated with the Initial Public Offering
Offering
costs consist of legal, accounting, underwriting fees and other costs incurred that were directly related to the Initial Public Offering
and were charged to stockholders’ equity or written off to the statement of operations upon
the completion of the Initial Public Offering. The portion of the offering costs related to the
issuance of the public and private warrants was written off to the statement of operations as a financing costs – warrant liabilities.
Class A
Common Stock Subject to Possible Redemption
The
Company accounts for its Class A common stock subject to possible redemption in accordance with the guidance in FASB ASC Topic 480
“Distinguishing Liabilities from Equity.” Class A common stock subject to mandatory redemption (if any) is classified
as liability instruments and are measured at fair value. Conditionally redeemable Class A common stock (including Class A common
stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of
uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, Class A
common stock is classified as stockholders’ equity. The Company’s Class A common stock feature certain redemption rights
that are considered to be outside of the Company’s control and subject to the occurrence of uncertain future events. Accordingly,
at December 31, 2020, 3,464,860 shares of Class A common stock subject to possible redemption is presented at redemption value as
temporary equity, outside of the stockholders’ equity section of the Company’s balance sheet.
Income
Taxes
The
Company follows the asset and liability method of accounting for income taxes under FASB ASC Topic 740, “Income Taxes.”
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the
financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. As of December 31, 2020, the Company has aggregate deferred tax assets of approximately $898,000 and has recognized
a full valuation allowance against the deferred tax assets.
FASB
ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more
likely than not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of December
31, 2020. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No
amounts were accrued for the payment of interest and penalties as of December 31, 2020. The Company is currently not aware of
any issues under review that could result in significant payments, accruals or material deviation from its position. The Company
is subject to income tax examinations by major taxing authorities since inception.
Net
Loss Per Ordinary Share
Net
income (loss) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding
during the period. The Company has not considered the effect of the warrants sold in the Public Offering and Private Placement
to purchase an aggregate of 9,195,000 shares in the calculation of diluted loss per share, since the exercise of the warrants
are contingent upon the occurrence of future events and the inclusion of such warrants would be ant- dilutive.
The
Company’s statement of operations includes a presentation of income (loss) per share for Redeemable Class A Common Stock
in a manner similar to the two-class method of income (loss) per share. Net income per common share, basic and diluted, for Redeemable
Class A Common Stock is calculated by dividing the proportionate share of income or loss on marketable securities held by the
Trust Account, net of applicable franchise and income taxes, by the weighted average number of Common stock subject to possible
redemption outstanding since original issuance.
Net
loss per share, basic and diluted, for Non-Redeemable Class A and Class B Common Stock is calculated by dividing the net loss,
adjusted for income or loss on marketable securities attributable to Redeemable Class A Common Stock, by the weighted average
number of non-redeemable common stock outstanding for the period.
Non-Redeemable
Class A and Class B Common Stock includes Founder Shares and non-redeemable shares of common stock as these shares do not have
any redemption features. Non-Redeemable Class A and Class B Common Stock participates in the income or loss on marketable securities
based on non-redeemable common stock shares’ proportionate interest.
Accordingly,
basic and diluted loss per common share is calculated as follows for the period from May 22, 2020 (inception) through December
31, 2020:
|
|
|
For The
Period From
May 22,
2020
(Inception) Through
December 31,
2020
|
|
|
Class A Common stock subject to possible redemption
|
|
|
|
|
Numerator: Earnings allocable to Common stock subject to possible redemption
|
|
|
|
|
Income from investments held in Trust Account
|
|
$
|
29
|
|
|
Less: Company’s portion available to be withdrawn to pay taxes
|
|
|
(29
|
)
|
|
Net income attributable
|
|
$
|
-
|
|
|
Denominator: Weighted average Class A common stock subject to possible redemption
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
|
|
3,556,309
|
|
|
Basic and diluted net income per share
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Non-Redeemable Common Stock
|
|
|
|
|
|
Numerator: Net Loss minus Net Earnings
|
|
|
|
|
|
Net loss
|
|
$
|
(4,718,021
|
)
|
|
Net income allocable to Class A common stock subject to possible redemption
|
|
|
-
|
|
|
Non-redeemable net loss
|
|
$
|
(4,718,021
|
)
|
|
Denominator: weighted average Non-redeemable common stock
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding, Non-redeemable common stock
|
|
|
1,447,732
|
|
|
Basic and diluted net loss per share, Non-redeemable common stock
|
|
$
|
(3.26
|
)
|
Recent
Accounting Standards
Management
does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material
effect on the Company’s financial statements.
Note
3 — Initial Public Offering
On December
17, 2020, the Company consummated its Initial Public Offering of 5,750,000 Units, including 750,000 Over-Allotment
Units, at $10.00 per Unit, generating gross proceeds of $57.5 million, and incurring offering costs of approximately
$3.7 million, of which approximately $2.0 million was for deferred underwriting commissions.
Each
Unit consists of one share of Class A common stock, and one redeemable warrant (each, a “Public Warrant”).
Each Public Warrant entitles the holder to purchase one share of Class A common stock at a price of $11.50 per share, subject
to adjustment (see Note 6).
Note
4 — Related Party Transactions
Founder
Shares
On
June 30, 2020, the Sponsor purchased 1,437,500 shares of the Company’s Class B common stock, par value $0.0001 per share,
(the “Founder Shares”) for an aggregate price of $25,000. The initial stockholders agreed to forfeit up to 187,500
Founder Shares to the extent that the over-allotment option was not exercised in full by the underwriters, so that the Founder
Shares would represent 20% of the Company’s issued and outstanding shares after the Initial Public Offering (excluding the
Representative Shares as defined below). The underwriter exercised its over-allotment option in full on December 17, 2020; thus,
the 187,500 Founder Shares were no longer subject to forfeiture.
The
initial stockholders agreed, subject to limited exceptions, not to transfer, assign or sell any of the Founder Shares until the
earlier to occur of: (A) 180 days after the completion of the initial Business Combination or (B) subsequent to the initial Business
Combination, the date on which the Company completes a liquidation, merger, capital stock exchange or other similar transaction
that results in all of the Public Stockholders having the right to exchange their shares of common stock for cash, securities
or other property. Any permitted transferees will be subject to the same restrictions and other agreements of our initial stockholders
with respect to any Founder Shares.
Private
Placement Warrants
Simultaneously with the closing
of the Initial Public Offering, the Company consummated the Private Placement of 3,445,000 Private Placement Warrants at a price of $1.00
per Private Placement Warrant to the Sponsor, generating proceeds of approximately $3.4 million. The initial fair value of the Private
Placement Warrants was estimated to be $1.849 per warrant, determined using a binomial Monte-Carlo simulation. Key inputs to the simulation
are disclosed in Note 9, below. The excess initial fair value of $0.849 per warrant above the Sponsor’s purchase price aggregated
approximately $2.9 million, which was attributed as one-time compensation to the Sponsor and recognized in general and administrative
expenses in the statement of operations.
Each
Private Placement Warrant is exercisable for one share of Class A common stock at a price of $11.50 per share. A portion
of the proceeds from the sale of the Private Placement Warrants to the Sponsor was added to the proceeds from the Initial Public
Offering held in the Trust Account. If the Company does not complete a Business Combination within the Combination Period, the
Private Placement Warrants will expire worthless. The Private Placement Warrants will be non-redeemable for cash
and exercisable on a cashless basis so long as they are held by the Sponsor or their permitted transferees.
The
Sponsor and the Company’s officers and directors agreed, subject to limited exceptions, not to transfer, assign or sell
any of their Private Placement Warrants until the completion of the initial Business Combination.
Related
Party Loans
On
June 30, 2020, as amended on October 20, 2020, an affiliate of the Sponsor agreed to loan the Company an aggregate of up to
$300,000 to cover expenses related to the Initial Public Offering pursuant to a promissory note (the “Note”). This loan was non-interest bearing and
payable upon the completion of the Initial Public Offering. The Company borrowed approximately $157,000 under the Note and fully repaid
the Note on December 17, 2020.
In
addition, in order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor,
or certain of the Company’s officers and directors may, but are not obligated to, loan the Company funds as may be required (“Working
Capital Loans”). If the Company completes a Business Combination, the Company would repay the Working Capital Loans out of the
proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans would be repaid only out of funds held outside
the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the
Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital
Loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination or, at the lenders’ discretion,
up to $1.5 million of such Working Capital Loans may be convertible into warrants of the post Business Combination entity at a price
of $1.00 per warrant. The warrants would be identical to the Private Placement Warrants. Except for the foregoing, the terms of
such Working Capital Loans, if any, have not been determined and no written agreements exist with respect to such loans. To date, the
Company had no borrowings under the Working Capital Loans.
As
discussed in Note 1, the Company may extend the period of time to consummate a Business Combination up to two times, each
by an additional three months (for a total of 18 months to complete a Business Combination). In order to extend the time
available for the Company to consummate a Business Combination, the Sponsor or its affiliates or designees must deposit into the
Trust Account $500,000, or $575,000 if the underwriters’ over-allotment option is exercised in full ($0.10 per Public
Share in either case), on or prior to the date of the applicable deadline, for each three-month extension (each, an “Extension
Loan”). Any such payments would be made in the form of a non-interest bearing, unsecured promissory note. Such notes
would either be paid upon consummation of a Business Combination, or, at the relevant insiders’ discretion, converted upon
consummation of a Business Combination into additional Private Warrants at a price of $1.00 per Private Placement Warrant. The
Sponsor and its affiliates or designees are not obligated to fund the Trust Account to extend the time for the Company to complete
a Business Combination.
Administrative
Services Agreement
Commencing
on the date that the Company’s securities were first listed on Nasdaq until the earlier of the Company’s consummation
of a Business Combination or the Company’s liquidation, the Company agreed to pay the Sponsor a total of $10,000 per month
for office space, administrative and support services.
Note
5 — Commitments & Contingencies
Registration
Rights
The
holders of Founder Shares, Private Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans
and Extension Loans, if any, (and any shares of Class A common stock issuable upon the exercise of the Private Placement
Warrants and warrants that may be issued upon conversion of Working Capital Loans and Extension Loans and upon conversion of the
Founder Shares) were entitled to registration rights pursuant to a registration rights agreement signed upon the consummation
of the Initial Public Offering. These holders were entitled to certain demand and “piggyback” registration rights.
The Company will bear the expenses incurred in connection with the filing of any such registration statements.
Underwriting
Agreement
The
underwriters were entitled to underwriting discounts of: (i) two percent (2.0%) of the gross proceeds of the Initial Public Offering,
or approximately $1.2 million in the aggregate, paid upon the closing of the Initial Public Offering; (ii) one percent (1.0%)
of the gross proceeds of the Initial Public Offering issued in the form of Class A common stock (the “Representative Shares”),
or 57,500 Class A common stock, at the closing of the Initial Public Offering; (iii) upon the consummation of a Business Combination,
a deferred underwriting discount of three and a half percent (3.5%) of the gross proceeds of the Initial Public Offering, or approximately
$2.0 million in the aggregate. The deferred fee will become payable to the underwriters from the amounts held in the Trust
Account solely in the event that the Company completes a Business Combination, subject to the terms of the underwriting agreement.
Right
of First Refusal
The
Company granted the underwriters a right of first refusal to act as lead-left book running manager for any and all future
private or public equity, equity-linked, convertible and debt offerings as well as exclusive strategic advisor in connection with
any subsequent merger or acquisition during such period, or any successor to or any subsidiary of the Company for a period of
16 months from the closing of a Business Combination.
Note 6 — Derivative Warrant Liabilities
The
Public Warrants will become exercisable on the later of (a) the completion of a Business Combination or (b) 12 months from the closing
of the Initial Public Offering; provided in each case that the Company has an effective registration statement under the Securities Act
covering the shares of Class A common stock issuable upon exercise of the Public Warrants and a current prospectus relating to them
is available (or the Company permits holders to exercise their Public Warrants on a cashless basis and such cashless exercise is exempt
from registration under the Securities Act). The Company has agreed that as soon as practicable, but in no event later than 15 business
days after the closing of the initial Business Combination, the Company will use its best efforts to file with the SEC and have an effective
registration statement covering the shares of Class A common stock issuable upon exercise of the warrants and to maintain a current
prospectus relating to those shares of Class A common stock until the warrants expire or are redeemed. If a registration statement
covering the Class A common stock issuable upon exercise of the warrants is not effective by the 60th business day after the closing
of the initial Business Combination, warrant holders may, until such time as there is an effective registration statement and during
any period when the Company will have failed to maintain an effective registration statement, exercise warrants on a “cashless
basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption. Notwithstanding the above, if the Company’s
shares of Class A common stock are at the time of any exercise of a warrant not listed on a national securities exchange such that
they satisfy the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at
its option, require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with
Section 3(a)(9) of the Securities Act and, in the event the Company so elect, it will not be required to file or maintain in effect
a registration statement, and in the event the Company does not so elect, it will use our best efforts to register or qualify the shares
under applicable blue sky laws to the extent an exemption is not available.
The
warrants have an exercise price of $11.50 per share, subject to adjustments, and will expire five years after the completion of
a Business Combination or earlier upon redemption or liquidation. In addition, if (x) the Company issues additional shares of
Class A common stock or equity-linked securities for capital raising purposes in connection with the closing of the initial
Business Combination at an issue price or effective issue price of less than $9.20 per share of Class A common stock (with such
issue price or effective issue price to be determined in good faith by the board of directors and, in the case of any such issuance
to the Sponsor or its affiliates, without taking into account any Founder Shares held by the Sponsor or such affiliates, as applicable,
prior to such issuance) (the “Newly Issued Price”), (y) the aggregate gross proceeds from such issuances represent
more than 60% of the total equity proceeds, and interest thereon, available for the funding of the initial Business Combination
on the date of the consummation of the initial Business Combination (net of redemptions), and (z) the volume weighted average
trading price of the Class A common stock during the 20 trading day period starting on the trading day prior to the day on which
the Company consummates its initial Business Combination (such price, the “Market Value”) is below $9.20 per share,
then the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the greater of the Market
Value and the Newly Issued Price, and the $18.00 per share redemption trigger price described below will be adjusted (to the nearest
cent) to be equal to 180% of the greater of the Market Value and the Newly Issued Price.
The
Private Placement Warrants are identical to the Public Warrants, except that the Private Placement Warrants and the shares of
Class A common stock issuable upon exercise of the Private Placement Warrants will not be transferable, assignable or salable
until the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Placement Warrants
will be non-redeemable so long as they are held by the Sponsor or their permitted transferees. If the Private Placement
Warrants are held by someone other than the Sponsor or their permitted transferees, the Private Placement Warrants will be redeemable
by the Company and exercisable by such holders on the same basis as the Public Warrants.
Once
the warrants become exercisable, the Company may redeem the outstanding warrants for cash (except as described herein with respect
to the Private Placement Warrants):
|
|
●
|
at
a price of $0.01 per warrant;
|
|
|
●
|
upon
a minimum of 30 days’ prior written notice of redemption; and
|
|
|
●
|
if
and only if, the last sale price of Class A common stock equals or exceeds $18.00 per share (as adjusted for stock splits,
stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day
period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant
holders.
|
If
the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise
the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement.
In
no event will the Company be required to net cash settle any warrant. If the Company is unable to complete a Business Combination
within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of warrants will not receive
any of such funds with respect to their warrants, nor will they receive any distribution from the Company’s assets held
outside of the Trust Account with the respect to such warrants. Accordingly, the warrants may expire worthless.
Note 7 — Stockholders’ Equity
Class A Common
Stock — The Company is authorized to issue 50,000,000 shares of Class A common stock with a par value of
$0.0001 per share. As of December 31, 2020, there were 5,807,500 shares of Class A common stock issued or outstanding, including
3,464,860 shares of Class A common stock subject to possible redemption, respectively.
Class B Common
Stock — The Company is authorized to issue 2,000,000 shares of Class B common stock with a par value of $0.0001
per share. On June 30, 2020, the Company issued 1,437,500 shares of Class B common stock to the Sponsor. Of these, up to
187,500 shares of Class B common stock were subject to forfeiture to the Company by the initial stockholders for no consideration
to the extent that the underwriters’ over-allotment option was not exercised in full or in part, so that the initial stockholders
would collectively own 20% of the Company’s issued and outstanding common stock after the Initial Public Offering (excluding the
Representative Shares). The underwriter exercised its over-allotment option in full on December 17, 2020; thus, the 187,500 Founder Shares
were no longer subject to forfeiture.
Common stockholders of record
are entitled to one vote for each share held on all matters to be voted on by stockholders. Holders of record of the Class A common stock
and holders of record of the Class B common stock will vote together as a single class on all matters submitted to a vote of the stockholders,
with each share of common stock entitling the holder to one vote except as required by law.
The Class B common stock
will automatically convert into Class A common stock at the closing of the initial Business Combination on a one-for-one basis,
subject to adjustment for stock splits, stock dividends, reorganizations, recapitalizations and the like, and subject to further adjustment
as provided herein. In the case that additional shares of Class A common stock or equity-linked securities are issued or deemed issued
in connection with the initial Business Combination, the number of shares of Class A common stock issuable upon conversion of all Founder
Shares will equal, in the aggregate, on an as-converted basis, 20% of the sum of the total number of all shares of common stock outstanding
upon the completion of the Initial Public Offering, plus the total number of shares of Class A common stock issued, or deemed issued or
issuable upon conversion or exercise of any equity-linked securities or rights issued or deemed issued, by the Company in connection
with or in relation to the consummation of the initial Business Combination, excluding the Representative Shares and any shares of Class
A common stock or equity-linked securities exercisable for or convertible into shares of Class A common stock issued, or to be issued,
to any seller in the initial Business Combination and any private placement-equivalent warrants issued to the Sponsor, officers or
directors upon conversion of Working Capital Loans; provided that such conversion of Founder Shares will never occur on a less than one
for one basis.
Preferred Stock —
The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.0001 per share, with such designations, voting
and other rights and preferences as may be determined from time to time by the Company’s board of directors. As of December 31,
2020, there were no shares of preferred stock issued or outstanding.
Note 8—Income Taxes
The
Company’s taxable income primarily consists of interest income on the Trust Account. The Company’s general and administrative
expenses are generally considered start-up costs and are not currently deductible. There was no income tax expense for the period
from May 22, 2020 (inception) through December 31, 2020.
The
income tax provision (benefit) consists of the following for the period from May 22, 2020 (inception) through December 31, 2020:
|
Current
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
Deferred
|
|
|
|
|
|
Federal
|
|
|
(661,587
|
)
|
|
State
|
|
|
(236,281
|
)
|
|
Valuation allowance
|
|
|
897,868
|
|
|
Income tax provision
|
|
$
|
-
|
|
The
Company’s net deferred tax assets are as follows as of December 31, 2020:
|
Deferred tax assets:
|
|
|
|
|
Start-up/Organization costs
|
|
$
|
848,805
|
|
|
Net operating loss carryforwards
|
|
|
49,063
|
|
|
Total deferred tax assets
|
|
|
897,868
|
|
|
Valuation allowance
|
|
|
(897,868
|
)
|
|
Deferred tax asset, net of allowance
|
|
$
|
-
|
|
In assessing the realization
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled
reversal of deferred tax assets, projected future taxable income and tax planning strategies in making this assessment. After consideration
of all of the information available, Management believes that significant uncertainty exists with respect to future realization of the
deferred tax assets and has therefore established a full valuation allowance. For the year ended December 31, 2020, the change in the
valuation allowance was approximately $898,000.
As of December 31, 2020, the
Company had approximately $172,000 of U.S. federal and State net operating loss carryovers available to offset future taxable income.
The federal net operating losses do not expire, while the state net operating losses will expire in 2041.
There
were no unrecognized tax benefits as of December 31, 2020. No amounts were accrued for the payment of interest and penalties at
December 31, 2020. The Company is currently not aware of any issues under review that could result in significant payments, accruals
or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.
A
reconciliation of the statutory federal income tax rate (benefit) to the Company’s effective tax rate is as follows for
the period from May 22, 2020 (inception) through December 31, 2020:
|
Statutory Federal income tax rate
|
|
|
21.0
|
%
|
|
State income taxes
|
|
|
7.5
|
%
|
|
Change in fair value of warrants
|
|
|
(4.1
|
)%
|
|
Issuance costs - warrants
|
|
|
(2.9
|
)%
|
|
Change in Valuation Allowance
|
|
|
(21.5
|
)%
|
|
Income Taxes Benefit
|
|
|
0.0
|
%
|
Note 9—Fair Value Measurements
The following table presents
information about the Company’s assets that are measured at fair value on a recurring basis as of December 31, 2020 and indicates
the fair value hierarchy of the valuation techniques that the Company utilized to determine such fair value:
|
Description
|
|
Quoted Prices in Active Markets (Level 1)
|
|
|
Significant Other Observable Inputs (Level 2)
|
|
|
Significant Other Unobservable Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Investments held in Trust Account
|
|
$
|
58,650,048
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liabilities – public warrants
|
|
$
|
10,005,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Warrant Liabilities – private warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,693,635
|
|
Transfers to/from Levels
1, 2, and 3 are recognized at the end of the reporting period. There were no transfers between levels for the period from May 22, 2020
(inception) through December 31, 2020.
The Company utilizes a binomial
Monte-Carlo simulation to estimate the fair value of the warrants at each reporting period, with changes in fair value recognized in the
statement of operations. The Company recognized $15,776,805 for the derivative warrant liabilities upon their issuance on December 17,
2020. For the period from May 22, 2020 (inception) through December 31, 2020, the Company recognized a charge to the statement of operations
resulting from an increase in the fair value of liabilities of $922,000 presented as change in fair value of derivative warrant liabilities
on the accompanying statement of operations. As a result of the fair value of the private warrants exceeding the value that the Sponsor
paid for the warrants, the Company recognized compensation costs of $2,924,805 which is included in general and administrative expenses
in the statement of operations.
The change in the fair value
of the derivative warrant liabilities from May 22, 2020 (inception) through December 31, 2020 is summarized as follows:
|
Warrant liabilities at May 22, 2020
|
|
$
|
-
|
|
Issuance of Public and Private warrants
|
|
|
15,776,805
|
|
Change in fair value of warrant liabilities
|
|
|
921,830
|
|
Warrant liabilities at December 31, 2020
|
|
$
|
16,698,635
|
The estimated fair value
of the derivative warrant liabilities is determined using Level 3 inputs. Inherent in a Monte Carlo simulation are assumptions related
to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of
its common stock based on historical volatility of select peer companies that matches the expected remaining life of the warrants. The
risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected
remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The
dividend rate is based on the historical rate, which the Company anticipates remaining at zero.
The following table provides
quantitative information regarding Level 3 fair value measurements inputs as their measurement dates:
|
|
|
As of December 17,
2020
|
|
|
As of December 31,
2020
|
|
|
Exercise price
|
$
|
11.50
|
|
|
$11.50
|
|
|
Contractual term (years)
|
|
|
5.9
|
|
|
$
|
5.8
|
|
|
Volatility
|
|
|
10.00
|
%
|
|
|
10.00 %
|
|
|
Risk-free interest rate
|
|
|
0.50
|
%
|
|
|
0.48 %
|
|
|
Dividend yield (per share)
|
|
|
0.0
|
%
|
|
$
|
0.0 %
|
|
Note 10—Revision
to Prior Period Financial Statements
During
the course of preparing the annual report on Form 10-K for the period from May 22, 2020 (inception) through December 31, 2020, the Company
identified a misstatement in its misapplication of accounting guidance related to the Company’s warrants in the Company’s
previously issued audited balance sheet dated December 17, 2020, filed on Form 8-K on December 23, 2020 (the “Post-IPO Balance Sheet”).
On April
12, 2021, the staff of the Securities and Exchange Commission (the “SEC Staff”) issued a public statement entitled “Staff
Statement on Accounting and Reporting Considerations for Warrants issued by Special Purpose Acquisition Companies (“SPACs”)”
(the “SEC Staff Statement”). In the SEC Staff Statement, the SEC Staff expressed its view that certain terms and conditions
common to SPAC warrants may require the warrants to be classified as liabilities on the SPAC’s balance sheet as opposed to equity.
Since their issuance on December 17, 2020, the Company’s warrants have been accounted
for as equity within the Company’s previously reported balance sheets. After discussion and evaluation, including with the Company’s
independent registered public accounting firm and the Company’s audit committee, management concluded that the warrants should be
presented as liabilities with subsequent fair value remeasurement.
The
Warrants were reflected as a component of equity in the Post-IPO Balance Sheet as opposed to liabilities on the balance sheet, based on
the Company’s application of FASB ASC Topic 815-40, Derivatives and Hedging, Contracts in Entity’s Own Equity (“ASC
815-40). The views expressed in the SEC Staff Statement were not consistent with the Company’s
historical interpretation of the specific provisions within its warrant agreement and the Company’s application of ASC 815-40 to
the warrant agreement. The Company reassessed its accounting for Warrants issued on December 17, 2020, in light of the SEC Staff’s
published views. Based on this reassessment, management determined that the Warrants should be classified as liabilities measured at fair
value upon issuance, with subsequent changes in fair value reported in the Company Statement of Operations each reporting period.
The
Company concluded that the misstatement was not material to the Post-IPO Balance Sheet and the misstatement had no material impact to
any prior interim period. The effect of the revisions to the Post-IPO Balance Sheet is as follows:
|
|
|
As of December 17, 2020
|
|
|
|
|
As Previously Reported
|
|
|
Restatement Adjustment
|
|
|
As Restated
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
59,328,581
|
|
|
$
|
-
|
|
|
$
|
59,328,581
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
198,291
|
|
|
$
|
-
|
|
|
$
|
198,291
|
|
|
Deferred underwriting commissions
|
|
|
2,012,500
|
|
|
|
|
|
|
|
2,012,500
|
|
|
Derivative warrant liabilities
|
|
|
-
|
|
|
|
15,776,805
|
|
|
|
15,776,805
|
|
|
Total liabilities
|
|
|
2,210,791
|
|
|
|
15,776,805
|
|
|
|
17,987,596
|
|
|
Class A common stock, $0.0001 par value; shares subject to possible redemption
|
|
|
52,117,783
|
|
|
|
(15,776,805
|
)
|
|
|
36,340,978
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock- $0.0001 par value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Class A common stock - $0.0001 par value
|
|
|
69
|
|
|
|
148
|
|
|
|
217
|
|
|
Class B common stock - $0.0001 par value
|
|
|
144
|
|
|
|
-
|
|
|
|
144
|
|
|
Additional paid-in-capital
|
|
|
5,147,829
|
|
|
|
3,570,433
|
|
|
|
8,718,262
|
|
|
Accumulated deficit
|
|
|
(148,035
|
)
|
|
|
(3,570,581
|
)
|
|
|
(3,718,616
|
)
|
|
Total stockholders’ equity
|
|
|
5,000,007
|
|
|
|
-
|
|
|
|
5,000,007
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
59,328,581
|
|
|
$
|
-
|
|
|
$
|
59,328,581
|
|
Note
11—Subsequent Events
On April 27, 2021, the Company
entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Blue Water Merger Sub Corp., a Delaware corporation
(the “Merger Sub”) and wholly-owned subsidiary of the Company, and Clarus Therapeutics, Inc. a Delaware corporation (“Clarus”).
Management has evaluated
subsequent events to determine if events or transactions occurring through May 6, 2021, the date the financial statements were available
for issuance, require potential adjustment to or disclosure in the financial statements and has concluded that all such events that would
require recognition or disclosure have been recognized or disclosed, including the Merger Agreement referenced above
CLARUS THERAPEUTICS, INC.
Condensed Balance Sheets
Unaudited
(in thousands, except share and per share data)
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,278
|
|
|
$
|
7,233
|
|
|
Accounts receivable, net
|
|
|
6,229
|
|
|
|
4,400
|
|
|
Inventory, net
|
|
|
9,761
|
|
|
|
5,857
|
|
|
Prepaid expenses and other current
assets
|
|
|
1,985
|
|
|
|
1,846
|
|
|
Total current assets
|
|
|
28,253
|
|
|
|
19,336
|
|
|
Property and equipment, net
|
|
|
73
|
|
|
|
64
|
|
|
Total assets
|
|
$
|
28,326
|
|
|
$
|
19,400
|
|
|
Liabilities, redeemable convertible
preferred stock, and stockholders’ deficit
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Senior notes payable
|
|
$
|
51,297
|
|
|
$
|
41,902
|
|
|
Accounts payable
|
|
|
13,463
|
|
|
|
12,107
|
|
|
Accrued expenses
|
|
|
11,002
|
|
|
|
4,631
|
|
|
Deferred revenue
|
|
|
1,048
|
|
|
|
1,172
|
|
|
Total current liabilities
|
|
|
76,810
|
|
|
|
59,812
|
|
|
Convertible notes payable to related parties
|
|
|
98,130
|
|
|
|
77,911
|
|
|
Royalty obligation
|
|
|
10,802
|
|
|
|
9,262
|
|
|
Total liabilities
|
|
|
185,742
|
|
|
|
146,985
|
|
|
Commitments and contingencies (See Note 12)
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock, $0.001 par value,
53,340,636 shares authorized at June 30, 2021 and December 31, 2020; 35,537,077 and 36,756,498 shares issued and outstanding at June
30, 2021 and December 31, 2020, respectively
|
|
|
197,463
|
|
|
|
198,195
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
|
Common stock $0.001 par value; 56,593,539 shares authorized at June 30, 2021
and December 31, 2020; 3,500,848 and 870,263 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively
|
|
|
3
|
|
|
|
1
|
|
|
Additional paid-in capital
|
|
|
4,443
|
|
|
|
—
|
|
|
Accumulated deficit
|
|
|
(359,325
|
)
|
|
|
(325,781
|
)
|
|
Total stockholders’ deficit
|
|
|
(354,879
|
)
|
|
|
(325,780
|
)
|
|
Total liabilities, redeemable convertible
preferred stock, and stockholders’ deficit
|
|
$
|
28,326
|
|
|
$
|
19,400
|
|
The accompanying notes are an integral part
of these unaudited condensed financial statements.
CLARUS THERAPEUTICS, INC.
Condensed Statements of Operations
Unaudited
(in thousands, except share and per share data)
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Net product revenue
|
|
$
|
2,779
|
|
|
$
|
822
|
|
|
$
|
5,109
|
|
|
$
|
1,719
|
|
|
Cost of product sales
|
|
|
554
|
|
|
|
103
|
|
|
|
921
|
|
|
|
8,071
|
|
|
Gross profit (loss)
|
|
|
2,225
|
|
|
|
719
|
|
|
|
4,188
|
|
|
|
(6,352
|
)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
9,530
|
|
|
|
9,875
|
|
|
|
17,467
|
|
|
|
14,824
|
|
|
General and administrative
|
|
|
5,327
|
|
|
|
2,012
|
|
|
|
8,932
|
|
|
|
5,221
|
|
|
Research and development
|
|
|
606
|
|
|
|
429
|
|
|
|
1,817
|
|
|
|
1,381
|
|
|
Total operating expenses
|
|
|
15,463
|
|
|
|
12,316
|
|
|
|
28,216
|
|
|
|
21,426
|
|
|
Loss from operations
|
|
|
(13,238
|
)
|
|
|
(11,597
|
)
|
|
|
(24,028
|
)
|
|
|
(27,778
|
)
|
|
Other (expense) income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability and derivative, net
|
|
|
—
|
|
|
|
26,462
|
|
|
|
—
|
|
|
|
32,915
|
|
|
Interest income
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
|
|
23
|
|
|
Interest expense
|
|
|
(4,877
|
)
|
|
|
(4,319
|
)
|
|
|
(9,517
|
)
|
|
|
(6,499
|
)
|
|
Total other (expense) income, net
|
|
|
(4,877
|
)
|
|
|
22,152
|
|
|
|
(9,517
|
)
|
|
|
26,439
|
|
|
Net (loss) income before income taxes
|
|
|
(18,115
|
)
|
|
|
10,555
|
|
|
|
(33,545
|
)
|
|
|
(1,339
|
)
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net (loss) income
|
|
$
|
(18,115
|
)
|
|
$
|
10,555
|
|
|
$
|
(33,545
|
)
|
|
$
|
(1,339
|
)
|
|
Net (loss) income attributable to common stockholders, basic (Note 13)
|
|
$
|
(21,913
|
)
|
|
$
|
200
|
|
|
$
|
(41,282
|
)
|
|
$
|
(8,680
|
)
|
|
Net loss attributable to common stockholders, diluted (Note 13)
|
|
$
|
(21,913
|
)
|
|
$
|
(24,221
|
)
|
|
$
|
(41,282
|
)
|
|
$
|
(8,680
|
)
|
|
Net (loss) income per common share attributable to common stockholders, basic (Note 13)
|
|
$
|
(6.26
|
)
|
|
$
|
0.23
|
|
|
$
|
(17.12
|
)
|
|
$
|
(9.97
|
)
|
|
Net loss per common share attributable to common stockholders, diluted (Note 13)
|
|
$
|
(6.26
|
)
|
|
$
|
(1.39
|
)
|
|
$
|
(17.12
|
)
|
|
$
|
(9.97
|
)
|
|
Weighted-average common shares used in net (loss) income per share attributable to common stockholders, basic (Note 13)
|
|
|
3,500,848
|
|
|
|
870,263
|
|
|
|
2,410,827
|
|
|
|
870,263
|
|
|
Weighted-average common shares used in net loss per share attributable to common stockholders, diluted (Note 13)
|
|
|
3,500,848
|
|
|
|
17,417,776
|
|
|
|
2,410,827
|
|
|
|
870,263
|
|
The accompanying notes are an integral part
of these unaudited condensed financial statements.
CLARUS THERAPEUTICS, INC.
Condensed Statements of Redeemable Convertible
Preferred Stock and Stockholders’ Deficit
Unaudited
(in thousands, except share and per share data)
|
|
|
Redeemable Convertible
Preferred
Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
Balance at December 31, 2020
|
|
|
36,756,498
|
|
|
$
|
198,195
|
|
|
|
870,263
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(325,781
|
)
|
|
$
|
(325,780
|
)
|
|
Conversion of convertible notes payable into Series D
redeemable convertible preferred stock
|
|
|
747,451
|
|
|
|
3,360
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Conversion of Series D redeemable convertible preferred
stock into common stock
|
|
|
(1,966,872
|
)
|
|
|
(11,829
|
)
|
|
|
2,630,585
|
|
|
|
2
|
|
|
|
11,827
|
|
|
|
—
|
|
|
|
11,829
|
|
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
—
|
|
|
|
3,939
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,939
|
)
|
|
|
—
|
|
|
|
(3,939
|
)
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
176
|
|
|
|
—
|
|
|
|
176
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,429
|
)
|
|
|
(15,429
|
)
|
|
Balance at March 31, 2021
|
|
|
35,537,077
|
|
|
$
|
193,665
|
|
|
|
3,500,848
|
|
|
$
|
3
|
|
|
$
|
8,064
|
|
|
$
|
(341,210
|
)
|
|
$
|
(333,143
|
)
|
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
—
|
|
|
|
3,798
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,798
|
)
|
|
|
—
|
|
|
|
(3,798
|
)
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
177
|
|
|
|
—
|
|
|
|
177
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(18,115
|
)
|
|
|
(18,115
|
)
|
|
Balance at June 30, 2021
|
|
|
35,537,077
|
|
|
$
|
197,463
|
|
|
|
3,500,848
|
|
|
|
3
|
|
|
$
|
4,443
|
|
|
$
|
(359,325
|
)
|
|
$
|
(354,879
|
)
|
|
|
|
Redeemable Convertible
Preferred
Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
Balance at December 31, 2019
|
|
|
36,756,498
|
|
|
$
|
183,513
|
|
|
|
870,263
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(316,269
|
)
|
|
$
|
(316,268
|
)
|
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
—
|
|
|
|
3,671
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(74
|
)
|
|
|
(3,597
|
)
|
|
|
(3,671
|
)
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74
|
|
|
|
—
|
|
|
|
74
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,894
|
)
|
|
|
(11,894
|
)
|
|
Balance at March 31, 2020
|
|
|
36,756,498
|
|
|
$
|
187,184
|
|
|
|
870,263
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(331,760
|
)
|
|
$
|
(331,759
|
)
|
|
Accretion of redeemable convertible preferred stock to
redemption value
|
|
|
—
|
|
|
|
3,670
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(70
|
)
|
|
|
(3,600
|
)
|
|
|
(3,670
|
)
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70
|
|
|
|
—
|
|
|
|
70
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,555
|
|
|
|
10,555
|
|
|
Balance at June 30, 2020
|
|
|
36,756,498
|
|
|
$
|
190,854
|
|
|
|
870,263
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(324,805
|
)
|
|
$
|
(324,804
|
)
|
The accompanying notes are an integral part
of these unaudited condensed financial statements.
CLARUS THERAPEUTICS, INC.
Condensed Statements of Cash Flows
Unaudited
(in thousands, except share and per share data)
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Operating activities
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(33,545
|
)
|
|
$
|
(1,339
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Non-cash interest expense related to debt financing and
royalty obligation
|
|
|
6,392
|
|
|
|
6,499
|
|
|
Settlement of interest with payment-in-kind note
|
|
|
3,125
|
|
|
|
—
|
|
|
Change in fair value of warrant liability
|
|
|
—
|
|
|
|
(449
|
)
|
|
Change in fair value of derivative liability
|
|
|
—
|
|
|
|
(32,466
|
)
|
|
Stock-based compensation expense
|
|
|
353
|
|
|
|
144
|
|
|
Depreciation
|
|
|
12
|
|
|
|
9
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,828
|
)
|
|
|
(970
|
)
|
|
Inventory
|
|
|
(3,903
|
)
|
|
|
2,815
|
|
|
Prepaid expenses and other current assets
|
|
|
(142
|
)
|
|
|
(3,745
|
)
|
|
Accounts payable
|
|
|
1,357
|
|
|
|
2,293
|
|
|
Accrued expenses
|
|
|
6,369
|
|
|
|
3,640
|
|
|
Deferred revenue
|
|
|
(125
|
)
|
|
|
210
|
|
|
Net cash used in operating activities
|
|
|
(21,935
|
)
|
|
|
(23,359
|
)
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(20
|
)
|
|
|
(60
|
)
|
|
Net cash used in investing activities
|
|
|
(20
|
)
|
|
|
(60
|
)
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes payable
|
|
|
20,000
|
|
|
|
1,611
|
|
|
Proceeds from issuance of senior notes payable
|
|
|
5,000
|
|
|
|
49,125
|
|
|
Proceeds from PPP loan
|
|
|
—
|
|
|
|
500
|
|
|
Repayment of PPP loan
|
|
|
—
|
|
|
|
(500
|
)
|
|
Debt issuance costs
|
|
|
—
|
|
|
|
(3,516
|
)
|
|
Net cash provided by financing activities
|
|
|
25,000
|
|
|
|
47,220
|
|
|
Net increase in cash and cash equivalents
|
|
|
3,045
|
|
|
|
23,801
|
|
|
Cash and cash equivalents—beginning
of period
|
|
|
7,233
|
|
|
|
1,656
|
|
|
Cash and cash equivalents—end
of period
|
|
$
|
10,278
|
|
|
$
|
25,457
|
|
|
Supplemental disclosure of non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Conversion of convertible notes payable
into Series D redeemable convertible preferred stock
|
|
$
|
3,360
|
|
|
$
|
—
|
|
|
Conversion of Series D redeemable
convertible preferred stock into common stock
|
|
$
|
11,829
|
|
|
$
|
—
|
|
|
Accretion of redeemable convertible
preferred stock to redemption value, including dividends on preferred stock
|
|
$
|
7,737
|
|
|
$
|
7,341
|
|
The accompanying notes are an integral part
of these unaudited condensed financial statements.
CLARUS THERAPEUTICS, INC.
Notes to Condensed Financial Statements
Unaudited
1. Organization and Description of Business Operations
Clarus Therapeutics, Inc.
(the “Company” or “Clarus”) is a specialty pharmaceutical company focused on the commercialization of JATENZO,
the first and only oral testosterone (“T”) replacement, or testosterone replacement therapy (“TRT”), of its kind
approved by the U.S. Food and Drug Administration, or FDA. The FDA completed its review of the Company’s New Drug Application and
approved JATENZO for marketing on March 27, 2019. The Company commercially launched JATENZO on February 10, 2020. JATENZO is the Company’s
sole source of revenue and sales are exclusively within the United States. Management remains committed to the product’s commercial
success. The Company was founded in 2004 and is located and headquartered in Northbrook, Illinois.
The Company is subject to risks
and uncertainties associated with any pharmaceutical company that is transitioning from the development to commercial stage. Since inception,
the Company has incurred substantial operating losses due to substantial product development and commercialization expenditures. In addition,
the Company operates in an environment of rapid technological change and is largely dependent on the services of its employees and consultants.
The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of JATENZO, is cash
flow positive from operations, or enters into cash flow positive business development transactions.
The Company’s U.S. patent
portfolio on JATENZO currently includes five issued patents. The issued U.S. patents contain claims to both pharmaceutical compositions
and methods of treatment using the Company’s proprietary pharmaceutical composition and all are listed in the FDA Orange Book: Approved
Drug Products with Therapeutic Equivalence Evaluations. In addition, the Company has several patent applications pending in the United
States and other countries that, if issued, will cover pharmaceutical compositions, methods of treatment and other features of JATENZO,
and have the potential to extend patent coverage beyond 2030.
Merger
On September 9, 2021 (the “Closing
Date”), Blue Water Acquisition Corp. (“Blue Water”, or “BLUW”), a Delaware corporation and Special Purpose
Acquisition Company (“SPAC”) and Blue Water Merger Sub Corp., a Delaware corporation and wholly-owned subsidiary of Blue Water
(“Merger Sub”), consummated the previously announced merger, dated as of April 27, 2021, with Clarus Therapeutics, Inc., a
Delaware corporation (“Clarus”), pursuant to which, subject to the terms and conditions set forth in the Merger Agreement,
the Merger Sub merged with and into Clarus, with Clarus surviving as a wholly-owned subsidiary of Blue Water, and with Clarus’s
equity holders and convertible debt holders equity interests converted into the right to receive shares of New Blue Water common stock
or else be canceled, retired and terminated without consideration, as provided in the Merger Agreement. Upon the consummation of the Business
Combination, Blue Water changed its name to “Clarus Therapeutics Holdings, Inc.”
In connection with the Merger,
the Company’s convertible noteholders and senior secured noteholders provided $25.0 million in additional capital to the Company
following the announcement of the merger. All such proceeds plus accrued interest converted to shares of Combined Entity common stock
at a price of $10.00 per share at the Closing Date, resulting in 2,558,705 shares issued. As of June 30, 2021 the Company had received
$17.8 million of the $25.0 million in additional capital through the issuance of convertible notes and indenture notes (Note
6, Debt). The remaining additional capital of $25.0 million was received by the Company
prior to the Closing Date. Together with Blue Water’s cash resources and additional capital, the Company received gross proceeds
from the Merger (not including the $25.0 million of additional capital) of approximately $25.3 million.
At the effective time of the
Merger (the “Effective Time”), shares of Clarus’s redeemable convertible Series D Preferred Stock issued and outstanding
and all principal and accrued interest under the Company’s Series D convertible notes and Clarus’ outstanding warrants immediately
prior to the Effective Time converted into 13,431,889 shares of the combined Company’s common stock. Additionally, $10.0 million
of debt related to the Company’s senior secured notes including certain royalty rights was exchanged for an aggregate 1,905,000
shares of the combined Company’s common stock (which included 135,000 shares from the Sponsor pursuant to a share allocation agreement).
All unexpired, outstanding Series D Warrants remain outstanding and became exercisable shares of common stock of the surviving entity,
subject to adjustment in accordance with the exchange ratio
All other series of preferred
stock, common stock and stock options were cancelled and extinguished upon completion of the Merger. In addition, Clarus’s existing
equity incentive plans were terminated.
Liquidity and Going Concern
The Company has evaluated
whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s
ability to continue as a going concern within one year after the date that the condensed financial statements are issued.
Since its inception, the Company
has devoted substantially all its efforts to business planning, clinical development, commercial planning and raising capital. The Company
has incurred losses since inception and has an accumulated deficit of $359.3 million as of June 30, 2021, including $101.7 million of
cumulative accretion on the Series A Redeemable Convertible Preferred Stock (“Series A Preferred Stock”), the Series B Redeemable
Convertible Preferred Stock (“Series B Preferred Stock”), the Series C Redeemable Convertible Preferred Stock (“Series
C Preferred Stock”) and the Series D Redeemable Convertible Preferred Stock (“Series D Preferred Stock”), collectively,
Preferred Stock, and $99.0 million of cumulative non-cash interest related to previously issued convertible debt. The Company is also
in forbearance and default on its March 12, 2020 senior secured notes as it was unable to maintain at least $10.0 million in cash and
cash equivalents as of the last day of each calendar month beginning December 2020 and was unable to pay the required $3.1 million
interest payment due in March 2021.
In addition to the consummation
of the SPAC merger and the related investment, the Company plans to seek additional funding through the expansion of its commercial efforts
to grow JATENZO and its operating cash flow, business development efforts to out-license JATENZO internationally, equity financings,
debt financings such as the secured notes described in Note 6, Debt, or other capital sources including collaborations with other
companies or other strategic arrangements with third parties. There can be no assurance that these future financing efforts will be successful.
If the Company is unable to
obtain funding or generate operating cash flow, the Company will be forced to delay, reduce or eliminate some or all of its product portfolio
expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue
operations. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining
sufficient funding on terms acceptable to the Company to fund continuing operations, if at all. The terms of any financing may adversely
affect the holdings or the rights of the Company’s stockholders.
Based on its recurring losses
from operations incurred since inception, expectation of continuing operating losses for the foreseeable future, and need to raise additional
capital to finance its future operations, as of the issuance date of the condensed financial statements for the six months ended June
30, 2021, the Company has concluded that its cash and cash equivalents will not be sufficient to fund its operating expenses, capital
expenditure requirements and debt service payments through at least twelve months from the date that these condensed financial statements
are available to be issued and that there is substantial doubt about the Company’s ability to continue as a going concern.
The accompanying condensed
financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the condensed
financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the
realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Impact of the COVID-19 Pandemic
The business disruptions associated
with the COVID-19 pandemic had a significant negative impact on the Company’s condensed financial statements for the six months
ended June 30, 2021. Management expects that the public health actions being undertaken to reduce the spread of the virus, and that may
have to be undertaken again in the event of a resurgence of the virus, will create significant disruptions to the Company with respect
to: (i) the demand for its products, (ii) the ability of its sales representatives to reach healthcare customers, (iii) its
ability to maintain staffing levels to support its operations, (iv) its ability to continue to manufacture certain of its products,
(v) the reliability of its supply chain and (vi) its ability to achieve the financial covenants required by the senior secured
notes agreement (see Note 6, Debt). The extent to which the COVID-19 pandemic will impact the Company’s business will depend
on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, travel
restrictions and social distancing in the U.S. and other countries, business closures or business disruptions and the effectiveness of
actions taken in the U.S. and other countries to contain and treat the disease.
The Company is closely monitoring
the evolving impact of the pandemic on all aspects of its business. The Company has implemented a number of measures designed to protect
the health and safety of its employees, support its customers and promote business continuity. The Company is also actively reviewing
and implementing cost-saving measures, including discontinuing or delaying all non-essential services and programs and instituting controls
on travel, events, marketing and clinical studies to adapt the business plan for the evolving COVID-19 challenges.
2. Summary of Significant Accounting Policies
Significant Accounting Policies
The Company’s significant
accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2020 and the notes
thereto, which are included in Blue Water’s final prospectus that forms part of the Blue Water’s Registration Statement on
Form S-4 (Reg. No. 333-256116), filed with the SEC pursuant to Rule 424(b)(3) on July 23, 2021. Since the date of those consolidated
financial statements, there have been no material changes to its significant accounting policies, except as noted below.
Basis of Presentation
The condensed financial statements
and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States of America
(“U.S. GAAP”). The unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the
U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments necessary to fairly present
the financial position of the Company as of June 30, 2021 and December 31, 2020, the results of operations for the three and six months
ended June 30, 2021 and 2020 and its cash flows for the six months ended June 30, 2021 and 2020 have been included and are of a normal,
recurring nature except as otherwise disclosed. These condensed financial statements and notes thereto have been prepared under the presumption
that users of the financial information have either read or have access to the audited financial statements for the latest year ended
December 31, 2020.
Use of Estimates
Preparation of the condensed
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed financial statements and
the reported amounts of revenues and expenses during the reporting period covered by the condensed financial statements and accompanying
notes. The most significant estimates relate to determination of fair value of the Company’s common stock and common stock warrants,
stock-based compensation, notes, royalty obligation and the valuation of embedded derivatives. Management evaluates its estimates and
assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and records
adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results
could differ from those estimates.
Net Income (Loss) Per Share
Basic net income (loss) per
share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted
net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period and, if dilutive,
the weighted-average number of potential shares of common stock. Net income (loss) per share attributable to common stockholders is calculated
using the two-class method, which is an earnings allocation formula that determines net income (loss) per share for the holders of the
Company’s common shares and participating securities. The Company’s preferred stock and warrants to purchase preferred stock
contain participation rights in any dividend paid by the Company and are deemed to be participating securities. Net income (loss) attributable
to common stockholders and participating preferred stock and participating preferred stock warrants is allocated first to preferred stockholders
and warrant holders based on dividend rights and then to common and preferred stockholders based on ownership interests on an as-converted
basis as if all of the earnings for the period had been distributed. The participating securities do not include a contractual obligation
to share in losses of the Company and are not included in the calculation of net loss per share in the periods in which a net loss is
recorded.
When considering the impact
of the convertible equity instruments, diluted net income (loss) per share is computed using the more dilutive of (a) the two-class
method or (b) the if-converted method. The Company allocates earnings first to preferred stockholders and warrant holders based
on dividend rights and then to common and preferred stockholders and warrant holders based on ownership interests. The weighted-average
number of common shares included in the computation of diluted net loss gives effect to all potentially dilutive common equivalent shares,
including outstanding stock options, warrants, convertible redeemable preferred stock and the potential issuance of common stock upon
the conversion of the Company’s convertible notes. Common stock equivalent shares are excluded from the computation of diluted
net income (loss) per share if their effect is antidilutive. In periods in which the Company reports a net loss attributable to common
stockholders, diluted net loss per share attributable to common stockholders is generally the same as basic net loss per share attributable
to common stockholders since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
3. Fair Value Measurements
The following tables present
information about the Company’s financial assets and liabilities measured at fair value on a recurring basis:
|
|
|
June 30, 2021
|
|
|
(in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
7,833
|
|
|
$
|
7,833
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total assets
|
|
$
|
7,833
|
|
|
$
|
7,833
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
December 31, 2020
|
|
|
(in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
7,205
|
|
|
$
|
7,205
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total assets
|
|
$
|
7,205
|
|
|
$
|
7,205
|
|
|
$
|
—
|
|
|
$
|
—
|
|
During the six months ended
June 30, 2021 and the year ended December 31, 2020, there were no transfers between levels.
As of June 30, 2021 and December
31, 2020, the Company’s cash equivalents consisted of money market funds, classified as Level 1 financial assets, as these assets
are valued using quoted market prices in active markets without any valuation adjustment. There were no financial assets valued based
on Level 2 inputs.
The carrying amounts reported
in the accompanying balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate their fair value
based on the short-term nature of these instruments. The carrying value of long-term and short-term debt, taking into consideration debt
discounts and related derivative instruments, is estimated to approximate fair value.
As of June 30, 2021 and December
31, 2020, the Company had Level 3 financial liabilities that were measured at fair value on a recurring basis. The Company’s warrant
liability and derivative liability are carried at fair value, determined using Level 3 inputs in the fair value hierarchy. As of June 30, 2021 and December 31, 2020, the warrant liability and derivative liability were valued at zero.
4. Inventory
Inventory consisted of the
following as of June 30, 2021 and December 31, 2020 (in thousands):
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Raw material
|
|
$
|
4,226
|
|
|
$
|
4,225
|
|
|
Work-in-process
|
|
|
5,060
|
|
|
|
—
|
|
|
Finished goods
|
|
|
475
|
|
|
|
1,632
|
|
|
Total
|
|
$
|
9,761
|
|
|
$
|
5,857
|
|
The inventory balance as of
June 30, 2021 is disclosed net of the Company’s inventory reserve. As of June 30, 2021 and December 31, 2020, the Company had an
inventory reserve balance of $7.8 million.
5. Accrued Expenses
Accrued expenses consisted
of the following (in thousands):
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Selling and marketing costs
|
|
$
|
8,875
|
|
|
$
|
3,468
|
|
|
Employee compensation and related benefits
|
|
|
1,483
|
|
|
|
1,090
|
|
|
Professional Fees
|
|
|
635
|
|
|
|
73
|
|
|
Other
|
|
|
9
|
|
|
|
—
|
|
|
Total
|
|
$
|
11,002
|
|
|
$
|
4,631
|
|
6. Debt
Convertible Notes
From 2016 to 2021, the Company
issued several convertible notes (the “Convertible Notes”) pursuant to which the Company borrowed an aggregate of $81.3 million
from existing investors and related parties. All Convertible Notes accrue interest at a rate of 8% compounded daily and have a maturity
date of March 1, 2025.
The Company had the following
convertible notes outstanding as of June 30, 2021 (in thousands):
|
Issuance Year
|
|
Outstanding Principal Amount
|
|
|
2016
|
|
$
|
17,243
|
|
|
2017
|
|
|
13,410
|
|
|
2018
|
|
|
8,911
|
|
|
2019
|
|
|
17,547
|
|
|
2020
|
|
|
1,611
|
|
|
2021
|
|
|
20,000
|
|
|
Total
|
|
$
|
78,722
|
|
The Convertible Notes contain
various conversion features. Upon the occurrence of a qualified financing, the Convertible Notes plus accrued interest mandatorily convert,
to shares issued in the qualified financing, as defined in the notes, at a 20% discount, or into shares of Series D Preferred Stock at
the Series D Price of $4.50 per share. Upon the occurrence of a non-qualified financing, the noteholders have the option to convert at
the same terms as described above for a qualified financing. At maturity, the noteholders also have an option to convert at the terms
described above for a qualified or non-qualified financing. If the Company completes a strategic transaction and the Convertible Notes
have not been previously converted, noteholders will automatically receive an acquisition premium of the greater of a) the sum of (i)
1.5 times the principal amount of the Convertible Notes and (ii) accrued and unpaid interest thereon, or b) the amount that would
have been payable to the noteholders if such notes had been converted to shares of Series D Preferred Stock at the Series D price immediately
prior to the close of such strategic transaction.
The Company determined that
the acquisition premium and the qualified and non-qualified financing conversion features were embedded derivative instruments requiring
bifurcation as separate liabilities with a corresponding debt discount, of which were determined to be fair valued at zero as of June
30, 2021 and December 31, 2020. The debt discount was amortized to interest expense using the effective interest rate method over the
term of the Convertible Notes.
In April 2021, pursuant to
the executed amendment of the Convertible Notes, the Company and certain lenders agreed to extend or further extend the maturity dates
of the Convertible Notes to September 1, 2025. The amendment only modified the maturity date, no other terms, and accordingly was deemed
administrative in nature as it was not intended to change any of the economic terms between parties. As such the extension of the maturity
dates was deemed to be a modification of the Convertible Notes and modification accounting was applied. The Company calculated the remaining
debt discount for each of the Convertible Notes and adjusted the effective interest rate to amortize the remaining debt discount over
the adjusted remaining life of the Convertible Notes.
In March 2021, upon an investor’s
decision to not participate in the next round of Convertible Notes, pursuant to the Convertible Notes’ provisions, $3.4 million
of the investor’s Convertible Notes converted into 747,451 shares of Series D Preferred Stock and such Series D Preferred Stock
issued as a result of this conversion was converted into common stock. At the date of conversion, the outstanding principal and accrued
interest on the Convertible Notes were $2.6 million and $0.8 million, respectively. Refer to Note 7, Redeemable Convertible Preferred
Stock, for additional information.
The carrying value of the
Company’s Convertible Notes consisted of (in thousands):
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Principal amount
|
|
$
|
81,300
|
|
|
$
|
61,300
|
|
|
Accrued and unpaid interest
|
|
|
20,673
|
|
|
|
17,287
|
|
|
Unamortized debt discount
|
|
|
(483
|
)
|
|
|
(676
|
)
|
|
Conversion of convertible notes payable into Series D redeemable convertible preferred stock
|
|
|
(3,360
|
)
|
|
|
—
|
|
|
Total
|
|
$
|
98,130
|
|
|
$
|
77,911
|
|
The Company recognized interest
expense of $1.8 million and $1.5 million during the three months ended June 30, 2021 and 2020, respectively. The Company recognized interest
expense of $3.4 million and $3.0 million during the six months ended June 30, 2021 and 2020, respectively.
Senior Secured Notes
The carrying value of the
Company’s senior secured notes consisted of the following (in thousands):
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Principal amount
|
|
$
|
58,125
|
|
|
$
|
50,000
|
|
|
Accrued and unpaid interest
|
|
|
1,234
|
|
|
|
1,278
|
|
|
Unamortized debt discount
|
|
|
(8,062
|
)
|
|
|
(9,376
|
)
|
|
Total
|
|
$
|
51,297
|
|
|
$
|
41,902
|
|
On March 12, 2020, the Company
issued and sold senior secured notes to certain lenders not related to the Company. The aggregate principal amount of the senior secured
notes was $50.0 million and the Company received $42.7 million in net proceeds after deducting transaction expenses of $4.4 million and
prepaid interest of $2.9 million. In the second quarter of 2021, the Company added two additional notes to the principal senior secured
notes balance, the PIK Note and the Indenture Note, totaling $8.1 million (refer to additional information below). The aggregate principal
balance as of June 30, 2021 is $58.1 million.
The senior secured notes bear
interest at 12.5% and specify semiannual payments on March 1 and September 1 and have a maturity date of March 1, 2025. The first two
years provide for interest-only payments and the final three years amortize the principal balance at $15.0 million, $15.0 million and
$20.0 million, respectively. The senior secured notes are governed by an indenture, dated as of March 12, 2020, between the Company and
the investors. The interest rate will increase to 14.50% for overdue installments in the event of default. In addition to liquidation
preference, the senior secured notes contain a lien on all assets of the Company.
Future principal payments
of the senior secured notes are as follows (in thousands):
|
Years ended December 31,
|
|
Amount
|
|
|
2021 (remaining 6 months)
|
|
$
|
5,000
|
|
|
2022
|
|
|
7,500
|
|
|
2023
|
|
|
18,125
|
|
|
2024
|
|
|
17,500
|
|
|
2025
|
|
|
10,000
|
|
|
Total
|
|
$
|
58,125
|
|
The senior secured notes also
have a detachable royalty feature under which the lenders receive a royalty of 0.56% to 1.67% on net sales beginning in 2021, with the
royalty obligation continuing until the lenders receive total royalty payments of approximately $24.2 million. The value assigned to
royalty rights is recorded as a debt discount to the Notes and is amortized to interest expense over the life of the notes. The royalty
obligation had a fair value of $7.9 million at issuance in March of 2020. The lenders have a security interest in the assets and intellectual
property of the Company. Since the royalty rights are tied to Clarus’ net sales of JATENZO, such royalty rights are not subject
to treatment as a derivative instrument and thus do not need to be periodically measured and marked to market. Proceeds were used to
finance the commercial launch of JATENZO. Refer to the section below for the accounting treatment of the royalty obligation.
In connection with the senior
secured notes, the Company entered into an indenture stating that the Company would maintain cash and cash equivalents in the amount
of at least $10.0 million as of the last day of each calendar month, commencing on March 31, 2020. As of December 31, 2020, the Company
was unable to maintain cash and cash equivalents of $10.0 million, and such breach of the indenture resulted in a default and the negotiation
of a forbearance agreement noted below.
Forbearance Agreement
On March 17, 2021, the Company
entered into a forbearance agreement with noteholders in relation to the senior secured notes. The Company was unable to and did not
pay interest of $3.1 million due on March 1, 2021. As of March 31, 2021, the Company entered into default on its senior secured notes,
and in accordance with the terms of the senior secured notes, the interest increased to 14.5%.
Under the forbearance agreement,
in exchange for the investors’ agreement not to exercise their rights to retrieve the funds owed, the Company was required to maintain
cash and cash equivalents of at least $2.5 million amongst other financial budgeting and reporting requirements until consummation of
the Business Combination. Under the forbearance agreement, the forbearance period would not be terminated provided that the Company,
amongst other things, executed the merger agreement and provided financial reporting requirements by April 27, 2021.
PIK Note
In May 2021, the Company
entered into a payment-in-kind, or PIK, note (the “PIK Note”), in relation to the Company’s missed interest payment
(which was due in March 2021) on its senior secured notes, pursuant to which the Company borrowed an aggregate of $3.1 million from senior
secured noteholders, to be included in the principal senior secured notes balance. The PIK Note accrues interest at a rate of 14.5%,
compounded daily. Pursuant to the PIK Note, on February 1, 2023 the Company is required to make a payment of principal in the amount
of $3.1 million, plus accrued and unpaid interest in respect of such principal.
Indenture Note
In June 2021, the Company
entered into the Indenture Note, pursuant to which the Company borrowed an aggregate of $5.0 million from senior secured noteholders,
to be included in the principal senior secured notes balance. The Indenture Note accrues interest at a rate of 14.5%, compounded daily,
and was repaid with the combined entity’s common stock upon the date of merger.
Royalty Obligation
The Company periodically assesses
the estimated royalty payments related to the senior secured notes to the lender and to the extent such payments are greater or less
than its initial estimates or the timing of such payments is materially different than its original estimates, the Company will prospectively
adjust the accretion of interest on the royalty obligation. There are a number of factors that could materially affect the amount and
the timing of royalty payments, most of which are not within the Company’s control. Such factors include, but are not limited to,
the rate of JATENZO prescriptions, the number of doses administered, the introduction of competing products, manufacturing or other delays,
patent protection, adverse events that result in governmental health authority-imposed restrictions on the use of the drug products,
and sales never achieving forecasted numbers, which would result in reduced royalty payments and reduced non-cash interest expense over
the life of the royalty obligation. To the extent future royalties result in an amount less than the liability, the Company is not obligated
to fund any such shortfall.
The Company records estimated
royalties due for the current period in accrued other expenses until the payment is received from the customer, at which time the Company
then remits payment to the lenders. In order to determine the accretion of the royalty obligation, the Company is required to estimate
the total amount of future royalty payments to be received and submitted to the lenders. The sum of these amounts less the proceeds the
Company received will be recorded as interest expense over the life of the royalty obligation. As of June 30, 2021 and December 31, 2020,
the Company’s estimate of its total interest expense resulted in an annual effective interest rate of approximately 32.3%.
The carrying value of the
Company’s royalty obligation is as follows (in thousands):
|
|
|
June 30,
2021
|
|
|
Royalty obligation as of December 31, 2020
|
|
$
|
9,262
|
|
|
Non-cash interest expense recognized
|
|
|
1,540
|
|
|
Royalty obligation - ending balance
|
|
$
|
10,802
|
|
During the three months ended
June 30, 2021 and 2020, the Company recorded $0.8 million and $0.1 million, respectively, of related non-cash interest expense. During
the six months ended June 30, 2021 and 2020, the Company recorded $1.5 million and $0.7 million, respectively, of related non-cash interest
expense.
PPP Loan
In March of 2020, the Coronavirus
Aid, Relief and Economic Security Act (the “CARES Act”) was enacted to, among other provisions, provide emergency assistance
for individuals, families and businesses affected by the COVID-19 pandemic. The CARES Act includes a Paycheck Protection Program (“PPP”)
administered through the Small Business Association (“SBA”). Under the PPP, beginning April 3, 2020, small businesses and
other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the
program, subject to numerous limitations and eligibility criteria.
In April of 2020, the Company
received an unsecured loan of $0.5 million from the SBA. After considering further guidance issued by SBA, the Company elected to repay
the loan in full in May of 2020 with no interest due under safe harbor provisions of the CARES Act.
7. Redeemable Convertible Preferred Stock
There were no shares of redeemable
convertible preferred stock issued during the six months ended June 30, 2020.
In March 2021, 2,630,585
shares of Series D Preferred Stock (of which 747,451 shares are from the conversion of Convertible Notes discussed in Note 6, Debt)
converted into 2,630,585 shares of common stock. At the date of conversion, the cost at purchase plus accrued and unpaid dividends on
the Series D Preferred Stock was $11.8 million.
As of June 30, 2021 and December
31, 2020, Preferred Stock consisted of the following (in thousands, except for share data):
|
|
|
June 30, 2021
|
|
|
|
|
Preferred Stock
Authorized
|
|
|
Preferred Stock Issued
and Outstanding
|
|
|
Carrying Value
|
|
|
Liquidation Value
|
|
|
Common Stock Issuable
Upon Conversion
|
|
|
Series A Preferred Stock
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
$
|
9,537
|
|
|
$
|
9,537
|
|
|
|
2,500,000
|
|
|
Series B Preferred Stock
|
|
|
5,066,637
|
|
|
|
5,066,637
|
|
|
|
15,722
|
|
|
|
15,722
|
|
|
|
5,066,637
|
|
|
Series C Preferred Stock
|
|
|
9,438,744
|
|
|
|
9,438,744
|
|
|
|
20,859
|
|
|
|
20,859
|
|
|
|
9,438,744
|
|
|
Series D Preferred Stock
|
|
|
36,335,255
|
|
|
|
18,531,696
|
|
|
|
151,345
|
|
|
|
151,345
|
|
|
|
18,531,696
|
|
|
Total
|
|
|
53,340,636
|
|
|
|
35,537,077
|
|
|
$
|
197,463
|
|
|
$
|
197,463
|
|
|
|
35,537,077
|
|
|
|
|
December 31, 2020
|
|
|
|
|
Preferred Stock
Authorized
|
|
|
Preferred Stock Issued
and Outstanding
|
|
|
Carrying Value
|
|
|
Liquidation Value
|
|
|
Common Stock Issuable
Upon Conversion
|
|
|
Series A Preferred Stock
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
$
|
9,170
|
|
|
$
|
9,170
|
|
|
|
2,500,000
|
|
|
Series B Preferred Stock
|
|
|
5,066,637
|
|
|
|
5,066,637
|
|
|
|
15,118
|
|
|
|
15,118
|
|
|
|
5,066,637
|
|
|
Series C Preferred Stock
|
|
|
9,438,744
|
|
|
|
9,438,744
|
|
|
|
20,057
|
|
|
|
20,057
|
|
|
|
9,438,744
|
|
|
Series D Preferred Stock
|
|
|
36,335,255
|
|
|
|
19,751,117
|
|
|
|
153,850
|
|
|
|
153,850
|
|
|
|
19,751,117
|
|
|
Total
|
|
|
53,340,636
|
|
|
|
36,756,498
|
|
|
$
|
198,195
|
|
|
$
|
198,195
|
|
|
|
36,756,498
|
|
The following is a summary
of the rights and preferences of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred
Stock (collectively, “Preferred Stock”) are as follows:
Conversion —
Each share of Preferred Stock is convertible into common stock, upon approval of the holders of at least 65% of the preferred shares,
on a share-for-share basis to be adjusted for the effect of any stock splits or reverse splits, subject to certain antidilution adjustments,
are entitled to vote together with the common stockholders as one class and are entitled to separate votes on certain matters. Preferred
Stock automatically converts on a share-for-share basis into shares of common stock upon the closing of a qualified IPO.
Dividends —
Preferred stockholders are entitled to receive an annual, cumulative 8% dividend, when and if declared by the Board of Directors. No
dividends have been declared through June 30, 2021.
Liquidation Preference —
Upon liquidation, dissolution, or winding up of business, the holders of the Preferred Stock are entitled to receive a liquidation preference
in priority over the holders of common stock, at an amount per share equal to their original purchase price of $1.82 per share for Series
A Preferred Stock and Series B Preferred Stock, $1.50 per share for Series C Preferred Stock and $4.50 for Series D Preferred Stock,
plus accumulated dividends. Upon liquidation, the Company’s remaining assets will be distributed to Preferred Stockholders in the
following order: Series D Preferred Stock, Series C Preferred Stock, Series B Preferred Stock, Series A Preferred Stock. When holders
of preferred stock are satisfied in full, any excess assets available for distribution will be allocated ratably among common stockholders
based on their pro rata shareholdings. Upon a deemed liquidation event, as defined, holders have the option to redeem their shareholding
at the liquidation payment amounts summarized above.
Redemption —
Holders of at least 65% of the then outstanding preferred shares, voting together as a separate class, may require the Company to redeem
all outstanding shares of Preferred Stock upon the earlier of (a) September 9, 2016 (in which case such shares of Preferred Stock
shall be redeemed by the Company in three equal annual installments), and (b) the occurrence of any redemption event. A redemption
event shall mean the breach by the Company of any material term of its Certificate of Incorporation or any material provision of the
related securities purchase agreement, the stockholders’ agreement or the registration rights agreement. To date holders have not
required redemption of the Preferred Stock.
Voting Rights —
Preferred Stock and common stock generally vote together as one class on an as-converted basis; however, common stock voting rights on
certain matters are subject to the powers, preferences, and rights of the Preferred Stock. The holders of Series C Preferred Stock are
entitled to elect three directors to the Company’s board of directors and the holders of Series D Preferred Stock are entitled
to elect one director to the Company’s board of directors. Certain actions, such as mergers, acquisition, liquidation, dissolution,
wind up of business, and deemed liquidation events, must be approved by the holders of at least 65% of outstanding shares of Series D
Preferred Stock.
8. Common Stock
The Company was authorized
to issue up to 56,593,539 shares of common stock with a $0.001 par value per share as of June 30, 2021.
The voting, dividend and liquidation
rights of the holders of the Company’s common stock are subject to and qualified by the rights, powers and preferences of the holders
of the preferred stock as set forth above.
The holders of common stock
are entitled to one vote for each share of common stock. Subject to the payment in full of all preferential dividends to which the holders
of the Preferred Stock are entitled, the holders of common stock shall be entitled to receive dividends out of funds legally available.
In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, after the payment or provision for
payment of all debts and liabilities of the Company and all preferential amounts to which the holders of Preferred Stock are entitled
with respect to the distribution of assets in liquidation, the holders of common stock shall be entitled to share ratably in the remaining
assets of the Company available for distribution.
As of June 30, 2021, the Company
has reserved the following shares of common stock for the potential conversion of outstanding preferred stock and exercise of stock options:
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
Preferred stock, as converted
|
|
|
35,537,077
|
|
|
Options to purchase common stock
|
|
|
3,814,659
|
|
|
Series D warrants
|
|
|
183,438
|
|
|
Remaining shares reserved for future issuance
|
|
|
1,350,481
|
|
|
Total
|
|
|
40,885,655
|
|
9. Stock-Based Compensation
2004 Stock Incentive Plan
Effective February 13, 2004,
the Company adopted the Clarus Therapeutics 2004 Stock Incentive Plan (the “2004 Plan”). The 2004 Plan was amended on
January 28, 2011 to increase the number of shares of the Company’s common stock reserved for issuance to employees, directors,
and consultants to 1,529,936 shares. Options granted under the 2004 Plan may be incentive stock options or non-statutory stock options.
Restricted stock awards may also be granted under the 2004 Plan. Incentive stock options may only be granted to employees. Options generally
vest over a four-year period. The exercise price of incentive stock options shall be not less than 100% of the fair market value per
share of the Company’s Common Stock on the grant date. As of June 30, 2021, only incentive stock options to employees have been
awarded under the 2004 Plan. The awards granted under this plan generally vest over a four-year period and have a 10-year contractual
term.
2014 Stock Option and Incentive Plan
Effective February 13, 2014,
the Company adopted the Clarus Therapeutics 2014 Stock Option and Incentive Plan (the “2014 Plan”) and reserved 1,000,000
shares of Common Stock for the issuance of awards under the 2014 Plan. The 2014 Plan permits the Company to make grants of incentive
stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, unrestricted
stock awards, cash-based awards, performance share awards and dividend equivalent rights. To qualify as incentive options, stock options
must meet additional federal tax requirements, including a $100,000 limit on the value of shares subject to incentive options which first
become exercisable in any calendar year, and a shorter term and higher minimum exercise price in the case of certain large stockholders.
All full-time and part-time officers, employees, non-employee directors and other key persons, including consultants and prospective
employees, are eligible to participate in the 2014 Plan, subject to the sole discretion of the administrator. On December 15, 2017, April
17, 2019 and again on December 18, 2020, the 2014 Plan was amended, increasing the total shares of Common Stock reserved for issuance
by 416,500, 26,140, and 3,000,000 shares, respectively, for a total of 4,442,640 shares of Common Stock available for award in the 2014
Plan. As of June 30, 2021, no shares of common stock were available for future grants under the 2014 Plan. Once the 2014 Plan was adopted,
no further options were awarded under the 2004 Plan. The awards granted under this plan generally vest over a four-year period and have
a 10-year contractual term.
Stock Options
The following table summarizes
stock option activity under the Plans:
|
|
|
Number of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
life (years)
|
|
|
Aggregate
intrinsic
value
|
|
|
Outstanding as of December 31, 2020
|
|
|
3,814,659
|
|
|
$
|
2.17
|
|
|
|
6.8
|
|
|
$
|
—
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2021
|
|
|
3,814,659
|
|
|
$
|
2.17
|
|
|
|
6.3
|
|
|
$
|
—
|
|
|
Options vested and exercisable as of June 30, 2021
|
|
|
2,830,253
|
|
|
$
|
1.99
|
|
|
|
5.3
|
|
|
$
|
—
|
|
No stock options were granted
during the six months ended June 30, 2021 and 51,968 stock options were granted during the six months ended June 30, 2020. The total
fair value of stock options vested during the six months ended June 30, 2021 and 2020 was $0.4 million and $0.2 million, respectively.
Stock-Based Compensation Expense
Stock-based compensation expense
is as follows (in thousands):
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Selling and marketing
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
Research and development
|
|
|
16
|
|
|
|
19
|
|
|
|
32
|
|
|
|
40
|
|
|
General and administrative
|
|
|
156
|
|
|
|
51
|
|
|
|
311
|
|
|
|
104
|
|
|
Total stock-based compensation expense
|
|
$
|
177
|
|
|
$
|
70
|
|
|
$
|
353
|
|
|
$
|
144
|
|
As of June 30, 2021, there
was $0.2 million of unrecognized stock-based compensation expense related to unvested stock options, which is being recognized over a
period of 0.8 years. At the Effective Time of the merger, the Company terminated its equity incentive plans and all options issued
and outstanding, whether vested or unvested, were cancelled and extinguished.
10. Income Taxes
The Company did not record
a federal or state or income tax provision or benefit for the six months ended June 30, 2021 or 2020 due to the expected loss before
income taxes to be incurred, as well as the Company’s continued maintenance of a full valuation allowance against its net deferred
tax assets.
11. License Agreements
Agreement with HavaH
In May 2021, the Company
entered into a license agreement (the “HavaH Agreement”) with HavaH Therapeutics, or HavaH, an Australia-based biopharmaceutical
company developing androgen therapies for inflammatory breast disease and certain forms of breast cancer. Under the HavaH Agreement,
the Company will acquire the development and commercialization rights for HavaH T+Ai™, to be renamed CLAR-121.
Under the terms of the licensing
agreement, HavaH may be eligible for up to $10.8 million in potential development and regulatory milestone payments. Additionally, HavaH
would be eligible for royalty payments and up to $30.0 million in potential commercial milestones. Such royalty payments will be based
on total aggregate annual net sales of CLAR-121 in the territory, at a low single digit percentage rate (when there is no patent protection
or regulatory exclusivity) or a low teens percentage rate (where CLAR-121 has patent protection or regulatory exclusivity). Additionally,
such royalties are payable until the later of ten years or the loss of patent protection or regulatory exclusivity.
To date, pursuant to the HavaH
Agreement, the Company has made cash payments of $0.5 million consisting of the upfront payment.
12. Commitments and Contingencies
Lease Commitments
The Company leases office
space in Northbrook, Illinois and Murfreesboro, Tennessee under non-cancelable operating leases which expire on December 31, 2021 and
September 30, 2022, respectively. Total rent expense under the lease agreements was $0.1 million for the six months ended June 30, 2021
and 2020, respectively.
A summary of the Company’s
future minimum lease payments required under non-cancellable lease agreements is as follows (in thousands):
|
Years ended December 31,
|
|
Amount
|
|
|
2021 (remaining 6 months)
|
|
$
|
47
|
|
|
2022
|
|
|
16
|
|
|
2023
|
|
|
—
|
|
|
2024
|
|
|
—
|
|
|
2025
|
|
|
—
|
|
|
Total
|
|
$
|
63
|
|
Purchase Obligation
In July of 2009, the Company
entered into a commercial manufacturing agreement, as amended, with Catalent Pharma Solutions, LLC (the “Catalent Agreement”).
Pursuant to the terms of the Catalent Agreement, the Company must make minimum annual purchases of JATENZO equal to 7.0 million softgels,
through the initial term, or March 2025. Any shortfall between the minimum annual purchase quantities and actual purchases will be
multiplied by a unit price, as defined in the Catalent Agreement, and paid to Catalent within 30 days of any year-end that the minimum
purchase requirement is not met. The Company has not made any payments to Catalent as a result of a shortfall in minimum purchase quantities.
The Catalent Agreement renews automatically for two-year periods and either party may terminate the contract upon twelve months written
notice. Purchases under the Catalent Agreement for the three months ended June 30, 2021 and 2020 were $1.7 million and $0.2 million, respectively.
Purchases under the Catalent Agreement for the six months ended June 30, 2021 and 2020 were $5.1 million and $3. million, respectively.
The Company entered into a
product supply agreement with Pharmacia & Upjohn Company LLC, or Pfizer (the “Pfizer Agreement”), effective
January 1, 2021. Pursuant to the terms of the Pfizer Agreement, the Company must make minimum annual purchases of T-undecanoate equal
to approximately $1.8 million per year, through the initial term, or January 2024. If there is a shortfall between the minimum annual
purchase quantities and actual purchases, the difference between the minimum annual purchase amount and actual purchases will be paid
to Pfizer by the Company. There were no purchases under the Pfizer Agreement during the six months ended June 30, 2021.
Legal Proceedings
From time to time, in the
ordinary course of business, the Company is subject to litigation and regulatory examinations as well as information gathering requests,
inquiries and investigations.
On April 2, 2019, an action
for patent infringement was filed against the Company by Lipocine in the U.S. District Court for the District of Delaware. The lawsuit
(Civil Action No. 19-cv-622, assigned to Judge William Bryson, U.S. Court of Appeals for the Federal Circuit, sitting by designation)
sought a declaratory judgement of infringement under 35 U.S.C. § 271(a)-(c) arising from the Company’s intent to market and
sell JATENZO, based on the FDA’s approval of JATENZO in March 2019. Lipocine ultimately alleged that the Company infringed certain
claims in each of four U.S. Patents: U.S. Patent No. 9,034,858, U.S. Patent No. 9,205,057, U.S. Patent No. 9,480,690 and U.S. Patent
No. 9,757,390. Lipocine sought monetary damages in the form of a reasonable royalty, pre-judgment interest, post-judgment interest, and
attorneys’ fees, costs and disbursements, and injunctive relief.
In July 2021, Clarus and Lipocine
entered into a settlement agreement that settled all claims between the parties, including the interference matter (described above)
and the pending Clarus counterclaims against Lipocine, and provides for a payment by Lipocine to Clarus of a $4.0 million settlement
fee payable as follows: $2.5 million upfront, $1.0 million within 12 months, and the remainder within two years. The Company received
payment of $2.5 million of the $4.0 million in July 2021.
Pursuant to the settlement
agreement, a joint stipulation for dismissal was filed, and was so ordered by the Court on July 15, 2021, thereby terminating the district
court action. Moreover, and as part of this settlement, Lipocine filed a request for entry of an adverse judgment in Interference No.
106,128 on July 16, 2021, and the Company is awaiting action on that request by the Patent Trial and Appeal Board (PTAB). The Company
believes that its ‘178 application will proceed to issuance following what it believes will be entry of a decision adverse to Lipocine
by the PTAB.
13. Net Income (Loss) Per Share
Basic and diluted earnings
(loss) per share attributable to common stockholders are calculated as follows:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (income)
|
|
$
|
(18,115
|
)
|
|
$
|
10,555
|
|
|
$
|
(33,545
|
)
|
|
$
|
(1,339
|
)
|
|
Accretion of preferred stock
|
|
|
(3,798
|
)
|
|
|
(3,670
|
)
|
|
|
(7,737
|
)
|
|
|
(7,341
|
)
|
|
Loss attributable to participating warrants and preferred stock shareholders
|
|
|
-
|
|
|
|
(6,685
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Net (loss) income attributable to common stockholders, basic
|
|
|
(21,913
|
)
|
|
|
200
|
|
|
|
(41,282
|
)
|
|
|
(8,680
|
)
|
|
Effect of convertible notes
|
|
|
-
|
|
|
|
(24,421
|
)
|
|
|
-
|
|
|
|
(24,421
|
)
|
|
Net loss attributable to common stockholders, diluted
|
|
$
|
(21,913
|
)
|
|
$
|
(24,221
|
)
|
|
$
|
(41,282
|
)
|
|
$
|
(33,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
$
|
5,470
|
|
|
$
|
(41,650
|
)
|
|
$
|
5,470
|
|
|
$
|
(41,650
|
)
|
|
Weighted-average common shares attributable to common stockholders, basic
|
|
|
3,500,848
|
|
|
|
870,263
|
|
|
|
2,410,827
|
|
|
|
870,263
|
|
|
Effect of convertible notes
|
|
|
-
|
|
|
|
16,547,513
|
|
|
|
-
|
|
|
|
-
|
|
|
Weighted average number of common shares - diluted
|
|
|
3,500,848
|
|
|
|
17,417,776
|
|
|
|
2,410,827
|
|
|
|
870,263
|
|
|
Weighted-average common shares attributable to common stockholders, diluted
|
|
$
|
(6.26
|
)
|
|
$
|
0.23
|
|
|
$
|
(17.12
|
)
|
|
$
|
(9.97
|
)
|
|
Effect of convertible notes
|
|
|
-
|
|
|
|
(1.62
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Net loss per common share attributable to common stockholders, diluted
|
|
$
|
(6.26
|
)
|
|
$
|
(1.39
|
)
|
|
$
|
(17.12
|
)
|
|
$
|
(9.97
|
)
|
The Company excluded the following
shares from the computation of diluted net loss per share attributable to common stockholders as of June 30, 2021 and 2020 because including
them would have had an anti-dilutive effect:
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Redeemable convertible preferred stock
|
|
|
35,537,077
|
|
|
|
-
|
|
|
|
35,537,077
|
|
|
|
36,756,498
|
|
|
Convertible notes (1)
|
|
|
21,806,713
|
|
|
|
-
|
|
|
|
21,806,713
|
|
|
|
16,547,513
|
|
|
Options to purchase common stock
|
|
|
3,814,659
|
|
|
|
2,229,562
|
|
|
|
3,814,659
|
|
|
|
2,229,562
|
|
|
Series D warrants
|
|
|
183,438
|
|
|
|
-
|
|
|
|
183,438
|
|
|
|
183,438
|
|
|
|
(1)
|
Convertible note shares are calculated using the Series D Preferred
Stock issue price of $4.50 per share and includes interest accrued as of June 30, 2021 and 2020.
|
The convertible notes including
interest for redeemable convertible preferred stock, which as of June 30, 2020 would be convertible into 16,547,513 shares common stock
using the as-if converted method, are included in the calculation of diluted earnings per share for the three months ended June 30, 2020.
These convertible notes were included in the anti-dilutive table above for the three months ended June 30, 2021, and the six months ended
June 30, 2021 and 2020 because they would be anti-dilutive for this period.
As of the three months ended
June 30, 2021, and the six months ended June 30, 2021 and 2020, the Company’s potentially dilutive securities, which include preferred
stock and stock options, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net
loss per share. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss
per share attributable to common stockholders is the same for these periods.
14. Related Party Transactions
In July of 2020, a member
of the Company’s board of directors temporarily expanded his director duties as an executive director, at the request of the Company’s
board of directors. As executive director, this member received a total of $0.1 million in consulting fees during the six months ended
June 30, 2021.
15. Subsequent Events
Issuance of Convertible Note
In July 2021, the Company entered
into an additional note purchase agreement (the “2021 Notes”) pursuant to which the Company borrowed an aggregate of $3.6
million from existing investors. Outstanding balances under the 2021 Notes accrue interest at a rate of 8%, compounded daily, and was
repaid with the combined entity’s common stock upon the date of consummation of the Merger. The conversion features of the 2021
Notes are identical to the conversion features of the Convertible Notes.
Issuance of Indenture Note
In July 2021, the Company entered
into an additional note purchase agreements (the “Second Indenture Note”) pursuant to which the Company borrowed an aggregate
of $3.6 million from senior secured noteholders. The outstanding balance under the Second Indenture Note accrues interest at a rate of
14.5%, compounded daily, and was repaid with the combined entity’s common stock upon the date of consummation of the Merger.
Forbearance Extension
In August 2021, the Company
entered into forbearance extensions with the noteholders in relation to the senior secured notes. The latest forbearance extension, entered
into on August 26, 2021, extended the forbearance period through September 9, 2021, the consummation date of the Merger.
As of the date these financial
statements are issued, the Company has not made the $3.9 million interest payment due September 1, 2021 pursuant to a 30-day grace period
provided in the indenture.
Transfer of Merger Shares
In September 2021, the Company
entered into a share allocation agreement in connection with the Merger and additional forbearance. Under the share allocation agreement,
Clarus noteholders received an additional 405,000 shares of the Combined Entity. Of these 405,000 shares, 135,000 was transferred from
the Blue Water founder shares and 270,000 shares were reallocated from the Clarus equityholders and received upon the closing of the Merger.
Report
of Independent Registered Public Accounting Firm
To
the Stockholders and the Board of Directors of Clarus Therapeutics, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Clarus Therapeutics, Inc. (the Company) as of December 31, 2020 and 2019, the related
statements of operations, changes in redeemable convertible preferred stock and stockholders’ deficit and cash flows for each of
the years then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019,
and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
Going
Concern
The
accompanying financial statements have been prepared assuming that Clarus Therapeutics, Inc. will continue as a going concern. As discussed
in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency. This
raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these
matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/
RSM US LLP
We
have served as the Company’s auditor since 2006.
Chicago,
Illinois
May 13, 2021
CLARUS
THERAPEUTICS, INC.
Balance Sheets
(in thousands, except share and per share data)
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,233
|
|
|
$
|
1,656
|
|
|
Accounts receivable, net
|
|
|
4,400
|
|
|
|
—
|
|
|
Inventory
|
|
|
5,857
|
|
|
|
6,961
|
|
|
Prepaid expenses and other current assets
|
|
|
1,846
|
|
|
|
1,229
|
|
|
Total current assets
|
|
|
19,336
|
|
|
|
9,846
|
|
|
Property and equipment, net
|
|
|
64
|
|
|
|
21
|
|
|
Total assets
|
|
$
|
19,400
|
|
|
$
|
9,867
|
|
|
Liabilities, redeemable convertible preferred stock, and stockholders’ deficit
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Convertible notes payable to related parties
|
|
$
|
—
|
|
|
$
|
70,919
|
|
|
Senior notes payable
|
|
|
41,902
|
|
|
|
—
|
|
|
Accounts payable
|
|
|
12,107
|
|
|
|
4,379
|
|
|
Accrued expenses
|
|
|
4,631
|
|
|
|
1,767
|
|
|
Deferred revenue
|
|
|
1,172
|
|
|
|
—
|
|
|
Total current liabilities
|
|
|
59,812
|
|
|
|
77,065
|
|
|
Convertible notes payable to related parties
|
|
|
77,911
|
|
|
|
—
|
|
|
Convertible preferred stock warrant liability
|
|
|
—
|
|
|
|
551
|
|
|
Derivative liability
|
|
|
—
|
|
|
|
65,006
|
|
|
Royalty obligation
|
|
|
9,262
|
|
|
|
—
|
|
|
Total liabilities
|
|
|
146,985
|
|
|
|
142,622
|
|
|
Commitments and contingencies (See Note 12)
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock, $0.001 par value, 53,340,636 shares authorized at December 31, 2020 and 2019; 36,756,498 shares issued and outstanding at December 31, 2020 and 2019
|
|
|
198,195
|
|
|
|
183,513
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
|
Common stock $0.001 par value; 56,593,539 shares authorized at December 31, 2020 and 2019; 870,263 shares issued and outstanding at December 31, 2020 and 2019
|
|
|
1
|
|
|
|
1
|
|
|
Additional paid-in capital
|
|
|
—
|
|
|
|
—
|
|
|
Accumulated deficit
|
|
|
(325,781
|
)
|
|
|
(316,269
|
)
|
|
Total stockholders’ deficit
|
|
|
(325,780
|
)
|
|
|
(316,268
|
)
|
|
Total liabilities, redeemable convertible preferred stock, and stockholders’ deficit
|
|
$
|
19,400
|
|
|
$
|
9,867
|
|
The
accompanying notes are an integral part of these financial statements.
CLARUS
THERAPEUTICS, INC.
Statements of Operations
(in thousands, except share and per share data)
|
|
|
Years Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Net product revenue
|
|
$
|
6,369
|
|
|
$
|
—
|
|
|
Cost of product sales
|
|
|
8,687
|
|
|
|
—
|
|
|
Gross loss
|
|
|
(2,318
|
)
|
|
|
—
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
29,515
|
|
|
|
7,374
|
|
|
General and administrative
|
|
|
11,937
|
|
|
|
7,414
|
|
|
Research and development
|
|
|
3,407
|
|
|
|
3,088
|
|
|
Loss from operations
|
|
|
(47,177
|
)
|
|
|
(17,876
|
)
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability and derivative, net
|
|
|
66,891
|
|
|
|
13
|
|
|
Interest income
|
|
|
25
|
|
|
|
79
|
|
|
Interest expense
|
|
|
(15,394
|
)
|
|
|
(23,866
|
)
|
|
Total other income (expense), net
|
|
|
51,522
|
|
|
|
(23,774
|
)
|
|
Net income (loss) before income taxes
|
|
|
4,345
|
|
|
|
(41,650
|
)
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
Net income (loss)
|
|
|
4,345
|
|
|
|
(41,650
|
)
|
|
Accretion of preferred stock
|
|
|
(14,682
|
)
|
|
|
(13,594
|
)
|
|
Net loss attributable to common stockholders – basic and diluted
|
|
$
|
(10,337
|
)
|
|
$
|
(55,244
|
)
|
|
Net loss per common share attributable to common stockholders, basic and diluted
|
|
$
|
(11.88
|
)
|
|
$
|
(63.48
|
)
|
|
Weighted-average common shares used in net loss per share attributable to common stockholders, basic and diluted
|
|
|
870,263
|
|
|
|
870,263
|
|
The
accompanying notes are an integral part of these financial statements.
CLARUS
THERAPEUTICS, INC.
Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit
(in thousands, except share data)
|
|
|
Redeemable Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Additional Paid-in
|
|
|
Accumulated
|
|
|
Total Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
Balance at December 31, 2018
|
|
|
36,756,498
|
|
|
$
|
169,919
|
|
|
|
870,263
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(261,384
|
)
|
|
$
|
(261,383
|
)
|
|
Accretion of redeemable convertible preferred stock to redemption value
|
|
|
—
|
|
|
|
13,594
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(359
|
)
|
|
|
(13,235
|
)
|
|
|
(13,594
|
)
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
359
|
|
|
|
—
|
|
|
|
359
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(41,650
|
)
|
|
|
(41,650
|
)
|
|
Balance at December 31, 2019
|
|
|
36,756,498
|
|
|
$
|
183,513
|
|
|
|
870,263
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(316,269
|
)
|
|
$
|
(316,268
|
)
|
|
Accretion of redeemable convertible preferred stock to redemption value
|
|
|
—
|
|
|
|
14,682
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(825
|
)
|
|
|
(13,857
|
)
|
|
|
(14,682
|
)
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
825
|
|
|
|
—
|
|
|
|
825
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,345
|
|
|
|
4,345
|
|
|
Balance at December 31, 2020
|
|
|
36,756,498
|
|
|
$
|
198,195
|
|
|
|
870,263
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(325,781
|
)
|
|
$
|
(325,780
|
)
|
The
accompanying notes are an integral part of these financial statements.
CLARUS
THERAPEUTICS, INC.
Statements of Cash Flows
(in thousands)
|
|
|
Years Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,345
|
|
|
$
|
(41,650
|
)
|
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Non-cash interest expense related to debt financing and royalty obligation
|
|
|
12,459
|
|
|
|
9,005
|
|
|
Change in fair value of warrant liability
|
|
|
(551
|
)
|
|
|
(138
|
)
|
|
Change in fair value of derivative liability
|
|
|
(66,340
|
)
|
|
|
14,986
|
|
|
Stock-based compensation expense
|
|
|
825
|
|
|
|
359
|
|
|
Depreciation
|
|
|
18
|
|
|
|
4
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,400
|
)
|
|
|
—
|
|
|
Inventory
|
|
|
1,104
|
|
|
|
(6,961
|
)
|
|
Prepaid expenses and other current assets
|
|
|
(804
|
)
|
|
|
(939
|
)
|
|
Accounts payable
|
|
|
7,728
|
|
|
|
4,035
|
|
|
Accrued expenses
|
|
|
2,864
|
|
|
|
1,584
|
|
|
Deferred revenue
|
|
|
1,172
|
|
|
|
—
|
|
|
Net cash used in operating activities
|
|
|
(41,580
|
)
|
|
|
(19,715
|
)
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(63
|
)
|
|
|
(21
|
)
|
|
Net cash used in investing activities
|
|
|
(63
|
)
|
|
|
(21
|
)
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes payable
|
|
|
1,611
|
|
|
|
18,389
|
|
|
Proceeds from issuance of senior notes payable, net of discount
|
|
|
49,125
|
|
|
|
—
|
|
|
Proceeds from PPP loan
|
|
|
488
|
|
|
|
—
|
|
|
Repayment of PPP loan
|
|
|
(488
|
)
|
|
|
—
|
|
|
Debt issuance costs
|
|
|
(3,516
|
)
|
|
|
(29
|
)
|
|
Net cash provided by financing activities
|
|
|
47,220
|
|
|
|
18,360
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
5,577
|
|
|
|
(1,376
|
)
|
|
Cash and cash equivalents – beginning of period
|
|
|
1,656
|
|
|
|
3,032
|
|
|
Cash and cash equivalents – end of period
|
|
$
|
7,233
|
|
|
$
|
1,656
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3,125
|
|
|
$
|
—
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock to redemption value, including dividends on preferred stock
|
|
$
|
14,682
|
|
|
$
|
13,594
|
|
The
accompanying notes are an integral part of these financial statements.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
1.
Organization and Description of Business Operations
Clarus
Therapeutics, Inc. (the “Company” or “Clarus”) is a specialty pharmaceutical company focused on the commercialization
of JATENZO, the first and only oral testosterone (“T”) replacement, or testosterone replacement therapy (“TRT”),
of its kind approved by the U.S. Food and Drug Administration, or FDA. The FDA completed its review of the Company’s New Drug Application
and approved JATENZO for marketing on March 27, 2019. The Company commercially launched JATENZO on February 10, 2020. JATENZO is the
Company’s sole source of revenue and sales are exclusively within the United States. Management remains committed to the product’s
commercial success. The Company was founded in 2004 and is located and headquartered in Northbrook, Illinois.
The
Company is subject to risks and uncertainties associated with any pharmaceutical company that is transitioning from the development to
commercial stage. Since inception, the Company has incurred substantial operating losses due to substantial product development and commercialization
expenditures. In addition, the Company operates in an environment of rapid technological change and is largely dependent on the services
of its employees and consultants. The Company anticipates incurring additional losses until such time, if ever, that it can generate
significant sales of JATENZO, is cash flow positive from operations, or enters into cash flow positive business development transactions.
Liquidity
and Going Concern
The
Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about
the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
Since
its inception, the Company has devoted substantially all its efforts to business planning, clinical development, commercial planning
and raising capital. The Company has incurred losses since inception and has an accumulated deficit of $325.8 million as of December
31, 2020, including $94.0 million of cumulative accretion on the Series A Redeemable Convertible Preferred Stock (“Series A Preferred
Stock”), the Series B Redeemable Convertible Preferred Stock (“Series B Preferred Stock”), the Series C Redeemable
Convertible Preferred Stock (“Series C Preferred Stock”) and the Series D Redeemable Convertible Preferred Stock (“Series
D Preferred Stock”), collectively, Preferred Stock, and $97.6 million of cumulative non-cash interest related to previously issued
convertible debt. The Company is also in forbearance on its March 12, 2020 senior secured notes as it was unable to maintain at least
$10.0 million in cash and cash equivalents as of the last day of each calendar month beginning December 2020 and was unable to pay
the required $3.1 million interest payment due in March 2021. In accordance with the related forbearance agreement, the Company
will need to maintain at least $2.5 million of cash and cash equivalents as of the last day of each calendar month until the proposed
SPAC merger (see below).
The
Company is seeking to complete a merger with a newly-formed Special Purpose Acquisition Company (“SPAC”), whereby the Company
will become a 100% owned subsidiary of the SPAC. In addition, current Clarus stakeholders will invest an additional $25.0 million in
Clarus before the close of this transaction (Note 15). In addition to pursuing consummation of the SPAC merger and the related investment,
the Company plans to seek additional funding through the expansion of its commercial efforts to grow JATENZO and its operating cash flow,
business development efforts to out-license JATENZO internationally, equity financings, debt financings such as the secured notes described
in Note 7, Debt, or other capital sources including collaborations with other companies or other strategic arrangements with third
parties. There can be no assurance that these future financing efforts will be successful.
If
the Company is unable to obtain funding or generate operating cash flow, the Company will be forced to delay, reduce or eliminate some
or all of its product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company
may be unable to continue operations. Although management continues to pursue these plans, there is no assurance that the Company will
be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all. The terms
of any financing may adversely affect the holdings or the rights of the Company’s stockholders.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
1.
Organization and Description of Business Operations (cont.)
Based
on its recurring losses from operations incurred since inception, expectation of continuing operating losses for the foreseeable future,
and need to raise additional capital to finance its future operations, as of the issuance date of the financial statements for the year
ended December 31, 2020, the Company has concluded that its cash and cash equivalents will not be sufficient to fund its operating expenses,
capital expenditure requirements and debt service payments through at least twelve months from the date that these financial statements
are available to be issued and that there is substantial doubt about the Company’s ability to continue as a going concern.
The
accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly,
the financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates
the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Impact
of the COVID-19 Pandemic
The
business disruptions associated with the COVID-19 pandemic had a significant negative impact on the Company’s financial statements
for the year ended December 31, 2020. Management expects that the public health actions being undertaken to reduce the spread of the
virus, and that may have to be undertaken again in the event of a resurgence of the virus, will create significant disruptions to the
Company with respect to: (i) the demand for its products, (ii) the ability of its sales representatives to reach healthcare
customers, (iii) its ability to maintain staffing levels to support its operations, (iv) its ability to continue to manufacture
certain of its products, (v) the reliability of its supply chain and (vi) its ability to achieve the financial covenants required
by the senior secured notes agreement (see Note 7, Debt). The extent to which the COVID-19 pandemic will impact the Company’s
business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration
of the outbreak, travel restrictions and social distancing in the U.S. and other countries, business closures or business disruptions
and the effectiveness of actions taken in the U.S. and other countries to contain and treat the disease.
The
Company is closely monitoring the evolving impact of the pandemic on all aspects of its business. The Company has implemented a number
of measures designed to protect the health and safety of its employees, support its customers and promote business continuity. The Company
is also actively reviewing and implementing cost-saving measures including discontinuing or delaying all non-essential services and programs
and instituting controls on travel, events, marketing and clinical studies to adapt the business plan for the evolving COVID-19 challenges.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”).
Reclassifications
Certain
reclassifications have been made to the Company’s prior year financial statements to conform to the Company’s current year
presentation. These reclassifications had no effect on the Company’s previously reported results of operations or accumulated deficit.
Segment
Information
The
Company’s chief operating decision maker manages its operations as a single operating segment for the purposes of assessing performance
and making operating decisions. All of the Company’s long-lived assets are held in the United States.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
2.
Summary of Significant Accounting Policies (cont.)
Use
of Estimates
Preparation
of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period covered by the financial statements and accompanying notes.
The most significant estimates relate to determination of fair value of the Company’s common stock and common stock warrants, stock-based
compensation, notes, royalty obligation and the valuation of embedded derivatives. Management evaluates its estimates and assumptions
on an ongoing basis using historical experience and other factors, including the current economic environment, and records adjustments
when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ
from those estimates.
Fair
Value of Financial Instruments
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The three levels of inputs that may be used to measure fair value are defined below:
|
Level
1:
|
Quoted market
prices in active markets for identical assets or liabilities.
|
|
|
|
|
Level
2:
|
Inputs other than Level
1 inputs that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves.
|
|
|
|
|
Level
3:
|
Unobservable inputs for
the asset or liability (i.e. supported by little or no market activity). Level 3 inputs include management’s own assumptions
about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
|
To
the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest
for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level
of any input that is significant to the fair value measurement.
Cash
and Cash Equivalents
Cash
and cash equivalents and represent cash and highly liquid investments with an original contractual maturity at the date of purchase of
three months or less. As of December 31, 2020 and 2019, cash and cash equivalents included government-backed money market funds.
Concentrations
of Risk
Substantially
all of the Company’s cash and money market funds are held with a single financial institution. Due to its size, the Company believes
this financial institution represents minimal credit risk. Deposits in this institution may exceed the amount of insurance provided on
such deposits by the Federal Deposit Insurance Corporation for U.S. institutions. The Company has not experienced any losses on its deposits
of cash and cash equivalents. Management believes that the Company is not exposed to significant credit risk due to the financial position
of the depository institutions in which those deposits are held.
The
Company’s accounts receivable balance is compromised solely from transactions with the Company’s single third-party logistics
provider, or 3PL. The Company monitors economic conditions to identify facts or circumstances that may indicate that any of its accounts
receivable are at risk of collection.
The
Company depends on two third-party suppliers for its supply of T-undecanoate (“TU”), the active pharmaceutical ingredient
of JATENZO.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
2.
Summary of Significant Accounting Policies (cont.)
Accounts
Receivable, Net
Accounts
receivable are stated at net realizable value. On a periodic basis, management evaluates its accounts receivable and determines whether
to provide an allowance or if any accounts should be written off based on a past history of write-offs, collections and current credit
conditions. A receivable is considered past due if the Company has not received payments based on agreed-upon terms. The Company generally
does not require any security or collateral to support its receivables. The Company performs ongoing evaluations of its customers.
Inventory
Inventory
is stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) method.
Inventories are written down for product that has become obsolete, inventory that has a cost basis in excess of its expected net realizable
value and inventory in excess of expected requirements. The estimate of excess quantities is subjective and primarily dependent on our
estimates of future demand for a particular product. Write-downs of inventory establish a new cost basis which is not increased for future
increases in the net realizable value of inventories or changes in estimated obsolescence.
Property
and Equipment, net
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated
useful lives of the respective assets, as follows:
|
Asset Class
|
|
|
Estimated
Useful Life
|
|
|
Computer and office equipment
|
|
|
3 years
|
|
|
Furniture and fixtures
|
|
|
7 years
|
|
Upon
retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting
gain or loss is included in loss from operations. Repair and maintenance costs are charged to expense as incurred.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of
an asset group may not be recoverable. There were no charges as a result of impairment losses for the years ended December 31, 2020 or
2019.
Deferred
Financing Costs
The
Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity
financings or debt financings as deferred financing costs until such financings are consummated. After consummation of a financing, these
costs are presented in the balance sheets as a direct reduction from the carrying amount of the respective equity or debt instrument
issued. Should an in-process financing be abandoned, the deferred financing costs will be expensed immediately as a charge to operating
expenses in the statements of operations and loss.
Redeemable
Convertible Preferred Stock
The
Company has adopted current accounting guidance in regard to accounting for certain financial instruments with characteristics of both
liabilities and equity and for the classification and measurement of redeemable securities. This guidance requires companies with mandatorily
redeemable features in their equity instruments to be classified separately from equity. The Company measures these instruments by recognizing
changes in redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value
at the end of each reporting period. In accordance with this guidance, the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock have been classified separately from equity in the accompanying balance sheets.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
2.
Summary of Significant Accounting Policies (cont.)
Revenue
Recognition
In
accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”), an entity recognizes revenue when its
customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to be entitled
to in exchange for those goods or services. The Company performs the following five steps to recognize revenue under ASC 606: (i) identify
the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or
as) the entity satisfies a performance obligation. The Company only recognizes revenue when it is probable that it will collect the consideration
to which it is entitled in exchange for the goods or services that will be transferred to the customer. At contract inception, once the
contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and
determines those that are performance obligations. The Company then recognizes as revenue the amount of the transaction price that is
allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The Company has determined that
the delivery of its product to its customer constitutes a single performance obligation as there are no other promises to deliver goods
or services. Shipping and handling activities are considered fulfillment activities and are not considered to be a separate performance
obligation. The Company has assessed the existence of a significant financing component in the agreements with its customers. The trade
payment terms with its customers do not exceed one year and therefore, no amount of consideration has been allocated as a financing component.
Taxes collected related to product sales are remitted to governmental authorities and are excluded from revenue.
Net
Product Sales
The
Company began selling JATENZO in February 2020, in the United States through a 3PL which takes title and control of the goods.
The 3PL distributes the product to wholesale distributors (collectively the “Distributors”), with whom the Company has entered
into formal agreements for delivery to retail pharmacies. The Company has also entered into arrangements with payors that provide government
mandated and/or privately negotiated rebates, chargebacks and discounts for the purchase of the Company’s products.
The
Company recognizes revenue on sales of JATENZO when the customer obtains control of the product, which occurs at a point in time, typically
upon delivery. Product revenues are recorded at the product’s wholesale acquisition costs, net of applicable reserves for variable
consideration that are offered within contracts between the Company and its customers, wholesale distributors, payors, and other indirect
customers relating to the sale of JATENZO. Components of variable consideration include government and commercial contract rebates, product
returns, chargebacks, commercial co-payment assistance program transactions and distribution services fees. These deductions are based
on the amounts earned or to be claimed on the related sales and are classified as a current liability or reduction of receivables, based
on expected value method and a range of outcomes and are probability weighted in accordance with ASC 606.
The
amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price
only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognition under contracts
will not occur in a future period. The Company’s analyses contemplate the application of the constraint in accordance with ASC
606. Actual amounts of consideration ultimately received may differ from its estimates. If actual results in the future vary from its
estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances
become known.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
2.
Summary of Significant Accounting Policies (cont.)
Cost
of Product Sales
Cost
of product sales include manufacturing and distribution costs, the cost of drug substance, FDA program fees and a reserve for short-dated,
obsolete inventory. The Company began capitalizing inventory upon FDA approval of JANTENZO®.
Research
and Development Expenses
Research
and development expenses include salaries and benefits, clinical trials costs, contract services and manufacturing development costs.
Research and development expenses are charged to operations as they are incurred. The Company follows the provisions of the Research
and Development Topic of the Codification which requires the Company to defer and capitalize nonrefundable advance payments made for
goods or services to be used in research and development activities until the goods have been delivered or the related services have
been performed. If the goods are no longer expected to be delivered or the services are no longer expected to be performed, the Company
would be required to expense the related capitalized advance payments. The Company had no capitalized nonrefundable advance payments
and no refundable advance payments as of December 31, 2020 or 2019.
Leases
The
Company leases office space and recognizes related rent expense on a straight-line basis over the term of the lease.
Stock-Based
Compensation
The
Company accounts for all stock-based compensation awards granted as stock-based compensation expense at fair value. The Company’s
stock-based payments include stock options and grants of common stock, restricted for vesting conditions. The measurement date for awards
is the date of grant, and stock-based compensation costs are recognized as expense over the requisite service period, which is generally
the vesting period, on a straight-line basis. Stock-based compensation expense is classified in the accompanying statements of operations
based on the function to which the related services are provided. The Company recognizes stock-based compensation expense for the portion
of awards that have vested. Forfeitures are recorded as they occur. The fair value of each stock option grant is estimated on the date
of grant using the Black-Scholes option-pricing model.
Patents
and Trademarks
All
patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty
of the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses in the statement of operations.
Basic
and Diluted Loss per Share
Basic
and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the weighted average
common shares outstanding. Basic net loss per share is determined using the weighted average number of shares of common stock outstanding
during each period. Diluted net loss per share includes the effect, if any, from the potential exercise or conversion of securities,
such as convertible preferred stock, warrants and stock options, which would result in the issuance of incremental shares of common stock.
The computation of diluted net loss per shares does not include the conversion of securities that would have an anti-dilutive effect.
The basic and diluted computations of net loss per share for the Company are the same because the effects of the Company’s convertible
securities would be anti-dilutive. See Note 13, Net Loss per Share, for further detail.
CLARUS THERAPEUTICS, INC.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (cont.)
Comprehensive Loss
The Company’s comprehensive
loss was the same as its reported net loss for all periods presented.
Income Taxes
The Company accounts for income
taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax
assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using
enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred
tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred
tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the
Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be
able to realize its deferred tax assets in the future in excess of its net recorded amount, it would make an adjustment to the deferred
tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain
tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more
likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax
positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more
than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest
and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying statement of operations. As of December
31, 2020 and 2019, no accrued interest or penalties are included on the related tax liability line in the balance sheet.
Emerging Growth Company Status
The Company is expected to
be an “emerging growth company” (“EGC”) upon merger, as defined in the Jumpstart Our Business Startups Act (“JOBS
Act”) and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies
that are not EGCs. The Company may take advantage of these exemptions until it is no longer an EGC under Section 107 of the JOBS
Act, which provides that an EGC can take advantage of the extended transition period afforded by the JOBS Act for the implementation of
new or revised accounting standards. The Company expects to elect to avail itself of the extended transition period and, therefore, while
the Company is an EGC it will not be subject to new or revised accounting standards the same time that they become applicable to other
public companies that are not EGCs, unless it chooses to early adopt a new or revised accounting standard.
Recently Adopted Accounting Pronouncements
In January 2016, the FASB
issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities (“ASU 2016-01”). ASU 2016-01 amends various aspects of the recognition, measurement, presentation,
and disclosure for financial instruments. The Company adopted ASU 2016-01 as of January 1, 2020. The adoption of this ASU did not have
a material impact on the Company’s financial statements and related disclosures.
CLARUS THERAPEUTICS, INC.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (cont.)
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the
FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, an entity is required to recognize
right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. For leases with
a term of twelve months or less, the lessee is permitted to make an accounting policy election not to recognize lease assets and lease
liabilities by class of underlying assets. The new lease standard is effective for annual periods beginning after December 15, 2021. The
Company will adopt the new standard using a modified retrospective basis, which requires the Company to reflect its leases on its balance
sheet for the earliest comparative period presented. The adoption of this standard is not expected to have a material impact on the Company’s
financial statements and related disclosures.
In June 2016, the FASB
issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized
cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model. It also eliminates the concept of
other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance
for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes may result in earlier recognition
of credit losses. For public entities that are Securities and Exchange Commission filers, excluding entities eligible to be smaller reporting
companies, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal
years. For all other entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods
within those fiscal years. Early adoption is permitted. This standard will be effective for the Company on January 1, 2023. The Company
does not expect the adoption of ASU 2016-13 to have a material impact on the Company’s financial statements.
In December 2019, the
FASB issued ASU 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”): Simplifying the Accounting for Income Taxes,
which adds or clarifies guidance on accounting for income taxes. The new guidance will become effective for the Company on January 1,
2022, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial
statements and related disclosures.
In March 2020, the FASB
issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting
(“ASU 2020-4”), which applies to entities that have contracts, such as debt agreements, lease agreements or derivative instruments,
which reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Entities can elect not to apply
certain modification accounting requirements for contract modifications that replace a reference rate affected by reference rate reform.
If elected, such contracts are accounted for as a continuation of the existing contract and no reassessments or remeasurements are required.
ASU 2020-04 is effective for all entities from March 12, 2020 through December 31, 2022 and does not apply to contract modifications made
after December 31, 2022. The Company is currently evaluating the impact that the adoption for ASU 2020-04 will have on its financial statements.
In June 2020, the FASB
issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts
in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
(“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain convertible instruments, amends guidance on derivative
scope exceptions for contracts in an entity’s own equity and modifies the guidance on diluted earnings per share calculations as
a result of these changes. The new guidance will become effective for the Company on January 1, 2024, with early adoption permitted.
The Company is currently evaluating the impact that the adoption for ASU 2020-06 will have on its financial statements.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
3.
Fair Value Measurements
The
following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring
basis:
|
|
|
December 31, 2020
|
|
|
(in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
7,205
|
|
|
$
|
7,205
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total assets
|
|
$
|
7,205
|
|
|
$
|
7,205
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
December 31, 2019
|
|
|
(in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
1,628
|
|
|
$
|
1,628
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total Assets
|
|
$
|
1,628
|
|
|
$
|
1,628
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
551
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
551
|
|
|
Derivative liability
|
|
|
65,006
|
|
|
|
—
|
|
|
|
—
|
|
|
|
65,006
|
|
|
Total liabilities
|
|
$
|
65,557
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
65,557
|
|
During
the years ended December 31, 2020 and 2019, there were no transfers between levels.
As
of December 31, 2020 and 2019, the Company’s cash equivalents consisted of money market funds, classified as Level 1 financial
assets, as these assets are valued using quoted market prices in active markets without any valuation adjustment. There were no financial
assets valued based on Level 2 inputs.
As
of December 31, 2019, the Company had Level 3 financial liabilities that were measured at fair value on a recurring basis. The Company’s
Warrant Liability and Derivative Liability (defined below) are carried at fair value, determined using Level 3 inputs in the fair value
hierarchy as described below. As of December 31, 2020, the Warrant Liability and Derivative Liability were valued at zero.
The
carrying amounts reported in the accompanying balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate
their fair value based on the short-term nature of these instruments. The carrying value of long-term and short-term debt, taking into
consideration debt discounts and related derivative instruments, is estimated to approximate fair value.
Warrant
Liability
In
conjunction with a previous loan agreement that was fully paid in 2017, certain lenders were granted warrants, or the Series D Warrants,
to purchase a total of 183,438 shares of Series D Preferred Stock at an exercise price of $4.50 per share. The expiration date of the
warrants will be the earlier of July 14, 2021 for 122,292 shares and April 9, 2023 for 61,146 shares, or three years from the effective
date of a registration statement for an initial public offering of the Company’s stock. No warrants were exercised during the years
ended December 31, 2020 and 2019.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
3.
Fair Value Measurements (cont.)
The
warrant is a freestanding financial instrument that requires the Company to transfer equity instruments upon exercise by the warrant
holder at a strike price equal to the issuance price of the underlying preferred stock (the “Warrant Liability”). The valuation
of the warrant liability was determined with the assistance of an independent valuation firm which utilized the hybrid method, a hybrid
valuation between a probability-weighted expected return model (“PWERM”) and an option pricing model (“OPM”).
The hybrid method estimates probability-weighted values across multiple scenarios, but uses the OPM to estimate the allocation of value
within one or more of those scenarios. Weighting allocations are assigned to the OPM and PWERM methods factoring possible future liquidity
events. Specifically, for each exit event date and exit scenario, the OPM method was utilized to estimate the Series D Preferred Stock
value per share. The fair value was determined using Level 3 inputs. The warrants to purchase preferred stock are remeasured at each
reporting and settlement date. Changes in fair value for each reporting period are recognized in other income (expense) in the statements
of operations. A change in the assumptions related to the valuation of the Warrant Liability could have a significant impact on the value
of the obligation.
The
following table sets forth a summary of changes in the fair value of the Company’s warrant liability (in thousands):
|
Balance at December 31, 2018
|
|
$
|
689
|
|
|
Change in fair value of warrants
|
|
|
(138
|
)
|
|
Balance at December 31, 2019
|
|
$
|
551
|
|
|
Change in fair value of warrants
|
|
|
(551
|
)
|
|
Balance at December 31, 2020
|
|
$
|
—
|
|
As
the fair value of Series D Preferred Stock at December 31, 2020 was less than the Series D Preferred Stock issuance price of $4.50, the
fair value of the Series D warrants was reduced to zero.
Derivative
Liability
From
2016 through 2020, the Company entered into convertible notes purchase agreements with related parties for a total aggregate borrowing
amount of $61.3 million (see Note 7, Debt). The convertible notes contain various conversion features including mandatory conversion
upon the occurrence of a qualified financing at a 20% discount or shares of Series D Preferred Stock at the Series D Preferred Stock
issuance price of $4.50. Upon the occurrence of a non-qualified financing, the noteholders have the option to convert at the same terms
as described above for a qualified financing. The Company determined that the acquisition premium and the qualified and non-qualified
financing conversion features were embedded derivative instruments requiring bifurcation as separate liabilities with a corresponding
debt discount.
The
derivative liability is a freestanding financial instrument that requires the Company to transfer equity instruments upon exercise by
the noteholders. The derivative liability was initially recorded as a liability at fair value, with a corresponding debt discount, which
was amortized to interest expense using the effective interest rate method over the term of the related notes. The valuation of the derivative
liability was determined with the assistance of an independent valuation firm utilizing a probability-weighted expected return model
(“PWERM”), which estimates the value based on probability-weighted present value of potential future liquidity events, with
an allocation of probabilities applied to each scenario. Future liquidity event scenarios for the Convertible Notes as of December 31,
2019 included an acquisition event prior to expected FDA approval, an IPO prior to expected FDA approval, an acquisition event after
expected FDA approval and an IPO after expected FDA approval, and only two scenarios as of December 31, 2020 which were an acquisition
event after expected FDA approval and an IPO after expected FDA approval. The fair value was determined using Level 3 inputs. The derivative
liability is remeasured at each reporting and settlement date. Changes in fair value for each reporting period are recognized in other
income (expense) in the statements of operations. A change in the assumptions related to the valuation of the derivative liability could
have a significant impact on the value of the obligation.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
3.
Fair Value Measurements (cont.)
The
following table sets forth a summary of changes in the fair value of the Company’s derivative liability (in thousands):
|
Balance at December 31, 2018
|
|
$
|
50,020
|
|
|
2019 Notes issued
|
|
|
14,861
|
|
|
Change in fair value of derivative
|
|
|
125
|
|
|
Balance at December 31, 2019
|
|
$
|
65,006
|
|
|
2020 Notes issued
|
|
|
1,334
|
|
|
Change in fair value of derivative
|
|
|
(66,340
|
)
|
|
Balance at December 31, 2020
|
|
$
|
—
|
|
As
the fair value of Series D Preferred Stock at December 31, 2020 was less than the Series D Preferred Stock issuance price of $4.50, the
fair value of the derivative liability related to the Company’s convertible notes was reduced to zero.
4.
Inventory
Inventory
consisted of the following as of December 31, 2020 and 2019 (in thousands):
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Raw material
|
|
$
|
4,225
|
|
|
$
|
94
|
|
|
Work-in-process
|
|
|
—
|
|
|
|
4,664
|
|
|
Finished goods
|
|
|
1,632
|
|
|
|
2,203
|
|
|
Total
|
|
$
|
5,857
|
|
|
$
|
6,961
|
|
As
of December 31, 2020, the Company recorded a reserve for inventory obsolescence of $7.8 million, with a corresponding charge to cost
of product sales. The charge was estimated based on an analysis of the remaining shelf life of the Company’s inventory at the time
that inventory is forecasted to be sold.
5.
Property and Equipment, net
Property
and equipment consisted of the following as of December 31, 2020 and 2019 (in thousands):
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Office equipment and computer hardware
|
|
$
|
99
|
|
|
$
|
96
|
|
|
Furniture and fixtures
|
|
|
109
|
|
|
|
51
|
|
|
Total property and equipment
|
|
|
208
|
|
|
|
147
|
|
|
Less accumulated depreciation
|
|
|
(144
|
)
|
|
|
(126
|
)
|
|
Property and equipment, net
|
|
$
|
64
|
|
|
$
|
21
|
|
Depreciation
expense for the years ended December 31, 2020 and 2019 was approximately $18 thousand and $4 thousand, respectively.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
6.
Accrued Expenses
Accrued
expenses consisted of the following (in thousands):
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Selling and marketing costs
|
|
$
|
3,468
|
|
|
$
|
698
|
|
|
Employee compensation and related benefits
|
|
|
1,090
|
|
|
|
569
|
|
|
Other research costs
|
|
|
—
|
|
|
|
61
|
|
|
Professional Fees
|
|
|
73
|
|
|
|
426
|
|
|
Other
|
|
|
—
|
|
|
|
13
|
|
|
Total
|
|
$
|
4,631
|
|
|
$
|
1,767
|
|
7.
Debt
Convertible
Notes
From
2016 to 2020, the Company issued several convertible notes (the “Convertible Notes”) pursuant to which the Company borrowed
an aggregate of $61.3 million from existing investors and related parties. All Convertible Notes accrue interest at a rate of 8% compounded
daily and have a maturity date of March 1, 2025.
The
Company had the following convertible notes outstanding as of December 31, 2020 (in thousands):
|
Issuance Year
|
|
Aggregate
Borrowing Amount
|
|
|
2016
|
|
$
|
18,000
|
|
|
2017
|
|
|
14,000
|
|
|
2018
|
|
|
9,300
|
|
|
2019
|
|
|
18,389
|
|
|
2020
|
|
|
1,611
|
|
|
Total
|
|
$
|
61,300
|
|
The
Convertible Notes contain various conversion features. Upon the occurrence of a qualified financing, the Convertible Notes plus accrued
interest mandatorily converts, to shares issued in the qualified financing, as defined in the notes, at a 20% discount, or into shares
of Series D Preferred Stock at the Series D Price of $4.50 per share. Upon the occurrence of a non-qualified financing, the noteholders
have the option to convert at the same terms as described above for a qualified financing. At maturity, the noteholders also have an
option to convert at the terms described above for a qualified or non-qualified financing. If the Company completes a strategic transaction
and the Convertible Notes have not been previously converted, noteholders will automatically receive an acquisition premium of the greater
of a) the sum of (i) 1.5 times the principal amount of the Convertible Notes and (ii) accrued and unpaid interest thereon, or b)
the amount that would have been payable to the noteholders if such notes had been converted to shares of Series D Preferred Stock at
the Series D price immediately prior to the close of such strategic transaction.
The
Company determined that the acquisition premium and the qualified and non-qualified financing conversion features were embedded derivative
instruments requiring bifurcation as separate liabilities with a corresponding debt discount (see Note 3, Fair Value Measurements).
The debt discount was amortized to interest expense using the effective interest rate method over the term of the Convertible Notes.
During
the year ended December 31, 2020, pursuant to the executed amendment of the Convertible Notes, the Company and certain lenders agreed
to extend or further extend the maturity dates of the Convertible Notes to March 1, 2025. The amendment only modified the maturity date,
no other terms, and accordingly was deemed administrative in nature as it was not intended to change any of the economic terms between
parties. As such the extension of the maturity dates was deemed to be a modification of the Convertible Notes and modification accounting
was applied. The Company calculated the remaining debt discount for each of the Convertible Notes and adjusted the effective interest
rate to amortize the remaining debt discount over the adjusted remaining life of the Convertible Notes.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
7.
Debt (cont.)
The
carrying value of the Company’s Convertible Notes is as follows (in thousands):
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Principal amount
|
|
$
|
61,300
|
|
|
$
|
59,689
|
|
|
Accrued and unpaid interest
|
|
|
17,287
|
|
|
|
11,230
|
|
|
Unamortized debt discount
|
|
|
(676
|
)
|
|
|
—
|
|
|
Total
|
|
$
|
77,911
|
|
|
$
|
70,919
|
|
The
Company recognized interest expense of $6.1 million and $4.5 million during the years ended December 31, 2020 and 2019, respectively.
Senior
Secured Notes
The
carrying value of the Company’s senior secured notes is as follows (in thousands):
|
|
|
December 31,
2020
|
|
|
Principal amount
|
|
$
|
50,000
|
|
|
Accrued and unpaid interest
|
|
|
1,278
|
|
|
Unamortized debt discount
|
|
|
(9,376
|
)
|
|
Total
|
|
$
|
41,902
|
|
On
March 12, 2020, the Company issued and sold senior secured notes to certain lenders not related to the Company. The aggregate principal
amount of the senior secured notes was $50.0 million and the Company received $42.7 million in net proceeds after deducting transaction
expenses of $4.4 million and prepaid interest of $2.9 million. The senior secured notes bear interest at 12.5% and specify semiannual
payments on March 1 and September 1 and have a maturity date of March 1, 2025. The first two years provide for interest-only payments
and the final three years amortize the principal balance at $15.0 million, $15.0 million and $20.0 million, respectively. The senior
secured notes are governed by an indenture, dated as of March 12, 2020, between the Company and the investors. The interest rate will
increase to 14.50% for overdue installments in the event of default. In addition to liquidation preference, the senior secured notes
contain a lien on all assets of the Company.
Future
principal payments of the senior secured notes are as follows (in thousands):
|
Years ending December 31,
|
|
Amount
|
|
|
2021
|
|
$
|
—
|
|
|
2022
|
|
|
7,500
|
|
|
2023
|
|
|
15,000
|
|
|
2024
|
|
|
17,500
|
|
|
2025
|
|
|
10,000
|
|
|
Total
|
|
$
|
50,000
|
|
The
senior secured notes also have a detachable royalty feature under which the lenders receive a royalty of 0.56% to 1.67% on net sales
beginning in 2021, with the royalty obligation continuing until the lenders receive total royalty payments of approximately $24.2 million.
The value assigned to royalty rights is recorded as a debt discount to the Notes and is amortized to interest expense over the life of
the notes. The royalty obligation had a fair value of $7.9 million at issuance in March of 2020. The lenders have a security interest
in the assets and intellectual property of the Company. Since the royalty rights are tied to Clarus’ net sales of JATENZO, such
royalty rights are not subject to treatment as a derivative instrument and thus do not need to be periodically measured and marked to
market. Proceeds were used to finance the commercial launch of JATENZO. Refer to the section below for the accounting treatment of the
royalty obligation.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
7.
Debt (cont.)
In
connection with the senior secured notes, the Company entered into an indenture stating that the Company would maintain cash and cash
equivalents in the amount of at least $10.0 million as of the last day of each calendar month, commencing on March 31, 2020. As of December
31, 2020, the Company was unable to maintain cash and cash equivalents of $10.0 million, and such breach of the indenture resulted in
a default and the negotiation of a forbearance agreement noted below.
Forbearance
Agreement
On
March 17, 2021, the Company entered into a forbearance agreement with noteholders in relation to the senior secured notes. The Company
was unable to and did not pay interest of $3.1 million due on March 1, 2021. If the Company is unable to secure the funds to repay its
debt as of March 31, 2021, all investors have the right to exercise all remedies available under the indenture to receive the funds due.
Under
the forbearance agreement, in exchange for the investors’ agreement not to exercise their rights to retrieve the funds owed, the
Company was required to maintain cash and cash equivalents of at least $2.5 million amongst other financial budgeting and reporting requirements
until consummation of the Business Combination. Under the forbearance agreement, the forbearance period would automatically terminate
if certain conditions, including the execution of the merger agreement, did not occur on or prior to April 15, 2021 (see Note 15, Subsequent
Events). The noteholders have also agreed to provide additional capital under certain circumstances to the Company for operations
up to $10.0 million until such time of the proposed business combination transaction.
On
April 14, 2021, the Company entered into a written consent to update the terms of its forbearance agreement. Per the written consent,
the forbearance period would not be terminated on April 15, 2021, provided that the Company, amongst other things, executed the merger
agreement and provided financial reporting requirements by April 27, 2021.
Royalty
Obligation
The
Company periodically assesses the estimated royalty payments related to the senior secured notes to the lender and to the extent such
payments are greater or less than its initial estimates or the timing of such payments is materially different than its original estimates,
the Company will prospectively adjust the accretion of interest on the royalty obligation. There are a number of factors that could materially
affect the amount and the timing of royalty payments, most of which are not within the Company’s control. Such factors include,
but are not limited to, the rate of JATENZO prescriptions, the number of doses administered, the introduction of competing products,
manufacturing or other delays, patent protection, adverse events that result in governmental health authority-imposed restrictions on
the use of the drug products, and sales never achieving forecasted numbers, which would result in reduced royalty payments and reduced
non-cash interest expense over the life of the royalty obligation. To the extent future royalties result in an amount less than the liability,
the Company is not obligated to fund any such shortfall.
The
Company records estimated royalties due for the current period in accrued other expenses until the payment is received from the customer,
at which time the Company then remits payment to the lenders. In order to determine the accretion of the royalty obligation, the Company
is required to estimate the total amount of future royalty payments to be received and submitted to the lenders. The sum of these amounts
less the proceeds the Company received will be recorded as interest expense over the life of the royalty obligation. As of December 31,
2020, the Company’s estimate of its total interest expense resulted in an annual effective interest rate of approximately 32.3%.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
7.
Debt (cont.)
The
following table shows the activity of the royalty obligation since the transaction inception through December 31, 2020:
|
|
|
December 31, 2020
|
|
|
Value assigned to royalty obligation at inception
|
|
$
|
7,211
|
|
|
Non-cash interest expense recognized
|
|
|
2,051
|
|
|
Royalty obligation – ending balance
|
|
$
|
9,262
|
|
PPP
Loan
In
March of 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted to, among other provisions,
provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The CARES Act includes a Paycheck
Protection Program (“PPP”) administered through the Small Business Association (“SBA”). Under the PPP, beginning
April 3, 2020, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved
regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria.
In
April of 2020, the Company received an unsecured loan of $0.5 million from the SBA. After considering further guidance issued by SBA,
the Company elected to repay the loan in full in May of 2020 with no interest due under safe harbor provisions of the CARES Act.
8.
Redeemable Convertible Preferred Stock
There
were no shares of redeemable convertible preferred stock issued during the years ended December 31, 2020 and December 31, 2019 As of
December 31, 2020, and 2019, preferred stock consisted of the following (in thousands, except for share data):
|
|
|
December 31, 2020
|
|
|
|
|
Preferred Stock Authorized
|
|
|
Preferred
Stock
Issued and
Outstanding
|
|
|
Carrying Value
|
|
|
Liquidation Value
|
|
|
Common Stock Issuable Upon Conversion
|
|
|
Series A Preferred Stock
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
$
|
9,170
|
|
|
$
|
9,170
|
|
|
|
2,500,000
|
|
|
Series B Preferred Stock
|
|
|
5,066,637
|
|
|
|
5,066,637
|
|
|
|
15,118
|
|
|
|
15,118
|
|
|
|
5,066,637
|
|
|
Series C Preferred Stock
|
|
|
9,438,744
|
|
|
|
9,438,744
|
|
|
|
20,057
|
|
|
|
20,057
|
|
|
|
9,438,744
|
|
|
Series D Preferred Stock
|
|
|
36,335,255
|
|
|
|
19,751,117
|
|
|
|
153,850
|
|
|
|
153,850
|
|
|
|
19,751,117
|
|
|
Total
|
|
|
53,340,636
|
|
|
|
36,756,498
|
|
|
$
|
198,195
|
|
|
$
|
198,195
|
|
|
|
36,756,498
|
|
|
|
|
December 31, 2019
|
|
|
|
|
Preferred
Stock Authorized
|
|
|
Preferred
Stock
Issued and
Outstanding
|
|
|
Carrying
Value
|
|
|
Liquidation Value
|
|
|
Common Stock Issuable Upon Conversion
|
|
|
Series A Preferred Stock
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
$
|
8,491
|
|
|
$
|
8,491
|
|
|
|
2,500,000
|
|
|
Series B Preferred Stock
|
|
|
5,066,637
|
|
|
|
5,066,637
|
|
|
|
13,998
|
|
|
|
13,998
|
|
|
|
5,066,637
|
|
|
Series C Preferred Stock
|
|
|
9,438,744
|
|
|
|
9,438,744
|
|
|
|
18,571
|
|
|
|
18,571
|
|
|
|
9,438,744
|
|
|
Series D Preferred Stock
|
|
|
36,335,255
|
|
|
|
19,751,117
|
|
|
|
142,453
|
|
|
|
142,453
|
|
|
|
19,751,117
|
|
|
Total
|
|
|
53,340,636
|
|
|
|
36,756,498
|
|
|
$
|
183,513
|
|
|
$
|
183,513
|
|
|
|
36,756,498
|
|
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
8.
Redeemable Convertible Preferred Stock (cont.)
The
following is a summary of the rights and preferences of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
and Series D Preferred Stock (collectively, “Preferred Stock”) are as follows:
Conversion —
Each share of Preferred Stock is convertible into common stock, upon approval of the holders of at least 65% of the preferred shares,
on a share-for-share basis to be adjusted for the effect of any stock splits or reverse splits, subject to certain antidilution adjustments,
are entitled to vote together with the common stockholders as one class and are entitled to separate votes on certain matters. Preferred
Stock automatically converts on a share-for-share basis into shares of common stock upon the closing of a qualified IPO.
Dividends
— Preferred stockholders are entitled to receive an annual, cumulative 8% dividend, when and if declared by the Board of Directors.
No dividends have been declared through December 31, 2020. For the years ended December 31, 2020, and 2019, there were $14.7 million
and $13.6 million of accrued and unpaid dividends, respectively.
Liquidation
Preference — Upon liquidation, dissolution, or winding up of business, the holders of the Preferred Stock are entitled
to receive a liquidation preference in priority over the holders of common stock, at an amount per share equal to their original purchase
price of $1.82 per share for Series A Preferred Stock and Series B Preferred Stock, $1.50 per share for Series C Preferred Stock and
$4.50 for Series D Preferred Stock, plus accumulated dividends. Upon liquidation, the Company’s remaining assets will be distributed
to Preferred Stockholders in the following order: Series D Preferred Stock, Series C Preferred Stock, Series B Preferred Stock,
Series A Preferred Stock. When holders of preferred stock are satisfied in full, any excess assets available for distribution will be
allocated ratably among common stockholders based on their pro rata shareholdings. Upon a deemed liquidation event, as defined, holders
have the option to redeem their shareholding at the liquidation payment amounts summarized above.
Redemption —
Holders of at least 65% of the then outstanding preferred shares, voting together as a separate class, may require the Company to redeem
all outstanding shares of Preferred Stock upon the earlier of (a) September 9, 2016 (in which case such shares of Preferred Stock
shall be redeemed by the Company in three equal annual installments), and (b) the occurrence of any redemption event. A redemption
event shall mean the breach by the Company of any material term of its Certificate of Incorporation or any material provision of the
related securities purchase agreement, the stockholders’ agreement or the registration rights agreement. To date holders have not
required redemption of the Preferred Stock.
Voting
Rights — Preferred Stock and common stock generally vote together as one class on an as-converted basis; however, common stock
voting rights on certain matters are subject to the powers, preferences, and rights of the Preferred Stock. The holders of Series C Preferred
Stock are entitled to elect three directors to the Company’s board of directors and the holders of Series D Preferred Stock are
entitled to elect one director to the Company’s board of directors. Certain actions, such as mergers, acquisition, liquidation,
dissolution, wind up of business, and deemed liquidation events, must be approved by the holders of at least 65% of outstanding shares
of Series D Preferred Stock.
9.
Common Stock
The
Company was authorized to issue up to 56,593,539 shares of common stock with a $0.001 par value per share as of December 31, 2020.
The
voting, dividend and liquidation rights of the holders of the Company’s common stock are subject to and qualified by the rights,
powers and preferences of the holders of the preferred stock as set forth above.
The
holders of common stock are entitled to one vote for each share of common stock. Subject to the payment in full of all preferential dividends
to which the holders of the Preferred Stock are entitled, the holders of common stock shall be entitled to receive dividends out of funds
legally available. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, after the payment
or provision for payment of all debts and liabilities of the Company and all preferential amounts to which the holders of Preferred Stock
are entitled with respect to the distribution of assets in liquidation, the holders of common stock shall be entitled to share ratably
in the remaining assets of the Company available for distribution.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
9.
Common Stock (cont.)
As
of December 31, 2020, and 2019, the Company has reserved the following shares of common stock for the potential conversion of outstanding
preferred stock and exercise of stock options:
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Preferred stock, as converted
|
|
|
36,756,498
|
|
|
|
36,756,498
|
|
|
Options to purchase common stock
|
|
|
3,814,659
|
|
|
|
2,307,640
|
|
|
Series D warrants
|
|
|
183,438
|
|
|
|
183,438
|
|
|
Remaining shares reserved for future issuance
|
|
|
1,350,481
|
|
|
|
3,156,710
|
|
|
Total
|
|
|
42,105,076
|
|
|
|
42,404,286
|
|
10.
Stock-Based Compensation
2004
Stock Incentive Plan
Effective
February 13, 2004, the Company adopted the Clarus Therapeutics 2004 Stock Incentive Plan (the “2004 Plan”). The 2004 Plan
was amended on January 28, 2011 to increase the number of shares of the Company’s common stock reserved for issuance to employees,
directors, and consultants to 1,529,936 shares. Options granted under the 2004 Plan may be incentive stock options or non-statutory stock
options. Restricted stock awards may also be granted under the 2004 Plan. Incentive stock options may only be granted to employees. Options
generally vest over a four-year period. The exercise price of incentive stock options shall be not less than 100% of the fair market
value per share of the Company’s Common Stock on the grant date. As of December 31, 2020, only incentive stock options to employees
have been awarded under the 2004 Plan. The awards granted under this plan generally vest over a four-year period and have a 10-year contractual
term.
2014
Stock Option and Incentive Plan
Effective
February 13, 2014, the Company adopted the Clarus Therapeutics 2014 Stock Option and Incentive Plan (the “2014 Plan”) and
reserved 1,000,000 shares of Common Stock for the issuance of awards under the 2014 Plan. The 2014 Plan permits the Company to make grants
of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units,
unrestricted stock awards, cash-based awards, performance share awards and dividend equivalent rights. To qualify as incentive options,
stock options must meet additional federal tax requirements, including a $100,000 limit on the value of shares subject to incentive options
which first become exercisable in any calendar year, and a shorter term and higher minimum exercise price in the case of certain large
stockholders. All full-time and part-time officers, employees, non-employee directors and other key persons, including consultants and
prospective employees, are eligible to participate in the 2014 Plan, subject to the sole discretion of the administrator. On December
15, 2017, April 17, 2019 and again on December 18, 2020, the 2014 Plan was amended, increasing the total shares of Common Stock reserved
for issuance by 416,500, 26,140, and 3,000,000 shares, respectively, for a total of 4,442,640 shares of Common Stock available for award
in the 2014 Plan. As of December 31, 2020, no shares of common stock were available for future grants under the 2014 Plan. Once the 2014
Plan was adopted, no further options were awarded under the 2004 Plan. The awards granted under this plan generally vest over a four-year
period and have a 10-year contractual term.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
10.
Stock-Based Compensation (cont.)
Stock
Options
The
following table summarizes stock option activity under the Plans:
|
|
|
Number of
options
|
|
|
Weighted average
exercise
price
|
|
|
Weighted
average
remaining
contractual
life (years)
|
|
|
Aggregate
intrinsic
value
|
|
|
Outstanding as of December 31, 2019
|
|
|
2,307,640
|
|
|
$
|
1.70
|
|
|
|
5.1
|
|
|
$
|
—
|
|
|
Granted
|
|
|
1,806,229
|
|
|
|
2.69
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(142,500
|
)
|
|
|
1.49
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(156,710
|
)
|
|
|
1.98
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2020
|
|
|
3,814,659
|
|
|
$
|
2.17
|
|
|
|
6.8
|
|
|
$
|
—
|
|
|
Options vested and exercisable as of December 31, 2020
|
|
|
2,320,686
|
|
|
$
|
1.86
|
|
|
|
6.9
|
|
|
$
|
—
|
|
The
weighted average grant-date fair value of stock options granted in 2020 and 2019 was $1.26 per share and $1.59 per share, respectively.
The total fair value of stock options vested during the years ended December 31, 2020 and 2019 was $0.8 million and $0.4 million, respectively.
The
fair value was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions:
|
|
|
Years Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Expected volatility
|
|
|
59.66
|
%
|
|
|
58.13
|
%
|
|
Weighted-average risk-free interest rate
|
|
|
1.59
|
%
|
|
|
2.58
|
%
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Expected term (in years)
|
|
|
4.00
|
|
|
|
4.00
|
|
Stock-Based
Compensation Expense
Stock-based
compensation expense is as follows (in thousands):
|
|
|
Years Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Selling and marketing
|
|
$
|
183
|
|
|
$
|
—
|
|
|
Research and development
|
|
|
189
|
|
|
|
108
|
|
|
General and administrative
|
|
|
453
|
|
|
|
251
|
|
|
Total stock-based compensation expense
|
|
$
|
825
|
|
|
$
|
359
|
|
As
of December 31, 2020, there was $0.6 million of unrecognized stock-based compensation expense related to unvested stock options, which
is being recognized over a period of 1.14 years.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
11.
Income Taxes
No
provision for federal or state income taxes was recorded during the years ended December 31, 2020 and 2019, as the Company incurred operating
losses and maintains a full valuation allowance against its net deferred tax assets. The reported amount of income tax benefit for the
years ended December 31, 2020 and 2019 differs from the amount that would result from applying domestic federal statutory rates to pretax
losses primarily because of changes in the valuation allowance, state taxes, and the generation of research and development credits.
A
reconciliation of the Company’s statutory income tax rate to the Company’s effective income tax rate is as follows (in thousands):
|
|
|
Year Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Income at U.S. statutory rate
|
|
$
|
912
|
|
|
|
21.00
|
%
|
|
$
|
(8,746
|
)
|
|
|
21.00
|
%
|
|
State taxes, net of federal benefit
|
|
|
(1,583
|
)
|
|
|
-36.45
|
%
|
|
|
(1,171
|
)
|
|
|
2.81
|
%
|
|
Change in fair value
|
|
|
(14,047
|
)
|
|
|
-323.39
|
%
|
|
|
—
|
|
|
|
0.00
|
%
|
|
Interest expense
|
|
|
1,410
|
|
|
|
32.46
|
%
|
|
|
5,009
|
|
|
|
-12.03
|
%
|
|
Stock compensation
|
|
|
127
|
|
|
|
2.93
|
%
|
|
|
1,139
|
|
|
|
-2.73
|
%
|
|
Permanent differences
|
|
|
6
|
|
|
|
0.13
|
%
|
|
|
3
|
|
|
|
-0.01
|
%
|
|
Valuation allowance
|
|
|
13,175
|
|
|
|
303.32
|
%
|
|
|
3,561
|
|
|
|
-8.55
|
%
|
|
Other
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
205
|
|
|
|
-0.49
|
%
|
|
|
|
$
|
—
|
|
|
|
0.00
|
%
|
|
$
|
—
|
|
|
|
0.00
|
%
|
The
net deferred income tax asset balance related to the following (in thousands):
|
|
|
Year Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
Stock compensation
|
|
$
|
64
|
|
|
$
|
12
|
|
|
Accruals and other
|
|
|
4,151
|
|
|
|
1,060
|
|
|
Debt discount
|
|
|
483
|
|
|
|
—
|
|
|
Royalty liability
|
|
|
2,272
|
|
|
|
—
|
|
|
Net operating loss carryforwards
|
|
|
51,918
|
|
|
|
44,641
|
|
|
Tax credits
|
|
|
6,774
|
|
|
|
6,774
|
|
|
Total deferred tax assets
|
|
|
65,662
|
|
|
|
52,487
|
|
|
Less: valuation allowance
|
|
|
(65,662
|
)
|
|
|
(52,487
|
)
|
|
Deferred tax assets, net
|
|
$
|
—
|
|
|
$
|
—
|
|
At
December 31, 2020, the Company had approximately $189.2 million and $169.1 million of federal and state net operating loss (“NOL”)
carryforwards, respectively. Approximately $134.9 million of the federal NOL and $124.1 million of the state NOL was generated prior
to the 2018 tax year. As a result, these net operating loss carryforwards will expire, if not utilized, between 2021 and 2037 for federal
and state income tax purposes. As a result of the Tax Cuts and Jobs Act, federal NOLs generated in tax years ending after December 31,
2017 are limited to a deduction of 80% of the taxpayer’s taxable income. Furthermore, the post 2017 NOLs are subject to an
indefinite carryforward period; therefore, $54.4 million of federal NOL generated after 2017 may be carried forward indefinitely.
As it pertains to the approximately $45.0 million of state NOLs generated after 2017, not all states have conformed to the Act;
therefore, the NOL expiration will vary based on the state. The Company also has federal tax credits of $6.7 million, which begin to
expire in 2024 and state tax credits of $0.1 million which begin to expire in 2021.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
11.
Income Taxes (cont.)
Future
realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence
of sufficient taxable income within the carryforward period. As of December 31, 2020 and 2019, the Company performed an evaluation to
determine whether a valuation allowance was needed. The Company considered all available evidence, both positive and negative, which
included the results of operations for the current and preceding years. The Company determined that it was not possible to reasonably
quantify future taxable income and determined that it is more likely than not that all of the deferred tax assets will not be realized.
Accordingly, the Company maintained a full valuation allowance as of December 31, 2020 and 2019.
The
Company’s valuation allowance for the year ended December 31, 2020 and 2019 is as follows (in thousands):
|
|
|
Year Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Valuation allowance at beginning of year
|
|
$
|
52,487
|
|
|
$
|
48,926
|
|
|
Increases recorded to income tax provision
|
|
|
13,175
|
|
|
|
3,561
|
|
|
Valuation allowance at the end of year
|
|
$
|
65,662
|
|
|
$
|
52,487
|
|
Under
Internal Revenue Code Section 382, if a corporation undergoes an “ownership change,” the corporation’s ability
to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We have
not completed a study to assess whether an “ownership change” has occurred or whether there have been multiple ownership
changes since we became a “loss corporation” as defined in Section 382. Future changes in our stock ownership, which
may be outside of our control, may trigger an “ownership change.” In addition, future equity offerings or acquisitions that
have equity as a component of the purchase price could result in an “ownership change.” If an “ownership change”
has occurred or does occur in the future, utilization of the NOL carryforwards or other tax attributes may be limited, which could potentially
result in increased future tax liability to us.
The
calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both
federal taxes and the many states in which we operate or do business in. ASC 740 states that a tax benefit from an uncertain tax position
may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any
related appeals or litigation processes, on the basis of the technical merits.
The
Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business,
the Company is subject to examination by federal and state jurisdictions, where applicable. The earliest tax years that remain subject
to examination by jurisdiction is 2017 for both federal and state. However, to the extent the Company utilizes net operating losses from
years prior to 2017, the statute remains open to the extent of the net operating losses or other credits are utilized. The resolution
of tax matters is not expected to have a material effect on the Company’s financial statements.
12.
Commitments and Contingencies
Lease
Commitments
The
Company leases office space in Northbrook, Illinois and Murfreesboro, Tennessee under non-cancelable operating leases which expire on
December 31, 2021 and September 30, 2022, respectively. Total rent expense under the lease agreements was $0.2 million and $0.1 million
for the years ended December 31, 2020 and 2019, respectively.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
12.
Commitments and Contingencies (cont.)
A
summary of the Company’s future minimum lease payments required under non-cancellable lease agreements is as follows (in thousands):
|
Years ending December 31,
|
|
Amount
|
|
|
2021
|
|
$
|
95
|
|
|
2022
|
|
|
16
|
|
|
2023
|
|
|
—
|
|
|
2024
|
|
|
—
|
|
|
2025
|
|
|
—
|
|
|
Total
|
|
$
|
111
|
|
Purchase
Obligation
In
July of 2009, the Company entered into a commercial manufacturing agreement, as amended, with Catalent Pharma Solutions, LLC (the “Catalent
Agreement”). Pursuant to the terms of the Catalent Agreement, the Company must make minimum annual purchases of JATENZO equal to
7.0 million softgels, through the initial term, or March 2025. Any shortfall between the minimum annual purchase quantities and
actual purchases will be multiplied by a unit price, as defined in the Catalent Agreement, and paid to Catalent within 30 days of
any year-end that the minimum purchase requirement is not met. The Company has not made any payments to Catalent as a result of a shortfall
in minimum purchase quantities. The Catalent Agreement renews automatically for two-year periods and either party may terminate the contract
upon twelve months written notice. Purchases under the Catalent Agreement were $3.2 million and $5.8 million during 2020 and 2019, respectively.
The
Company entered into a product supply agreement with Pharmacia & Upjohn Company LLC, or Pfizer (the “Pfizer Agreement”),
effective January 1, 2021. Pursuant to the terms of the Pfizer Agreement, the Company must make minimum annual purchases of testosterone
undecanoate equal to 2,000 kilograms per year, through the initial term, or January 2024. If there is a shortfall between the minimum
annual purchase quantities and actual purchases, the difference between the minimum annual purchase amount and actual purchases will
be paid to Pfizer by the Company. Purchases under the Pfizer Agreement are expected to be approximately $1.8 million per year, over the
life of the contract.
Legal
Proceedings
From
time to time, in the ordinary course of business, the Company is subject to litigation and regulatory examinations as well as information
gathering requests, inquiries and investigations.
On
April 2, 2019, an action for patent infringement was filed against the Company by Lipocine Inc. (“Lipocine”) in the U.S.
District Court for the District of Delaware. The lawsuit (Civil Action No. 19-622) seeks a declaratory judgement of infringement under
35 U.S.C. § 271(a)-(c) arising from the Company’s intent to market and sell JATENZO, based on the FDA’s approval of
JATENZO in March 2019. Lipocine currently alleges that the Company has infringed certain claims in each of four U.S. Patents: U.S. Patent
No. 9,034,858, U.S. Patent No. 9,205,057, U.S. Patent No. 9,480,690 and U.S. Patent No. 9,757,390. Lipocine seeks reasonable royalty
monetary damages, pre-judgment interest, post-judgment interest, and attorneys’ fees, and costs and disbursements, and injunctive
relief. While the Company believes its defenses are strong, patent litigation is inherently risky and uncertain. In the event this litigation
is not resolved in the Company’s favor, it may need to obtain a license from Lipocine. Such a license may not be available or may
be available only on terms not favorable to the Company. This could have a material adverse effect on Clarus.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
12.
Commitments and Contingencies (cont.)
Clarus
has asserted defenses of noninfringement, invalidity under 35 U.S.C. §§ 103 and 112, as well as inequitable conduct. The Company’s
motion for summary judgment of invalidity under Section 112 was argued in January 2021 and is awaiting decision. A hearing has been scheduled
before the presiding judge on May 14, 2021 to address questions he has that are pertinent to the summary judgement of motion. The lawsuit
is otherwise ready for trial, but no trial date has been set due to court delays arising from the COVID-19 pandemic.
On
January 4, 2021, an interference (No. 106,128) was declared by the U.S. Patent and Trademark Office between our U.S. Patent Application
No. 16/656,178 and Lipocine’s U.S. Patent Application No. 16/818,779. This proceeding (Interference No. 106,128 (DK)) is currently
pending. The claims at issue in the interference cover uses of JATENZO and TLANDO. The involved Lipocine patent application, however,
contains claims the Company believes cover the use of TLANDO and not JATENZO. The Company believes that it would not need a license from
Lipocine, nor that it would be liable for any damages, based solely on the outcome of the pending interference. There is also risk that
other interference proceedings could be declared that involve Lipocine patent applications and/or patents and claims that cover JATENZO
interference. And while two interferences were previously decided against the Company, Lipocine has not tried to assert patent claims
issued to it as a result of prevailing in those interferences against the Company, and Clarus believes these claims do not cover JATENZO.
In the event the Company’s beliefs turn out to be incorrect, or future declared interferences involving claims that cover JATENZO
are not resolved in its favor, Clarus may need to obtain a license from Lipocine. Such a license may not be available or may be available
only on terms not favorable to the Company. This could also have a material adverse effect on the Company.
13.
Net Loss per Share
The
Company’s potentially dilutive securities, which include preferred stock and stock options, have been excluded from the computation
of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common
shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company
excluded the following shares from the computation of diluted net loss per share attributable to common stockholders as of December 31,
2020 and 2019 because including them would have had an anti-dilutive effect:
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Redeemable convertible preferred stock
|
|
|
36,756,497
|
|
|
|
36,756,497
|
|
|
Options to purchase common stock
|
|
|
3,814,659
|
|
|
|
2,307,640
|
|
|
Convertible notes(1)
|
|
|
17,313,456
|
|
|
|
15,759,821
|
|
|
Series D warrants
|
|
|
183,438
|
|
|
|
183,438
|
|
|
(1)
|
Convertible
note shares are calculated using the Series D Preferred Stock issue price of $4.50 per share and includes interest accrued as of December
31, 2020 and 2019.
|
14.
Related Party Transactions
During
the year ended December 31, 2020, a member of the Company’s board of directors, temporarily expanded his director duties as an
executive director, at the request of the Company’s board of directors. As executive director, this member received a total of
$0.1 million in consulting fees during the year ended December 31, 2020.
CLARUS
THERAPEUTICS, INC.
Notes
to Financial Statements
15.
Subsequent Events
Issuance
of Convertible Notes
In
March and April of 2021, the Company entered into additional note purchase agreements (the “2021 Notes”) pursuant to which
the Company borrowed an aggregate of $12.5 million from existing investors. Outstanding balances under the 2021 Notes accrue interest
at a rate of 8%, compounded daily, and have a maturity date of September 1, 2025. The conversion features of the 2021 Notes are identical
to the conversion features of the Convertible Notes.
Proposed
Merger
On
April 27, 2021, the Company executed a definitive merger agreement with Blue Water Acquisition Corporation (“Blue Water”,
or “BLUW”), a Special Purpose Acquisition Company. Upon the completion of the proposed business combination transaction,
the convertible noteholders and Series D Preferred Stock shareholders of Clarus will exchange their interests in Clarus for shares of
common stock of continuing public company or Combined Entity. The proposed merger is expected to be accounted for as a “reverse
recapitalization” in accordance with U.S. GAAP. Under the reverse recapitalization model, the Business Combination will be treated
as Clarus issuing equity for the net assets of BLUW, with no goodwill or intangible assets recorded. Under this method of accounting,
Blue Water will be treated as the “acquired” company for financial reporting purposes. This determination is primarily based
on the fact that subsequent to the merger, the Company’s stockholders are expected to have a majority of the voting power of the
combined company, the Company will comprise all of the ongoing operations of the combined entity, the Company will comprise a majority
of the governing body of the combined company, and the Company’s senior management will comprise all of the senior management of
the combined company. As a result of the proposed merger, Blue Water will be renamed Clarus Therapeutics Holdings, Inc., or Combined
Entity, and Clarus will become a wholly owned subsidiary of Combined Entity.
Blue
Water is expected to receive net proceeds of approximately $198.2 million upon the closing of the proposed merger transaction, assuming
no redemptions are affected by stockholders of Blue Water, and will operate under the current Clarus management team upon the closing
of the proposed merger. In connection with the proposed merger, the Company’s convertible noteholders and senior secured noteholders
agreed to provide $25.0 million in additional capital to the Company following the close of the merger. All such proceeds will convert
to shares of Blue Water common stock at a price of $10.00 per share at the merger closing. The closing of the proposed merger is a precondition
to the additional financing.
Subject
to the terms of the merger agreement, at the effective time of the merger (the “Effective Time”), each share of Clarus’s
redeemable convertible Series D Preferred Stock issued and outstanding immediately prior to the Effective Time shall be converted into
shares of the combined Company’s common stock and all principal and accrued interest under the Company’s Series D convertible
notes shall convert into shares of common stock of the surviving entity, subject to adjustment in accordance with the exchange ratio.
All other series of preferred stock, common stock and stock options will be cancelled and extinguished upon completion of the proposed
merger. In addition, Clarus’s existing equity incentive plans will be terminated. Any unexpired, outstanding Series D Warrants
will remain outstanding and become exercisable shares of common stock of the surviving entity, subject to adjustment in accordance with
the exchange ratio.
The
boards of directors of both Blue Water and Clarus have approved the proposed transaction. Completion of the transaction is expected to
be in the third quarter of 2021, and is subject to, among other things, the approval by Blue Water’s shareholders, satisfaction
of the conditions stated in the merger agreement and other customary closing conditions. There is no assurance that the transaction will
be consummated.
Up to 19,816,610 Shares
of Common Stock
Up to 9,195,000 Shares of Common Stock
Issuable Upon Exercise of Warrants
Up to 3,445,000 Warrants
PROSPECTUS
October 7, 2021
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