CLARUS THERAPEUTICS HOLDINGS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and Old Clarus's audited financial statements and notes thereto for the year endedDecember 31, 2020 included in the Prospectus as filed with theSecurities and Exchange Commission pursuant to Rule 424(b)(3) onOctober 7, 2021 . Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Unless otherwise indicated or the context otherwise requires, references in this Management's Discussion & Analysis of Financial Condition and Results of Operations section to "Clarus," "we," "us," "our" and other similar terms refer to Old Clarus (as defined below) prior to the Business Combination (as defined below) and to the Company and its consolidated subsidiary after giving effect to the Business Combination. 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 theU.S. Food and Drug Administration (" 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 dedicated to providing solutions to unmet medical needs by advancing androgen and metabolic therapies for men and women. Our corporate objectives include maximizing the commercial success of JATENZO inthe 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) • Dose adjustable 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.
InMarch 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. InFebruary 2020 , we commencedU.S. commercial sales of JATENZO and, as ofDecember 31, 2020 , JATENZO was available under health plans representing approximately 61% ofU.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 nine months endedSeptember 30, 2021 , JATENZO generated net revenues of approximately$4.3 million , and$9.4 million , respectively, demonstrating consistent prescription and sales growth despite the commercial challenges presented by the COVID-19 pandemic. Total prescription growth for JATENZO for the three months endedSeptember 30, 2021 increased 12% as compared to the prior quarter, and 132% as compared to the prior year period. InAugust 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 untilMarch 27, 2022 . We continue to work on several life cycle management projects for JATENZO, including a label expansion to treat hypogonadal men with CKD, development of a once-daily oral TU with Phase 2 clinical trial initiation anticipated in the first half of 2022, and a label expansion to provide T therapy for female-to-male transgender individuals, with a Phase 4 clinical trial initiation anticipated in the first half of 2022. 22 -------------------------------------------------------------------------------- Table of Contents OurU.S. patent portfolio on JATENZO currently includes five issued patents expiring betweenMarch 2029 andDecember 2030 and we recently received two notices of allowance from the United States Patent and Trademark Office (USPTO) for claims that cover JATENZO. The issuedU.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 inthe 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 inAustralia ,Canada ,China ,Costa Rica ,Europe ,Hong Kong ,India ,Indonesia ,Israel ,Japan ,Mexico ,New Zealand ,Philippines ,Russia ,Singapore ,South Africa andSouth Korea . Since the beginning of Old Clarus's operations in 2004, Old Clarus 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 ofSeptember 30, 2021 . Old Clarus funded operations primarily with proceeds from the sale of convertible preferred stock and debt through convertible and senior secured notes, including a royalty obligation. ThroughSeptember 30, 2021 , we have received gross proceeds of$104.2 million from investors in Old Clarus's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, gross proceeds of$82.3 million from investors in Old Clarus's issued convertible debt, gross proceeds of$61.7 million from investors in issued senior secured notes and related royalty obligation, and net proceeds of$17.0 million from Blue Water in connection with the closing of the Business Combination. Merger On the Closing Date, we, together withBlue Water Merger Sub Corp. , aDelaware corporation and our wholly-owned subsidiary ("Merger Sub"), consummated the previously announced merger, pursuant to the Agreement and Plan of Merger, dated as ofApril 27, 2021 (the "Merger Agreement"), withClarus Therapeutics, Inc. , aDelaware corporation ("Old Clarus"), pursuant to which, subject to the terms and conditions set forth in the Merger Agreement, Merger Sub merged with and into Old Clarus, with Old Clarus surviving as our wholly-owned subsidiary, and with Old Clarus's equity holders and convertible debt holders equity interests converted into the right to receive shares of the our common stock or else be canceled, retired and terminated without consideration, as provided in the Merger Agreement (the "Merger"). Upon the consummation of the business combination, Blue Water changed its name to "Clarus Therapeutics Holdings, Inc. " In connection with the Merger, Old Clarus's convertible noteholders and senior secured noteholders provided$25.0 million in additional capital to Old Clarus following the announcement of the execution of the Merger Agreement. All such proceeds plus accrued interest converted to shares of the our common stock at a price of$10.00 per share at the Closing Date, resulting in 2,549,939 shares issued. The additional capital of$25.0 million was received by the Old Clarus prior to the Closing Date. Together with Blue Water's cash resources and additional capital, the combined company received net proceeds from the Merger (not including the$25.0 million of additional capital) of approximately$17.0 million . At the effective time of the Merger (the "Effective Time"), shares of Old Clarus's redeemable convertible Series D Preferred Stock issued and outstanding and all principal and accrued interest under Old Clarus's Series D convertible notes immediately prior to the Effective Time converted into 13,431,410 shares of our common stock at a price of$10.20 per share. Additionally,$10.0 million of debt related to Old Clarus' senior secured notes including certain royalty rights was exchanged for an aggregate 1,905,000 shares of our common stock (which included 405,000 shares of our common stock that were allocated to the senior secured noteholders pursuant to the share allocation agreement, of which 270,000 shares were reallocated from Old Clarus's equity holders and 135,000 shares that were transferred from the Sponsor). All unexpired, outstanding Series D Warrants of Old Clarus remained outstanding and became exercisable for shares of our common stock, subject to adjustment in accordance with the Merger exchange ratio All other series of Old Clarus preferred stock, common stock and stock options were cancelled and extinguished upon completion of the Merger. In addition, Old Clarus's existing equity incentive plans were terminated. As a result of the Merger, we operate under Old Clarus's 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 , 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 was named Chairperson of our board after the closing of the business combination. Risks and Liquidity Since inception, we have incurred significant operating losses and have experienced negative operating cash flows. Our net losses were$2.7 million and$36.3 million for the three and nine months endedSeptember 30, 2021 . As ofSeptember 30, 2021 , we had an accumulated deficit of$317.3 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
of adult males with a deficiency or absence of endogenous T;
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• 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-licenseor 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 encounters 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. Old Clarus 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 our 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$22.0 million as ofSeptember 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." 24 -------------------------------------------------------------------------------- Table of Contents COVID-19 Business Update The business disruptions associated with the COVID-19 pandemic had a significant negative impact on our financial statements for the nine months endedSeptember 30, 2021 and for the year endedDecember 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 inthe United States and other countries, business closures or business disruptions and the effectiveness of actions taken inthe 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 our 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 end of 2022. 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. Components of Our Results of Operations Product Revenue Old Clarus 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, inMarch 2019 and became commercially available inFebruary 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. 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 endedDecember 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 beJune 2023 . 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 nine months endedSeptember 30, 2020 . Absent this charge, the gross profit for the nine months endedSeptember 30, 2020 was$3.4 million . We will continue to assess obsolescence in future periods as demand for JATENZO and the rate of inventory turnover evolves. Operating Expenses Selling 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 selling and marketing expenses. We anticipate that our sales and marketing expenses will increase in 2021 as we continue to expand our commercialization of JATENZO. 25 -------------------------------------------------------------------------------- Table of Contents 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 theSEC , 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;
• post-marketing requirements of the FDA for JATENZO and pharmaceutical
development expense related to our recently
in-licensed
products; 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. 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 our
liability-classified Old Clarus Series D Preferred Stock warrants, and
convertible notes derivative liability, which were recognized in connection with
our equity financing and certain borrowing arrangements. Such instruments no
longer require remeasurement at fair value option due to completion of the
Merger.
Subsequent to the completion of the Merger, the change in fair value of the
warrant liability relates to the change in fair value of the Private Placement
Warrant liabilities, which relate to the Private Placement Warrants issued by
Blue Water in its IPO and were assumed by the combined company as part of the
Merger. The total change in fair value of the Private Placement Warrants
recorded during the three and nine months ended September 30, 2021 was
$7.6 million .
Interest Income
Interest income related to our operating bank accounts, including money market
funds.
Interest Expense
Interest expense related to Old Clarus's convertible notes, senior secured notes
and debt discount amortization.
Litigation Settlement
Litigation settlement relates to cash payment received as a result of the patent
infringement lawsuit with Lipocine, as further described in Note 12 in the Notes
to the Unaudited Condensed Consolidated Financial Statements in this Quarterly
Report on Form 10-Q. We recognize the cash payments within income as they are
received. During the three and nine months ended September 30, 2021 , we
recognized $2.5 million associated with the first settlement payment received in
July 2021 .
26
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Table of Contents
Results of Operations
Comparison of the three months ended September 30, 2021 and 2020
The following table summarizes our results of operations for the three months
ended September 30, 2021 and 2020 (in thousands):
Three Months Ended
September 30,
2021 2020 Change
Net product revenue $ 4,286 $ 2,224 $ 2,062
Cost of product sales 510 257 253
Gross profit 3,776 1,967 1,809
Operating expenses:
Sales and marketing 7,550 8,733 (1,183 )
General and administrative 3,384 3,040 344
Research and development 1,275 1,437 (161 )
Total operating expenses 12,209 13,210 (1,000 )
Loss from operations (8,433 ) (11,243 ) 2,810
Other (expense) income, net:
Change in fair value of warrant liability and
derivative, net 7,610 20,939 (13,329 )
Interest income 1 1 -
Interest expense (4,447 ) (4,291 ) (156 )
Litigation settlement 2,500 - 2,500
Total other (expense) income, net 5,664 16,649 (10,985 )
Net (loss) income $ (2,769 ) $ 5,406 $ (8,175 )
Net Product Revenue
For the three months ended September 30, 2021 , we recorded $4.3 million of net
product revenue, which increased by $2.1 million from $2.2 million for the three
months ended September 30, 2020 . The increase in net revenue is related to the
growth of the brand through our sales and marketing efforts. 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 product sales was $0.5 million for the three months ended September 30,
2021 , which increased by $0.2 million , from $0.3 million for the three months
ended September 30, 2020 . The increase in cost of product sales is related to an
increase in product revenue.
Sales and Marketing Expenses
Sales and marketing expenses were $7.5 million for the three months ended
September 30, 2021 , which decreased by $1.2 million , from $8.7 million for the
three months ended September 30, 2020 . The decrease in sales and marketing
expenses was primarily attributable to the following:
• A
to timing of media buys and agency activities;
• a
primarily related to prescription and payor data; and
• a $0.1 million decrease in other sales and marketing related costs.
General and Administrative Expenses
General and administrative expenses were $3.4 million for the three months ended
September 30, 2021 , which increased by $0.3 million , from $3.0 million for the
three months ended September 30, 2020 . The increase in general and
administrative expenses was primarily attributable to the following:
• A
compensation expense, primarily due to an increase in headcount and
external consultants;
• a
due to a decrease in legal fees related to patents; and
• a $0.1 million decrease in other general and administrative costs
27-------------------------------------------------------------------------------- Table of Contents Research and Development Expenses Research and development expenses were$1.3 million for the three months endedSeptember 30, 2021 , which decreased by$0.1 million from$1.4 million for the three months endedSeptember 30, 2020 . The decrease in research and development expenses was primarily attributable to the following:
• A
consulting services; offset by
• A
with HavaH and McGill.
Other (Expense) Income, Net Total other income, net was$5.6 million for the three months endedSeptember 30, 2021 , compared to other income, net of$16.6 million for the three months endedSeptember 30, 2020 . The decrease of$10.9 million was primarily related to a$13.3 million decrease in the change in fair value of the warrant liability and derivative, an increase of$2.5 million from a legal settlement received associated with the patent infringement lawsuit with Lipocine, and an increase in interest expense of$0.1 million , related to an increase of$0.2 million in interest incurred with related parties, an increase of$0.2 in interest incurred with third parties, offset by a decrease of$0.3 million associated with a gain on extinguishment of the senior secured notes. Comparison of the nine months endedSeptember 30, 2021 and 2020 The following table summarizes our results of operations for the nine months endedSeptember 30, 2021 and 2020 (in thousands): Nine Months Ended September 30, 2021 2020 Change Net product revenue$ 9,395 $ 3,943 $ 5,452 Cost of product sales 1,431 8,328 (6,897 ) Gross profit (loss) 7,964 (4,385 ) 12,349 Operating expenses: Sales and marketing 25,017 23,557 1,460 General and administrative 12,316 8,261 4,055 Research and development 3,093 2,818 276 Total operating expenses 40,426 34,636 5,790 Loss from operations (32,462 ) (39,021 ) 6,559 Other (expense) income, net: Change in fair value of warrant liability and derivative, net 7,610 53,854 (46,244 ) Interest income 1 24 (23 ) Interest expense (13,964 ) (10,790 ) (3,174 ) Litigation settlement 2,500 - 2,500 Total other (expense) income, net (3,853 ) 43,088 (46,941 ) Net (loss) income$ (36,315 ) $ 4,067 $ (40,382 ) Net Product Revenue For the nine months endedSeptember 30, 2021 , we recorded$9.4 million of net product revenue, which increased by$5.5 million from$3.9 million for the nine months endedSeptember 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 withinthe United States untilFebruary 2020 , following FDA approval inMarch 2019 . Cost of Product Sales Cost of product sales was$1.4 million for the nine months endedSeptember 30, 2021 , which decreased by$6.9 million , from$8.3 million for the nine months endedSeptember 30, 2020 . The decrease in cost of product sales is related to a reserve for inventory obsolescence of$7.8 million recorded in the nine months endedSeptember 30, 2020 , offset by an increase due to increased product revenue sales. 28 -------------------------------------------------------------------------------- Table of Contents Sales and Marketing Expenses Sales and marketing expenses were$25.0 million for the nine months endedSeptember 30, 2021 , which increased by$1.5 million , from$23.5 million for the nine months endedSeptember 30, 2020 . The increase in sales and marketing expenses was primarily attributable to the following:
• A
timing of agency activities; and
• a
marketing costs; offset by
• a
General and Administrative Expenses General and administrative expenses were$12.3 million for the nine months endedSeptember 30, 2021 , which increased by$4.1 million , from$8.2 million for the nine months endedSeptember 30, 2020 . The increase in general and administrative expenses was primarily attributable to the following:
• A
compensation expense, primarily due to an increase headcount and external
consultants;
• a
due to an increase in fees paid to outside accounting and finance
consultants and audit fees incurred as a result of becoming a public
company;
• a
officers' insurance; and
• a
Research and Development Expenses Research and development expenses were$3.1 million for the nine months endedSeptember 30, 2021 , which increased by$0.3 million from$2.8 million for the nine months endedSeptember 30, 2020 . The increase in research and development expenses was primarily attributable to the following:
• A
and McGill Agreement; and
• a
related to the development of JATENZO, our lead commercial product;
offset by
• a
consulting services.
Other (Expense) Income, Net Total other expense, net was$3.8 million for the nine months endedSeptember 30, 2021 , compared to other income of$43.8 million for the nine months endedSeptember 30, 2020 . The decrease of$46.9 million was primarily related to a$46.2 million decrease in the change in fair value of the warrant liability and derivative, an increase of$2.5 million associated with a legal settlement received associated with the patent infringement lawsuit with Lipocine, and an increase in interest expense of$3.2 million , related to an increase of$0.4 million in interest incurred with related parties, an increase of$3.1 million in interest incurred with third parties, offset by a decrease of$0.3 million associated with a gain on extinguishment of the senior secured notes. Liquidity and Capital Resources Sources of Liquidity Since inception, Old Clarus has incurred significant operating losses, have experienced negative operating cash flows and have accumulated significant accrued liabilities. Our net loss was$2.7 million and$36.3 million for the three and nine months endedSeptember 30, 2021 , respectively. As ofSeptember 30, 2021 , we had cash and cash equivalents of$22.0 million and an accumulated deficit of$317.3 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. 29 -------------------------------------------------------------------------------- Table of Contents Merger On the Closing Date, we received net proceeds from the Merger of approximately$17.0 million (not including the$25.0 million of additional capital). Further, as a result of the closing of the Merger, approximately$18.6 million of the principal balance of the senior secured notes and the related royalty obligation were exchanged for shares of our common stock, and Old Clarus's equity holders' and convertible debt holders' equity interests converted into the right to receive shares of our common stock or else be canceled, retired and terminated without consideration, as provided in the Merger Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" for further discussion of the Merger. Convertible Promissory Notes On various dates from 2016 to 2021, Old Clarus entered into note purchase agreements, pursuant to which it borrowed an aggregate of$82.3 million from related party investors as ofSeptember 30, 2021 . The carrying value of all convertible notes prior to conversion into shares of our common stock at the Effective Time was$103.7 million . All Old Clarus convertible notes had the option to convert into Old Clarus Series D Preferred Stock at an exercise price of$4.50 . At the Effective Time, all principal and accrued interest under Old Clarus's convertible notes converted into 8,529,846 shares of our common stock. Senior Secured Notes OnMarch 12, 2020 , Old Clarus issued and sold senior secured notes to certain lenders not related to it. Gross proceeds from the senior secured notes were$50.0 million , and Old Clarus received$42.7 million in net proceeds after deducting the original issue discount, interest reserve and transaction expenses. In the second quarter of 2021, Old Clarus added two additional notes to the principal senior secured notes balance, the PIK Note (as defined below) and the Indenture Note (as defined below), totaling$8.1 million . In the third quarter of 2021, we added one additional note to the principal senior secured notes balance, the Second Indenture Note (as defined below), totaling$3.6 million . The PIK Note, the Indenture Note and the Second Indenture Note are further described below. As part of the Merger (as further described in Note 1 in the Notes to the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q),$10.0 million of the principal on the senior secured notes and certain royalty rights were exchanged for an aggregate 1,905,000 shares of our common stock (which included the 405,000 shares of our common stock that were allocated to the senior secured noteholders pursuant to the share allocation agreement, of which 270,000 shares were reallocated from Old Clarus's equity holders and 135,000 shares that were transferred from the Sponsor) and converted at a price of$10.20 per share. Further, an additional$5.0 million of the principal of the senior secured notes balance associated with the Indenture Note and$3.6 million of the principal of the senior secured notes balance associated with the Second Indenture Note, plus related accrued interest, were exchanged for an aggregate 882,318 shares of our common stock, which converted at a price of$10.00 per share. 30 -------------------------------------------------------------------------------- Table of Contents As a result of the exchange of the principal on the senior secured notes and certain royalty rights for shares of our common stock, we wrote off$18.6 million of principal associated with the senior secured notes,$1.5 million of the remaining unamortized debt discount associated with the senior secured notes, and the full carrying value of$11.5 million associated with royalty rights obligation. We recorded a gain of approximately$0.3 million during the period endingSeptember 30, 2021 as a result of the extinguishment, representing the difference between the carrying value of the debt exchanged and the value of the shares converted based on the conversion price. As of theSeptember 30, 2021 and following the completion of the Merger, 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. The senior secured notes bear interest at 12.5% and specify semiannual payments onMarch 1 andSeptember 1 and have a maturity date ofMarch 1, 2025 . The first two years provide for interest-only payments with principal payments beginning in 2022. The senior secured notes are governed by an indenture, dated as ofMarch 12, 2020 , between Old Clarus 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 Old Clarus. The senior secured notes had a detachable royalty feature under which the lenders were to 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 was recorded as a debt discount to the Notes and is amortized to interest expense over the life of the notes. For the three months endedSeptember 30, 2021 and 2020, we recorded$0.7 million and$0.6 million , respectively, of interest expense associated with the royalty rights. For the nine months endedSeptember 30, 2021 and 2020 we recorded$2.2 million and$1.4 million , respectively, of interest expense associated with the royalty rights. The royalty obligation had a fair value of$7.9 million at issuance in March of 2020. Pursuant to the Merger Agreement and conversion terms, no royalty obligation exists as ofSeptember 30, 2021 . During the three months endedSeptember 30, 2021 and 2020, we recorded$2.6 million and$2.1 million , respectively in interest expense on the senior secured notes, of which$0.7 million and$0.7 million , respectively, was non-cash interest expense associated with the amortization of the debt discount and debt issue costs. During the nine months endedSeptember 30, 2021 and 2020, we recorded$7.2 million and$5.0 million , respectively in interest expense on the senior secured notes, of which$2.0 million and$1.5 million , respectively, was non-cash interest expense associated with the amortization of the debt discount and issue costs. We did not make any cash interest payments during the three and nine months endedSeptember 30, 2021 and 2020. Pursuant to the indenture governing the senior secured notes, Old Clarus agreed to maintain cash and cash equivalents in an amount of not less than$10.0 million , calculated as of the last day of each calendar month commencing onMarch 31, 2020 . As ofDecember 31, 2020 , Old Clarus' cash and cash equivalents were less than$10.0 million , resulting in a default under the indenture and the negotiation of a forbearance agreement, as noted below. In connection with the Merger, the indenture was amended to require Old Clarus to maintain a balance of not less than$8.0 million in cash and cash equivalents, calculated as of the last day of each calendar month. We classified the full carrying value of$40.3 million related to the senior secured notes as a current liability within theSeptember 30, 2021 balance sheet as, if we are unable to obtain funding or generate operating cash flow, we do not expect that we will be in compliance with the covenants under the senior secured notes within one year of the balance sheet date. Refer to Note 1 in the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further disclosure related to our assessment of the ability to operate as a going concern as ofSeptember 30, 2021 . Forbearance Agreement OnMarch 17, 2021 , Old Clarus entered into a forbearance agreement with noteholders in relation to the senior secured notes. Old Clarus was unable to and did not pay interest of$3.1 million due onMarch 1, 2021 . As ofMarch 31, 2021 , Old Clarus 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, Old Clarus 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 Old Clarus, amongst other things, executed the Merger Agreement and provided financial reporting requirements byApril 27, 2021 . Forbearance Extension InAugust 2021 , Old Clarus entered into forbearance extensions with the noteholders in relation to the senior secured notes. The latest forbearance extension, entered into onAugust 26, 2021 , extended the forbearance period throughSeptember 9, 2021 , the Closing Date of the Merger. OnSeptember 28 2021 , we entered into a supplemental indenture with the noteholders in relation to the senior secured notes. The supplemental indenture extended the due date of the$3.9 million interest payment dueSeptember 1, 2021 toMarch 1, 2022 , and further accrues interest on the past interest due amount at a rate of 18.5% per annum beginning onSeptember 1, 2021 until paid. 31 -------------------------------------------------------------------------------- Table of Contents PIK Note InMay 2021 , Old Clarus entered into a payment-in-kind, or PIK, note (the "PIK Note"), in relation to its missed interest payment (which was due inMarch 2021 ) on its senior secured notes, pursuant to which Old Clarus 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, onFebruary 1, 2023 we are 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 InJune 2021 , Old Clarus entered into the Indenture Note (the "Indenture Note"), pursuant to which it 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 our common stock upon the closing of the Merger. Second Indenture Note InJuly 2021 , Old Clarus entered into an additional note purchase agreement (the "Second Indenture Note") pursuant to which it 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 our common stock upon the closing of the Merger. 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 theSmall Business Association ("SBA"). Under the PPP, beginningApril 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, Old Clarus received an unsecured loan of$0.5 million from the SBA. After considering further guidance issued by the SBA, Old Clarus elected to repay the loan in full in May of 2020 with no interest due under safe harbor provisions of the CARES Act. Cash Flows The following table summarizes our cash flows for the nine months endedSeptember 30, 2021 and 2020 (in thousands): Nine Months EndedSeptember 30, 2021 2020
Net cash used in operating activities (34,452 ) (35,661 ) Net cash used in investing activities
(20 ) (62 )
Net cash provided by financing activities 49,192 47,220
Net increase in cash and cash equivalents
Operating Activities Net cash used in operating activities was$34.4 million for the nine months endedSeptember 30, 2021 , reflecting net loss of$36.3 million , offset by a net change of$5.0 million in net operating assets and liabilities and non-cash charges of$6.9 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$6.6 million , an increase in accounts receivable of$2.5 million , an increase in prepaid expenses and other current assets of$2.0 million , partially offset by a decrease in deferred revenue of$0.3 million , an increase in accounts payable of$3.7 million and an increase in accrued expenses of$2.7 million . Net cash used in operating activities was$35.6 million for the nine months endedSeptember 30, 2020 , reflecting net income of$4.1 million , offset by a net change of$6.0 million in net operating assets and liabilities and non-cash charges of$45.7 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, change in fair value of warrant liabilities, stock-based compensation expense and depreciation. The change in net operating assets and liabilities was primarily due to an increase in accounts receivable of$3.5 million , partially offset by an increase in accounts payable of$7.2 million , an increase in accrued expenses of$1.7 million , and an increase in deferred revenue of$0.6 million . 32 -------------------------------------------------------------------------------- Table of Contents Investing Activities During the nine months endedSeptember 30, 2021 and 2020, we used approximately$20,000 and$62,000 , respectively, of cash in investing activities for purchases of property and equipment. Financing Activities During the nine months endedSeptember 30, 2021 , net cash provided by financing activities was$49.2 million , related to$23.6 million of proceeds from the issuance of convertible notes payable,$8.6 million of proceeds from the issuance of senior notes payable, and$17.0 million in net proceeds from the Business Combination. During the nine months endedSeptember 30, 2020 , net cash provided by financing activities was$47.2 million , primarily related to$49.1 million of 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 inthe 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 and our research and development pipeline. 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 evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued. Since its inception, Old Clarus has devoted substantially all its efforts to business planning, clinical development, commercial planning and raising capital. Old Clarus, and since the Merger, we have incurred significant losses from operations since inception and has an accumulated deficit of$317.3 million as ofSeptember 30, 2021 . Further, as ofSeptember 30, 2021 , we had a working capital deficit of$19.1 million . In addition to the consummation of 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 described in Note 6, Debt , in the Notes to the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q 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. 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 its future operations, as of the issuance date of the condensed consolidated financial statements for the nine months endedSeptember 30, 2021 , 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 twelve months from the date that these condensed consolidated financial statements are available to be issued and that there is substantial doubt about our ability to continue as a going concern. 33 -------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 30, 2021 , and the effects such obligations are expected to have on our liquidity and cash flow in future periods (in thousands): More than More than Less than 1 1 year and 3 years and More than Contractual obligation Total year less than 3 less than 5 5 years Senior secured notes 43,125 6,000 29,125 8,000 - Interest on senior secured notes (1) 18,226 10,207 7,439 580 - Operating lease obligations (2) 40 40 - - - Catalent Agreement purchase obligation 12,737 3,639 7,278 1,820 - Pfizer Agreement purchase obligation 4,719 1,849 2,870 - - Total$ 78,846 $ 21,734 $ 46,712 $ 10,400 $ 0
(1) We have
notes that bear interest at 12.5% and mature on
(2) 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 InJuly 2009 , Old Clarus entered into a commercial manufacturing agreement, as amended, withCatalent 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, orMarch 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 endedSeptember 30, 2021 and 2020 were$0.9 million and$0.1 million , respectively. Purchases under the Catalent Agreement for the nine months endedSeptember 30, 2021 and 2020 were$6.0 million and$3.1 million , respectively. 34 -------------------------------------------------------------------------------- Table of Contents Old Clarus entered into a product supply agreement withPharmacia & Upjohn Company LLC , or Pfizer (the "Pfizer Agreement"), effectiveJanuary 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, orJanuary 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 nine months endedSeptember 30, 2021 . Lease Commitments We have operating leases for rental space inNorthbrook, Illinois andMurfreesboro, Tennessee that extend intoDecember 31, 2021 andSeptember 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 in the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, we have senior secured notes that are included in the table above. License Agreement Commitments InMay 2021 , Old Clarus entered into a license agreement (the "HavaH Agreement") with HavaH Therapeutics, or HavaH, anAustralia -based biopharmaceutical company developing androgen therapies for inflammatory breast disease ("PDM") and certain forms of breast cancer. Under the HavaH Agreement, we acquired the development and commercialization rights for HavaH T+Ai ™ , which we renamed CLAR-121, and plan to develop for treatment of PDM and as an adjunctive therapy in ER+/AR+ breast cancer. We believe that HavaH's pharmacokinetic, safety, and early efficacy data will speed our ability to enter into Phase 2 clinical trials. We believe the potential addressable U.S. market for PDM exceeds$400 million and have applied for Orphan Drug status for CLAR-121. We believe even greater opportunities for CLAR-121 exist in the potential treatment for high breast density in women and as adjunctive therapy in women with ER+/AR+ breast cancer, which represents approximately 80% of all breast cancers. 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. To date, pursuant to the HavaH Agreement, we have made cash payments of$0.5 million consisting of the upfront payment. InSeptember 2021 , Old Clarus entered into a license agreement (the "McGill Agreement") withThe Royal Institution for the Advancement ofLearning/McGill University , or McGill, aCanadian University , which owns the right, title, and interest in licensed patents including the invention of No. 2018-049 titled "A new ubiquinone-10 formulation for the treatment of ubiquinone deficiency and other conditions. Under the McGill Agreement, we acquired the license rights to certain licensed patents for the research, development, and commercialization rights for future products to treat conditions associated with CoQ10 deficiencies. There are currently an estimated one in 5,000 adults worldwide that have a mitochondrial disease, and we believe that our first candidate in this program, CLAR-122, has potential to receive Orphan Drug status in primary CoQ10 deficiency. Under the terms of the licensing agreement, McGill may be eligible for up to$10.5 million in potential development and regulatory milestone payments. Additionally, McGill would be eligible for royalty payments and up to$15.0 million in potential commercial milestones. Such royalty payments will be based on total aggregate annual net sales of any licensed products that are covered by the licensed patents in the territory, at a low single digit percentage rate. To date, pursuant to the McGill Agreement, we have made cash payments of$0.4 million consisting of the upfront payment. 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 included in the Prospectus. Recently Issued Accounting Pronouncements See Note 2 to our annual financial statements appearing in our audited financial statements for the year endedDecember 31, 2020 included in the Prospectus. 35
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Table of Contents Emerging Growth Company Status We are 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. We 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. We expect to avail ourselves of the extended transition period and, therefore, while we are an emerging growth company, we 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.
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