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The loss attributable to Old Clarus participating warrants relates to the total earnings attributable to the 9,246 Old Clarus participating warrants using the two-class method.The gain on extinguishment of convertible notes relates to the difference between the carrying value of the convertible notes upon conversion to shares and the fair value of the shares exchanged which requires adjustment to the numerator when calculating basic EPS.The effect of the convertible notes on the numerator for the three and nine months ended September 30, 2020 relates to the impact that the convertible notes had on net income during the period, and are removed from net income when calculating net income (loss) attributable to common stockholders diluted using the if-converted method.The effect of convertible notes on the denominator for the three and nine months ended September 30, 2020 was calculated based on the carrying value of the convertible notes balance at September 30, 2020, converted at the 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As filed with the Securities and Exchange Commission on December 17, 2021
Registration
No. 333-                
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
Clarus Therapeutics Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
Delaware
 
2836
 
85-1231852
(State or Other Jurisdiction of
Incorporation or Organization)
 
(Primary Standard Industrial
Classification Code No.)
 
(I.R.S. Employer
Identification No.)
555 Skokie Boulevard, Suite 340
Northbrook, Illinois 60062
(847)
562-4300
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
 
 
Robert E. Dudley, Ph.D.
Chief Executive Officer
555 Skokie Boulevard, Suite 340
Northbrook, Illinois 60062
(847)
562-4300
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
 
 
Copies to:
Mitchell S. Bloom, Esq.
Marianne Sarrazin, Esq.
Goodwin Procter LLP
100 Northern Avenue
Boston, Massachusetts 02210
Tel: (617)
570-1000
 
 
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box.  ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in
Rule 12b-2
under the Securities Exchange Act of 1934:
 
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
        
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  
 
 
CALCULATION OF REGISTRATION FEE
 
 
 
Title of Each Class of
Securities to be Registered
 
Amount
to be
Registered
(1)
 
Proposed
Maximum
Offering Price
Per Share
 
Proposed
Maximum
Aggregate
Offering Price
 
Amount of
Registration Fee
Common Stock, $0.0001 par value per share
 
6,048,388
(2)
 
$4.17
(3)
 
$25,221,778
 
$2,338.06
Total
 
 
 
 
 
$25,221,778
 
$2,338.06
 
 
(1)
Pursuant to Rule 416(a), there are also being registered an indeterminable number of additional securities as may be issued to prevent dilution resulting from share splits, share dividends or similar transactions.
(2)
Consists of (i) 2,300,000 shares of Common Stock registered for sale by the Selling Securityholder named in this registration statement (including the shares referred to in the following clause (ii)), (ii) 724,194 shares of Common Stock issuable upon the exercise of 724,194
Pre-Funded
Warrants (as defined herein) and (iii) 3,024,194 shares of Common Stock issuable upon the exercise of 3,024,194 Common Warrants (as defined herein)
(3)
Pursuant to Rule 457(c) under the Securities Act, and solely for the purpose of calculating the registration fee, the proposed maximum offering price per share is $4.17, which is the average of the high and low prices of the Common Stock on December 16, 2021 on The Nasdaq Global Market.
 
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 
 
 

Table of Contents
The information in this preliminary prospectus is not complete and may be changed. Neither we nor the Selling Securityholder may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION — DATED DECEMBER 17, 2021
PRELIMINARY PROSPECTUS
 
Up to 6,048,388 Shares of Common Stock
 
 
This prospectus relates to the offer and sale from time to time by the selling securityholder named in this prospectus (the “
Selling Securityholder
”) of an aggregate of up to 6,048,388 shares of our common stock, $0.0001 par value per share (“
Common Stock
”), which consists of (i) up to 2,300,000 shares of Common Stock, (ii) up to 724,194 shares of Common Stock that are issuable upon the exercise of 724,194
pre-funded
warrants (the “
Pre-Funded
Warrants
”) and (iii) up to 3,024,194 shares of Common Stock that are issuable upon the exercise of 3,024,194 common warrants (the “
Common Warrants
” and, together with the
Pre-Funded
Warrants, the “
PIPE Warrant
s”), which shares of Common Stock and PIPE Warrants were originally issued in a private placement to the Selling Securityholder.
We will not receive any proceeds from the sale of shares of Common Stock by the Selling Securityholder pursuant to this prospectus but we will receive the proceeds from any exercise of any PIPE Warrants for cash. We will pay the expenses, other than underwriting discounts and commissions and expenses incurred by the Selling Securityholder for brokerage, accounting, tax or legal services or any other expenses incurred by the Selling Securityholder 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 Securityholder’s registration rights under a registration rights agreement between us and the Selling Securityholder. Our registration of the securities covered by this prospectus does not mean that the Selling Securityholder will offer or sell any of the shares of Common Stock. The Selling Securityholder may offer, sell or distribute all or a portion of its shares of Common Stock publicly or through private transactions at prevailing market prices or at negotiated prices. We provide more information about how the Selling Securityholder may sell the Shares 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 warrants issued as part of the units in our initial public offering (the “
Public Warrants
”) are listed on The Nasdaq Global Market (“
Nasdaq
”) under the symbols “CRXT” and “CRXTW,” respectively. On December 16, 2021, the closing price of the Common Stock was $4.19 and the closing price for the Public Warrants was $0.349.
 
 
See the section entitled “Risk Factors” beginning on page 4 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                 , 2021.

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II-9
 
 
 
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 Securityholder have authorized anyone to provide you with different information. Neither we nor the Selling Securityholder 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.
 
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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 Securityholder may, from time to time, sell the securities offered by it described in this prospectus. We will not receive any proceeds from the sale by such Selling Securityholder of the securities offered by it described in this prospectus although we will receive the exercise price upon any cash exercise of the PIPE Warrants.
Neither we nor the Selling Securityholder 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 Securityholder 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 Securityholder 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 Merger Closing Date, Clarus Therapeutics Holdings, Inc., a Delaware corporation, 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 Merger Closing Date, the registrant changed its name from Blue Water Acquisition Corp. to Clarus Therapeutics Holdings, Inc. (the “
Combined Entity
”).
On the PIPE Closing Date, the Company completed a private placement pursuant to the terms of the Securities Purchase Agreement, by and among the Company and the purchaser listed therein (the “
Purchaser
”). Pursuant to the terms of the Securities Purchase Agreement, the Company issued the Shares,
Pre-Funded
Warrants and Common Warrants, as described in this prospectus.
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:
 
   
Blue Water
” means Blue Water Acquisition Corp., a Delaware corporation, which was renamed “Clarus Therapeutics Holdings, Inc.” in connection with the Merger Closing.
 
   
Blue Water IPO
,” “
IPO
” or “
Initial Public Offering
” means Blue Water’s initial public offering that was consummated on December 17, 2020.
 
   
Board
” means the board of directors of Clarus.
 
   
Business Combination
” means the Merger and the other transactions contemplated by the Merger Agreement.
 
   
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.
 
   
Code
” means the Internal Revenue Code of 1986, as amended.
 
   
Common Stock
” means the common stock, $0.0001 par value per share, of the Company.
 
   
Common Warrants
” means 3,024,194 warrants to purchase shares of Common Stock issued to the Purchaser in the Private Placement. Each Common Warrant entitles the holder thereof to purchase one share of Common Stock for $5.25 per share.
 
   
DGCL
” means the General Corporation Law of the State of Delaware, as amended.
 
   
Effective Time
” means the effective time of the Merger in accordance with the Merger Agreement.
 
   
Exchange Act
” means the Securities Exchange Act of 1934, as amended.
 
   
Founder Shares
” means Class B common stock purchased by the Sponsor on June 30, 2020.
 
   
Legacy Clarus
” means Clarus Therapeutics, Inc., a Delaware corporation, and a wholly-owned subsidiary of the Company.
 
   
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.
 
   
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.
 
   
Merger Closing
” means the closing of the Business Combination.
 
   
Merger Closing Date
” means September 9, 2021.
 
   
PIPE Warrants
” means any of the
Pre-Funded
Warrants and the Common Warrants.
 
   
PIPE
Closing
” means the closing of the Private Placement.
 
   
PIPE
Closing Date
” means December 7, 2021.
 
   
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.
 
   
Pre-Funded
Warrants
” means 724,194 warrants to purchase shares of Common Stock issued to the Purchaser in the Private Placement. Each
Pre-Funded
Warrant entitles the holder thereof to purchase one share of Common Stock for $0.00001 per share.
 
   
Private Placement
” means the private placement pursuant to which the Shares,
Pre-Funded
Warrants and Common Warrants described in this prospectus were issued, and the other transactions contemplated by the Securities Purchase Agreement.
 
   
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.
 
   
Purchaser
” means the purchaser of the Shares,
Pre-Funded
Warrants and Common Warrants pursuant to the Securities Purchase Agreement.
 
   
PIPE Registration Rights Agreement
” means the Registration Rights Agreement, dated December 7, 2021, by and among the Company and the Purchaser, pursuant to which the Company agreed to register the Shares and the shares of Common Stock issuable upon exercise of the PIPE.
 
   
SEC
” means the U.S. Securities and Exchange Commission.
 
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Securities Act
” means the Securities Act of 1933, as amended.
 
   
Securities Purchase Agreement
” means the Securities Purchase Agreement, dated December 3, 2021, by and among the Company and the Purchaser.
 
   
Shares
” means the shares of Common Stock issued to the Purchaser in the Private Placement.
 
   
Sponsor
” means Blue Water Sponsor LLC.
 
   
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:
 
   
our ability to realize the benefits from the Business Combination;
 
   
the ability to maintain the listing of the Common Stock on the Nasdaq Global Market;
 
   
our future financial performance;
 
   
the potential liquidity and trading of our securities;
 
   
the impact from the outcome of any known and unknown litigation;
 
   
our ability to forecast and maintain an adequate rate of revenue growth and appropriately plan expenses;
 
   
our expectations regarding future expenditures;
 
   
the future mix of revenue and effect on gross margins;
 
   
the attraction and retention of qualified directors, officers, employees and key personnel;
 
   
our ability to compete effectively in a competitive industry;
 
   
our ability to protect and enhance our corporate reputation and brand;
 
   
our expectations concerning our relationships and actions with third parties;
 
   
the impact from future regulatory, judicial, and legislative changes in our industry;
 
   
the ability to locate and acquire complementary products or product candidates and integrate those into our business;
 
   
future arrangements with, or investments in, other entities or associations;
 
   
intense competition and competitive pressures from other companies in the industries in which we operate; and
 
   
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.
 
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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
,” “
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 (“
TRT
”) approved by the U.S. Food and Drug Administration (“
FDA
”). Our primary goal is to make JATENZO the preferred choice for TRT among men with testosterone (“
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, we 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 Merger Closing Date, we changed our name from Blue Water Acquisition Corp. to Clarus Therapeutics Holdings, Inc. At the Effective Time, we issued an aggregate of 17,751,348 shares of Common Stock to the Legacy Clarus security holders, assumed some Legacy Clarus warrants that are now exercisable for 9,246 shares of Common Stock, and the remaining shares of Legacy Clarus capital 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 were cancelled, retired and terminated without any consideration or any liability to Legacy Clarus with respect thereto. In addition, all shares of Blue Water Class B common stock, par value $0.00001 per share, of Blue Water were converted into Blue Water Class A common stock in accordance with Blue Water’s amended and restated certificate of incorporation. 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 Public Warrants are governed by the Certificate of Incorporation, the Bylaws and the DGCL, and, in the case of the Placement Warrants, the Warrant Agreement. See the sections entitled “
Description of our Securities
” and “
Certain Relationships and Related Party Transactions
.”
The Private Placement
On December 3, 2021, we entered into a Securities Purchase Agreement with the Selling Securityholder, pursuant to which we issued and sold, in a private placement (the “
Private Placement
”), an aggregate of
 
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(i) 2,300,000 shares (the “
Shares
”) of Common Stock, together with Common Warrants to purchase up to 2,300,000 shares of Common Stock, and (ii) 724,194
Pre-Funded
Warrants with each
Pre-funded
Warrant exercisable for one share of Common Stock, together with Common Warrants to purchase up to 724,194 shares of Common Stock (collectively, the “
Offering
”). Each share of Common Stock and accompanying Common Warrant was sold together at a combined offering price of $4.96, and each
Pre-Funded
Warrant and accompanying Common Warrant was sold together at a combined offering price of $4.95999. The
Pre-Funded
Warrants are immediately exercisable, at an exercise price of $0.00001, and may be exercised at any time until all of the
Pre-Funded
Warrants are exercised in full. The Common Warrants have an exercise price of $5.25 per share, are exercisable beginning six months following the PIPE Closing and expire five years from the date of issuance, subject to customary adjustments.
In connection with the Offering, and pursuant to the PIPE Registration Rights Agreement, we are obligated, among other things, to (i) file a registration statement with the U.S. Securities and Exchange Commission (the “
SEC
”) within 15 days following the PIPE Closing for purposes of registering the Shares and the shares of Common Stock issuable upon exercise of the PIPE Warrants for resale and (ii) use our commercially reasonable efforts to have the registration statement declared effective as promptly as possible after the filing thereof, subject to certain specified penalties if timely effectiveness is not achieved.
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:
 
   
There is substantial doubt about our ability to continue as a going concern.
 
   
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.
 
   
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.
 
   
JATENZO is the only product we are commercializing, and we depend almost entirely on its success.
 
   
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.
 
   
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
 
   
Our reliance on third-party suppliers and distributors could harm our ability to commercialize JATENZO.
 
   
The ongoing
COVID-19
pandemic is having, and is expected to have, an adverse impact on our business.
 
   
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.
 
   
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.
 
   
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.
 
   
If coverage and reimbursement for JATENZO are limited, it may be difficult to profitably sell JATENZO.
 
   
Our market is subject to intense competition.
 
   
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 may be involved in lawsuits and proceedings to protect or enforce our patents, which could be expensive, time consuming and unsuccessful.
 
   
We will need to grow our company, and may encounter difficulties in managing this growth.
 
   
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.
 
   
Our debt agreements contain restrictions that limit our flexibility in operating our business.
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.
 
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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 $2.8 million and $36.3 million for the three and nine months ended September 30, 2021, respectively, and we had an accumulated deficit of $317.4 million as of September 30, 2021. Although we completed the Business Combination in September 2021 and the Private Placement in December 2021, we expect that our revenue generated from the sales of JATENZO along with existing cash and cash equivalents of $22.0 million as of September 30, 2021 will not be sufficient to fund our operating expenses in order to maximize the commercial launch of JATENZO and capital expenditure requirements through at least 12 months from November 19, 2021, the date we filed our Form 10-Q for the quarter ended September 30, 2021 with the SEC.
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 $3.9 million due
 
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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 on 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
 
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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 September 30, 2021, we have generated $17.5 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.
 
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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.
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:
 
   
establish and maintain our relationships with healthcare providers who will be treating the patients who may receive JATENZO and any future products;
 
   
obtain adequate pricing and reimbursement for JATENZO and any future products;
 
   
develop and maintain successful strategic alliances; and
 
   
manage our spending as costs and expenses increase due to clinical trials, marketing approvals, and commercialization.
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
 
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December 31, 2020, we had U.S. federal and state NOL carryforwards of $189.2 million and $169.1 million, respectively. We have not performed a detailed analysis to determine whether an ownership change under Section 382 of the Code has occurred. As a result, our ability to utilize those NOLs could be restricted. 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
 
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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.
 
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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:
 
   
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;
 
   
decreasing the demand for JATENZO; and
 
   
the ability of our sales representatives to reach healthcare customers.
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
 
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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:
 
   
physicians’ views as to the scope of the approved indication and limitations on use and warnings and precautions contained in JATENZO’s approved labeling;
 
   
the availability, efficacy and safety of competitive therapies;
 
   
pricing and the perception of physicians and payors as to cost effectiveness;
 
   
the existence of sufficient third-party coverage or reimbursement; and
 
   
the effectiveness of our sales, marketing and distribution strategies.
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.
 
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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 for JATENZO, the approval was, subject to three postmarketing requirements and a required pediatric assessment. Moreover regulatory authorities may impose significant restrictions on JATENZO’s indicated uses or marketing or impose further ongoing requirements for potentially costly post-approval studies if circumstances warrant. 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. While a REMS was not required for JATENZO at the time of approval of the NDA, any REMS required by the FDA in the future would 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. For certain commercial prescription drug and biologic products, manufacturers and other parties involved in the supply chain must also meet chain of distribution requirements and build electronic, interoperable systems for product tracking and tracing and for notifying the FDA of counterfeit, diverted, stolen and intentionally adulterated products or other products that are otherwise unfit for distribution in the United States. 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:
 
   
issue warning or untitled letters or notice of violation letters;
 
   
seek an injunction or impose civil or criminal penalties or monetary fines;
 
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suspend or withdraw marketing approval;
 
   
suspend any ongoing clinical trials;
 
   
refuse to approve pending applications or supplements to applications submitted by us;
 
   
suspend or impose restrictions on operations, including costly new manufacturing requirements; or
 
   
seize or detain products, refuse to permit the import or export of products, or request that we initiate a product recall.
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.
 
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We may seek orphan drug designation from the FDA future product candidates, and we may not receive any
of the requested designations or we may be unable to realize the benefits associated with orphan drug designation, including the potential for market exclusivity.
Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if, among other things, it is intended to treat a rare disease or condition, defined as a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. Orphan drug designation neither shortens the development time or regulatory review time of a product candidate, nor gives the product candidate any advantage in the regulatory review or approval process (other than as discussed below).
In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and
user-fee
waivers. In addition, if a product candidate receives the first FDA approval for the indication for which it has orphan designation, the product is entitled to orphan drug exclusivity for that indication. Orphan drug exclusivity means the FDA may not approve another application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity or where the manufacturer is unable to assure sufficient product quantity.
We may seek orphan drug designation for HAVAH T+Ai
(CLAR-121)
for use in the treatment of inflammatory periductal mastitis (“
PDM
”) or for any other future product candidates. Even if we receive orphan drug designation, the benefit of orphan drug exclusivity may be limited if we seek approval for an indication broader than the orphan designated indication or could be revoked under certain circumstances, for example, if the FDA later determines that the request for designation was materially defective or that we are unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition. Further, even if we receive orphan drug exclusivity for a product, that exclusivity may not effectively protect the product from competition during the exclusivity period because different drugs with different active moieties can be approved for the same condition, and the same product can be approved for different uses. Also, in the United States, even after an orphan drug is approved and receives orphan drug exclusivity, the FDA may subsequently approve another drug for the same condition if the FDA concludes that the latter drug is not the same drug, including because it has been shown to be clinically superior to the drug with exclusivity because it is safer, more effective or makes a major contribution to patient care.
Recently enacted and future federal legislation and regulation 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, increased minimum Medicaid rebates
 
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owed by manufacturers under the Medicaid Drug Rebate Program and extended 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 created a Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 70%
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.
There have been executive, legislative and judicial efforts to modify, repeal or otherwise invalidate all or certain aspects of the ACA. By way of example, the Tax Cuts and Jobs Act, or the TCJA, was enacted, effective January 1, 2019, and included, among other things, a provision repealing the
tax-based
shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On June 17, 2021, the U.S. Supreme Court dismissed a challenge that argued the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress on procedural grounds. Thus, the ACA will remain in effect in its current form. Further, prior to the U.S. Supreme Court ruling, on January 28, 2021, President Biden issued an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through the ACA marketplace, which began on February 15, 2021 and closed on August 15, 2021. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is possible that the ACA will be subject to judicial or Congressional challenges in the future. It is uncertain how any such challenges and the healthcare measures of the Biden administration 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 December 31, 2021 due to the
COVID-19 pandemic,
unless additional Congressional action is taken.
Further, there has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state 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 drug products. By way of example, in December 2020, the U.S. Centers for Medicare & Medicaid Services (“CMS”) issued a final rule implementing significant manufacturer price reporting changes under the Medicaid Drug Rebate Program, including regulations that affect manufacturer-sponsored patient assistance programs subject to pharmacy benefit manager accumulator programs and Best Price reporting related to certain value-based purchasing arrangements. On September 9, 2021, the Biden Administration published a wide-ranging list of policy proposals, most of which would need to be carried out by Congress, to reduce drug prices and drug payment. The U.S. Department of Health and Human Services (“HHS”) plan includes, among other reform measures, proposals to (1) give Medicare authority to directly negotiate drug prices with manufacturers, (2) authorize HHS to negotiate Medicaid supplemental rebates on behalf of states, (3) allow employer-based, ACA marketplace and commercial health insurance plans to access Medicare negotiated drug prices, (4) place a cap on
out-of-pocket
costs for Medicare Part D beneficiaries and redistribute a higher proportion of drug costs to Part D and manufacturers, (5) mandate purchase of the least costly-alternative and to institute value-based or outcomes-based pricing arrangements, (6) disincentivize drug price increases, (8) facilitate approval and prescription of biosimilar and generic drugs, (9) increase drug pricing
 
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transparency, (10) prohibit certain types of rebates to pharmacy benefit managers, and (11) develop drug pricing models by tying price to outcomes. Many similar proposals, including the plans to give Medicare authority to negotiate drug prices and cap
out-of-pocket
costs, have already been included in policy statements and legislation currently being considered by Congress. It is unclear to what extent new statutory, regulatory, and administrative initiatives will be enacted and implemented, and to what extent these or any future legislation or regulations by the Biden administration will have on our business, including our ability to generate revenue and achieve profitability. Further, on July 9, 2021 President Biden signed an Executive Order affirming the administration’s policy to (i) support legislative reforms that would lower the prices of prescription drug and biologics, including by allowing Medicare to negotiate drug prices, by imposing inflation caps, and, by supporting the development and market entry of lower-cost generic drugs and biosimilars; and (ii) support the enactment of a public health insurance option. Among other things, the Executive Order also directs HHS to provide a report on actions to combat excessive pricing of prescription drugs, enhance the domestic drug supply chain, reduce the price that the Federal government pays for drugs, and address price gouging in the industry; and directs the FDA to work with states and Indian Tribes that propose to develop section 804 Importation Programs in accordance with the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and the FDA’s implementing regulations. FDA released such implementing regulations on September 24, 2020, which went into effect on November 30, 2020, providing guidance for states to build and submit importation plans for drugs from Canada. 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. If implemented importation of drugs from Canada may materially and adversely affect the price we receive for any of our product candidates.
Further, on November 20, 2020, CMS issued an Interim Final Rule implementing the Most Favored Nation or (“
MFN
”) Model under which Medicare Part B reimbursement rates would have been 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 Interim Final Rule has not been implemented and has been subject to challenge. On August 6, 2021, CMS announced a proposed rule to rescind the Most Favored Nations rule. Additionally, on November 30, 2020, HHS published 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. Pursuant to court order, the removal and addition of the aforementioned safe harbors have been delayed until January 1, 2023. Further, implementation of these changes 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.
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.
 
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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:
 
   
the demand for our products and any products for which we may obtain regulatory approval;
 
   
our ability to set a price that we believe is fair for our products;
 
   
our ability to obtain coverage and reimbursement approval for a product;
 
   
our ability to generate revenues and achieve or maintain profitability; and
 
   
the level of taxes that we are required to pay.
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)
controlled 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)
controlled 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 statutory and DEA regulatory requirements relating to manufacturing, distribution, dispensing, importation and exportation. The law and 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 CSA and DEA require entities handling controlled substances to: maintain inventories and records of receipt and distribution, file reports related to transactions involving controlled substances follow specific labeling and packaging requirements, and provide appropriate security measures to control against theft and 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. The federal and CSA does not preempt state law, and all states have established controlled substances laws and regulations. Though state controlled substances laws and regulations often mirror federal law, because the states are separate jurisdictions, they will separately schedule drug substances and require additional licensing, recordkeeping, reporting and security requirements. 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.
Our CMOs and other business partners who handle controlled substances on our behalf must maintain a DEA registration and comply with all requirements under the CSA and DEA regulations. 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.
 
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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-
 
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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:
 
   
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. The HHS Office of Inspector General (“
OIG
”), heavily scrutinizes relationships between pharmaceutical companies and persons in a position to generate referrals for or the purchase of their products, such as physicians, other healthcare providers, and pharmacy benefit managers, among others.
 
   
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. Manufacturers can be held liable under the False Claims Act, even when they do not submit claims directly to government payors, if they are deemed to have “caused” the submission of the claim. The False Claims Act allows private individuals acting as “whistleblowers” to bring actions on the U.S. Federal Government’s behalf and to share in any recovery.
 
   
The federal and civil false claims laws and civil monetary penalty laws, such as 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 antikickback 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.
 
   
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
 
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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.
 
   
The federal transparency requirements, sometimes referred to as the “Sunshine Act”, under the 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 Department of Health and Human Services (“
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, applicable manufacturers will be required to report such information regarding payments and transfers of value provided during the previous year to certain other healthcare providers, including physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists & anesthesiologist assistants, and certified nurse-midwives.
Additionally, we are subject to state and foreign equivalents of each of the healthcare laws and regulations described above, among others, some of which may be broader in scope and may apply regardless of the payor. Many U.S. states have adopted laws similar to the federal Anti-Kickback Statute and False Claims Act, and may apply to our business practices, including, but not limited to, research, distribution, sales or marketing arrangements and claims involving healthcare items or services reimbursed by
non-governmental
payors, including private insurers. In addition, some states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and/or the Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state and require the registration of pharmaceutical sales representatives. State and foreign laws, including for example the European Union General Data Protection Regulation, which became effective May 2018 also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. There are ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement we could be subject to penalties.
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-
 
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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:
 
   
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;
 
   
generic
T-injectables;
 
   
oral
methyl-T;
 
   
transdermal patches, such as Androderm
®
, marketed by Allergan Sales, LLC, a subsidiary of AbbVie; buccal patches, such as Striant
®
, marketed by Endo;
 
   
implanted subcutaneous pellets, such as Testopel
®
, marketed by Endo;
 
   
Aveed, a
long-acting T-injectable marketed
by Endo;
 
   
Xyosted, a
sub-cutaneous weekly
auto-injector T-therapy marketed
by Antares Pharma, Inc.; and
 
   
Natesto
®
, an intranasal
T-therapy,
marketed by Acerus Pharmaceuticals.
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
 
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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:
 
   
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. Antares Pharma, Inc. will market TLANDO under a licensing agreement with Lipocine;
 
   
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;
 
   
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
 
   
an oral
bio-identical testosterone,
which has completed its Phase 2 clinical studies, being developed by TesoRx LLC.
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 certain approved NDAs to provide sufficient quantities of product samples on commercially reasonable, market-based terms to entities developing generic and
follow-on
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. Additionally, on July 9, 2021, President Biden issued an executive order directing the FDA to, among other things, continue to clarify and improve the approval framework for generic drugs and identify and address any efforts to impede generic drug competition.
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
 
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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:
 
   
substantial monetary awards to patients from our clinical trials or other claimants;
 
   
decreased demand for JATENZO;
 
   
damage to our business reputation and exposure to adverse publicity;
 
   
increased FDA warnings on product labels;
 
   
costs of related litigation;
 
   
distraction of management’s attention from our primary business;
 
   
loss of revenue; and
 
   
the inability to successfully commercialize JATENZO.
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.
 
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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, we prevailed in a third interference, and several more were suggested, see below and see “—
Legal Proceedings
” subsection below. 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 may 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 claims of any of our patent applications or issued patents subject to
pre-America
Invents Act patent laws. The outcome of an interference can invalidate the involved applications and/or 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
 
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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
 
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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
 
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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
 
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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.
 
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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:
 
   
sell, transfer, lease or dispose of certain assets;
 
   
encumber or permit liens on certain assets;
 
   
make certain restricted payments, including paying dividends on, or repurchasing or making distributions with respect to, the Common Stock; and
 
   
enter into certain transactions with affiliates.
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 Common Stock and Public Warrants 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:
 
   
a limited availability of market quotations for its securities;
 
   
reduced liquidity for its securities;
 
   
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;
 
   
a limited amount of news and analyst coverage; and
 
   
a decreased ability to issue additional securities or obtain additional financing in the future.
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
 
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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:
 
   
results of operations that vary from the expectations of securities analysts and investors;
 
   
results of operations that vary from those our competitors;
 
   
changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors;
 
   
declines in the market prices of stocks generally;
 
   
strategic actions by us or our competitors;
 
   
announcements by us or our competitors of significant contracts, acquisitions, joint ventures, other strategic relationships or capital commitments;
 
   
any significant change in our management;
 
   
changes in general economic or market conditions or trends in our industry or markets;
 
   
changes in business or regulatory conditions, including new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
 
   
future sales of Common Stock or other securities;
 
   
investor perceptions of the investment opportunity associated with the Common Stock relative to other investment alternatives;
 
   
the public’s response to press releases or other public announcements by our or third parties, including our filings with the SEC;
 
   
litigation involving our, our industry, or both, or investigations by regulators into our operations or those of our competitors;
 
   
guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;
 
   
the development and sustainability of an active trading market for the Common Stock;
 
   
actions by institutional or activist stockholders;
 
   
changes in accounting standards, policies, guidelines, interpretations or principles; and
 
   
other events or factors, including those resulting from pandemics, natural disasters, war, acts of terrorism or responses to these events.
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
 
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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.
Certain of our 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 certain of our 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.
 
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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 63.3% 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 Merger Closing Date continuing through the earlier of: (i) the date that is 180 days from the Merger 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 filed a registration statement on
Form S-8 ,
and will file additional 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
 
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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 PIPE Warrants will be redeemable by us for cash and 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
 
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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:
 
   
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;
 
   
opting out of Section 203 of the DGCL to allow us to establish our own rules governing business combinations with interested parties;
 
   
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;
 
   
the limitation of the liability of, and the indemnification of, our directors and officers;
 
   
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;
 
   
the requirement that directors may only be removed from our board of directors for cause;
 
   
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;
 
   
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;
 
   
controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings;
 
   
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;
 
   
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
 
   
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.
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.
 
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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.
 
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USE OF PROCEEDS
All of the Common Stock offered by the Selling Securityholder pursuant to this prospectus will be sold by the Selling Securityholder for its account. We will not receive any of the proceeds from these sales.
We will receive up to an aggregate of approximately $15.9 million from the exercise of the PIPE Warrants, assuming the exercise in full of all of the PIPE Warrants for cash. We expect to use the net proceeds from the exercise of the PIPE Warrants to support growth initiatives for our near-term commercial objectives for JATENZO. We will have broad discretion over the use of proceeds from the exercise of the PIPE Warrants. There is no assurance that the holders of the PIPE Warrants will elect to exercise any or all of such PIPE Warrants. To the extent that the PIPE Warrants are exercised on a “cashless basis,” the amount of cash we would receive from the exercise of the PIPE Warrants will decrease.
 
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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
Pre-Funded
Warrants or Common Warrants issued to the Selling Securityholder on any stock exchange or stock market.
As of the PIPE Closing Date and immediately following completion of the Private Placement, we had approximately 24,025,817 shares of Common Stock issued and outstanding held of record by 24 registered holders and approximately 5,750,000 Public 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 Merger Closing.
We have filed and 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. Once these shares are registered, they can be sold in the public market upon issuance, subject to applicable restrictions.
 
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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 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 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 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 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)
 
   
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.
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
 
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with the fatty acid undecanoic acid to form 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 nine months ended September 30, 2021 and the year ended December 31, 2020, JATENZO generated net revenues of approximately $4.3 million, $9.4 million and $6.4 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 ended September 30, 2021 increased 12% as compared to the prior quarter, and 132% as compared to the prior year period. 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.
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 pilot study initiation anticipated in the first half of 2022.
Our U.S. patent portfolio on JATENZO currently includes five issued patents expiring between March 2029 and December 2030 and we recently received two notices of allowance from the United States Patent and Trademark Office (USPTO) for claims that cover JATENZO. 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 Legacy Clarus’s operations in 2004, Legacy 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 of September 30, 2021. Legacy 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. Through September 30, 2021, we have received gross proceeds of $104.2 million from investors in Legacy 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 Legacy 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.
Private Placement
On December 3, 2021, we entered into a Securities Purchase Agreement with the Selling Securityholder, pursuant to which we issued and sold, in a private placement, an aggregate of (i) 2,300,000 shares of Common Stock, together with Common Warrants to purchase up to 2,300,000 shares of Common Stock, and (ii) 724,194
Pre-Funded
Warrants with each
Pre-funded
Warrant exercisable for one share of Common Stock, together with Common Warrants to purchase up to 724,194 shares of Common Stock. Each share of Common Stock and accompanying Common Warrant was sold together at a combined offering price of $4.96, and each
Pre-Funded
Warrant and accompanying Common Warrant was sold together at a combined offering price of $4.95999. The
Pre-Funded
Warrants are immediately exercisable, at an exercise price of $0.00001, and may be exercised at any
 
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time until all of the
Pre-Funded
Warrants are exercised in full. The Common Warrants have an exercise price of $5.25 per share, are exercisable beginning six months following the PIPE Closing and expire five years from the date of issuance, subject to customary adjustments.
Merger
On the Merger Closing Date, we, together with Merger Sub, consummated the previously announced merger, pursuant to the Merger Agreement, with Legacy Clarus, pursuant to which, subject to the terms and conditions set forth in the Merger Agreement, Merger Sub merged with and into Legacy Clarus, with Legacy Clarus surviving as our wholly-owned subsidiary, and with Legacy 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. Upon the consummation of the business combination, Blue Water changed its name to “Clarus Therapeutics Holdings, Inc.”
In connection with the Merger, Legacy Clarus’s convertible noteholders and senior secured noteholders provided $25.0 million in additional capital to Legacy Clarus following the announcement of the execution of the Merger Agreement. All such proceeds plus accrued interest converted to shares of our common stock at a price of $10.00 per share at the Merger Closing Date, resulting in 2,549,939 shares issued. The additional capital of $25.0 million was received by the Legacy Clarus prior to the Merger 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, shares of Legacy Clarus’s redeemable convertible Series D Preferred Stock issued and outstanding and all principal and accrued interest under Legacy 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 Legacy 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 Legacy Clarus’s equity holders and 135,000 shares that were transferred from the Sponsor). All unexpired, outstanding Series D Warrants of Legacy 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 Legacy Clarus preferred stock, common stock and stock options were cancelled and extinguished upon completion of the Merger. In addition, Legacy Clarus’s existing equity incentive plans were terminated.
As a result of the Merger, we operate under Legacy 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 $2.8 million and $36.3 million for the three and nine months ended September 30, 2021 and our net income was $4.3 million for the year ended December 31, 2020 as compared to net loss of $41.7 million for the year ended December 31, 2019. As of September 30, 2021 and December 31, 2020, we had an accumulated deficit of $317.4 million and $325.8 million, respectively. 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;
 
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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-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. Legacy 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.
 
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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 of September 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 nine months ended September 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 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
Legacy 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, 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.
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.
 
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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 June 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 ended September 30, 2020. Absent this charge, the gross profit for the nine months ended September 30, 2020 and the year ended December 31, 2020 was $3.4 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
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.
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;
 
   
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.
 
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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 Legacy 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 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 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 Legacy Clarus’ 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 of the financial statements appearing elsewhere in this prospectus. 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.
 
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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 $1.7 million decrease in outsourced advertising and promotion costs due to timing of media buys and agency activities;
 
   
a $0.4 million increase in commercial analytic and market research costs, primarily related to prescription and payor data; and
 
   
a $0.1 million decrease in other sales and marketing related costs.
 
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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 $1.0 million increase in personnel costs, including stock-based compensation expense, primarily due to an increase in headcount and external consultants;
 
   
a $0.6 million decrease in consulting and professional fees, primarily due to a decrease in legal fees related to patents; and
 
   
a $0.1 million decrease in other general and administrative costs.
Research and Development Expenses
Research and development expenses were $1.3 million for the three months ended September 30, 2021, which decreased by $0.1 million from $1.4 million for the three months ended September 30, 2020. The decrease in research and development expenses was primarily attributable to the following:
 
   
a $1.0 million decrease in costs related to research and development consulting services; offset by
 
   
a $0.9 million increase in license fees related to the License Agreements with HavaH and McGill.
Other (Expense) Income, Net
Total other income, net was $5.6 million for the three months ended September 30, 2021, compared to other income, net of $16.6 million for the three months ended September 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.
 
 
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Comparison of the nine months ended September 30, 2021 and 2020
The following table summarizes our results of operations for the nine months ended September 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 ended September 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 ended September 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 product sales was $1.4 million for the nine months ended September 30, 2021, which decreased by $6.9 million, from $8.3 million for the nine months ended September 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 ended September 30, 2020, offset by an increase due to increased product revenue sales.
 
Sales and Marketing Expenses
Sales and marketing expenses were $25.0 million for the nine months ended September 30, 2021, which increased by $1.5 million, from $23.5 million for the nine months ended September 30, 2020. The increase in sales and marketing expenses was primarily attributable to the following:
 
   
a $2.6 million increase in marketing costs, primarily related to the timing of agency activities;
 
   
a $0.2 million increase in patient assistance costs and other sales and marketing costs; offset by
 
   
a $1.3 million decrease in commercial analytics and market research costs.
 
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General and Administrative Expenses
General and administrative expenses were $12.3 million for the nine months ended September 30, 2021, which increased by $4.1 million, from $8.2 million for the nine months ended September 30, 2020. The increase in general and administrative expenses was primarily attributable to the following:
 
   
a $2.6 million increase in personnel costs, including stock-based compensation expense, primarily due to an increase headcount and external consultants;
 
   
a $0.8 million increase in consulting and professional fees, primarily 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 $0.5 million increase in insurance fees, related to directors’ and officers’ insurance; and
 
   
a $0.2 million increase in other general and administrative expenses.
Research and Development Expenses
Research and development expenses were $3.1 million for the nine months ended September 30, 2021, which increased by $0.3 million from $2.8 million for the nine months ended September 30, 2020. The increase in research and development expenses was primarily attributable to the following:
 
   
a $0.9 million increase in license fees related to the HavaH Agreement and McGill Agreement; and
 
   
a $1.0 million increase in clinical costs related to Phase 4 studies related to the development of JATENZO, our lead commercial product; offset by
 
   
a $1.6 million decrease in costs related to research and development consulting services.
Other (Expense) Income, Net
Total other expense, net was $3.8 million for the nine months ended September 30, 2021, compared to other income of $43.8 million for the nine months ended September 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.
 
 
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Comparison of the Years Ended December 31, 2020 and 2019
The following table summarizes Clarus’s results of operations for the years ended December 31, 2020 and 2019 (in thousands):
 
    
Year Ended
December 31,
       
    
2020
   
2019
   
Change
 
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       7,374       22,141  
General and administrative
     11,937       7,414       4,523  
Research and development
     3,407       3,088       319  
  
 
 
   
 
 
   
 
 
 
Loss from operations
     (47,177     (17,876     (29,301
Other income (expense), net:
      
Change in fair value of warrant liability and derivative, net
     66,891       13       66,878  
Interest income
     25       79       (54
Interest expense
     (15,394     (23,866     8,472  
  
 
 
   
 
 
   
 
 
 
Total other income (expense), net
     51,522       (23,774     75,296  
  
 
 
   
 
 
   
 
 
 
Net income (loss)
   $ 4,345     $ (41,650   $ 45,995  
  
 
 
   
 
 
   
 
 
 
Net Product Revenue
Clarus began commercially selling JATENZO within the United States in February 2020, following FDA approval in March 2019. For the year ended December 31, 2020, Clarus recorded $6.4 million of net product revenue. For further discussion regarding Clarus’s revenue recognition policy, see Note 2 to Clarus’s audited financial statements appearing elsewhere in this proxy statement/prospectus.
Cost of Product Sales
Cost of sales was $8.7 million for the year ended December 31, 2020. Cost of sales consisted of $0.9 million related to the actual cost of units sold and a reserve for inventory obsolescence of $7.8 million. Based on Clarus’s policy to expense costs associated with the manufacture of its products prior to regulatory approval, raw material costs of $0.6 million used to manufacture JATENZO that were recognized as revenue during the year ended December 31, 2020 were expensed prior to the March 2019 FDA approval and, therefore, are not included in cost of sales during the period.
Sales and Marketing Expenses
Sales and marketing expenses were $29.5 million for the year ended December 31, 2020, which increased by $22.1 million, from $7.4 million for the year ended December 31, 2019. The increase in sales and marketing expenses was primarily attributable to the following:
 
   
A $21.8 million increase in commercialization costs, primarily due to an increase in outsourced commercial costs of $21.1 million and an increase of patient assistance program costs of $0.5 million; and
 
   
a $0.3 million increase in 3PL distribution fees.
 
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General and Administrative Expenses
General and administrative expenses were $11.9 million for the year ended December 31, 2020, which increased by $4.5 million, from $7.4 million for the year ended December 31, 2019. The increase in general and administrative expenses was primarily attributable to the following:
 
   
A $2.2 million increase in personnel costs, including stock-based compensation expense, primarily due to an increase headcount and external consultants; and
 
   
a $2.2 million increase in consulting and professional fees, including legal, business development, accounting and audit fees.
Research and Development Expenses
Research and development expenses were $3.4 million for the year ended December 31, 2020, which increased by $0.3 million from $3.1 million for the year ended December 31, 2019. The increase in research and development expenses was primarily attributable to the following:
 
   
A $0.6 million increase in outside consulting costs; and
 
   
a $0.3 million decrease in costs related to the development of JATENZO, Clarus’s lead commercial product, specifically due to the decreased clinical and manufacturing expenses after JATENZO was commercially available in February 2020.
Other Income (Expense), Net
Total other income, net was $51.5 million for the year ended December 31, 2020, compared to an expense of $23.8 million for the year ended December 31, 2019. The increase of $75.3 million was primarily related to a $66.9 decrease in the change in fair value of the warrant liability and derivative and a decrease in interest expense of $8.4 million, related to a decrease of $17.1 million in interest incurred with related parties and an increase of $8.7 in interest incurred with third parties.
Liquidity and Capital Resources
Sources of Liquidity
Since inception, Legacy Clarus has incurred significant operating losses, have experienced negative operating cash flows and have accumulated significant accrued liabilities. Our net loss was $2.8 million and $36.3 million for the three and nine months ended September 30, 2021, respectively and our net income was $4.3 million for the year ended December 31, 2020 as compared to net loss of $41.7 million for the year ended December 31, 2019. As of September 30, 2021 and December 31, 2020, we had cash and cash equivalents of $22.0 million and $7.2 million, respectively, and an accumulated deficit of $317.4 million and $325.8 million, respectively. 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 and the Private Placement, 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.
Private Placement
On the PIPE Closing Date, we received net proceeds from the Private Placement of approximately $13.5 million.
 
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Merger
On the Merger 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 Legacy 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, Legacy Clarus entered into note purchase agreements, pursuant to which it borrowed an aggregate of $82.3 million from related party investors as of September 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 Legacy Clarus convertible notes had the option to convert into Legacy Clarus Series D Preferred Stock at an exercise price of $4.50.
At the Effective Time, all principal and accrued interest under Legacy Clarus’s convertible notes converted into 8,529,846 shares of our common stock.
Senior Secured Notes
On March 12, 2020, Legacy 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 Legacy 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, Legacy 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 of the financial statements appearing elsewhere in this prospectus), $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 Legacy 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.
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 ending September 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 the September 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.
 
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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 with principal payments beginning in 2022. The senior secured notes are governed by an indenture, dated as of March 12, 2020, between Legacy 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 Legacy 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 ended September 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 ended September 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 of September 30, 2021.
During the three months ended September 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 ended September 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 ended September 30, 2021 and 2020.
Pursuant to the indenture governing the senior secured notes, Legacy 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 on March 31, 2020. As of December 31, 2020, Legacy 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 Legacy 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 the September 30, 2021 consolidated 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 of the financial statements appearing elsewhere in this prospectus for further disclosure related to our assessment of the ability to operate as a going concern as of September 30, 2021.
Forbearance Agreement
On March 17, 2021, Legacy Clarus entered into a forbearance agreement with noteholders in relation to the senior secured notes. Legacy Clarus was unable to and did not pay interest of $3.1 million due on March 1, 2021. As of March 31, 2021, Legacy 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, Legacy 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 Legacy Clarus, amongst other things, executed the Merger Agreement and provided financial reporting requirements by April 27, 2021.
 
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Forbearance Extension
In August 2021, Legacy Clarus 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 Merger Closing Date.
On September 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 due September 1, 2021 to March 1, 2022, and further accrues interest on the past interest due amount at a rate of 18.5% per annum beginning on September 1, 2021 until paid.
PIK Note
In May 2021, Legacy Clarus entered into a
payment-in-kind,
or PIK, note (the “
PIK Note
”), in relation to its missed interest payment (which was due in March 2021) on its senior secured notes, pursuant to which Legacy 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, on February 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
In June 2021, Legacy 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
In July 2021, Legacy 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 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 PPP administered through the 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, Legacy Clarus received an unsecured loan of $0.5 million from the SBA. After considering further guidance issued by the SBA, Legacy Clarus elected to repay the loan in full in May of 2020 with no interest due under safe harbor provisions of the CARES Act.
 
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Cash Flows
The following table summarizes our cash flows for the nine months ended September 30, 2021 and 2020 and the years ended December 31, 2020 and 2019 (in thousands):
 
    
Nine Months Ended
September 30,
    
Years Ended
December 31,
 
    
2021
    
2020
    
2020
    
2019
 
Net cash used in operating activities
     (34,452      (35,661    $ (41,580    $ (19,715
Net cash used in investing activities
     (20      (62      (63      (21
Net cash provided by financing activities
     49,192        47,220        47,220        18,360  
Net increase in cash and cash equivalents
   $ 14,720      $ 11,497      $ 5,577      $ (1,376
Operating Activities
Net cash used in operating activities was $34.4 million for the nine months ended September 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 ended September 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.
 
Net cash used in operating activities was $41.6 million for the year ended December 31, 2020, reflecting net income of $4.3 million, offset by a net change of $17.2 million in net operating assets and non-cash charges of $63.1 million. The non-cash charges primarily consist of the change in fair value of the warrant and derivative liabilities, 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 a decrease in inventory of $1.1 million, an increase in accounts payable of $7.7 million, an increase in accrued expenses of $2.9 million, an increase in deferred revenue of $1.2 million and an increase in accrued interest included in debt and royalty obligation of $9.5 million, partially offset by an increase in accounts receivable of $4.4 million and a decrease in prepaid expenses and other current assets of $0.6 million.
Net cash used in operating activities was $19.7 million for the year ended December 31, 2019, reflecting a net loss of $41.7 million, offset by a net change of $2.3 million in net operating assets and non-cash charges of $24.2 million. The non-cash charges primarily consist of interest expense on convertible notes, beneficial conversion feature and derivatives stock compensation expense. The change in net operating assets and liabilities was primarily due to an increase in inventory of $7.0 million and an increase in prepaid expenses and other current assets of $0.9 million, partially offset by an increase in accounts payable and accrued expenses of $5.6 million.
Investing Activities
During the nine months ended September 30, 2021 and 2020, we used approximately $20,000 and $62,000, respectively, of cash in investing activities for purchases of property and equipment.
 
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During the years ended December 31, 2020 and 2019, Clarus used approximately $62,000 and $21,000, respectively, of cash in investing activities for purchases of property and equipment.
Financing Activities
During the nine months ended September 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 ended September 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.
 
During the year ended December 31, 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.
During the year ended December 31, 2019, net cash provided by financing activities was $18.4 million, primarily related to gross proceeds received from the issuance of convertible notes.
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 our 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, Legacy Clarus has devoted substantially all its efforts to business planning, clinical development, commercial planning and raising capital. Legacy Clarus, and since the Merger, we have incurred
 
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significant losses from operations since inception and has an accumulated deficit of $317.4 million as of September 30, 2021. Further, as of September 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 in the Notes of the financial statements appearing elsewhere in this prospectus 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 ended September 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.
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.
 
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Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of September 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
 
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 $43.1 million outstanding aggregate principal on our senior secured notes that bear interest at 12.5% and mature on March 1, 2025.
(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
In July 2009, Legacy Clarus 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 September 30, 2021 and 2020 and the years ended December 31, 2020 and 2019 were $0.9 million, $0.1 million, $3.2 million and $5.8 million respectively. Purchases under the Catalent Agreement for the nine months ended September 30, 2021 and 2020 were $6.0 million and $3.1 million, respectively.
Legacy Clarus 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 nine months ended September 30, 2021.
Lease Commitments
We have operating leases for rental space in Northbrook, Illinois and Murfreesboro, Tennessee that extend into December 31, 2022 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.
 
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Long-Term Debt Commitments
As discussed above and in Note 7 of the financial statements appearing elsewhere in this prospectus, we have senior secured notes that are included in the table above.
License Agreement Commitments
In May 2021, Legacy Clarus 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 (“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.
In September 2021, Legacy Clarus entered into a license agreement (the “McGill Agreement”) with The Royal Institution for the Advancement of Learning/McGill University, or McGill, a Canadian 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.
 
 
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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 elsewhere in this prospectus.
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 September 30, 2021 and December 31, 2020, we had cash and cash equivalents of $21.9 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 September 30, 2021 and December 31, 2020, $43.1 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 September 30, 2021 our outstanding debt obligations at fixed interest rates were comprised of senior notes and at December 31, 2020, our outstanding debt obligations at fixed interest rates were comprised of convertible promissory notes and senior notes.
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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BUSINESS
Overview
We are a pharmaceutical company focused on the commercialization of JATENZO, the first and only oral
T-replacement,
or 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 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.
The FDA granted
3-year Hatch-Waxman market
exclusivity to JATENZO, which prevents the FDA from granting full market approval to similar testosterone 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
 
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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:
 
   
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.
 
   
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.
 
   
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
 
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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.
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
 
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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:
 
   
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;
 
   
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;
 
   
the ability to easily identify low serum T levels through a simple blood test; and
 
   
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:
 
   
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.
 
   
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