NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note
1—Description of Organization, Business Operations and Basis of Presentation
Blue Water Acquisition Corp.,
including its consolidated subsidiary, (the “Company”) is a blank check company incorporated in Delaware on May 22, 2020.
The Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization
or similar business combination with one or more businesses (the “Business Combination”). The Company is an emerging growth
company and, as such, the Company is subject to all of the risks associated with emerging growth companies. On April 27, 2021, Blue Water
Merger Sub Corp., a Delaware corporation and a wholly-owned subsidiary of the Company was formed.
As
of June 30, 2021, the Company had not commenced any operations. All activity for the period from May 22, 2020 (inception) through
June 30, 2021 relates to the Company’s formation and the initial public offering (the “Initial Public Offering”) described
below. The Company will not generate any operating revenues until after the completion of its initial Business Combination, at the earliest.
The Company will generate non-operating income in the form of interest income on cash and cash equivalents from the proceeds
derived from the Initial Public Offering. The Company has selected December 31 as its fiscal year end.
The Company’s sponsor
is Blue Water Sponsor LLC, a Delaware limited liability company (the “Sponsor”). The registration statement for the Company’s
Initial Public Offering was declared effective on December 15, 2020. On December 17, 2020, the Company consummated its Initial
Public Offering of 5,750,000 units (the “Units” and, with respect to the Class A Common Stock included in the
Units being offered, the “Public Shares”), including 750,000 additional Units to cover over-allotments (the “Over-Allotment
Units”), at $10.00 per Unit, generating gross proceeds of $57.5 million, and incurring offering costs of approximately
$3.7 million, of which approximately $2.0 million was for deferred underwriting commissions (Note 5).
Simultaneously
with the closing of the Initial Public Offering, the Company consummated the private placement (“Private Placement”) of 3,445,000 warrants
(each, a “Private Placement Warrant” and collectively, the “Private Placement Warrants”) at a price of $1.00
per Private Placement Warrant to the Sponsor, generating proceeds of approximately $3.4 million (Note 4).
Upon
the closing of the Initial Public Offering and the Private Placement, approximately $58.7 million ($10.20 per Unit) of the net proceeds
of the Initial Public Offering and certain of the proceeds of the Private Placement was held in a trust account (“Trust
Account”) located in the United States with Continental Stock Transfer & Trust Company acting as trustee, and will be
invested only in U.S. “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act having
a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment
Company Act 1940, as amended (the “Investment Company Act”), which invest only in direct U.S. government treasury obligations,
as determined by the Company, until the earlier of: (i) the completion of a Business Combination and (ii) the distribution
of the Trust Account as described below.
The
Company’s management has broad discretion with respect to the specific application of the net proceeds of the Initial Public Offering
and the sale of Private Placement Warrants, although substantially all of the net proceeds are intended to be applied generally toward
consummating a Business Combination. There is no assurance that the Company will be able to complete a Business Combination successfully.
The Company must complete one or more initial Business Combinations having an aggregate fair market value of at least 80% of the net
assets held in the Trust Account (excluding the deferred underwriting commissions and taxes payable and interest previously released
for working capital purposes on the income earned on the Trust Account) at the time of the agreement to enter into the initial Business
Combination. However, the Company will only complete a Business Combination if the post-transaction company owns or acquires 50%
or more of the voting securities of the target or otherwise acquires a controlling interest in the target sufficient for it not to be
required to register as an investment company under the Investment Company Act.
The
Company will provide the holders (the “Public Stockholders”) of the Public Shares with the opportunity to redeem all or a
portion of their Public Shares upon the completion of a Business Combination either (i) in connection with a stockholder meeting
called to approve the Business Combination or (ii) by means of a tender offer. The decision as to whether the Company will seek
stockholder approval of a Business Combination or conduct a tender offer will be made by the Company, solely in its discretion. The Public
Stockholders will be entitled to redeem their Public Shares for a pro rata portion of the amount then held in the Trust Account (initially
anticipated to be $10.20 per Public Share). The per-share amount to be distributed to Public Stockholders who redeem their
Public Shares will not be reduced by the deferred underwriting commissions the Company will pay to the underwriters (as discussed in
Note 5). These Public Shares are recorded at a redemption value and classified as temporary equity upon the completion of the Initial
Public Offering in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification
(“ASC”) Topic 480 “Distinguishing Liabilities from Equity” (“ASC 480”). The Company will proceed
with a Business Combination if a majority of the shares voted are voted in favor of the Business Combination. The Company will not redeem
the Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001. If a stockholder vote is not required
by law and the Company does not decide to hold a stockholder vote for business or other legal reasons, the Company will, pursuant to
its Certificate of Incorporation (the “Certificate of Incorporation”), conduct the redemptions pursuant to the tender offer
rules of the U.S. Securities and Exchange Commission (“SEC”) and file tender offer documents with the SEC prior to completing
a Business Combination. If, however, stockholder approval of the transaction is required by law, or the Company decides to obtain stockholder
approval for business or legal reasons, the Company will offer to redeem shares in conjunction with a proxy solicitation pursuant to
the proxy rules and not pursuant to the tender offer rules. Additionally, each public stockholder may elect to redeem their Public Shares
irrespective of whether they vote for or against the proposed transaction. If the Company seeks stockholder approval in connection with
a Business Combination, the initial stockholders (as defined below) agreed to vote their Founder Shares (as defined below in Note 4)
and any Public Shares purchased during or after the Initial Public Offering in favor of a Business Combination. In addition, the initial
stockholders agreed to waive their redemption rights with respect to their Founder Shares and Public Shares in connection with the completion
of a Business Combination.
The
Certificate of Incorporation provided that a Public Stockholder, together with any affiliate of such stockholder or any other person
with whom such stockholder is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”)), will be restricted from redeeming its shares with respect to more than an
aggregate of 15% or more of the Public Shares, without the prior consent of the Company.
The
Sponsor and the Company’s officers and directors (the “initial stockholders”) agreed not to propose an amendment to
the Certificate of Incorporation to modify the substance or timing of the Company’s obligation to redeem 100% of the Public Shares
if the Company does not complete a Business Combination within the Combination Period (as defined below) or with respect to any other
material provisions relating to stockholders’ rights or pre-initial Business Combination activity, unless the Company
provides the Public Stockholders with the opportunity to redeem their Public Shares in conjunction with any such amendment.
The
Company will have up to 12 months from the closing of the Initial Public Offering, or December 17, 2021, (or up to 18 months
from the consummation of the Initial Public Offering, or June 17, 2022, if the Company extends the period of time to consummate a Business
Combination) (the “Combination Period”) to complete a Business Combination. In order to extend the time available for the
Company to consummate a Business Combination, the Sponsor or its affiliate or designees must deposit into the Trust Account $575,000
($0.10 per Public Share), on or prior to the date of the applicable deadline, for each three-month extension.
If
the Company is unable to complete a Business Combination within the Combination Period, the Company will (i) cease all operations except
for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the Public
Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account including interest
earned on the funds held in the Trust Account and not previously released to the Company for working capital purposes or to pay its taxes
(less up to $50,000 of interest to pay dissolution expenses), divided by the number of then outstanding Public Shares, which redemption
will completely extinguish Public Stockholders’ rights as stockholders (including the right to receive further liquidating distributions,
if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of
the remaining stockholders and the board of directors, dissolve and liquidate, subject in each case to the Company’s obligations
under Delaware law to provide for claims of creditors and the requirements of other applicable law.
The
initial stockholders agreed to waive their rights to liquidating distributions from the Trust Account with respect to the Founder Shares
if the Company fails to complete a Business Combination within the Combination Period. However, if the initial stockholders acquire Public
Shares in or after the Initial Public Offering, they will be entitled to liquidating distributions from the Trust Account with respect
to such Public Shares if the Company fails to complete a Business Combination within the Combination Period. The underwriters agreed
to waive their rights to the deferred underwriting commission (see Note 5) held in the Trust Account in the event the Company does not
complete a Business Combination within the Combination Period and, in such event, such amounts will be included with the other funds
held in the Trust Account that will be available to fund the redemption of the Public Shares. In the event of such distribution, it is
possible that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be
only $10.20. In order to protect the amounts held in the Trust Account, the Sponsor has agreed to be liable to the Company if and to
the extent any claims by a third party (except for the Company’s independent registered public accounting firm) for services rendered
or products sold to the Company, or a prospective target business with which the Company has entered into a letter of intent, confidentiality
or other similar agreement or business combination agreement (a “Target”), reduce the amount of funds in the Trust Account
to below the lesser of (i) $10.20 per Public Share and (ii) the actual amount per Public Share held in the Trust Account as of the
date of the liquidation of the Trust Account, if less than $10.20 per Public Share due to reductions in the value of the trust assets,
less taxes payable, provided that such liability will not apply to any claims by a third party or Target that executed a waiver of any
and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable) not will it apply to any claims under
the Company’s indemnity of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the “Securities Act”). The Company will seek to reduce the possibility that the Sponsor
will have to indemnify the Trust Account due to claims of creditors by endeavoring to have all vendors, service providers, prospective
target businesses or other entities with which the Company does business, execute agreements with the Company waiving any right, title,
interest or claim of any kind in or to monies held in the Trust Account.
Going
Concern
As
of June 30, 2021, the Company had approximately $225,000 in cash and working capital deficit of approximately $650,000.
The
Company’s liquidity needs prior to the consummation of the Initial Public Offering were satisfied through the payment $25,000 from
the Sponsor to cover certain offering costs on behalf of the Company in exchange for issuance of the Founders Shares (as defined in Note
4), and a loan from the Sponsor of approximately $157,000 under the Note (as defined in Note 4). The Company repaid the Note in full
on December 17, 2020. Subsequent to the consummation of the Initial Public Offering, the Company’s liquidity has been satisfied
through the net proceeds from the consummation of the Initial Public Offering and the Private Placement held outside of the Trust Account.
In connection with the Company’s
assessment of going concern considerations in accordance with FASB ASC Topic 205-40, “Basis of Presentation – Going Concern,”
management has determined that the anticipated cash requirements in the next twelve months raise substantial doubt about the Company’s
ability to continue as a going concern until the earlier of the consummation of the Business Combination or the date the Company is required
to liquidate, June 17, 2022. The unaudited condensed consolidated financial statements do not include any adjustment that might be necessary
if the Company is unable to continue as a going concern.
COVID-19
Impact
Management
is currently evaluating the impact of the COVID-19 pandemic on the industry and has concluded that while it is reasonably possible
that the virus could have a negative effect on the Company’s financial position, results of its operations and/or search for a
target company, the specific impact is not readily determinable as of the date of these unaudited condensed consolidated financial statements.
The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”) for interim financial information and Article 8 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by U.S. GAAP. In the opinion of management, all adjustments
(consisting of normal accruals) considered for a fair presentation have been included. Operating results for the three and six months
ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ended December 31, 2021.
The accompanying consolidated
financial statements comprise the Company and its wholly-owned subsidiary. As of June 30, 2021 and for the three and six month
ended June 30, 2021, the wholly-owned subsidiary has had no activity.
Emerging
Growth Company
The
Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart
Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not
being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act,
reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the
requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments
not previously approved.
Further,
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting
standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do
not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting
standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with
the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected
not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application
dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time
private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another
public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition
period difficult or impossible because of the potential differences in accounting standards used.
Proposed
Business Combination
On
April 27, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Blue Water Merger
Sub Corp., a Delaware corporation (the “Merger Sub”) and wholly-owned subsidiary of the Company, and Clarus Therapeutics,
Inc. a Delaware corporation (“Clarus”).
Pursuant to the Merger Agreement,
subject to the terms and conditions set forth therein, upon the consummation of the transactions contemplated by the Merger Agreement
(the “Closing”), Merger Sub will merge with and into Clarus (the “Merger” and, together with the other transactions
contemplated by the Merger Agreement, the “Transactions”), with Clarus continuing as the surviving corporation in the Merger
and a wholly-owned subsidiary of the Company. In the Merger, based on existing Clarus share preference and convertible debtholder rights, (i)
certain shares of Clarus preferred stock issued and outstanding immediately prior to the effective time of the Merger (the “Effective
Time”) will be canceled and converted into the right to receive a portion of the Merger Consideration (as defined below), (ii) all
other shares of Clarus capital stock, and all outstanding options under the Company’s equity incentive plan to purchase any capital
stock that have not been exercised prior to the Effective Time, will be canceled, retired and terminated without any consideration or
any liability to Clarus with respect thereto, and (iii) certain convertible and non-convertible promissory notes of the Company outstanding
as of the Closing will be canceled and converted into, or exchanged for, the right to receive a portion of the Merger Consideration.
The aggregate merger consideration
to be paid pursuant to the Merger Agreement to Clarus securityholders as of immediately prior to the Effective Time (“Clarus Securityholders”)
will be a number of shares of Company Class A Common Stock equal to (the “Merger Consideration”): (A) (i) $198,184,295.43,
plus (or minus) the estimated indebtedness of Clarus as of the Closing, net of its cash and cash equivalents (“Closing Net Indebtedness”),
divided by (ii) $10.20. minus 1,500,000 shares of Company Class A Common Stock (the “2025 Note Exchange Shares”) issuable
to the holders of certain non-convertible promissory notes of Clarus in exchange for $10 million of the aggregate principal amount of
such notes and other amendments to the terms of the remaining indebtedness pursuant to the Transaction Support Agreement; plus (B) the
2025 Note Exchange Shares, plus (C) (i) the outstanding balance (principal and interest) at Closing of certain convertible and non-convertible
promissory notes of Clarus issued between signing of the Merger Agreement and Closing, divided by (ii) $10.00, other than any such non-convertible
promissory notes that the Company elects in its discretion to pay off at Closing. The Merger Consideration to be paid to Clarus Securityholders
will be paid solely by the delivery of new shares of Company Class A Common Stock. The Closing Net Indebtedness (and the resulting Merger
Consideration) is based solely on estimates determined shortly prior to the Closing and is not subject to any post-Closing true-up or
adjustment. The Merger Consideration will be allocated among Clarus Securityholders as determined by Clarus shortly prior to the Closing
based on existing share preference and convertible debtholder rights.
Note
2—Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the Company’s management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the balance sheet. Actual results could differ from those estimates.
Cash
and Cash Equivalents
The Company considers all
short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company had no cash
equivalents as of June 30, 2021 and December 31, 2020 in its operating cash account.
Investments
Held in Trust Account
Upon
the closing of the Initial Public Offering and the Private Placement, $58.7 million of the net proceeds of the sale of the
Units in the Initial Public Offering and the Private Placement were placed in the Trust Account and invested in money market funds
meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act which invest only in direct U.S. government
treasury obligations. All of the Company’s investments held in the Trust Account are classified as trading securities. Trading
securities are presented on the unaudited condensed consolidated balance sheet at fair value at the end of each reporting period. Gains
and losses resulting from the change in fair value of these securities is included in net gain on investments, dividends and interest
held in Trust Account in the accompanying statement of operations. The estimated fair values of investments held in the Trust Account
are determined using available market information.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution,
which, at times, may exceed the Federal Depository Insurance Coverage limit of $250,000, and investments held in Trust Account. As of
June 30, 2021, the Company has not experienced losses on these accounts and management believes the Company is not exposed to significant
risks on such accounts.
Fair
Value of Financial Instruments
The
fair value of the Company’s assets and liabilities, which qualify as financial instruments under the FASB ASC Topic 820, “Fair
Value Measurements” approximates the carrying amounts represented in the unaudited condensed consolidated balance sheet.
Fair
Value Measurements
Fair
value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction
between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value.
The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
|
●
|
Level 1, defined as observable
inputs such as quoted prices for identical instruments in active markets;
|
|
●
|
Level 2, defined as inputs
other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments
in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
●
|
Level 3, defined as unobservable
inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations
derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
In
some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In
those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input
that is significant to the fair value measurement.
Derivative
warrant liabilities
The
Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates
all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are liabilities, derivatives
or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815 Derivatives and Hedging, (“ASC
815”). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as
equity, is re-assessed at the end of each reporting period.
The warrants issued in the
Initial Public Offering (the “Public Warrants”) and the Private Placement Warrants are recognized as derivative liabilities
in accordance with ASC 815. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts the instruments
to fair value at each reporting period. The liabilities are subject to re-measurement at each balance sheet date until exercised, and
any change in fair value is recognized in the Company’s statement of operations. The fair value of warrants issued in connection
with the Initial Public Offering were initially measured at fair value using a Monte Carlo simulation model and have subsequently been
measured based on the listed market price of such warrants. The fair value of the Private Placement warrants have been estimated using
a modified Monte Carlo simulation model at inception and subsequently at each measurement date using the Black-Scholes model.
Offering
Costs Associated with the Initial Public Offering
Offering
costs consist of legal, accounting, underwriting fees and other costs incurred that were directly related to the Initial Public Offering
and were charged to stockholders’ equity or written off to the statement of operations upon the completion of the Initial Public
Offering. The portion of the offering costs related to the issuance of the public and private warrants was written off to the statement
of operations as a financing costs – warrant liabilities.
Class A
Common Stock Subject to Possible Redemption
The Company accounts for
its Class A Common Stock subject to possible redemption in accordance with the guidance in FASB ASC Topic 480 “Distinguishing
Liabilities from Equity.” Class A Common Stock subject to mandatory redemption (if any) is classified as liability instruments
and are measured at fair value. Conditionally redeemable Class A Common Stock (including Class A Common Stock that features
redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not
solely within the Company’s control) are classified as temporary equity. At all other times, Class A Common Stock is classified
as stockholders’ equity. The Company’s Class A Common Stock feature certain redemption rights that are considered to be outside
of the Company’s control and subject to the occurrence of uncertain future events. Accordingly, at June 30, 2021 and December 31,
2020, 4,254,020 and 3,464,860 shares of Class A Common Stock, respectively, subject to possible redemption is presented at redemption
value as temporary equity, outside of the stockholders’ equity section of the Company’s unaudited condensed consolidated balance
sheet.
Income
Taxes
The Company follows the asset
and liability method of accounting for income taxes under FASB ASC Topic 740, “Income Taxes.” Deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment
date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. As of
June 30, 2021, the Company has aggregate deferred tax assets of approximately $4,100,000 and has recognized a full valuation allowance
against the deferred tax assets.
FASB
ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely
than not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of June 30, 2021. The Company
recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the
payment of interest and penalties as of June 30, 2021. The Company is currently not aware of any issues under review that could result
in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major
taxing authorities since inception.
Net
Income (Loss) Per Ordinary Share
Net
income (loss) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during
the period. The Company has not considered the effect of the warrants sold in the Public Offering and Private Placement to purchase an
aggregate of 9,195,000 shares in the calculation of diluted loss per share, since the exercise of the warrants are contingent upon the
occurrence of future events and the inclusion of such warrants would be ant- dilutive.
The
Company’s statement of operations includes a presentation of income (loss) per share for Redeemable Class A Common Stock in a manner
similar to the two-class method of income (loss) per share. Net income per common share, basic and diluted, for Redeemable Class A Common
Stock is calculated by dividing the proportionate share of income or loss on marketable securities held by the Trust Account, net of
applicable franchise and income taxes, by the weighted average number of Common stock subject to possible redemption outstanding since
original issuance.
Net
income per share, basic and diluted, for Non-Redeemable Class A and Class B Common Stock is calculated by dividing the net loss, adjusted
for income or loss on marketable securities attributable to Redeemable Class A Common Stock, by the weighted average number of non-redeemable
common stock outstanding for the period.
Non-Redeemable
Class A and Class B Common Stock includes Founder Shares and non-redeemable shares of common stock as these shares do not have any redemption
features. Non-Redeemable Class A and Class B Common Stock participates in the income or loss on marketable securities based on non-redeemable
common stock shares’ proportionate interest.
Accordingly,
basic and diluted income per common share is calculated as follows for the three and six months ended June 30, 2021:
|
|
For the
three months
ended
June 30,
2021
|
|
|
For the
six months
ended
June 30,
2021
|
|
|
For the
period
from
May 22,
2020
(inception)
through
June 30,
2020
|
|
Class A Common stock subject to possible redemption
|
|
|
|
|
|
|
|
|
|
Numerator: Earnings allocable to Common stock subject to possible redemption
|
|
|
|
|
|
|
|
|
|
Income from investments held in Trust Account
|
|
$
|
1,082
|
|
|
$
|
2,152
|
|
|
$
|
-
|
|
Less: Company’s portion available to be withdrawn to pay taxes
|
|
|
(1,082
|
)
|
|
|
(2,152
|
)
|
|
|
-
|
|
Net income attributable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Denominator: Weighted average Class A common stock subject to possible redemption
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
|
|
4,508,659
|
|
|
|
3,995,410
|
|
|
|
-
|
|
Basic and diluted net income per share
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Redeemable Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Net (Loss) income minus Net Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,597,315
|
)
|
|
$
|
8,049,432
|
|
|
$
|
(761
|
)
|
Net income allocable to Class A common stock subject to possible redemption
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-redeemable net (loss) income
|
|
$
|
(2,597,315
|
)
|
|
$
|
8,049,432
|
|
|
$
|
(761
|
)
|
Denominator: weighted average Non-redeemable common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding, Non-redeemable common stock
|
|
|
4,456,306
|
|
|
|
4,114,324
|
|
|
|
1,250,000
|
|
Basic and diluted net income per share, Non-redeemable common stock
|
|
$
|
(0.58
|
)
|
|
$
|
1.96
|
|
|
$
|
-
|
|
Recent
Accounting Standards
In
August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06, Debt—Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting
for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies accounting
for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement
conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted
earnings per share calculation in certain areas. The Company adopted ASU 2020-06 on January 1, 2021. Adoption of the ASU did not
impact the Company’s financial position, results of operations or cash flows.
The
Company’s management does not believe that any other recently issued, but not yet effective, accounting standards, if currently
adopted, that would have a material effect on the Company’s condensed consolidated financial statements.
Note
3—Initial Public Offering
On December
17, 2020, the Company consummated its Initial Public Offering of 5,750,000 Units, including 750,000 Over-Allotment
Units, at $10.00 per Unit, generating gross proceeds of $57.5 million, and incurring offering costs of approximately $3.7 million,
of which approximately $2.0 million was for deferred underwriting commissions.
Each Unit consists of one
share of Class A Common Stock, and one redeemable warrant (each, a “Public Warrant”). Each Public Warrant entitles
the holder to purchase one share of Class A Common Stock at a price of $11.50 per share, subject to adjustment (see Note 6).
Note
4—Related Party Transactions
Founder
Shares
On
June 30, 2020, the Sponsor purchased 1,437,500 shares of the Company’s Class B common stock, par value $0.0001 per share, (the
“Founder Shares”) for an aggregate price of $25,000. The initial stockholders agreed to forfeit up to 187,500 Founder Shares
to the extent that the over-allotment option was not exercised in full by the underwriters, so that the Founder Shares would represent
20% of the Company’s issued and outstanding shares after the Initial Public Offering (excluding the Representative Shares as defined
below). The underwriter exercised its over-allotment option in full on December 17, 2020; thus, the 187,500 Founder Shares were no longer
subject to forfeiture.
The
initial stockholders agreed, subject to limited exceptions, not to transfer, assign or sell any of the Founder Shares until the earlier
to occur of: (A) 180 days after the completion of the initial Business Combination or (B) subsequent to the initial Business Combination,
the date on which the Company completes a liquidation, merger, capital stock exchange or other similar transaction that results in all
of the Public Stockholders having the right to exchange their shares of common stock for cash, securities or other property. Any permitted
transferees will be subject to the same restrictions and other agreements of our initial stockholders with respect to any Founder Shares.
Private
Placement Warrants
Simultaneously
with the closing of the Initial Public Offering, the Company consummated the Private Placement of 3,445,000 Private Placement
Warrants at a price of $1.00 per Private Placement Warrant to the Sponsor, generating proceeds of approximately $3.4 million.
Each Private Placement Warrant
is exercisable for one share of Class A Common Stock at a price of $11.50 per share. A portion of the proceeds from the sale
of the Private Placement Warrants to the Sponsor was added to the proceeds from the Initial Public Offering held in the Trust Account.
If the Company does not complete a Business Combination within the Combination Period, the Private Placement Warrants will expire worthless.
The Private Placement Warrants will be non-redeemable for cash and exercisable on a cashless basis so long as they are
held by the Sponsor or their permitted transferees.
The
Sponsor and the Company’s officers and directors agreed, subject to limited exceptions, not to transfer, assign or sell any of
their Private Placement Warrants until the completion of the initial Business Combination.
Related
Party Loans
On
June 30, 2020, as amended on October 20, 2020, an affiliate of the Sponsor agreed to loan the Company an aggregate of up to
$300,000 to cover expenses related to the Initial Public Offering pursuant to a promissory note (the “Note”). This loan was non-interest bearing and
payable upon the completion of the Initial Public Offering. The Company borrowed approximately $157,000 under the Note and fully repaid
the Note on December 17, 2020.
In
addition, in order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor,
or certain of the Company’s officers and directors may, but are not obligated to, loan the Company funds as may be required (“Working
Capital Loans”). If the Company completes a Business Combination, the Company would repay the Working Capital Loans out of the
proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans would be repaid only out of funds held outside
the Trust Account.In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the
Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital
Loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination or, at the lenders’ discretion,
up to $1.5 million of such Working Capital Loans may be convertible into warrants of the post Business Combination entity at a price
of $1.00 per warrant. The warrants would be identical to the Private Placement Warrants. Except for the foregoing, the terms of such
Working Capital Loans, if any, have not been determined and no written agreements exist with respect to such loans. To date, the Company
had no borrowings under the Working Capital Loans.
As
discussed in Note 1, the Company may extend the period of time to consummate a Business Combination up to two times, each by an
additional three months (for a total of 18 months to complete a Business Combination). In order to extend the time available for
the Company to consummate a Business Combination, the Sponsor or its affiliates or designees must deposit into the Trust Account $500,000,
or $575,000 if the underwriters’ over-allotment option is exercised in full ($0.10 per Public Share in either case), on or
prior to the date of the applicable deadline, for each three-month extension (each, an “Extension Loan”). Any such payments
would be made in the form of a non-interest bearing, unsecured promissory note. Such notes would either be paid upon consummation
of a Business Combination, or, at the relevant insiders’ discretion, converted upon consummation of a Business Combination into
additional Private Warrants at a price of $1.00 per Private Placement Warrant. The Sponsor and its affiliates or designees are not obligated
to fund the Trust Account to extend the time for the Company to complete a Business Combination.
Administrative
Services Agreement
Commencing
on the date that the Company’s securities were first listed on Nasdaq until the earlier of the Company’s consummation of
a Business Combination or the Company’s liquidation, the Company agreed to pay the Sponsor a total of $10,000 per month for office
space, administrative and support services. The Company incurred approximately $30,000 and $60,000 in expenses in connection with such
services during the three and six months ended June 30, 2021 as reflected in the accompanying statement of operations. As of June 30,
2021, the Company had $60,000 in due to related party in connection with such services.
Note
5—Commitments & Contingencies
Registration
Rights
The holders of Founder Shares,
Private Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans and Extension Loans, if any, (and
any shares of Class A Common Stock issuable upon the exercise of the Private Placement Warrants and warrants that may be issued upon
conversion of Working Capital Loans and Extension Loans and upon conversion of the Founder Shares) were entitled to registration rights
pursuant to a registration rights agreement signed upon the consummation of the Initial Public Offering. These holders were entitled to
certain demand and “piggyback” registration rights. The Company will bear the expenses incurred in connection with the filing
of any such registration statements.
Underwriting
Agreement
The underwriters were entitled
to underwriting discounts of: (i) two percent (2.0%) of the gross proceeds of the Initial Public Offering, or approximately $1.2 million
in the aggregate, paid upon the closing of the Initial Public Offering; (ii) one percent (1.0%) of the gross proceeds of the Initial Public
Offering issued in the form of Class A Common Stock (the “Representative Shares”), or 57,500 Class A Common Stock, at the
closing of the Initial Public Offering; (iii) upon the consummation of a Business Combination, a deferred underwriting discount of three
and a half percent (3.5%) of the gross proceeds of the Initial Public Offering, or approximately $2.0 million in the aggregate. The
deferred fee will become payable to the underwriters from the amounts held in the Trust Account solely in the event that the Company completes
a Business Combination, subject to the terms of the underwriting agreement.
Right
of First Refusal
The
Company granted the underwriters a right of first refusal to act as lead-left book running manager for any and all future private
or public equity, equity-linked, convertible and debt offerings as well as exclusive strategic advisor in connection with any subsequent
merger or acquisition during such period, or any successor to or any subsidiary of the Company for a period of 16 months from the
closing of a Business Combination.
Note 6—Derivative Warrant Liabilities
The Public Warrants will
become exercisable on the later of (a) the completion of a Business Combination or (b) 12 months from the closing of the Initial
Public Offering; provided in each case that the Company has an effective registration statement under the Securities Act covering the
shares of Class A Common Stock issuable upon exercise of the Public Warrants and a current prospectus relating to them is available
(or the Company permits holders to exercise their Public Warrants on a cashless basis and such cashless exercise is exempt from registration
under the Securities Act). The Company has agreed that as soon as practicable, but in no event later than 15 business days after the closing
of the initial Business Combination, the Company will use its best efforts to file with the SEC and have an effective registration statement
covering the shares of Class A Common Stock issuable upon exercise of the warrants and to maintain a current prospectus relating
to those shares of Class A Common Stock until the warrants expire or are redeemed. If a registration statement covering the Class A
Common Stock issuable upon exercise of the warrants is not effective by the 60th business day after the closing of the initial Business
Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company
will have failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with
Section 3(a)(9) of the Securities Act or another exemption. Notwithstanding the above, if the Company’s shares of Class A
Common Stock are at the time of any exercise of a warrant not listed on a national securities exchange such that they satisfy the definition
of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders
of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the
Securities Act and, in the event the Company so elect, it will not be required to file or maintain in effect a registration statement,
and in the event the Company does not so elect, it will use our best efforts to register or qualify the shares under applicable blue sky
laws to the extent an exemption is not available.
The warrants have an exercise
price of $11.50 per share, subject to adjustments, and will expire five years after the completion of a Business Combination or earlier
upon redemption or liquidation. In addition, if (x) the Company issues additional shares of Class A Common Stock or equity-linked securities
for capital raising purposes in connection with the closing of the initial Business Combination at an issue price or effective issue price
of less than $9.20 per share of Class A common stock (with such issue price or effective issue price to be determined in good faith by
the board of directors and, in the case of any such issuance to the Sponsor or its affiliates, without taking into account any Founder
Shares held by the Sponsor or such affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y) the
aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for
the funding of the initial Business Combination on the date of the consummation of the initial Business Combination (net of redemptions),
and (z) the volume weighted average trading price of the Class A common stock during the 20 trading day period starting on the trading
day prior to the day on which the Company consummates its initial Business Combination (such price, the “Market Value”) is
below $9.20 per share, then the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the greater
of the Market Value and the Newly Issued Price, and the $18.00 per share redemption trigger price described below will be adjusted (to
the nearest cent) to be equal to 180% of the greater of the Market Value and the Newly Issued Price.
The Private Placement Warrants
are identical to the Public Warrants, except that the Private Placement Warrants and the shares of Class A Common Stock issuable
upon exercise of the Private Placement Warrants will not be transferable, assignable or salable until the completion of a Business Combination,
subject to certain limited exceptions. Additionally, the Private Placement Warrants will be non-redeemable so long as they
are held by the Sponsor or their permitted transferees. If the Private Placement Warrants are held by someone other than the Sponsor or
their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same
basis as the Public Warrants.
Once the warrants become
exercisable, the Company may redeem the outstanding warrants for cash (except as described herein with respect to the Private Placement
Warrants):
|
●
|
at a price of $0.01 per warrant;
|
|
●
|
upon a minimum of 30 days’ prior written notice of redemption; and
|
|
●
|
if and only if, the last sale price of Class A Common Stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders.
|
If the Company calls the
Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do
so on a “cashless basis,” as described in the warrant agreement.
In no event will the Company
be required to net cash settle any warrant. If the Company is unable to complete a Business Combination within the Combination Period
and the Company liquidates the funds held in the Trust Account, holders of warrants will not receive any of such funds with respect to
their warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with the respect
to such warrants. Accordingly, the warrants may expire worthless
Note 7—Stockholders’ Equity
Class A Common
Stock — The Company is authorized to issue 50,000,000 shares of Class A Common Stock with a par value of
$0.0001 per share. As of June 30, 2021 and December 31, 2020, there were 5,807,500 shares of Class A common stock issued or
outstanding, including 4,254,020 and 3,464,860 shares of Class A Common Stock subject to possible redemption, respectively.
Class B Common
Stock — The Company is authorized to issue 2,000,000 shares of Class B Common Stock with a par value of $0.0001
per share. On June 30, 2020, the Company issued 1,437,500 shares of Class B Common Stock to the Sponsor. Of these, up to
187,500 shares of Class B Common Stock were subject to forfeiture to the Company by the initial stockholders for no consideration
to the extent that the underwriters’ over-allotment option was not exercised in full or in part, so that the initial stockholders
would collectively own 20% of the Company’s issued and outstanding Common Stock after the Initial Public Offering (excluding the
Representative Shares). The underwriter exercised its over-allotment option in full on December 17, 2020; thus, the 187,500 Founder Shares
were no longer subject to forfeiture. As of June 30, 2021 and December 31, 2020, there were 1,437,500 shares of Class B Common
Stock issued or outstanding.
Common stockholders of record
are entitled to one vote for each share held on all matters to be voted on by stockholders. Holders of record of the Class A Common Stock
and holders of record of the Class B Common Stock will vote together as a single class on all matters submitted to a vote of the stockholders,
with each share of Common Stock entitling the holder to one vote except as required by law.
The Class B Common Stock
will automatically convert into Class A Common Stock at the closing of the initial Business Combination on a one-for-one basis,
subject to adjustment for stock splits, stock dividends, reorganizations, recapitalizations and the like, and subject to further adjustment
as provided herein. In the case that additional shares of Class A Common Stock or equity-linked securities are issued or deemed issued
in connection with the initial Business Combination, the number of shares of Class A Common Stock issuable upon conversion of all Founder
Shares will equal, in the aggregate, on an as-converted basis, 20% of the sum of the total number of all shares of common stock outstanding
upon the completion of the Initial Public Offering, plus the total number of shares of Class A Common Stock issued, or deemed issued or
issuable upon conversion or exercise of any equity-linked securities or rights issued or deemed issued, by the Company in connection
with or in relation to the consummation of the initial Business Combination, excluding the Representative Shares and any shares of Class
A Common Stock or equity-linked securities exercisable for or convertible into shares of Class A Common Stock issued, or to be issued,
to any seller in the initial Business Combination and any private placement-equivalent warrants issued to the Sponsor, officers or
directors upon conversion of Working Capital Loans; provided that such conversion of Founder Shares will never occur on a less than one
for one basis.
Preferred Stock —
The Company is authorized to issue 1,000,000 shares of preferred stock, par value $0.0001 per share, with such designations, voting
and other rights and preferences as may be determined from time to time by the Company’s board of directors. As of June 30, 2021
and December 31, 2020, there were no shares of preferred stock issued or outstanding.
Note 8—Fair Value Measurements
The following table presents
information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2021
and December 31, 2020 and indicates the fair value hierarchy of the valuation techniques that the Company utilized to determine such fair
value:
June 30, 2021
Description
|
|
Quoted Prices
in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Other
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments held in Trust Account
|
|
$
|
58,652,957
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrant liabilities - public warrants
|
|
$
|
4,082,500
|
|
|
|
|
|
|
|
|
|
Derivative warrant liabilities - private warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,169,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
Description
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Other
Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments held in Trust Account
|
|
$
|
58,650,048
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liabilities – public warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,005,000
|
|
Warrant Liabilities – private warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,693,635
|
|
Transfers to/from Levels
1, 2, and 3 are recognized at the beginning of the reporting period. The estimated fair value of the Public Warrants transferred from
a Level 3 measurement to a Level 1 fair value measurement in February 2021, upon trading of the Public Warrants in an active market. There
were no other transfers between levels for the six months ended June 30, 2021.
Level 1 assets include investments
in U.S. Treasury securities and money market funds that invest solely in U.S. Treasury securities. The Company uses inputs such as actual
trade data, benchmark yields, quoted market prices from dealers or brokers, and other similar sources to determine the fair value of its
investments.
The initial fair value of
the Public Warrants issued in connection with the Public Offering and the fair value of the Private Placement Warrants have been estimated
using a Monte-Carlo simulation. The fair value of the Public Warrants has subsequently been determined using listed prices in an active
market for such warrants. The changes in fair value are recognized in the statement of operations. For the three and six months ended
June 30, 2021, the Company recognized a charge to the statement of operations resulting from the change in the fair value of liabilities
of a loss of $1.7 million and income of $9.4 million, respectively, presented as change in fair value of derivative warrant liabilities
on the accompanying statement of operations.
The change in the level 3
fair value of the derivative warrant liabilities for the three and six months ended June 30, 2021 is summarized as follows:
|
|
|
|
Warrant liabilities at December 31, 2020
|
|
$
|
16,698,635
|
|
Change in fair value of warrant liabilities
|
|
|
(11,150,880
|
)
|
Transfer to level 1
|
|
|
(3,277,500
|
)
|
Warrant liabilities at March 31, 2021
|
|
$
|
2,270,255
|
|
Change in fair value of warrant liabilities
|
|
|
899,140
|
|
Warrant liabilities at June 30, 2021
|
|
$
|
3,169,395
|
|
The estimated fair value of the Public
Warrants, prior to being traded in an active market, and of the Private Placement Warrants is determined using Level 3 inputs. Inherent
in a Monte Carlo simulation are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend
yield. The Company estimates the volatility of its Common Stock based on historical volatility of select peer companies that matches
the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the
grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be
equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates remaining
at zero.
The following table provides
quantitative information regarding Level 3 fair value measurements inputs as their measurement dates:
|
|
As of
June 30,
2021
|
|
|
As of
December 31,
2020
|
|
Strike price
|
|
$
|
11.50
|
|
|
$
|
11.50
|
|
Contractual term (years)
|
|
|
5.0
|
|
|
|
5.8
|
|
Volatility
|
|
|
6.00
|
%
|
|
|
10.00
|
%
|
Risk-free interest rate
|
|
|
1.00
|
%
|
|
|
0.48
|
%
|
Dividend yield (per share)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Note 9—Subsequent Events
The Company evaluates subsequent
events and transactions that occur after the balance sheet date up to the date that the financial statements were issued. Based upon this
review, the Company did not identify subsequent events that would have required adjustment or disclosure in the consolidated financial
statements.