Clene Inc. (formerly Chelsea Worldwide Inc.) (the “Company,” “we,” “us,” or similar such references) is a biopharmaceutical company focused on the development of clean-surfaced nanocrystal drugs. We have developed an electrocrystal chemistry drug development platform, in which nanocrystals within a suspension are the therapeutic drug. Utilizing technology to create nanocrystal drug suspensions, our platform has produced multiple drug assets, of which our lead assets are currently in development for use in neurological and infectious diseases, among others, such as a study for treatment of COVID-19 coronavirus pandemic. Secondary to our drug development, as part of our identification of potential drug assets, we have also identified certain mineral solutions as dietary supplements. Our dietary supplements may also be commercialized by a related party (see Note 20).

The accompanying condensed consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries, Clene Nanomedicine, Inc. (“Clene Nanomedicine”), a subsidiary incorporated in Delaware, Clene Australia Pty Ltd (“Clene Australia”), a subsidiary incorporated in Australia, and dOrbital, Inc., a subsidiary incorporated in Delaware, after elimination of all intercompany accounts and transactions. The wholly-owned subsidiary, Clene Netherlands B.V. (“Clene Netherlands”) was established on April 21, 2021 and has no financial positions or operations to date.

Registration Statements

On February 16, 2021, we filed a registration statement on Form S-1 (file number 333-253173) to register 4,541,481 shares of Clene Inc. common stock (“Common Stock”) underlying outstanding warrants that we have previously issued, among which 2,517,500 and 904,231 warrants were originally issued by Tottenham Acquisition I Limited (“Tottenham” or “TOTA”) and Clene Nanomedicine, respectively, prior to the closing of the Reverse Recapitalization, and 1,119,750 warrants were issued as part of a private placement (the “PIPE”) in connection with the closing of the Reverse Recapitalization. We will receive aggregate proceeds of $30.7 million if all of these warrants are exercised. On April 19, 2021, the registration statement was declared effective by the Securities and Exchange Commission (the “SEC”). In connection with the registration statement on Form S-1, we incurred $0 and $27 thousand of certain offering costs during the three and six months ended June 30, 2021, respectively, recognized as an expense within general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss during the three and six months ended June 30, 2021.

On July 22, 2021, we filed a registration statement on Form S-1 (file number 333-258098) to register 1,140,731 shares of Common Stock underlying outstanding warrants that we have previously issued, among which 1,024,880 were originally issued by Clene Nanomedicine prior to the Reverse Recapitalization in April 2013 and 115,851 were issued pursuant to a loan agreement with Avenue Venture Opportunities Funds, L.P. (see Note 8). We will receive aggregate proceeds of $3.0 million if all of these warrants are exercised. In addition, the registration statement on Form S-1 registered 960,540 shares of Common Stock, issued in a private placement in May 2021, for possible sale by the selling shareholders. We will not receive any proceeds from the sale by the selling shareholders. On August 2, 2021, the registration statement was declared effective by the SEC. In connection with the registration statement on Form S-1, we incurred an immaterial amount of certain offering costs which will be recognized as an expense within general and administrative expenses in the condensed consolidated statement of operations and comprehensive loss during the three and nine months ended September 30, 2021.

Liquidity

We have incurred significant losses and negative cash flows from operations since our inception. We incurred net losses of $3.4 million and $43.1 million for the three and six months ended June 30, 2021, respectively. We incurred net losses of $5.8 million and $9.8 million for the three and six months ended June 30, 2020, respectively. As of June 30, 2021, our cash totaled $63.0 million, and our accumulated deficit was $196.7 million. As of December 31, 2020, our cash totaled $59.3 million, and our accumulated deficit was $153.6 million. We had net cash used in operating activities of $17.7 million and $5.4 million for the six months ended June 30, 2021 and 2020, respectively.

Prior to the Reverse Recapitalization, Clene Nanomedicine’s operations were financed through the issuance of equity instruments and the issuance of convertible promissory notes. Subsequent to the Reverse Recapitalization, we have obtained additional liquidity through a term loan and private placements of equity instruments. We have not generated significant revenues to date and do not anticipate generating any significant revenues unless we successfully complete development and obtain regulatory approval for our drugs or for our COVID-19 study. We expect to incur additional losses in the future to fund our operations and conduct product research and development and we recognize the need to raise additional capital to fully implement our business plan. Additionally, we may attempt to negotiate a collaboration agreement with a third party for development and commercialization of a drug candidate, which may provide upfront and milestone payments to reduce our spending going forward.

We expect to continue investing in product development, sales and marketing and customer support for our products. The long-term continuation of our business plan is dependent upon the generation of sufficient revenues from our products to offset expenses and capital expenditures. In the event that we do not generate sufficient revenues and are unable to obtain funding, we will be forced to delay, reduce, or eliminate some or all of our research and development programs, product portfolio expansion, commercialization efforts, or capital expenditures, which could adversely affect our business prospects, ability to meet long-term liquidity needs, or we may be unable to continue operations.

We expect that the cash on hand as of June 30, 2021 will be sufficient to fund our operations for a period extending beyond twelve months from the date these condensed consolidated financial statements are issued.

Impact of the COVID-19 Coronavirus Pandemic

The COVID-19 pandemic, which began in December 2019 and has spread worldwide, has caused many governments to implement measures to slow the spread of the outbreak. The outbreak and government measures taken in response have had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred, supply chains have been disrupted, and facilities and production have been suspended. The future progression of the pandemic and its effects on our business and operations remains uncertain. The COVID-19 pandemic may affect our ability to initiate and complete preclinical studies, delay the initiation of future clinical trials, disrupt regulatory activities, or have other adverse effects on our business and operations. In particular, the Company and our clinical research organizations (“CROs”) may face disruptions that may affect our ability to initiate and complete preclinical studies, manufacturing disruptions, and delays at clinical trial sites. The pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact our ability to raise additional funds to support our operations. Moreover, the pandemic has significantly impacted economies worldwide and could result in adverse effects on our business and operations.

We are monitoring the potential impact of the COVID-19 pandemic on our business and financial statements. While the COVID-19 pandemic has led to various research restrictions and paused certain of our clinical trials, these impacts have been temporary and to date we have not experienced material business disruptions or incurred impairment losses in the carrying values of our assets as a result of the pandemic and we are not aware of any specific related event or circumstance that would require us to revise the estimates reflected in these condensed consolidated financial statements. The extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows, and financial condition, including planned and future clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, the actions taken to contain or treat it, and the duration and intensity of the related effects.

On December 30, 2020 (the “Closing Date”), Chelsea Worldwide Inc., our predecessor company, consummated the previously announced business combination (referred to as the “Reverse Recapitalization”) pursuant to a merger agreement, dated as of September 1, 2020 (the “Merger Agreement”), by and among Clene Nanomedicine, Tottenham, Chelsea Worldwide Inc. (“PubCo”), a Delaware corporation and wholly-owned subsidiary of Tottenham, Creative Worldwide Inc. (“Merger Sub”), a Delaware corporation and wholly-owned subsidiary of PubCo, and Fortis Advisors LLC, a Delaware limited liability company as the representative of our shareholders. Prior to the Reincorporation Merger discussed below, Tottenham was incorporated in the British Virgin Islands as a blank check company for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization, or other similar business combination with one or more businesses or entities.

The Reverse Recapitalization was effected in two steps: (i) Tottenham was reincorporated to the state of Delaware by merging with and into PubCo (the “Reincorporation Merger”); (ii) promptly following the Reincorporation Merger, Merger Sub was merged with and into Clene Nanomedicine, resulting in Clene Nanomedicine becoming a wholly-owned subsidiary of PubCo (the “Acquisition Merger”). On the Closing Date, PubCo changed its name from Chelsea Worldwide Inc. to Clene Inc. and listed its shares of Common Stock, par value $0.0001 per share on Nasdaq under the symbol “CLNN.”

Upon the consummation of the Reverse Recapitalization, each Tottenham ordinary share issued and outstanding immediately prior to the effective time of the Reincorporation Merger, which totaled 2,303,495 shares held by the Initial Shareholders and Tottenham public shareholders (excluding certain shares that were canceled pursuant to the Merger Agreement, any redeemed shares, and any dissenting shares), was automatically cancelled and ceased to exist and (i) for each Tottenham ordinary share, we issued to each shareholder one validly-issued share of our Common Stock; (ii) each warrant to purchase one-half (1/2) of one Tottenham Ordinary Share converted into a warrant to purchase one-half (1/2) of one share of our Common Stock; (iii) each right exchangeable into one-tenth (1/10) of one Tottenham ordinary share converted into a right exchangeable for one-tenth (1/10) of one share of our Common Stock; provided, however, that no fractional shares were issued and all fractional shares were rounded down to the nearest whole share. In addition, pursuant to the Merger Agreement, the Initial Shareholders are entitled to receive up to 750,000 shares of Common Stock as earn-out shares upon the achievement of certain milestones described below.

On the Closing Date, each share of Clene Nanomedicine common stock then issued and outstanding was cancelled and the holders thereof in exchange received 54,339,012 shares of Clene Inc. Common Stock, which is equal to 0.1389 newly-issued shares of Clene Inc. Common Stock for each single share of Clene Nanomedicine common stock (the “Exchange Ratio”). Pursuant to the Merger Agreement, 5% of the aggregate amount of the closing payment shares, or 2,716,958 shares were held in escrow to satisfy any indemnification obligation incurred and were released six months after the closing of the Reverse Recapitalization. In addition, each share of Clene Nanomedicine’s preferred stock outstanding immediately prior to the closing of the Reverse Recapitalization was converted into the right to receive our Common Stock based on the same Exchange Ratio. All outstanding warrants exercisable for common stock in Clene Nanomedicine (other than warrants that expired, were exercised or were deemed automatically net exercised immediately prior to the Acquisition Merger) were exchanged for warrants exercisable for our Common Stock with the same terms and conditions except adjusted by the Exchange Ratio. All outstanding stock options of Clene Nanomedicine common stock, totaling 53,286,115 stock options, was cancelled and the holders thereof in exchange received 0.1320 newly issued stock options of our Common Stock for a total of 7,032,591 stock options, which is 95% of the Exchange Ratio. Pursuant to the Merger Agreement, we issued 370,101 RSUs to the option holders which complements the 5% closing payment shares held in escrow for Clene Nanomedicine common shareholders. The modification of the stock options did not result in a material incremental compensation expense upon closing of the Reverse Recapitalization.

In addition, we issued 1,136,961 RSUs to option holders to complement the earn-out payments that would contingently be issued to certain current Clene Nanomedicine’s shareholders upon the achievement of milestones described below.

The proceeds received from the Reverse Recapitalization were $3.7 million, net of offering costs of $5.9 million which excludes the fair value of common shares issued as a payment of related offering costs.

In connection with Tottenham’s initial public offering in August 2018, Tottenham issued to Chardan Capital Markets, LLC (“Chardan”), options to purchase 220,000 units at $11.50 per unit. Each of the units consists of one and one-tenth shares of Tottenham’s ordinary shares and one warrant to purchase one-half of one of Tottenham’s ordinary shares at an exercise price of $11.50 per share (the “Chardan Unit Purchase Option”). In connection with the Reverse Recapitalization, the Chardan Unit Purchase Option was converted into one Company unit purchase option. The warrants included in the Chardan Unit Purchase Option (the “Chardan Unit Purchase Option Warrants”) are exercisable upon the completion of the Reverse Recapitalization and will expire on December 30, 2025, five years after the consummation of the Reverse Recapitalization (see Note 10).

Also, in connection with the Reverse Recapitalization, Clene Nanomedicine entered into a letter agreement with LifeSci Capital LLC (“LifeSci") on July 2, 2020, according to which LifeSci was engaged to act as Clene Nanomedicine’s financial advisor with respect to identifying and soliciting special purpose acquisition companies for the purpose of entering into a merger or similar transaction with Clene Nanomedicine and its shareholders. Under this agreement, Clene Nanomedicine agreed that if it consummated a merger with Tottenham, LifeSci would receive consideration of (i) 3% of the amount by which the total transaction consideration exceeded $350 million, plus (ii) 7% of cash and cash-equivalents received by Clene Nanomedicine from the Tottenham’s trust account. Clene Nanomedicine could elect to pay LifeSci either in cash, equity interests of the surviving company, or a combination of the two. Upon the consummation of the Reverse Recapitalization, 644,164 shares of Common Stock were issued to LifeSci as consideration for its services as pursuant to the letter agreement (see Note 18).

Immediately after giving effect to the Reverse Recapitalization, there were 59,526,171 shares of Common Stock issued and outstanding and warrants to purchase 5,566,363 shares of Common Stock issued and outstanding (see Note 10). Based on the number of shares of Common Stock outstanding on December 30, 2020 (in each case, not giving effect to any shares issuable upon exercise of warrants, options, or earn-out shares), Clene Nanomedicine’s shareholders owned approximately 91% of the Common Stock of the Company, Tottenham shareholders owned approximately 4% of the Common Stock of the Company, and investors from the PIPE owned approximately 4% of the Common Stock of the Company.

During Tottenham’s IPO, Tottenham incurred deferred underwriters’ fees which were payable to Chardan from the amounts held in the trust account upon completion of the Reverse Recapitalization. Upon the closing of the Reverse Recapitalization, we paid $2.1 million to Chardan as settlement of the deferred underwriting fees which amount was included in the total offering costs of the Reverse Recapitalization transaction.

During the year ended December 31, 2020, we recorded $5.9 million of offering costs related to third-party legal, accounting, and other professional services to consummate the Reverse Recapitalization, excluding the fair value of common shares issued as a payment of related offering costs and Chardan underwriting fees discussed above. These offering costs are recorded as a reduction of additional paid-in capital upon the close of the Reverse Recapitalization in our condensed consolidated balance sheets.

The transaction was accounted for as a “reverse recapitalization” in accordance with GAAP. Under this method of accounting, Tottenham was treated as the “acquired” company for financial reporting purposes. This determination was primarily based on the fact that subsequent to the Reverse Recapitalization, Clene Nanomedicine’s shareholders have a majority of the voting power of the combined company, Clene Nanomedicine comprises all of the ongoing operations of the combined entity, Clene Nanomedicine comprises a majority of the governing body of the combined company, and Clene Nanomedicine’s senior management comprises all of the senior management of the combined company. Accordingly, for accounting purposes, this transaction was treated as the equivalent of Clene Nanomedicine issuing shares for the net assets of Tottenham, accompanied by a recapitalization. The shares and net loss per common share, prior to the Reverse Recapitalization, have been retroactively restated as shares reflecting the Exchange Ratio established in the Reverse Recapitalization. The net assets of Tottenham were recorded at historical costs, with no goodwill or other intangible assets recorded. Operations prior to the Reverse Recapitalization are those of Clene Nanomedicine.

Earn-out Shares 

Certain of Clene Nanomedicine’s current shareholders are entitled to receive earn-out shares as follows (the “Clene Nanomedicine Contingent Earn-out”): (i) 3,333,333 shares of Common Stock if (A) the volume-weighted average price (“VWAP”) of the shares of our Common Stock equals or exceeds $15.00 (or any foreign currency equivalent) (the “Milestone 1 Price”) in any twenty trading days within a thirty trading day period within the three years following the closing of the Reverse Recapitalization on any securities exchange or securities market on which the shares of our Common Stock are then traded or (B) the change of control price equals or exceeds the Milestone 1 Price if a change of control transaction occurs within the three years following the closing of the Reverse Recapitalization (the requirements set forth in clause (A) and (B), “Milestone 1”); (ii) 2,500,000 shares of Common Stock if (A) the VWAP of the shares of our Common Stock equals or exceeds $20.00 (or any foreign currency equivalent) (the “Milestone 2 Price”) in any twenty trading days within a thirty trading day period within the five years following the closing of the Reverse Recapitalization on any securities exchange or securities market on which the shares of our Common Stock are then traded or (B) the change of control price equals or exceeds the Milestone 2 Price if a change of control transaction occurs within the five years following the closing of the Reverse Recapitalization (the requirements set forth in clause (A) or (B), “Milestone 2”); and (iii) 2,500,000 shares of Common Stock if Clene Nanomedicine completes a randomized placebo-controlled study for treatment of COVID-19 which results in a statistically significant finding of clinical efficacy within twelve months after the closing of the Reverse Recapitalization (“Milestone 3”). If Milestone 1 is not achieved but Milestone 2 is achieved, the Clene Nanomedicine shareholders will receive a catch-up issuance equal to the shares issued upon satisfaction of Milestone 1. Upon the consummation of the Reverse Recapitalization, the Clene Nanomedicine Contingent Earn-out shares increased by 12,852 as a result of the exercise of stock options during November 2020. Therefore, the total Clene Nanomedicine Contingent Earn-out shares has increased to 8,346,185 shares of Common Stock. 

The Initial Shareholders of Tottenham may be entitled to receive earn-out shares as follows (the “Initial Shareholders Contingent Earn-out”): (i) 375,000 shares of Common Stock upon satisfaction of the requirements of Milestone 1; and (ii) another 375,000 shares of the Company’s Common Stock upon satisfaction of the requirements of Milestone 2. If Milestone 1 is not achieved but Milestone 2 is achieved, the Initial Shareholders shall receive a catch-up issuance equal to the shares granted upon satisfaction of the requirements of Milestone 1. 

The Clene Nanomedicine Contingent Earn-out and Initial Shareholders Contingent Earn-out (collectively, the “Contingent Earn-outs”) have been classified as liabilities in the condensed consolidated balance sheets and were initially measured at fair value on the date of the Reverse Recapitalization and are subsequently remeasured to fair value at each reporting date (see Note 16). 

Prepaid expenses and other current assets consisted of the following as of June 30, 2021 and December 31, 2020: 

Property and equipment, net consisted of the following as of June 30, 2021 and December 31, 2020:

Depreciation expense related to property and equipment, net for the three and six months ended June 30, 2021 was approximately $0.2 million and $0.5 million, respectively. Depreciation expense is reported in research and development expense and in general and administrative expense for $0.4 million and $0.1 million, respectively, for the six months ended June 30, 2021; and in research and development expense and in general and administrative expense for $0.2 million and $29 thousand, respectively, for the three months ended June 30, 2021, in the condensed consolidated statements of operations and comprehensive loss.

Depreciation expense related to property and equipment, net for the three and six months ended June 30, 2020 was approximately $0.2 million and $0.5 million, respectively. Depreciation expense is reported in research and development expense and in general and administrative expense for $0.5 million and $13 thousand, respectively, for the six months ended June 30, 2020; and in research and development expense and in general and administrative expense for $0.2 million and $12 thousand, respectively, for the three months ended June 30, 2020, in the condensed consolidated statements of operations and comprehensive loss.

Accrued liabilities consisted of the following as of June 30, 2021 and December 31, 2020: 

We adopted ASC 842, Leases on January 1, 2019 using the modified retrospective approach.

We also made an accounting policy election not to recognize leases with an initial term of 12 months or less within our condensed consolidated balance sheets and to recognize those lease payments on a straight-line basis in our condensed consolidated statements of operations and comprehensive loss over the lease term. 

At the lease commencement date, the discount rate implicit in the lease is used to discount the lease liability if readily determinable. If not readily determinable or leases do not contain an implicit rate, our incremental borrowing rate is used as the discount rate. 

In April 2020, we terminated an existing operating lease for office space. At the time of termination, we removed the remaining right-of-use asset of $0.3 million, lease liability of $0.3 million, and recognized a gain of $0.1 million. Further, in April 2020, we commenced a new operating lease. At the time of commencement, we recorded the right-of-use asset value of $0.4 million, leasehold improvements of $0.4 million, and a lease liability of $0.8 million. The net effect of the change in leases being an increase in right-of-use assets of $0.1 million, an increase in leasehold improvements of $0.5 million, an increase in lease liability of $0.4 million, and a gain on termination of $0.1 million. 

We have noncancelable operating lease arrangements primarily for office and lab space. We also have noncancelable finance leases for certain lab equipment. The maturity analysis of finance and operating lease liabilities as of June 30, 2021 are as follows: 

We expect that, in the normal course of business, the existing leases will be renewed or replaced by similar leases.

Finance Leases

Assets recorded under finance lease obligations and included with property and equipment as of June 30, 2021 and December 31, 2020 are summarized as follows: 

As of June 30, 2021, our finance lease obligations had a weighted-average interest rate of 8.4% and had a weighted-average remaining term of 2.5 years. As of December 31, 2020, our finance lease obligations had a weighted-average interest rate of 8.1% and had a weighted-average remaining term of 2.7 years. 

Operating Leases

Our balance of right-of-use assets on the face of the balance sheet pertain to operating leases. As of June 30, 2021, our operating lease obligations had a weighted-average discount rate of 9.6% and had a weighted-average remaining term of 6.3 years. As of December 31, 2020, our operating lease obligations had a weighted-average discount rate of 9.6% and a weighted-average remaining term of 6.3 years.

Components of Lease Cost

The components of finance and operating lease costs for the three and six months ended June 30, 2021 and 2020 were as follows:

Supplemental Cash Flow Information

Maryland Loan

In February 2019, we entered into a loan agreement (the “2019 MD Loan”) with the Department of Housing and Community Development, a principal department of the State of Maryland (“Maryland”). Pursuant to the 2019 MD Loan, Maryland agreed to provide a $0.5 million term loan. Amounts outstanding under the 2019 MD Loan bear simple interest at an annual rate of 8.00%. Under the 2019 MD Loan, we agreed to affirmative and negative covenants to which we will remain subject until maturity. These covenants include providing information about the Company and our operations; limitations on our ability to retire, repurchase, or redeem our common or preferred stock, options, and warrants other than per the terms of the securities; and limitations on our ability to pay dividends of cash or property. There are no financial covenants associated with the Loan Agreement. Events of default under the Loan Agreement include failure to make payments when due, insolvency events, failure to comply with covenants, and material adverse effects with respect to the Company. We are not in violation of any affirmative or negative covenants. Repayment of the full balance outstanding is due on February 22, 2034. The 2019 MD Loan establishes “Phantom Shares,” based on 119,906 shares of Common Stock (based on 863,110 Series C Preferred Shares prior to the Reverse Recapitalization), determined at issuance. The Loan Agreement states the repayment amount is to be the greater of the balance of principal and accrued interest or the Phantom Shares value. We determined that the note should be accounted for at fair value. We record the fair value of the debt at the end of each reporting period. In order to value the note, we consider the amount of the simple interest expense that would be due and the value of Phantom Shares. Upon the closing of the Reverse Recapitalization and as of December 31, 2020, the fair value of the 2019 MD Loan is determined based on the closing price of CLNN shares listed on Nasdaq. Income of $0.2 million and expense of $0.3 million was recognized during the three and six months ended June 30, 2021, respectively. Expense of $0.1 million and $0.1 million was recognized during the three and six months ended June 30, 2020, respectively. The fair value of $1.3 million and $1.1 million of principal and accrued interest is included in long-term notes payable as of June 30, 2021 and December 31, 2020, respectively.

Cecil County Loan

In April 2019, we entered into a loan agreement (the “2019 Cecil Loan”) with Cecil County, Maryland (“Cecil”). Pursuant to the 2019 Cecil Loan, Cecil agreed to provide a $0.1 million term loan. Amounts outstanding under the 2019 Cecil Loan bear simple interest at an annual rate of 8.00%. Under the 2019 Cecil Loan, we agreed to affirmative and negative covenants to which we will remain subject until maturity. These covenants include providing information about the Company and our operations; limitations on our ability to retire, repurchase, or redeem our common or preferred stock, options, and warrants other than per the terms of the securities; and limitations on our ability to pay dividends of cash or property. There are no financial covenants associated with the Loan Agreement. Events of default under the Loan Agreement include failure to make payments when due, insolvency events, failure to comply with covenants, and material adverse effects with respect to the Company. We are not in violation of any affirmative or negative covenants. Repayment of the full balance outstanding is due on April 30, 2034. The 2019 Cecil Loan establishes “Phantom Shares,” based on 23,981 shares of Common Stock (based on 172,622 Series C Preferred Shares prior to the Reverse Recapitalization), determined at issuance. The 2019 Cecil Loan states the repayment amount is to be the greater of the balance of principal and accrued interest or the Phantom Share value. We determined that the note should be accounted for at fair value. We record the fair value of the debt at the end of each reporting period. In order to value the note, we consider the amount of the simple interest expense that would be due and the value of Phantom Shares. Upon the closing of the Reverse Recapitalization and as of December 31, 2020, the fair value of the 2019 Cecil Loan is determined based on the closing price of CLNN shares listed on Nasdaq. Income of $36 thousand and expense of $0.1 million was recognized during the three and six months ended June 30, 2021, respectively. Expense of $11 thousand and $13 thousand was recognized during the three and six months ended June 30, 2020, respectively. The fair value of $0.3 million and $0.2 million of principal and accrued interest is included in long-term notes payable as of June 30, 2021 and December 31, 2020, respectively.  

PPP Loan

In May 2020, we entered into a note payable in the amount of $0.6 million (the “PPP Note”) under the Paycheck Protection Program of the CARES Act (the “PPP”). As amended, the PPP permits forgiveness of amounts loaned for payments of payroll and other qualifying expenses within 24 weeks of receipt of loaned funds, given that at least 60% of the total loan is used for payroll. Amounts not forgiven have a repayment period of five years. In January 2021, the full $0.6 million balance of the PPP Note was forgiven and has been recorded as a gain on extinguishment of debt during the six months ended June 30, 2021. There was no gain on extinguishment of debt recorded during the three months ended June 30, 2021.

Avenue Loan

In May 2021, we entered into a loan agreement (the “2021 Avenue Loan”) with Avenue Venture Opportunities Funds, L.P. (“Avenue”). The agreement provides for a 42-month term loan of up to $30.0 million. The first tranche is $20.0 million (“Tranche 1”), of which $15.0 million was funded at close. We incurred issuance costs for a total of $0.5 million of which $35 thousand have been expensed immediately. The remaining balance from Tranche 1 of $5.0 million and an additional tranche of $10.0 million (“Tranche 2”) are available at the Company’s request until December 31, 2021 and June 30, 2022, respectively. Funding of the remainder of Tranche 1 and entire Tranche 2 is subject to evidence reasonably satisfactory of receipt of an additional $5.0 million financing through Maryland’s State Incentive Programs and/or other Maryland State programs and mutual agreement of the Company and Avenue. Funding of Tranche 2 is also subject to (i) our achievement of a statistically significant result on the primary endpoint as defined within the statistical analysis plan for each respective study, or the totality of the results for any study warrant advancement into a subsequent clinical efficacy study, as reasonably determined by the Company and Avenue with respect to at least two of the following studies: (i) RESCUE-ALS or HEALEY-ALS; (ii) REPAIR-PD; or (iii) REPAIR- MS (“Performance Milestone 1”); and (ii) our receipt of net proceeds of at least $30 million from the sale and issuance of our equity securities (including any private placement or follow-on offering) between May 2, 2021 and June 30, 2022.

The term loan bears interest of 9.85%. Interest is the higher of the prime rate plus 6.60% or 9.85%. Payments for the loan are interest only for the initial 12 months and can be extended to (i) 12 months (the “First Interest-only Period Extension”) if we achieve Performance Milestone 1 and (ii) up to 36 months if we achieve the First Interest-only Period Extension and draw Tranche 2. The loan will amortize in equal payments of principal from the end of the interest period to the expiration of the 42-month term on December 1, 2024. On the maturity date, an additional payment equal to 4.25% of the funded loans, or $0.6 million, is due in addition to the remaining unpaid principal and accrued interest. The final payment is recorded as a debt premium and is being amortized over the contractual term using the effective interest method. The final payment provision is related to the loan host and is not bifurcated pursuant to ASC 815.

Pursuant to the agreement, we granted to Avenue a warrant for the purchase of 115,851 shares of Common Stock at an exercise price equal to the lower of (i) $8.63 (which is equal to the five-day VWAP per share, determined as of the end of trading on the last trading day prior to execution of the loan agreement), or (ii) the lowest price per share paid by cash investors for our Common Stock issued in the next bona fide round of equity financing prior to March 31, 2022 (the “Next Round Price”) (see Note 10). Upon the funding of Tranche 2, the warrant shall be automatically adjusted to include an additional 72,226 shares of Common Stock, which is equal to 5% of the principal amount of Tranche 2, divided by the lower of (i) the five (5)-day VWAP per share; determined as of the end of trading on the last trading day before the date of issuance of Tranche 2; or (ii) the Next Round Price. We accounted for the Tranche 2 warrants at inception of the 2021 Avenue Loan in accordance with ASC 815 (see Note 1 and Note 10). Avenue also has the right, in its discretion, but not the obligation, at any time from time to time from the first through the third-year anniversary of the agreement, while the loan is outstanding, to convert an amount of up to $5.0 million of the principal amount of the outstanding loan into Common Stock (the “Conversion Feature”) at a price per share equal to 120% of the stock purchase price set forth in the warrant. The Conversion Feature is subject to (i) the closing price of our Common Stock for each of the seven consecutive trading days immediately preceding the conversion being greater than or equal to the conversion price and (ii) the Common Stock issued in connection with any such conversion not exceeding 20% of the total trading volume of our Common Stock for the twenty-two consecutive trading days immediately prior to and including the effective date of such conversion.

Under the 2021 Avenue Loan, we agreed to affirmative and negative covenants to which we will remain subject upon maturity in the absence of prepayments. These covenants include providing information about the Company and our operations; limitation on our ability to retire, repurchase, or redeem our Common Stock, options, and warrants other than per the terms of the securities; and limitations on our ability to pay dividends of cash or property. The financial covenant associated with the loan agreement includes maintaining minimum unrestricted cash and cash equivalents of at least $5.0 million; provided that upon our (i) achievement of Performance Milestone 1, and (ii) receiving of net proceeds of at least $30.0 million from the sale and issuance of our equity securities (including any PIPE or follow-on offering) between May 1, 2021 and June 30, 2022, we shall no longer be subject to financial covenants. We are not in violation of the covenants. The agreement provides for events of default customary for loans of this type, including but not limited to non-payment, breaches or defaults in the performance of covenants, insolvency, and bankruptcy. The 2021 Avenue Loan is collateralized by substantially all of the Company’s assets. The net proceeds from the issuance of the loan were initially allocated to the warrant at an amount equal to their fair value of $1.5 million and the remainder to the loan. The allocation of incurred financing costs of $0.5 million, which together with the fair value of the warrant and the final payment, are recorded as a debt discount and debt premium, respectively, and are being amortized over the contractual term using the effective interest method. During the three and the six months ended June 30, 2021, we recorded interest expense of $0.2 million.

The loan consists of the following:

Following is a schedule of future payments, net of unamortized debt discounts, if Avenue does not convert up to $5.0 million of the loan into Common Stock between May 21, 2022 through May 21, 2024:

Prior to the Reverse Recapitalization, we issued Series A Preferred Stock Warrants in 2013 pursuant to certain note purchase agreements. The warrants expire ten years from issuance. These warrants are exercisable at a fixed exercise price of $1.97, which is equal to the price per share of the Series A Preferred Stock. As of December 31, 2019, these warrants were exercisable into 1,608,670 shares of the Series A Preferred Stock.

Prior to the Reverse Recapitalization, on April 8, 2013, we issued ten-year warrants to purchase units of our most senior equity equal to 0.25% of our fully diluted equity at the time of exercise pursuant to certain note purchase agreements. As of December 31, 2019, these warrants were exercisable into 271,439 shares of our most senior equity, Series C Preferred Stock, at a fixed exercise price of $1.97 per share. On August 11, 2020, in connection with our issuance of Series D Preferred Stock, these warrants became exercisable into 320,441 shares of our most senior equity, Series D Preferred Stock, at a fixed exercise price of $1.97 per share.

Prior to the Reverse Recapitalization, we classified Preferred Stock warrants as a liability on the condensed consolidated balance sheets because the warrants are freestanding financial instruments that may have required us to transfer assets upon exercise. The liability associated with each of these warrants was initially recorded at fair value upon the issuance date of each warrant and is subsequently remeasured to fair value as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. Upon the closing of the Reverse Recapitalization (see Note 3), and pursuant to the Merger Agreement, all of the outstanding Clene Nanomedicine Preferred Stock was converted into Common Stock and the Clene Nanomedicine Preferred Stock warrants to purchase Clene Nanomedicine Preferred Stock were converted to warrants to purchase Common Stock (see Note 10). Upon conversion, we assessed the features of the warrants and determined that they qualify for classification as permanent equity upon the closing of the Reverse Recapitalization. Accordingly, we remeasured the warrants to fair value one final time upon the close of the Reverse Recapitalization, and recognized a loss of $14.6 million for the year ended December 31, 2020, within other income, (expense), net on the condensed consolidated statements of operations and comprehensive loss. Upon the closing of the Reverse Recapitalization, the warrant liability was reclassified to additional paid-in capital (see Note 17). 

As of June 30, 2021 and December 31, 2020, we do not have any Preferred Stock warrants outstanding.

We recognized a change in fair value of the outstanding warrants of $2.4 million during the three months ended June 30, 2020 and $2.3 million during the six months ended June 30, 2020 in the condensed consolidated statements of operations and comprehensive loss. 

As of June 30, 2021, outstanding warrants to purchase shares of Common Stock consisted of the following:

As of December 31, 2020, outstanding warrants to purchase shares of Common Stock consisted of the following:

2020 Convertible Notes

In February through July 2020, we issued convertible promissory notes (the “2020 Convertible Notes”) in an aggregate principal amount of $6.1 million, bearing interest at an annual rate of 5%. The 2020 Convertible Notes were convertible at the earlier of (i) one year, at which point the notes would be convertible into Series C preferred shares at the Series C preferred share issuance price, and (ii) next equity financing of no less than $10.0 million, at which point the notes would be convertible into shares issued in the next equity financing at 90% of the per share issuance price of the next equity financing. The 2020 Convertible Notes contained embedded features that provide the lenders with multiple settlement alternatives. Certain of these settlement features provided the lenders with a right to a fixed number of our shares upon conversion of the notes. Other settlement features provided the lenders with the right or the obligation to receive cash or a variable number of shares upon the completion of a capital raising transaction, change of control, or default of the Company (the “Redemption Features”). The Redemption Features of the 2020 Convertible Notes met the requirements for separate accounting and were accounted for as a single derivative instrument (the “2020 Derivative Instrument”). Accordingly, the 2020 Derivative Instrument of $0.7 million was recorded at fair value at inception as redeemable convertible preferred stock derivative liability in the condensed consolidated balance sheets (see Note 12).

We recognized interest expense of $34 thousand, including amortization of debt discount of $0.1 million during the three months ended June 30, 2020, in connection with the 2020 Convertible Notes. We recognized interest expense of $42 thousand, including amortization of debt discount of $0.1 million during the six months ended June 30, 2020, in connection with the 2020 Convertible Notes.

On August 11, 2020, in connection with our issuance and sale of Series D Preferred Stock, all of the outstanding principal and accrued interest under the 2020 Convertible Notes, totaling $6.9 million, was automatically converted into 1,497,135 shares of Series D Preferred Stock at a price equal to 90% of $4.60 per share, the per share price paid in cash by investors in the Series D preferred stock financing. Upon the closing of the Reverse Recapitalization (see Note 3), and pursuant to the Merger Agreement, all outstanding Clene Nanomedicine Series D Preferred Stock was converted to Clene Inc. Common Stock.

We accounted for the conversion of the 2020 Convertible Notes as a debt extinguishment and recognized a loss on extinguishment of debt of $0.5 million within other income (expense), net in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2020. As of the date of conversion, the unamortized discount on the 2020 Convertible Notes was $0.5 million. The loss on extinguishment was calculated as the difference between (i) the fair value of the 1,497,135 shares of Series D Preferred Stock issued to settle the 2020 Convertible Notes of $6.9 million and (ii) the carrying value of the 2020 Convertible Notes of $5.7 million, which includes the principal balance of the 2020 Convertible Notes of $6.1 million and accrued but unpaid interest of $0.1 million, net of the unamortized debt discount of $0.5 million, plus the then-current fair value of derivative liability associated with the 2020 Convertible Notes at the time of the extinguishment of $0.7 million.

Convertible Notes Payable

In May 2021, we entered into the 2021 Avenue Loan from which we granted to Avenue the right, in its discretion, but not the obligation, at any time from time to time from May 21, 2022 through May 21, 2024, while the loan is outstanding, to convert an amount of up to $5.0 million of the principal amount of the outstanding loan into shares of Common Stock at a price per share equal to 120% of the stock purchase price set forth in the warrant (see Note 8). The Conversion Feature is subject to (i) the closing price of our Common Stock for each of the seven consecutive trading days immediately preceding the conversion being greater than or equal to the conversion price and (ii) the Common Stock issued in connection with any such conversion not exceeding 20% of the total trading volume of our Common Stock for the twenty-two consecutive trading days immediately prior to and including the effective date of such conversion. The Conversion Feature did not meet the requirements for separate accounting and is not accounted for as a derivative instrument. As of June 30, 2021, the number of shares of Common Stock potentially issuable upon conversion was 482,703.

We classified $5.0 million of the 2021 Avenue Loan as convertible notes payable in the condensed consolidated balance sheets as of June 30, 2021, with unamortized debt discount and issuance costs of $0.6 million.

During the three and six months ended June 30, 2021, we recognized (i) total interest expense of $0.1 million; (ii) coupon interest expense of $0.1 million; and (iii) amortization of debt discount and issuance costs of $23 thousand in connection with the convertible notes payable. During the three and six months ended June 30, 2020, we did not recognize any interest expense or amortization in connection with the convertible notes payable. The effective interest rate was 17.93% for the three and six months ended June 30, 2021.

Derivative instrument in connection with the 2020 Convertible Notes

One of the redemption features of the 2020 Convertible Notes met the requirements for separate accounting and was accounted for as a derivative instrument. The 2020 Derivative Instrument was recorded at fair value, which was $0.7 million at issuance. In August 2020, in connection with our issuance and sale of Series D Preferred Stock, all of the outstanding principal and accrued interest under the 2020 Convertible Notes was automatically converted into shares of Series D Preferred Stock and the derivative liability was extinguished. Prior to the extinguishment of derivative liability, the 2020 Derivative Instrument was marked to fair value and we recorded the change in the 2020 Derivative Instrument of ($29) thousand in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2020 (see Note 11). For the three and six months ended June 30, 2020, we recorded the change in the 2020 Derivative Instrument of $10 thousand and $14 thousand, respectively, in the condensed consolidated statements of operations and comprehensive loss. Upon the closing of the Reverse Recapitalization (see Note 3), and pursuant to the Merger Agreement, all outstanding Clene Nanomedicine Preferred Stock was converted to Clene Inc. Common Stock.

Derivative instruments in connection with the Contingent Earn-outs

The earn-out shares issued in connection with the Reverse Recapitalization met the requirements for separate accounting and are therefore accounted for as derivative instruments. Accordingly, upon the consummation of the Reverse Recapitalization, we recorded a liability in the condensed consolidated balance sheets and a debit to additional paid-in capital for the earn-out provision associated with the Initial Shareholders Contingent Earn-out and a debit to accumulated deficit for the earn-out provisions associated with the Clene Nanomedicine Contingent Earn-out. The contingent shares to be issued to the Clene Nanomedicine shareholders immediately prior to the Reverse Capitalization were treated as a deemed distribution. The Contingent Earn-outs were subsequently remeasured to fair value at each reporting date as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss.

Upon the closing of the Reverse Recapitalization, we recognized the Clene Nanomedicine Contingent Earn-out and Initial Shareholders Contingent Earn-out liabilities at their fair value of $64.7 million and $7.4 million, respectively, in the condensed consolidated balance sheets. As of December 31, 2020, the carrying values of the Clene Nanomedicine Contingent Earn-out and Initial Shareholders Contingent Earn-out were $52.1 million and $5.9 million, respectively. As of June 30, 2021, the carrying values of the Clene Nanomedicine Contingent Earn-out and Initial Shareholders Contingent Earn-out were $69.0 million and $7.6 million, respectively. For the three months ended June 30, 2021, we recognized income of $8.6 million in change in fair value of the Clene Nanomedicine Contingent Earn-out and $1.2 million in change in fair value of the Initial Shareholders Contingent Earn-out as components of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2021, we recognized losses of $17.0 million in change in fair value of the Clene Nanomedicine Contingent Earn-out and $1.7 million in change in fair value of the Initial Shareholders Contingent Earn-out as components of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. To date, none of the milestones have been achieved.

Derivative instrument in connection with the 2021 Avenue Loan

The warrant issued pursuant to Tranche 1 of the 2021 Avenue Loan and the warrant issuable pursuant to the draw of Tranche 2 (see Note 8) met the requirements for separate accounting and is therefore accounted for as derivative instrument. The 2021 Avenue Loan has the following features: (i) prepayment provision, (ii) final payment provision, (iii) event of default redemption provision, and (iv) event of default interest provision. The provisions (i) to (iii) are related to the loan host and are not bifurcated pursuant to ASC 815. For the provision (iv), we have not experienced an event of default in the past and believe the probability of triggering one in the future is remote. Therefore, we determined the value of this feature to be de minimis on the remote probability of occurrence of a triggering event.

Upon the closing of the 2021 Avenue Loan, we recognized the warrant liability as a debt discount based on its fair value of $1.5 million. The debt discount is being amortized over the contractual term using the effective interest method. Our determination of the fair value of the warrant utilized the Black-Scholes option-pricing valuation model. Additionally, a Monte Carlo simulation was used to simulate the exercise price as an input in the Black-Scholes valuation model (see Note 10). For the three and six months ended June 30, 2021, we recognized income of $0.1 million in change in fair value of the warrant as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. To date, the warrant has not been exercised.

Litigation 

From time to time, we may have certain contingent liabilities that arise in the ordinary course of business activities. We accrue a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. We are not aware of any current pending legal matters or claims.

We recorded income tax benefits of $0.1 million and $0.1 million for the net operating losses incurred for the three and six months ended June 30, 2021. We have not recorded income tax benefits for the net operating losses incurred during the three and six months ended June 30, 2020. We have not recorded income tax benefits for research and development tax credits and other deferred tax assets generated, due to its uncertainty of realizing a benefit from those items. 

The components of income (loss) before income taxes for the three and six months ended June 30, 2021 and 2020 were as follows:  

The Company is subject to taxation in the United States, Australia, and various state jurisdictions. The Company computes its quarterly income tax provision by using a forecasted annual effective tax rate and adjusts for any discrete items arising during the quarter. The primary difference between the effective tax rate and the federal statutory tax rate relates to the full valuation allowance on the Company’s U.S. net operating losses and other deferred tax assets.

2020 Stock Plan 

In December 2020, in connection with the Reverse Recapitalization, the Company’s Board of Directors approved the 2020 Stock Plan (the “2020 Stock Plan”) and reserved 12,000,000 shares of Common Stock for issuance thereunder, all of which may be issued pursuant to incentive stock options or any other type of award under the 2020 Stock Plan. The 2020 Stock Plan became effective immediately upon the closing of the Reverse Recapitalization. The maximum number of shares of Common Stock that may be issued pursuant to the exercise of incentive stock options under the 2020 Stock Plan is 12,000,000. Selected employees, officers, directors, and consultants are eligible to participate in the traditional stock option grants, stock appreciation rights, restricted stock awards, RSUs, other stock awards, and performance awards under the 2020 Stock Plan. The purpose of this 2020 Stock Plan is to enable us to offer competitive equity compensation packages in order to attract and retain the talent necessary for the combined company. 

The 2020 Stock Plan is administered by the Company’s Board of Directors. The exercise prices, vesting periods, and other restrictions are determined at the discretion of the Company’s Board of Directors, except that the exercise price per share of options may not be less than 100% of the fair market value of the Common Stock on the date of grant. Stock options awarded under the 2020 Stock Plan expire ten years after the grant date, unless the Company’s Board of Directors sets a shorter term. Stock options and restricted stock granted to employees, officers, members of the Company’s Board of Directors, and consultants generally vest over a four-year period. If an option or other award granted under the 2020 Stock Plan expires, terminates, or is cancelled, the unissued shares subject to that option or award shall again be available under the 2020 Stock Plan. If shares awarded pursuant to the 2020 Stock Plan are forfeited to or repurchased at original cost by the Company, the number of shares forfeited or repurchased at original cost shall again be available under the 2020 Stock Plan. 

As of June 30, 2021, the Company’s Board of Directors granted 3,806,257 RSUs and stock options under the 2020 Stock Plan. As of June 30, 2021, 8,193,743 shares remained available for future grant.

As of December 31, 2020, the Company’s Board of Directors granted 1,507,062 RSUs under the 2020 Stock Plan. As of December 31, 2020, 10,492,938 shares remained available for future grant.

2014 Stock Plan 

Following the closing of the Reverse Recapitalization, the 2014 Stock Plan is administered by the Company’s Board of Directors. Stock options awarded under the 2014 Stock Plan expire ten years after the grant date. Stock options and restricted stock granted to employees, officers, members of the Company’s Board of Directors, and consultants typically vest over a four-year period. 

As a result of the Reverse Recapitalization (see Note 3), stock options outstanding under the 2014 Stock Plan of 53,286,115 were converted into 7,032,591 of stock options of the Company based on the Exchange Ratio determined in accordance with the terms of the Merger Agreement. The exchange of Clene Nanomedicine’s stock options for Clene Inc. stock options was treated as a modification of the awards. The modification of the stock options did not result in a material incremental compensation expense to be recognized at the closing of the Reverse Recapitalization. 

During the year ended December 31, 2020, the Company’s Board of Directors granted stock options for 270,555 shares under the 2014 Stock Plan. Effective as of the closing of the Reverse Recapitalization on December 30, 2020, no additional awards may be made under the 2014 Stock Plan and as a result, (i) any shares in respect of stock options that are expired or terminated under the 2014 Stock Plan without having been fully exercised will not be available for future awards; (ii) any shares in respect of restricted stock that are forfeited to, or otherwise repurchased by the Company, will not be available for future awards; and (iii) any shares of Common Stock that are tendered to the Company by a participant to exercise an award will not be available for future awards. 

Stock-based compensation expense for the three months ended June 30, 2021 and 2020 was approximately $4.2 million and $0.2 million, respectively, and approximately $7.5 million and $0.3 million for the six months ended June 30, 2021 and 2020, respectively. Stock-based compensation is recorded in research and development and general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss as follows:

Stock Options

The following sets forth the outstanding stock options and related activity for the six months ended June 30, 2021 (in thousands, except share and per share data):