SEC Form 10-Q filed by 60 Degrees Pharmaceuticals Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
(Mark One)
FOR THE QUARTERLY PERIOD ENDED
or
FOR THE TRANSITION PERIOD FROM _________ to __________
COMMISSION FILE NUMBER
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐
No
As of November 14, 2024, the registrant had a
total of
INDEX
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends impacting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements.
Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “intend,” “seek,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” “might,” “forecast,” “continue,” or the negative of those terms, and similar expressions and comparable terminology intended to reference future periods. Forward-looking statements include, but are not limited to, statements about:
| ● | Our ability to effectively operate our business segments; |
| ● | Our ability to manage our research, development, expansion, growth and operating expenses; |
| ● | Our ability to evaluate and measure our business, prospects and performance metrics; |
| ● | Our ability to compete, directly and indirectly, and succeed in a highly competitive and evolving industry; |
| ● | Our ability to respond and adapt to changes in technology and customer behavior; and |
| ● | Our ability to protect our intellectual property and to develop, maintain and enhance a strong brand. |
Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, the forward-looking statements in this Quarterly Report on Form 10-Q should not be regarded as representations that the results or conditions described in such statements will occur or that our objectives and plans will be achieved, and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements.
ii
PART I – FINANCIAL INFORMATION
ITEM 1. Consolidated Condensed Financial Statements
60 DEGREES PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Accounts Receivable | ||||||||
| Prepaid and Other Assets | ||||||||
| Short-Term Investments | ||||||||
| Inventory (Note 3) | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment, net (Note 4) | ||||||||
| Other Assets: | ||||||||
| Right of Use Asset (Note 11) | ||||||||
| Long-Term Prepaid Expense | ||||||||
| Intangible Assets, net (Note 5) | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable and Accrued Expenses | $ | $ | ||||||
| Lease Liability (Note 11) | ||||||||
| SBA EIDL (including accrued interest) (Note 7) | ||||||||
| Derivative Liabilities (Note 8) | ||||||||
| Total Current Liabilities: | ||||||||
| Long-Term Liabilities: | ||||||||
| SBA EIDL (including accrued interest) (Note 7) | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 11) | ||||||||
| SHAREHOLDERS’ EQUITY: | ||||||||
| Series A Preferred Stock, $ | ||||||||
| Common Stock, $ | ||||||||
| Additional Paid-in Capital(1) | ||||||||
| Accumulated Other Comprehensive Income | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| 60P Shareholders’ Equity: | ||||||||
| Noncontrolling Interest | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
| (1) |
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
1
60 DEGREES PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Product Revenues – net of Discounts and Rebates | $ | $ | $ | $ | ||||||||||||
| Service Revenues | ||||||||||||||||
| Product and Service Revenues, net | ||||||||||||||||
| Cost of Revenues | ||||||||||||||||
| Gross Profit (Loss) | ( | ) | ( | ) | ||||||||||||
| Research Revenues | ||||||||||||||||
| Net Revenue (Loss) | ( | ) | ||||||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and Development | ||||||||||||||||
| General and Administrative Expenses | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Derivative Expense | ( | ) | ||||||||||||||
| Change in Fair Value of Derivative Liabilities | ( | ) | ||||||||||||||
| Loss on Debt Extinguishment | ( | ) | ( | ) | ||||||||||||
| Change in Fair Value of Promissory Note | ||||||||||||||||
| Other Income (Expense), net | ( | ) | ( | ) | ||||||||||||
| Total Interest and Other Income (Expense), net | ( | ) | ||||||||||||||
| (Loss) Income from Operations before Provision for Income Taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Provision for Income Taxes (Note 9) | ||||||||||||||||
| Net (Loss) Income including Noncontrolling Interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Net (Loss) Income – Noncontrolling Interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (Loss) Income – attributed to 60 Degrees Pharmaceuticals, Inc. | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive (Loss) Income: | ||||||||||||||||
| Net (Loss) Income | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized Foreign Currency Translation Gain | ||||||||||||||||
| Total Comprehensive (Loss) Income | ( | ) | ( | ) | ( | ) | ||||||||||
| Net Loss – Noncontrolling Interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive (Loss) Income – attributed to 60 Degrees Pharmaceuticals, Inc. | ( | ) | ( | ) | ( | ) | ||||||||||
| Cumulative Dividends on Series A Preferred Stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (Loss) Income - attributed to Common Shareholders | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Net (Loss) Income per Common Share: | ||||||||||||||||
| Basic and Diluted (1) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Basic and Diluted (1) | ||||||||||||||||
| (1) |
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
2
60 DEGREES PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
| For the Three and Nine Months Ended September 30, 2024 | ||||||||||||||||||||||||||||||||||||||||
| Series
A Preferred Stock | Common Stock(1) | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total
Shareholders’ Equity (Deficit) Attributable | Noncontrolling Interest on | Total
Shareholders’ Equity | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital(1) | Deficit | Income (Loss) | to 60P | Shareholders | (Deficit) | |||||||||||||||||||||||||||||||
| Balance—December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Issuance of common stock and warrants, net of underwriting discounts and offering costs paid at closing and deferred offering costs | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of Pre-Funded Warrants | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of shares for RSUs | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Net foreign translation loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance—March 31, 2024 (unaudited) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of Pre-Funded Warrants | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of shares for RSUs | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Voluntary return of shares issued to vendor for services | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Net foreign translation gain | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance—June 30, 2024 (unaudited) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Voluntary conversion of Series A Preferred Stock into common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to ATM Offering, net of offering costs paid at closing and deferred offering costs of $ | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of warrants in Private Placement, net of offering costs paid at closing and deferred offering costs of $ | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for fractional shares pursuant to Reverse Stock Split rounding adjustment | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||||||
| Net foreign translation gain | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance—September 30, 2024 (unaudited) | $ | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| (1) |
| For the Three and Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Series
A Preferred Stock | Common Stock(1) | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Shareholders’ Equity (Deficit) Attributable | Noncontrolling Interest on | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital(1) | Deficit | Income (Loss) | to 60P | Shareholders | (Deficit) | |||||||||||||||||||||||||||||||
| Balance—December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
| Cancellation of common stock | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Share-based compensation to vendors for services | - | |||||||||||||||||||||||||||||||||||||||
| Net foreign translation loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net (loss) income | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance—March 31, 2023 (unaudited) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net foreign translation loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance—June 30, 2023 (unaudited) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Issuance of common stock for payment of deferred compensation | - | |||||||||||||||||||||||||||||||||||||||
| Conversion of debt into common stock upon initial public offering | - | |||||||||||||||||||||||||||||||||||||||
| Conversion of debt into Series A Preferred Stock upon initial public offering | - | |||||||||||||||||||||||||||||||||||||||
| Reclassification of liability-classified warrants to equity-classified | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to IPO, net of underwriting discounts, commissions, and deferred offering costs of $ | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of warrants | - | |||||||||||||||||||||||||||||||||||||||
| Voluntary conversion of Series A Preferred Stock into common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to share-based compensation awards | - | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | - | - | ||||||||||||||||||||||||||||||||||||||
| Prepaid share-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Contribution from noncontrolling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net foreign translation gain | - | - | ||||||||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance—September 30, 2023 (unaudited) | $ | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| (1) | Periods presented have been adjusted to reflect the 1:12 reverse stock split on August 12, 2024. |
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
3
60 DEGREES PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the Nine Months Ended September 30, | 2024 | 2023 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Amortization of Debt Discount | ||||||||
| Amortization of ROU Asset | ||||||||
| Amortization of Note Issuance Costs | ||||||||
| Amortization of Capitalized Share-Based Payments | ||||||||
| Share-Based Compensation to Vendors for Services | ||||||||
| Share-Based Compensation under Equity Incentive Plan | ||||||||
| Loss on Debt Extinguishment | ||||||||
| Change in Fair Value of Derivative Liabilities | ( | ) | ( | ) | ||||
| Derivative Expense | ||||||||
| Change in Fair Value of Promissory Note | ( | ) | ||||||
| Write-offs of Capitalized Patents | ||||||||
| Inventory Reserve | ( | ) | ||||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | ( | ) | ( | ) | ||||
| Prepaid and Other Assets | ( | ) | ( | ) | ||||
| Inventory | ||||||||
| Accounts Payable and Accrued Liabilities | ( | ) | ||||||
| Accrued Interest, net | ( | ) | ||||||
| Reduction of Lease Liability | ( | ) | ( | ) | ||||
| Deferred Compensation | ( | ) | ||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Capitalization of Patents | ( | ) | ( | ) | ||||
| Purchases of Fixed Assets | ( | ) | ( | ) | ||||
| Acquisition of Intangibles | ( | ) | ( | ) | ||||
| Purchase of Short-Term Investments | ( | ) | ||||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net Proceeds from January 2024 Offering | ||||||||
| Payment of Deferred Offering Costs | ( | ) | ( | ) | ||||
| Proceeds from IPO and Over-Allotment, net of underwriting discounts and commissions paid at closing of $ | ||||||||
| Proceeds from ATM Offering, net of offering costs paid at closing of $ | ||||||||
| Proceeds from Private Placement, net of offering costs paid at closing of $ | ||||||||
| Proceeds from Exercise of Warrants | ||||||||
| Proceeds from Exercise of Pre-Funded Warrants | ||||||||
| Proceeds from Notes Payable | ||||||||
| Repayment of Notes Payable | ( | ) | ||||||
| Proceeds from Advances - Related Party | ||||||||
| Repayment of Related Party Advances | ( | ) | ||||||
| Net Cash Provided by Financing Activities | ||||||||
| Effect of Exchange Rate Changes on Cash | ||||||||
| Change in Cash and Cash Equivalents | ||||||||
| Cash and Cash Equivalents—Beginning of Period | ||||||||
| Cash and Cash Equivalents—End of Period | $ | $ | ||||||
| NONCASH INVESTING/FINANCING ACTIVITIES | ||||||||
| Conversion of Debt into Common Stock | $ | $ | ||||||
| Conversion of Debt into Series A Preferred Stock | $ | $ | ||||||
| Conversion of Series A Preferred Stock into Common Stock | $ | $ | ||||||
| Capitalized Share-Based Payments to Vendors | $ | $ | ||||||
| Fair Value of Warrants Issued to Underwriters | $ | $ | ||||||
| Reclassification of Liability-classified Warrants to Equity-classified | $ | $ | ||||||
| Additions to ROU Assets for Lease Renewal | $ | $ | ||||||
| Additions to Lease Liabilities for Lease Renewal | $ | $ | ||||||
| Debt Discount Recorded in Connection with Derivative Liabilities | $ | $ | ||||||
| Stock Issued for Payment of Deferred Compensation | $ | $ | ||||||
| Stock Issued for Acquisition of Intangibles | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated condensed financial statements.
4
60 DEGREES PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
60 Degrees Pharmaceuticals, Inc. was incorporated in Delaware on June 1, 2022 and merged on the same day with 60 Degrees Pharmaceuticals, LLC, a District of Columbia limited liability company organized on September 9, 2010. 60 Degrees Pharmaceuticals, Inc. and its subsidiary (referred to collectively as the “Company”, “60P”, or “60 Degrees Pharmaceuticals”) is a specialty pharmaceutical company that specializes in the development and marketing of new medicines for the treatment and prevention of infectious diseases. 60P achieved FDA approval of its lead product, ARAKODA® (tafenoquine), for malaria prevention, in 2018. Currently, 60P’s pipeline under development covers development programs for tick-borne fungal and other viral diseases utilizing three of the Company’s future products: (i) new products that contain the Arakoda regimen of tafenoquine; (ii) new products that contain tafenoquine; and (iii) celgosivir. The Company’s headquarters are located in Washington, D.C., with a majority-owned subsidiary in Australia.
(a) Initial Public Offering
On July 14, 2023, the Company closed its initial
public offering consisting of
The Company granted the underwriters a 45-day
over-allotment option to purchase up to
The units were offered and sold pursuant to the Company’s Registration Statement on Form S-1, as amended (File No. 333-269483), originally filed with the Securities and Exchange Commission (the “SEC”) on January 31, 2023 (the “IPO Registration Statement”) and the final prospectus filed with the SEC pursuant to Rule 424(b)(4) of the Securities Act of 1933, as amended. The Registration Statement was declared effective by the SEC on July 11, 2023. The common stock and tradeable warrants began trading on The Nasdaq Capital Market on July 12, 2023 under the symbols “SXTP” and “SXTPW,” respectively. The closing of the IPO occurred on July 14, 2023.
(b) Going Concern
The Company’s financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of obligations in the normal course of business. However, the Company has not demonstrated the ability to generate enough revenues to date to cover operating expenses and has accumulated losses to date. This condition, among others, raises substantial doubt about the ability of the Company to continue as a going concern for one year from the date these consolidated condensed financial statements are issued.
In view of these matters, continuation as a going concern is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and achieve gross profitability from their single marketed product. The financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should the Company not continue as a going concern.
5
Management plans to fund operations of the Company through third party and related party debt/advances, private placement of restricted securities and the issuance of stock in a subsequent offering until such a time as the business achieves profitability or a business combination may be achieved.
On September 30, 2024, the Company had cash and
cash equivalents totaling $
The Company’s future results are subject to substantial risks and uncertainties. The Company has operated at a loss for its entire history and there can be no assurance that it will ever achieve or maintain profitability. The Company has historically funded its operations primarily with proceeds from sales of common stock and warrants for the purchase of common stock, proceeds from the issuance of convertible debt, and borrowings under loan and security agreements.
The Company expects to need to raise additional capital under structures available to the Company, including debt and/or equity offerings, which may not be on favorable terms. The Company would not have sufficient funds to meet its obligations within twelve months from the issuance date of these consolidated condensed financial statements. As such, there is uncertainty regarding the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt about the Company’s ability to continue as a going concern. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting the Company’s ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If the Company raises funds through collaborations, or other similar arrangements with third parties, it may have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to the Company and/or may reduce the value of its common stock. If the Company is unable to raise additional funds through equity or debt financings when needed, it may be required to delay, limit, reduce or terminate its product development or future commercialization efforts or grant rights to develop and market its product candidates even if the Company would otherwise prefer to develop and market such product candidates itself.
The Company also expects to use cash and cash equivalents to fund activities relating to commercial support for its existing product and any future clinical research trials and operating activities. The Company’s future liquidity and capital requirements will depend on numerous factors, including the initiation and progress of clinical trials and research and product development programs; obtaining regulatory approvals and complying with applicable laws and regulations; the timing and effectiveness of product commercialization activities, including marketing arrangements; the timing and costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; and the effect of competing technological and market developments.
The Company’s capital commitments over the
next twelve months include interest obligations on the Company’s debt arrangements of $
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The financial statements of 60P and its subsidiary are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company has prepared the accompanying consolidated condensed financial statements pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). These financial statements are unaudited and, in the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2024 due to various factors. These consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto as of and for the years ended December 31, 2023 and 2022, included in the Company’s annual report on Form 10-K, as filed with the SEC on April 1, 2024 (the “Annual Report”). Certain information and footnote disclosures that would substantially duplicate the disclosures contained in the Annual Report have been omitted.
6
(b) Principles of Consolidation and Noncontrolling Interest
The Company’s consolidated condensed financial statements include the financial statements of its majority owned subsidiary 60P Australia Pty Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation.
On August 2, 2023, Geoffrey Dow assigned his interest
in 60P Australia Pty Ltd, of
For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than the Company. The aggregate of the income or loss and corresponding equity that is not owned by us is included in Noncontrolling Interest in the consolidated condensed financial statements.
(c) Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and those estimates may be material. Significant estimates include the reserve for inventory, and derivative liabilities.
(d) Reverse Stock Split
Following stockholder approval in July 2024, the
Company effected a reverse stock split at a ratio of
(e) Cash and Cash Equivalents
The Company’s cash consists of cash deposited
in demand accounts at financial institutions, which are insured by the Federal Deposit Insurance Corporation (“FDIC”). The
Company considers short-term highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s
cash and cash equivalents, at times, may exceed the FDIC insurable limits (currently $
(f) Short-term Investments
Short-term investments consist of certificates of deposit with original maturities of greater than three months and less than twelve months, which are classified as held-to-maturity as the Company has the intent and ability to hold these investments until they mature. The classification of short-term investments is determined at the time of purchase and is reevaluated at each balance sheet date. Short-term investments are reported at amortized cost.
7
(g) Accounts Receivable and Allowance for Doubtful Accounts
The Company records accounts receivable at net
realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on
the trade accounts receivable balances and charged to the provision for doubtful accounts. Based on the Company’s history there
has been no need to make a recording to Allowance for Doubtful Accounts. Most of the Company’s revenue has been earned via government
contracts, an Australian pharmaceutical distributor, and a large American pharmaceutical distributor. There was no allowance as of September
30, 2024 or December 31, 2023. As the Company continues to engage with smaller distributors, we will continue to analyze whether an allowance
should be established. As of September 30, 2024, the American pharmaceutical distributor accounted for
(h) Inventory
Inventories are stated at the lower of cost or net realizable value. Cost is comprised of direct materials and, where applicable, costs that have been incurred in bringing the inventories to their present location and condition. The Company uses the Specific Identification method per lot. A box price is calculated per lot number and sales are recognized by their lot number.
The Company regularly monitors its inventory levels
to identify inventory that may expire or has a cost basis in excess of its estimated realizable value, and records write-downs for inventory
that has expired, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected
sales requirements. Any write-downs of inventories are charged to Cost of Revenues in the Consolidated Condensed Statements of Operations
and Comprehensive (Loss) Income. During the three months ended September 30, 2024 and 2023, write-downs for expired inventory totaled
$
(i) Derivative Liabilities
The Company assesses the classification of its derivative financial instruments each reporting period, which formerly consisted of bridge shares, convertible notes payable, and certain warrants, and determined that such instruments qualified for treatment as derivative liabilities as they met the criteria for liability classification under ASC 815. As of September 30, 2024, the Company’s derivative financial instruments consist of contingent payment arrangements.
The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic No. 480, (“ASC 480”), Distinguishing Liabilities from Equity and FASB ASC Topic No. 815, Derivatives and Hedging (“ASC 815”). Derivative liabilities are adjusted to reflect fair value at each reporting period, with any increase or decrease in the fair value recorded in the results of operations, as a component of other income or expense as change in fair value of derivative liabilities. The Company uses a Monte Carlo simulation model or a probability-weighted discounted cash flow model to determine the fair value of these instruments.
Upon conversion or repayment of a debt or equity instrument in exchange for equity shares, where the embedded conversion option has been bifurcated and accounted for as a derivative liability (generally convertible debt and warrants), the Company records the equity shares at fair value on the date of conversion, relieves all related debt, derivative liabilities, and unamortized debt discounts, and recognizes a net gain or loss on debt extinguishment, if any.
Equity or liability instruments that become subject to reclassification under ASC Topic 815 are reclassified at the fair value of the instrument on the reclassification date.
(j) Equity-Classified Warrants
As of September 30, 2024, the Company accounts for all outstanding warrants to purchase common stock as equity-classified instruments based on an assessment of the warrants’ specific terms and applicable authoritative guidance in ASC 480 and ASC 815. This assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the respective issuance dates and as of each subsequent reporting period while the warrants are outstanding.
8
(k) Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, accounts receivable, inventory purchases, and borrowings.
Significant customers represent any customer whose
business makes up
Currently, the Company has exclusive relationships with distributors in Australia and Europe. A failure to perform by any of our current distributors would create disruption for patients in those markets.
Since the Company first started working on tafenoquine all inventory has been acquired in a collaborative relationship from a sole vendor. Should the vendor cease to supply tafenoquine, it would take significant costs and efforts to rebuild the supply chain with a new sole vendor sourcing the active pharmaceutical ingredient (“API”).
(l) Business Segments
The Company uses the “management approach” to identify its reportable segments. The management approach requires companies to report segment financial information consistent with information used by management for making operating decisions and assessing performance as the basis for identifying the Company’s reportable segments. A single management team that reports to the Chief Executive Officer comprehensively manages the business. Accordingly, since its inception, the Company has managed its business in one identifiable segment.
(m) Revenue Recognition
The Company recognizes revenue in accordance with FASB ASC Topic No. 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied. As part of the accounting for these arrangements, the Company may be required to make significant judgments, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each performance obligation.
Revenues from product sales are recorded at the net sales price, or “transaction price,” which may include estimates of variable consideration that result from product returns. The Company determines the amount of variable consideration by using either the expected value method or the most-likely-amount method. The Company includes the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price reflects the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment. Reserves are established for the estimates of variable consideration based on the amounts the Company expects to be earned or to be claimed on the related sales.
9
The Company receives the majority of its revenues from sales of its Arakoda™ product to resellers in the US and abroad. The Company records US commercial revenues as a receivable when our American distributor transfers shipped product to their title model for 60P. Foreign sales to both Australia and Europe are recognized as a receivable at the point product is shipped to distributor. The shipments to Australia and Europe are further subject to profit sharing agreements for boxes sold to customers.
(n) Research and Development Costs
The Company accounts for research and development costs in accordance with FASB ASC Subtopic No. 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, research and development costs are expensed as incurred. Accordingly, internal research and development costs are expensed as incurred. Prepayments for research and development services are deferred and amortized over the service period as the services are provided. Advance payments for specific materials, equipment, or facilities determined to have no alternative future use are initially deferred and recognized as research and development expense when the related goods are delivered.
The Company recorded $
(o) Fair Value of Financial Instruments and the Fair Value Option (“FVO”)
The carrying value of the Company’s financial instruments included in current assets and current liabilities (such as cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued expenses) approximate their fair value due to the short-term nature of such instruments.
The inputs used to measure fair value are based on a hierarchy that prioritizes observable and unobservable inputs used in valuation techniques. These levels, in order of highest to lowest priority, are described below:
| Level 1 | - | Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. |
| Level 2 | - | Observable prices that are based on inputs not quoted on active markets but corroborated by market data. |
| Level 3 | - | Unobservable inputs reflecting the Company’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. |
The Company may choose to elect the FVO for certain eligible financial instruments, such as certain Promissory Notes, in order to simplify the accounting treatment. Items for which the FVO has been elected are presented at fair value in the Consolidated Condensed Balance Sheets and any change in fair value unrelated to credit risk is recorded in Other Expense, net in the Consolidated Condensed Statements of Operations and Comprehensive (Loss) Income. Changes in fair value related to credit risk are recognized as other comprehensive income or loss. As a result of the completion of the IPO in July 2023, all financial instruments for which the FVO was elected were extinguished. See Note 7 for more information on the extinguishment of the Promissory Notes.
The Company’s financial instruments recorded at fair value on a recurring basis at September 30, 2024, and December 31, 2023 include Derivative Liabilities, which are carried at fair value based on Level 3 inputs. See Note 8 for more information on Derivative Liabilities.
10
| September 30, 2024 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative Liabilities | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative Liabilities | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
There were no transfers of financial instruments between Level 1, Level 2, and Level 3 during the periods presented.
A rollforward of liabilities measured at fair value using Level 3 inputs outstanding during the three and nine months ended September 30, 2024 and 2023 are presented in Note 7 (Debt) and Note 8 (Derivative Liabilities), respectively.
(p) Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company also measures certain assets and liabilities at fair value on a nonrecurring basis. The Company’s non-financial assets, including Intangible Assets and Property and Equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the assets’ projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.
As of September 30, 2024, and December 31, 2023, the fair value of Cash and Cash Equivalents, Short-Term Investments, Accounts Receivable, Prepaid Expenses and Other Current Assets, and Accounts Payable and Accrued Expenses approximated their carrying values due to the short-term nature of these assets and liabilities.
(q) Foreign Currency Transactions and Translation
The individual financial statements of each group entity are measured and presented in the currency of the primary economic environment in which the entity operates (its functional currency). The consolidated condensed financial statements of the Company are presented in US dollars, which is the functional currency of the Company and the presentation currency for the consolidated condensed financial statements.
For the purpose of presenting consolidated condensed financial statements, the assets and liabilities of the group’s foreign operations are mostly translated at exchange rates prevailing on the reporting date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized as a component of other comprehensive income (loss) as Unrealized Foreign Currency Translation Gain or Loss.
| Average Exchange Rate | As of | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | September 30, | December 31, | |||||||||||||||||||||
| Currency | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||
| 1 AUD = | ||||||||||||||||||||||||
11
(r) Reclassifications
Certain prior period interim amounts have been reclassified for consistency with the current period presentation. These reclassifications had no material effect on the consolidated condensed results of operations and comprehensive (loss) income, shareholders’ equity (deficit), or cash flows.
(s) Share-Based Payments
On November 22, 2022, the Company adopted the 2022 Equity Incentive Plan also referred to as (“2022 Plan”). The 2022 Plan and related share-based awards are discussed more fully in Note 10.
The Company accounts for share-based payments in accordance with ASC Subtopic 718, Compensation - Stock Compensation (“ASC 718”). The Company measures compensation for all share-based payment awards granted to employees, directors, and nonemployees, based on the estimated fair value of the awards on the date of grant. For awards that vest based on continued service, the service-based compensation cost is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the awards. For service vesting awards with compensation expense recognized on a straight-line basis, at no point in time does the cumulative grant date value of vested awards exceed the cumulative amount of compensation expense recognized. The grant date is determined based on the date when a mutual understanding of the key terms of the share-based awards is established. The Company accounts for forfeitures as they occur.
The Company estimates the fair value of all stock option awards as of the grant date by applying the Black-Scholes option pricing model. The application of this valuation model involves assumptions, including the fair value of the common stock, expected volatility, risk-free interest rate, expected dividends and the expected term of the option. Due to the lack of a public market for the Company’s common stock prior to the IPO and lack of company-specific historical implied volatility data, the Company has based its computations of expected volatility on the historical volatility of a representative group of public companies with similar characteristics of the Company, including stage of development and industry focus. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The Company uses the simplified method as prescribed by the SEC Staff Accounting Bulletin Topic 14, Share-Based Payment, to calculate the expected term for stock options, whereby, the expected term equals the midpoint of the weighted average remaining time to vest, vesting period and the contractual term of the options due to its lack of historical exercise data. The risk-free interest rate is based on U.S. Treasury securities with a maturity date commensurate with the expected term of the associated award. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock. The assumptions used in calculating the fair value of share-based awards represent management’s best estimates and involve inherent uncertainties and the application of significant judgment.
Compensation expense for restricted stock units (“RSUs”) with only service-based vesting conditions is recognized on a straight-line basis over the vesting period. Compensation cost for service-based RSUs is based on the grant date fair value of the award, which is the closing market price of the Company’s common stock on the grant date multiplied by the number of shares awarded.
For awards that vest upon a liquidity event or a change in control, the performance condition is not probable of being achieved until the event occurs. As a result, no compensation expense is recognized until the performance-based vesting condition is achieved, at which time the cumulative compensation expense is recognized. Compensation cost related to any remaining time-based service for share-based awards after the liquidity-based event is recognized on a straight-line basis over the remaining service period.
For fully vested, nonforfeitable equity instruments that are granted at the date the Company and a nonemployee enter into an agreement for goods or services, the Company recognizes the fair value of the equity instruments on the grant date. The corresponding cost is recognized as an immediate expense or a prepaid asset and expensed over the service period depending on the specific facts and circumstances of the agreement with the nonemployee. See Note 10 for further details.
12
(t) Leases
The Company applies ASC Topic 842, Leases (“ASC 842”) to its operating leases, which are reflected on the Consolidated Condensed Balance Sheets within Right of Use (ROU) Asset and the related current and non-current operating Lease Liability. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from lease agreements. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectation regarding the terms. Variable lease costs such as common area maintenance, property taxes and insurance are expensed as incurred.
The Company determines if an arrangement is a lease at contract inception. The Company’s contracts are determined to contain a lease when all of the following criteria, based on the specific circumstances of the arrangement, are met: (1) there is an identified asset for which there are no substantive substitution rights; (2) the Company has the right to obtain substantially all of the economic benefits from the identified asset; and (3) the Company has the right to direct the use of the identified asset.
At the commencement date, operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected lease term. The Company’s lease agreement does not provide an implicit rate. As a result, the Company utilizes an estimated incremental borrowing rate (“IBR”), to discount lease payments, which represents the rate of interest the Company would pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.
(u) Net (Loss) Income per Common Share
Net (Loss) Income per Common Share is computed by dividing net (loss) income attributable to common shareholders by the weighted average number of common shares outstanding during each period. The Company has included the Pre-Funded Warrants issued in January 2024 and September 2024 (See Note 6) in its computation of basic and diluted net (loss) income per share due to their nominal exercise prices. The cumulative dividends accrued on the Series A Preferred Stock during the period are reflected as an addition to net loss or a reduction of net income in determining basic and diluted net (loss) income attributable to common stockholders.
As the Company reported a net loss for the nine months ended September 30, 2024 and 2023 and the three months ended September 30, 2024, the calculation of diluted net loss per common share is the same as basic net loss per common share. For the three months ended September 30, 2023, all securities that could potentially dilute basic earnings per share in the future have been excluded from the diluted calculation because the effect would be antidilutive. The potential dilutive securities for the three months ended September 30, 2023 included: common stock warrants, stock options and unvested restricted stock units granted under the 2022 Plan.
As a result of the Reverse Stock Split, which was effective as of August 12, 2024, all shares of outstanding common stock and net (loss) income per common share calculations have been retroactively adjusted for all periods presented.
(v) Related Parties
Parties are considered to be related to the Company if the parties, directly or indirectly through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
(w) Subsequent Events
The Company considers events or transactions that occur after the balance sheet date, but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through November 14, 2024, which is the date the consolidated condensed financial statements were issued. See Note 12.
13
(x) Recently Issued Accounting Pronouncements
From time to time, the FASB issues Accounting Standards Updates (“ASU”) to amend the authoritative literature in the ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company’s financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses and segment profit or loss. The ASU also requires entities with a single reportable segment to provide all segment disclosures under ASC 280, including the new required disclosures under the ASU. The ASU is effective for all public entities with fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The ASU must be applied retrospectively. The Company is currently evaluating the impact that ASU 2023-07 will have on its financial statement disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (ASC 740): Improvements to Income Tax Disclosures, which requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that ASU 2023-09 will have on its financial statement disclosures.
3. INVENTORY
| September 30, 2024 | December 31, 2023 | |||||||
| Work in Process | $ | $ | ||||||
| Finished Goods | ||||||||
| Inventory | $ | $ | ||||||
4. PROPERTY AND EQUIPMENT
| September 30, 2024 | December 31, 2023 | |||||||
| Lab Equipment | $ | $ | ||||||
| Machinery | ||||||||
| Computer Equipment | ||||||||
| Furniture | ||||||||
| Property and Equipment, at cost | ||||||||
| Accumulated Depreciation | ( | ) | ( | ) | ||||
| Property and Equipment, Net | $ | $ | ||||||
Machinery of $
14
5. INTANGIBLE ASSETS
| September 30, 2024 | December 31, 2023 | |||||||
| Patents | $ | $ | ||||||
| Website Development Costs | ||||||||
| Intangible Assets, at cost | ||||||||
| Accumulated Amortization | ( | ) | ( | ) | ||||
| Intangible Assets, net | $ | $ | ||||||
During the three months ended September 30, 2024
and 2023, the Company capitalized website development-related costs of $
| Period | Patents | Website Development Costs | ||||||
| 2024 (remaining three months) | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total | $ | $ | ||||||
The Company has recorded $
6. STOCKHOLDERS’ EQUITY
Pursuant to the Certificate of Incorporation of
60 Degrees Pharmaceuticals, Inc., the Company’s authorized shares consist of (a)
Following stockholder approval in July 2024, on
July 30, 2024, the Company filed an Amendment to the Certificate of Incorporation with the Secretary of State of Delaware to effect the
15
(a) Common Stock
In January and March 2023, the Board of Directors,
with the consent of Tyrone Miller and Geoffrey S. Dow, respectively, approved resolutions to cancel an aggregate of
In January and March 2023, the Company issued
a total of
In connection with the closing of the Company’s IPO as discussed in Note 1, the Company issued common stock as follows:
| ● | As a result of the effectiveness of the Registration Statement on July 11, 2023, the Company issued a total of |
| ● | On July 14, 2023, the IPO closed, and the Company issued |
| o | The Company issued an aggregate of |
| o | The Company issued |
In July 2023, the Company issued an aggregate
of
On July 25, 2023, the Company converted
On January 29, 2024, the Company, entered into
an Underwriting Agreement with WallachBeth Capital LLC (the “Underwriting Agreement”), relating to the Company’s public
offering (the “January 2024 Offering”) of
16
The Company granted WallachBeth Capital LLC an
option, exercisable within 45 days after the closing of the offering, to purchase up to
The Company also issued to WallachBeth Capital
LLC warrants (the “January 2024 Representative Warrants”) to purchase
The Units and Pre-Funded Units were offered and
sold pursuant to the Company’s Registration Statement on Form S-1 (File No. 333-276641), originally filed with the SEC on January
22, 2024 (the “January 2024 Registration Statement”) and the final prospectus filed with the SEC pursuant to Rule 424(b)(4)
of the Securities Act of 1933, as amended. The January 2024 Registration Statement was declared effective by the SEC on January 29, 2024.
The closing of the January 2024 Offering occurred on January 31, 2024. The net proceeds to the Company from the January 2024 Offering
were approximately $
On February 1, 2024 and April 9, 2024, the Company
issued
On April 1, 2024, the Company entered into an
Amendment to the Debt Exchange Agreement with Trevally, LLC (“Trevally”), which amends the original agreement with Trevally
(executed in January 2023). Pursuant to the Amendment, Trevally agreed to return
On July 12, 2024, the Company entered into an
At-the-Market Issuance Sales Agreement (the “ATM Agreement”) with WallachBeth Capital LLC as sales agent, to sell shares of
common stock having an aggregate offering price of up to $
On July 22, 2024 and July 26, 2024, the Company
converted
(b) Common Stock Warrants
As of September 30, 2024, the Company accounts for all issued and outstanding warrants to purchase common stock as equity-classified instruments based on the guidance in ASC 480 and ASC 815.
17
In May 2022 and May 2023, in connection with the
issuance of the Related Party Notes and the 2022 and 2023 Bridge Notes as described in Note 8, the Company issued five-year warrants to
each of the noteholders with an exercise price dependent on the IPO price (collectively, the “Bridge Warrants”). The number
of shares issuable upon exercise of the warrants was contingent on the number of shares issued upon conversion of the notes following
the Company’s IPO. As of the closing of the Company’s IPO, the Bridge Warrants became exercisable into an aggregate of
As of the respective issuance dates, the Company accounts for the Tradeable Warrants, the Non-tradeable Warrants, and the IPO Representative Warrants (each as defined in Note 1), the January 2024 Pre-Funded Warrants, the January 2024 Warrants, and the January 2024 Representative Warrants (each as defined above) as equity-classified financial instruments.
On September 4, 2024, the Company entered into
a Securities Purchase Agreement (the “Purchase Agreement”) with an institutional investor, agreeing to issue and sell in a
private placement offering (the “Private Placement”) (i) pre-funded warrants to purchase
The September 2024 Pre-Funded Warrants have an
exercise price of $
As compensation for acting as the placement agent
for the Private Placement, the Company issued to H.C. Wainwright & Co., LLC warrants to purchase up to
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Total outstanding, December 31, 2022 | $ | |||||||||||
| Total outstanding, March 31, 2023 | $ | |||||||||||
| Total outstanding, June 30, 2023 | $ | |||||||||||
| Reclassified from derivative liabilities | ||||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Forfeited | ||||||||||||
| Expired | ||||||||||||
| Total outstanding, September 30, 2023 | $ | |||||||||||
| Total exercisable, September 30, 2023 | $ | |||||||||||
18
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Total outstanding, December 31, 2023 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Forfeited | ||||||||||||
| Expired | ||||||||||||
| Total outstanding, March 31, 2024 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Forfeited | ||||||||||||
| Expired | ||||||||||||
| Total outstanding, June 30, 2024 | $ | |||||||||||
| Granted(1) | ||||||||||||
| Exercised | ||||||||||||
| Forfeited | ||||||||||||
| Expired | ||||||||||||
| Total outstanding, September 30, 2024(1) | $ | |||||||||||
| Total exercisable, September 30, 2024(2) | $ | |||||||||||
| (1) | |
| (2) |
During the three and nine months ended September
30, 2023, the Company received aggregate cash proceeds of $
| 2024 | ||||
| Stock price | $ | |||
| Exercise price | $ | |||
| Risk-free interest rate | % | |||
| Expected volatility | % | |||
| Expected term (years) | ||||
| Expected dividend yield | % | |||
19
(c) Series A Preferred Stock
The holders of shares of Series A Preferred Stock have the rights, preferences, powers, restrictions and limitations as set forth below.
Voting Rights - The holders of shares of Series A Preferred Stock are not entitled to any voting rights.
Dividends - From and after the date of
issuance of any share of Series A Preferred Stock, cumulative dividends shall accrue, whether or not declared by the Board and whether
or not there are funds legally available for the payment of dividends, on a daily basis in arrears at the rate of
Liquidation Rights - In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of Series A Preferred Stock then outstanding will share ratably in any distribution of the remaining assets and funds of the Company with all other stockholders as if each share of Series A Preferred Stock had been converted by the Company to Common Stock as described below.
Conversion Rights - The Company has the
right, in its sole discretion, to convert all or any portion of the outstanding shares of Series A Preferred Stock (including any fraction
of a share), plus the aggregate accrued or accumulated and unpaid dividends thereon into a number of shares of Common Stock determined
by (i) multiplying the number of shares to be converted by $
7. DEBT
(a) Knight Therapeutics, Inc.
On December 27, 2019 the Company restructured
its cumulative borrowing with its senior secured lender, Knight Therapeutics, Inc. (“Knight”), into a note for the principal
amount of $
20
(b) Note, including Amendment
The Company executed a promissory note (the “Note”)
with an individual investor on October 11, 2017, later amended on December 11, 2022 (the “Amendment”). The Note, including
the Amendment was set to mature
As a result of the completion of the IPO and as
required under the terms of the Note, including the Amendment, the outstanding principal and accrued interest through March 31, 2022 converted
to
(c) Convertible Promissory Notes and Warrants
During May 2022 and May 2023 (the “2022
Bridge Notes” and “2023 Bridge Notes,” respectively), the Company executed promissory notes with various investors.
The notes were due at the earlier of
The Company performed an evaluation of the conversion features embedded in the 2022 and 2023 Bridge Notes and the warrants and concluded that such instruments qualified for treatment as derivative liabilities under ASC 815 and required bifurcation from the host contract. Derivative liabilities are carried at fair value at each balance sheet date, and any changes in fair value are recognized in the accompanying Consolidated Condensed Statements of Operations and Comprehensive (Loss) Income. See Note 8 for further details.
As a result of the completion of the IPO and as
required under the terms of the 2022 and 2023 Bridge Notes, the Company issued the holders
(d) Related Party Notes
During May 2022, the Company executed convertible
promissory notes with the Company’s Chief Executive Officer and a family member related to the Chief Executive Officer. The notes
were due at the earlier of one-year (1) from the issuance date or the closing of an IPO, later extended an additional two months to July
2023 (the “Related Party Notes”). Upon the closing of the IPO, these notes were mandatorily convertible at a conversion rate
determined at a
The Company performed an evaluation of the conversion features embedded in the Related Party Notes and the warrants and concluded that such instruments qualified for treatment as derivative liabilities under ASC 815 and required bifurcation from the host contract. See Note 8 for further details.
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As a result of the completion of the IPO and as
required under the terms of the Related Party Notes, the entirety of the outstanding principal balance converted to
| 2022 Bridge Notes | Related Party Notes | 2023 Bridge Notes | ||||||||||
| Issuance date of promissory notes | ||||||||||||
| Maturity date of promissory notes | ||||||||||||
| Interest rate | ||||||||||||
| Default interest rate | ||||||||||||
| Collateral | ||||||||||||
| Conversion rate | ||||||||||||
| 1 - | earlier of 1 year from date of issuance or closing of IPO, later extended to July 2023 |
| 2 - | earlier of 1 year from date of issuance or closing of IPO |
| 3 - | see discussion above in (c) and (d) for Bridge Notes and Related Party Notes, respectively |
For the nine months ended September 30, 2024 and
2023, the Company recorded amortization of debt discounts, including issuance costs, of $
(e) Knight Debt Conversion
On January 9, 2023, and in two subsequent amendments, the Company and Knight Therapeutics agreed to extinguish Knight’s debt in the event of an IPO. Key points of this agreement are as follows:
| ● | The Parties agreed to fix Knight’s
cumulative debt to the value as it stood on March 31, 2022, which consisted of $ |
| ● | The Parties agreed to convert
the fixed principal amount into (i) that number of shares of common stock equal to dividing the principal amount by an amount equal to
the offering price of the common stock in the IPO discounted by |
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| ● | The parties agreed to convert
the accrued interest into that number of shares of a new class of preferred stock (the “Preferred Stock”) by dividing the
fixed accumulated interest by $ |
| ● | In addition to the conversion
of the debt, for a period commencing on January 1, 2022 and ending upon the earlier of 10 years after the Closing or the conversion or
redemption in full of the Preferred Stock, Company shall pay Lender a royalty equal to |
The Company evaluated the January 9, 2023 exchange
agreement in accordance with ASC 470-50 and concluded that the debt qualified for debt extinguishment because a substantial conversion
feature was added to the debt terms. In January 2023, the Company recorded a loss upon extinguishment in the amount of $
| Convertible Knight Note, at fair value | ||||
| Promissory Notes, at fair value at December 31, 2022 | $ | |||
| Fair value at modification date - January 9, 2023 | ||||
| Fair value - mark to market adjustment | ( | ) | ||
| Accrued interest recognized | ||||
| Promissory Notes, at fair value at March 31, 2023 | ||||
| Fair value - mark to market adjustment | ||||
| Accrued interest recognized | ||||
| Promissory Notes, at fair value at June 30, 2023 | ||||
| Fair value - mark to market adjustment | ( | ) | ||
| Extinguishment of Promissory Notes | ( | ) | ||
| Promissory Notes, at fair value at September 30, 2023 | $ | |||
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As a result of the completion of the IPO and as
required under the terms of the Knight Debt Conversion Agreement, the cumulative outstanding principal as of March 31, 2022 converted
to
The Company performed an evaluation of the contingent payment features and concluded that the contingent milestone payment is a freestanding financial instrument that meets the definition of a derivative under ASC 815, and accordingly, the fair value of the derivative liability is marked to market each reporting period until settled. The future Royalty payment due to Knight was determined to be an embedded component of the Series A Preferred Stock, however is exempt from derivative accounting under the ASC 815 scope exception for specified volumes of sales or service revenues. Therefore, the Company accrues a royalty expense within cost of sales as sales are made.
(f) Debenture
On April 24, 2019, 60P entered into the Knight
debenture of $
(g) SBA COVID-19 EIDL
On May 14, 2020, the Company received COVID-19
EIDL lending from the Small Business Administration (SBA) in the amount of $
| Period | Principal Payments | |||
| 2024 (remaining three months) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
Due to the deferral, the Company is expected to
make a balloon payment of approximately $
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8. DERIVATIVE LIABILITIES
In accordance with the provisions of ASC 815, derivative liabilities are initially measured at fair value at the commitment date and subsequently remeasured at each reporting period, with any increase or decrease in the fair value recorded in the results of operations within other income/expense as the change in fair value of derivative liabilities.
As discussed in Notes 6 and 7 above, certain of the Company’s bridge shares, warrants and convertible notes (containing an embedded conversion feature) were previously accounted for as derivative liabilities. The bridge shares and related conversion features were derecognized upon conversion of the related debt obligations on the date of the IPO. In addition, certain of the Company’s common stock warrants were previously accounted for as derivative liabilities as there was an unknown exercise price and number of shares associated with each instrument. In connection with the IPO, the terms of these warrants became fixed, at which point the Company determined the warrants met all of the criteria for equity classification and reclassified the warrants to additional paid-in capital at their fair value on the IPO date.
As of September 30, 2024, derivative liabilities consist of the contingent milestone payment due to Knight upon a future sale of Arakoda™ or a Change of Control (See Note 7). The valuation of the contingent milestone payment includes significant inputs such as the timing and probability of discrete potential exit scenarios, forward interest rate curves, and discount rates based on implied and market yields.
In connection with the valuation of the Company’s
derivative liabilities related to the 2023 Bridge Notes and warrants, the Company determined a fair value on the commitment date (May
8, 2023) of $
| Commitment Date | May 8, 2023 | |||
| Fair value of derivative liabilities | $ | |||
| Less: face amount of debt | ( | ) | ||
| Derivative expense | $ | |||
| Contingent Milestone Payment | Total | |||||||
| Derivative liabilities - December 31, 2023 | $ | $ | ||||||
| Fair value - mark to market adjustment | ( | ) | ( | ) | ||||
| Derivative liabilities - March 31, 2024 | ||||||||
| Fair value - mark to market adjustment | ||||||||
| Derivative liabilities - June 30, 2024 | ||||||||
| Fair value - mark to market adjustment | ||||||||
| Derivative liabilities - September 30, 2024 | $ | $ | ||||||
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| Bridge Shares | Warrants | Convertible Notes Payable | Contingent Milestone Payment | Total | ||||||||||||||||
| Derivative liabilities - December 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Fair value - mark to market adjustment | ( | ) | ||||||||||||||||||
| Derivative liabilities - March 31, 2023 | ||||||||||||||||||||
| Fair value - commitment date | ||||||||||||||||||||
| Fair value - mark to market adjustment | ( | ) | ( | ) | ||||||||||||||||
| Derivative liabilities - June 30, 2023 | ||||||||||||||||||||
| Fair value - mark to market adjustment prior to conversion or reclassification | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Conversion of convertible promissory notes | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Reclassification of warrants to equity | ( | ) | ( | ) | ||||||||||||||||
| Recognition of contingent milestone liability | ||||||||||||||||||||
| Fair value - mark to market adjustment | ||||||||||||||||||||
| Derivative liabilities - September 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
Changes in fair value of derivative liabilities
(mark to market adjustment) are included in other income (expense) in the accompanying Consolidated Condensed Statements of Operations
and Comprehensive (Loss) Income. During the nine months ended September 30, 2024 and 2023, the Company recorded a net gain on the change
in fair of derivative liabilities of $
Prior to the Company’s IPO, the fair value of the Company’s potential future issuances of common stock related to common stock issued with promissory notes, warrants and embedded conversion features in convertible promissory notes was established with an estimate using the Monte Carlo Simulation Model to compute fair value as of each reporting date. The Monte Carlo simulation requires the input of assumptions, including our stock price, the volatility of our stock price, remaining term in years, expected dividend yield, and risk-free rate. In addition, the valuation model considered the probability of the occurrence or nonoccurrence of an IPO within the terms of liability-classified financial instruments, as an IPO could potentially impact the settlement.
9. INCOME TAXES
The Company did not record a federal income tax
provision or benefit for each of the three and nine months ended September 30, 2024 and 2023 due to taxable losses. The Company recorded
a provision for income taxes for the District of Columbia of $
10. SHARE-BASED COMPENSATION
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Research and Development | $ | $ | $ | $ | ||||||||||||
| General and Administrative Expenses | ||||||||||||||||
| Total Share-Based Compensation Expense Included in Operating Expenses | $ | $ | $ | $ | ||||||||||||
(a) Share-Based Compensation under 2022 Equity Incentive Plan
On November 22, 2022, the Company adopted the
2022 Equity Incentive Plan (the “2022 Plan”), which provides for the grant of stock options, stock appreciation rights, restricted
stock, restricted stock units and performance awards to eligible employees, directors and consultants, to be granted from time to time
by the Board of Directors of the Company. The 2022 Plan provides for an automatic increase in the number of shares available for issuance
beginning on January 1, 2023 and each January 1 thereafter, by
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Stock Grants
On July 11, 2023, the Company recognized $
Stock Options
The Company grants stock options to employees, non-employees, and Directors with exercise prices equal to the closing price of the underlying shares of the Company’s common stock on the Nasdaq Capital Market on the date that the options are granted. Options granted generally have a term of five or ten years from the grant date and are subject to vesting as determined in the individual award agreement. The Company estimates the fair value of stock options on the grant date by applying the Black-Scholes option pricing valuation model.
| 2024 | ||||
| Weighted-average grant date fair value | ||||
| Risk-free interest rate | % | |||
| Expected volatility | % | |||
| Expected term (years) | ||||
| Expected dividend yield | % | |||
| 2023 | ||||
| Weighted-average grant date fair value | ||||
| Risk-free interest rate | % | |||
| Expected volatility | % | |||
| Expected term (years) | ||||
| Expected dividend yield | % | |||
Upon the Closing of the IPO on July 12, 2023,
the Company granted an aggregate of
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For the three and nine months ended September
30, 2024, the Company recognized $
Restricted Stock Units
Compensation cost for service-based RSUs is based
on the grant date fair value of the award, which is the closing market price of the Company’s common stock on the grant date multiplied
by the number of shares awarded
Upon the Closing of the IPO on July 12, 2023,
the Company granted an aggregate of
There were no RSUs granted during the three or
nine months ended September 30, 2024. During the three and nine months ended September 30, 2024, the Company issued
(b) Share-Based Payments to Vendors for Services
During the nine months ended September 30, 2024
and 2023, the Company issued
In addition to share-based payments for research
and development services, during the nine months ended September 30, 2024 and 2023,
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The agreements with the nonemployees do not include any provisions to claw back the share-based payments in the event of nonperformance by the nonemployees. Subject to applicable federal and state securities laws, the nonemployees can sell the received equity instruments.
11. COMMITMENTS AND CONTINGENCIES
(a) Operating Lease
On February 3, 2016, and subsequently amended, the Company entered into the lease agreement with CXI Corp to rent business premises. In January 2023, the lease was extended for an additional twelve-month term, which expired on March 31, 2024. In December 2023, the Company executed an additional amendment with CXI Corp, pursuant to which the Company agreed to relocate to a new office space as of April 1, 2024. The term covered by the new amendment expires on March 31, 2025. The Company has accounted for the amendment for the new office space as a separate contract. As the initial term for the new office space is 12 months, the lease is not recorded on the balance sheet. The Company recognizes lease expense on this lease as short-term lease costs.
Operating lease costs, including short-term leases,
were in the amount of $
(b) Board of Directors
In 2022, the Company signed agreements with its
four Directors (Cheryl Xu, Paul Field, Charles Allen and Stephen Toovey) which came into effect on July 11, 2023, the date the Company’s
IPO Registration Statement was declared effective. Each director is entitled to receive cash compensation of $
(c) Contingencies
The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations.
(d) Contingent Compensation
Following the Company’s IPO and the conversion
of the outstanding debt pursuant to the Knight Debt Conversion Agreement as discussed in Note 7, the Company is obligated to pay Knight
a contingent milestone payment of $
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On July 15, 2015, the Company entered into the
Exclusive License Agreement with the U.S. Army Medical Materiel Development Activity (the “U.S. Army”), which was subsequently
amended (the “U.S. Army Agreement”), in which the Company obtained a license to develop and commercialize the licensed technology
with respect to all therapeutic applications and uses excluding radical cure of symptomatic vivax malaria. The term of the U.S. Army Agreement
will continue until the expiration of the last to expire of the patent application or valid claim of the licensed technology, or
(e) Litigation, Claims and Assessments
From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of September 30, 2024, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations.
12. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through November 14, 2024, which is the date the consolidated condensed financial statements were issued.
On October 1, 2024, the Company issued
On October 31, 2024, the Company issued an additional
On November 6, 2024, the Company conducted a Special
Meeting of Stockholders (the “Meeting”). The Company’s stockholders of record at the close of business on September
20, 2024, the record date for the determination of stockholders entitled to vote at the Meeting, approved the proposals to (1) approve
the exercise of the Series A Warrants, the Series B Warrants, and the September 2024 Agent Warrants (each as defined in Note 6) to purchase
up to an aggregate of
On November 12, 2024, the Board of Directors approved
a one-off cash payment of $
There have been no other events or transactions during this time which would have a material effect on these consolidated condensed financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our unaudited consolidated condensed financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and the other information set forth in certain of our filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on April 1, 2024. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the SEC.
Overview
We are a specialty pharmaceutical company with a goal of using cutting-edge biological science and applied research to further develop and commercialize new therapies for the prevention and treatment of infectious diseases. We have successfully achieved regulatory approval of Arakoda® (“Arakoda”), a malaria preventative treatment that has been on the market since late 2019. Currently, 60P’s pipeline under development covers development programs for vector-borne, fungal, and viral diseases utilizing three of the Company’s future products: (i) new products that contain the Arakoda regimen of Tafenoquine; (ii) new products that contain Tafenoquine; and (iii) Celgosivir.
Following our initial public offering in July 2023, our initial strategic priority was to conduct a Phase IIB study that would have evaluated the potential of the Arakoda regimen of Tafenoquine to accelerate disease recovery in COVID-19 patients with low risk of disease progression. In October 2023, we made a decision to suspend this study. This was a consequence of advice previously received from the U.S. Food and Drug Administration (FDA), which we interpreted to mean that the Agency would not have granted clearance for the study to proceed unless we redesigned it to (i) enroll a patient population in which receipt of Paxlovid or Lagevrio would be medically contraindicated, or (ii) compare Tafenoquine to placebo in patients taking a “standard of care” regimen (defined by the FDA as Lagevrio or Paxlovid). The FDA’s position was somewhat surprising given that neither Paxlovid nor Lagevrio is indicated for treatment of COVID-19 in low-risk patients. We determined that conducting our study in an alternate population in the United States would be unfeasible, and that conducting an add-on-to standard of care study might not be Phase III enabling. Accordingly, we made a decision to pivot back to continue commercialization of Arakoda for malaria, and further evaluation of the Arakoda regimen of Tafenoquine for babesiosis and other diseases. We believe such an approach is both less risky and less expensive.
Moving forward, our general strategy to achieve profitability and grow shareholder value has three facets: (i) increase sales of Arakoda; (ii) conduct clinical trials to expand the number of patients who can use Tafenoquine for new indications in the future; and (iii) reposition small molecule therapeutics with good clinical safety profiles for new indications.
Business Developments
The following highlights significant business developments in our business during the quarter ended September 30, 2024.
| ● | On July 9, 2024, our expanded use protocol for treatment of babesiosis in immunocompromised patients with persistent babesia microti received IRB (ethics) clearance. |
| ● | On July 15, 2024, we entered into clinical trial agreements with Yale University and Rhode Island Hospital for our tafenoquine babesiosis clinical trial in hospitalized patients. |
| ● | On July 22, 2024, we converted 1,291 shares of Series A Preferred Stock held by an investor into 40,000 shares of our common stock. On July 26, 2024, we converted an additional 1,032 shares of Series A Preferred Stock held by the investor into 33,334 shares of our common stock. |
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| ● | On July 24, 2024, we were awarded a fixed-price contract with the United States Army Medical Materiel Development Activity to support commercial validation of new bottle and replacement blister packaging of ARAKODA®. This initiative is critical for ensuring the continued procurement by the U.S. government. |
| ● | In August 2024, we granted the University of Kentucky a right of reference to our new drug application for ARAKODA®. The right of reference will allow the FDA to review clinical efficacy and safety data, non-clinical data and chemistry, manufacturing and control information on ARAKODA® as the FDA reviews protocols and new IND application submissions related to the University of Kentucky’s investigational SJ733 Phase IIB program. |
At-the-Market Sales Agreement
On July 12, 2024, we filed a shelf registration statement on Form S-3 (File No. 333-280796) containing a (i) base prospectus covering the offering, issuance and sale by us of up to $15,000,000 of our common stock, preferred stock, warrants, debt securities and units and (ii) sales agreement prospectus (“Prospectus Supplement”) covering the offering, issuance and sale by us of up to a maximum aggregate offering price of $1,253,603 (which amount was included in the $15,000,000 aggregate offering price set forth in the base prospectus) of our common stock that may be issued and sold under the At-The-Market Issuance Sales Agreement dated as of July 12, 2024 (the “ATM Agreement”), that we entered into with WallachBeth Capital LLC, as sales agent. The Prospectus Supplement was subsequently amended on July 22, 2024, July 24, 2024, July 26, 2024, and August 2, 2024, to increase the maximum aggregate offering price under the ATM Agreement to $1,774,640, $1,890,705, $2,190,416, and $2,295,192, respectively. Between July 19, 2024 and August 1, 2024, we sold a total of 677,819 shares pursuant to the ATM Agreement and Prospectus Supplement, as amended, for gross proceeds of $1,994,583.
2024 Annual Meeting of Stockholders
On July 16, 2024, we conducted our 2024 Annual Meeting of Stockholders (the “2024 Annual Meeting”). The stockholders of record at the close of business on May 12, 2024, the record date for the determination of stockholders entitled to vote at the 2024 Annual Meeting, approved the proposals to (1) elect five directors to serve until the 2025 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified; (2) approve an amendment to the 2022 Equity Incentive Plan to increase the number of shares of common stock available for issuance by 416,667 shares; (3) approve an amendment to our Certificate of Incorporation, to effect a reverse stock split of our common stock at a reverse stock split ratio ranging from 1:5 to 1:12 inclusive, as may be determined at the appropriate time by the Board of Directors, in its sole discretion; (4) approve the issuance of options granted to a consultant to comply with Nasdaq Listing Rule 5635(c); and (5) ratify the selection of RBSM LLP by the Board of Directors as our independent auditor for the fiscal year ending December 31, 2024.
Reverse Stock Split and Nasdaq Delisting Notice
In February 2024, we received a letter from the Listing Qualifications Department of the Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, for the last 30 consecutive business days, our common stock had not maintained a minimum closing bid price of $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), we were provided an initial period of 180 calendar days, or until August 26, 2024 (the “Compliance Period”), to regain compliance with the Bid Price Rule. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for a minimum of 10 consecutive trading days, unless extended by Nasdaq under Nasdaq Rule 5810(c)(3)(H), prior to August 26, 2024. At the 2024 Annual Meeting in July 2024, our stockholders approved an amendment to our Certificate of Incorporation to effect reverse stock split of our common stock at a range of ratios between 1:5 to 1:12 inclusive, and on July 19, 2024, our Board of Directors approved the implementation of the reverse stock split at a ratio of 1:12 (the “Reverse Stock Split”). The Reverse Stock Split was effective as of August 12, 2024.
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As of the effective time of the Reverse Stock Split, every twelve (12) issued and outstanding shares of our common stock was automatically combined and converted into one (1) issued and outstanding share of common stock, with no change to the par value, reducing the number of shares of common stock outstanding from 21,219,937 shares to 1,768,337 shares. No fractional shares of common stock were issued in connection with the Reverse Stock Split and all fractional shares were rounded up to the nearest whole share with respect to outstanding shares of common stock. We issued an additional 93,563 shares of common stock on August 19, 2024 for rounding due to fractional shares. The Reverse Stock Split did not change the authorized number of shares of common stock or preferred stock. Proportional adjustments were made to the number of shares of common stock issuable upon exercise or conversion of our equity awards, warrants, and other equity instruments convertible into common stock, as well as the respective exercise prices, if applicable in accordance with the terms of the instruments. Unless otherwise noted, all references to numbers of shares of our common stock and per share information presented in this Quarterly Report on Form 10-Q have been retroactively adjusted, as appropriate, to reflect the Reverse Stock Split.
On August 26, 2024, we received written notice from the Listing Qualifications Staff of Nasdaq stating that for the 10 consecutive business day period between August 12, 2024 through August 23, 2024, the closing bid price of our common stock was at $1.00 per share or greater. Accordingly, we regained compliance with the Bid Price Rule for continued listing on The Nasdaq Capital Market and the matter was closed.
Private Placement
On September 4, 2024, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an institutional investor, agreeing to issue and sell in a private placement offering (the “Private Placement”) (i) pre-funded warrants to purchase 2,898,551 shares of common stock (the “September 2024 Pre-Funded Warrants”), (ii) series A warrants to purchase 2,898,551 shares of common stock (the “Series A Warrants”), and (iii) series B warrants to purchase 2,898,551 shares of common stock (the “Series B Warrants”) at a price of $1.379 per Pre-Funded Warrant and accompanying Series A and Series B Warrants. The Private Placement closed on September 5, 2024, generating net proceeds to us of $3,414,502, after deducting placement agent fees and offering expenses.
The September Pre-Funded Warrants have an exercise price of $0.001 per share and are immediately exercisable, subject to certain ownership restrictions, and will remain exercisable until exercised in full. The Series A and Series B Warrants have an exercise price of $1.38 per share and will be exercisable beginning on the effective date of stockholder approval to approve the exercise of the Series A and Series B Warrants and the September 2024 Agent Warrants, defined below, to comply with applicable listing rules and regulations of the Nasdaq Stock Market (“Stockholder Approval”, and such date that approval is obtained, the “Stockholder Approval Date”). The Series A Warrants expire five years after the Stockholder Approval Date and the Series B Warrants will expire 18 months after the Stockholder Approval Date.
As compensation for acting as the placement agent for the Private Placement, we issued to H.C. Wainwright & Co., LLC warrants to purchase up to 217,391 shares of stock (the “September 2024 Agent Warrants”). The September 2024 Agent Warrants have substantially the same terms as the Series A Warrants, except that the September 2024 Agent Warrants have an exercise price equal to $1.725 per share.
The Purchase Agreement requires that we must hold an annual or special meeting of stockholders within 90 days from the Closing for the purposes of obtaining the Stockholder Approval. If Stockholder Approval is not obtained, we must call an additional stockholder meeting every six months thereafter until the earlier of the date such Stockholder Approval is obtained, or the Series A Warrants, the Series B Warrants, and the September 2024 Agent Warrants are no longer outstanding.
The September 2024 Pre-Funded Warrants, the Series A Warrants, the Series B Warrants, and the September 2024 Agent Warrants and the shares of our Common Stock issuable upon the exercise of the warrants have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), were not offered pursuant to the Registration Statement and were offered pursuant to the exemption provided in Section 4(a)(2) under the Securities Act and Rule 506(b) promulgated thereunder. In connection with the Private Placement, we entered into a registration rights agreement (the “Registration Rights Agreement”) with the Purchaser, pursuant to which, among other things, we are required to prepare and file with the Securities and Exchange Commission (the “SEC”) one or more registration statements to register for resale the shares of Common Stock issuable upon exercise of the Series A Warrants, the Series B Warrants, and the September 2024 Pre-Funded Warrants (the “Warrant Shares”). We are required to use our best efforts to have such registration statement(s) declared effective as promptly as possible thereafter, and in any event no later than 45 days following September 4, 2024, or, in the event of a “full review” by the SEC, 75 days following the date such additional registration statement is required to be filed thereunder.
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Liquidity and Capital Resources
For the nine months ended September 30, 2024 and 2023, our net cash used in operating activities was $4,009,871 and $4,479,242, respectively and the cash balance was $3,300,688 as of September 30, 2024 ($2,142,485 as of December 31, 2023). To date, we have funded our operations through debt and equity financings. Based on current internal projections, taking into consideration the net proceeds of approximately $1.8 million received under the ATM Agreement, an additional $3.4 million received from the Private Placement, and recent growth in Arakoda sales, we estimate that we will have sufficient funds to remain viable through June 30, 2025, excluding the additional costs of conducting the expanded access study for chronic babesiosis patients (currently being planned). We cannot give assurance that we can increase our cash balances or limit our cash consumption and thus maintain sufficient cash balances for our planned operations or future acquisitions. Future business demands may lead to cash utilization at levels greater than recently experienced. We may need to raise additional capital in the future. However, we cannot assure you that we will be able to raise additional capital on acceptable terms, or at all.
Going Concern
As of September 30, 2024, we had an accumulated deficit of $38,482,920. In their audit report for the fiscal year ended December 31, 2023, our auditors have expressed their concern as to our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate cash flows from operations and obtain financing.
The audited consolidated financial statements for the years ended December 31, 2023, and December 31, 2022, respectively, included an explanatory note referring to our recurring operating losses and expressing substantial doubt in our ability to continue as a going concern. The accompanying consolidated condensed financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of obligations in the normal course of business. However, we have not demonstrated the ability to generate enough revenues to date to cover operating expenses and have accumulated losses to date. This condition, among others, raises substantial doubt about our ability to continue as a going concern for one year from the date these consolidated condensed financial statements are issued.
In view of these matters, continuation as a going concern is dependent upon our ability to meet financial requirements, raise additional capital, and achieve gross profitability from our single marketed product. We plan to fund our operations through third party and related party debt/advances, private placement of restricted securities and the issuance of stock in a subsequent offering until such a time as we are able to generate profitable operations, or a business combination may be achieved.
Our consolidated condensed financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
Contractual Obligations
The following table summarizes our contractual obligations as of September 30, 2024:
| Payments Due By Period | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 Years | ||||||||||||||||
| Principal obligations on the debt arrangements | $ | 150,000 | $ | - | $ | 3,089 | $ | 6,757 | $ | 140,154 | ||||||||||
| Interest obligations on the debt arrangements | 106,312 | 8,772 | 14,455 | 10,787 | 72,298 | |||||||||||||||
| Purchase obligations | 677,617 | 677,617 | - | - | - | |||||||||||||||
| Total | $ | 933,929 | $ | 686,389 | $ | 17,544 | $ | 17,544 | $ | 212,452 | ||||||||||
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Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the achievement of certain milestones. These contingent milestones may or may not be achieved. We have not included any of these amounts in the table above as we cannot estimate or predict when, or if, these amounts will become due.
Components of Results of Operations
Product Revenues - net of Discounts and Rebates
To date, we have received the majority of our product revenues from sales of our Arakoda product to the US Department of Defense (the “DoD”) and resellers in the U.S. and abroad. Foreign sales to both Australia and Europe are further subject to profit sharing agreements for boxes sold to customers. Currently, the procurement contract with the DoD has expired and DoD sales last occurred in 2021. Sales to resellers in the US are subject to considerable discounts and rebates for services provided by our third-party logistics (“3PL”) partner and wholesalers and pharmacy benefit managers (“PBMs”).
Cost of Revenues, Gross Profit (Loss), and Gross Margin
Cost of revenues associated with our products is primarily comprised of direct materials, manufacturing related costs incurred in the production process and inventory write-downs due to expiration.
Other Operating Revenues
Other operating revenues for the periods presented primarily consist of research revenue earned from the Australian Tax Authority for research activities conducted in Australia. Beginning in the third quarter of 2024, we began to recognize research revenues associated with the new contract with the United States Army Medical Materiel Development Activity (USAMMDA) for Arakoda supply chain upgrade support. Research revenue under this contract is recognized when we incur the direct costs eligible for reimbursement, up to the maximum allowable amount.
Operating Expenses
Research and Development
Research and development costs for the periods presented primarily consist of contracted R&D services and costs associated with preparation for our Babesiosis trial in 2024 and, in 2023 related to our now halted COVID-19 clinical trial. We expense all research and development costs in the period in which they are incurred. Payments made prior to the receipt of goods or services to be used in research and development are recognized as prepaid assets and expensed over the service period as the services are provided. We have also issued shares of our common stock in exchange for research and development services.
General and Administrative Expenses
Our general and administrative expenses primarily consist of salaries, advertising and promotion expenses, professional services fees, such as consulting, audit, accounting and legal fees, general corporate costs and allocated costs, including facilities, information technology and amortization of intangibles.
Interest and Other Income (Expense), Net
Interest expense consists of interest accrued on our debt obligations and related amortization of debt discounts and deferred issuance costs. Other components of other income (expense), net include changes in the fair value of financial instruments, gains and losses on extinguishments of debt, and other miscellaneous income (expense). We also earn interest income from cash invested in interest-bearing accounts as well as cash equivalents and short-term investments consisting of certificates of deposits with original maturities ranging from three to six months.
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Results of Operations
The following table sets forth our results of operations for the periods presented:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| Consolidated Statements of Operations Data: | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Product Revenues – net of Discounts and Rebates | $ | 135,293 | $ | 51,188 | $ | 365,939 | $ | 127,892 | ||||||||
| Service Revenues | - | - | 10,789 | - | ||||||||||||
| Product and Service Revenues, net | 135,293 | 51,188 | 376,728 | 127,892 | ||||||||||||
| Cost of Revenues | 111,687 | 71,196 | 266,688 | 328,293 | ||||||||||||
| Gross Profit (Loss) | 23,606 | (20,008 | ) | 110,040 | (200,401 | ) | ||||||||||
| Research Revenues | 12,818 | 75,566 | 43,177 | 82,974 | ||||||||||||
| Net Revenue (Loss) | 36,424 | 55,558 | 153,217 | (117,427 | ) | |||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and Development | 940,063 | 263,703 | 4,372,571 | 591,569 | ||||||||||||
| General and Administrative Expenses | 1,215,053 | 1,313,617 | 3,419,747 | 2,551,426 | ||||||||||||
| Total Operating Expenses | 2,155,116 | 1,577,320 | 7,792,318 | 3,142,995 | ||||||||||||
| Loss from Operations | (2,118,692 | ) | (1,521,762 | ) | (7,639,101 | ) | (3,260,422 | ) | ||||||||
| Interest Expense | (1,467 | ) | (40,106 | ) | (6,490 | ) | (2,281,191 | ) | ||||||||
| Derivative Expense | - | - | - | (399,725 | ) | |||||||||||
| Change in Fair Value of Derivative Liabilities | (56,712 | ) | 92,490 | 1,683,034 | 95,324 | |||||||||||
| Loss on Debt Extinguishment | - | (391,593 | ) | - | (1,231,480 | ) | ||||||||||
| Change in Fair Value of Promissory Note | - | 6,105,066 | - | 5,379,269 | ||||||||||||
| Other Income (Expense), net | 16,623 | (70,490 | ) | 56,569 | (69,169 | ) | ||||||||||
| Total Interest and Other Income (Expense), net | (41,556 | ) | 5,695,367 | 1,733,113 | 1,493,028 | |||||||||||
| (Loss) Income from Operations before Provision for Income Taxes | (2,160,248 | ) | 4,173,605 | (5,905,988 | ) | (1,767,394 | ) | |||||||||
| Provision for Income Taxes (Note 9) | 250 | 63 | 751 | 189 | ||||||||||||
| Net (Loss) Income including Noncontrolling Interest | (2,160,498 | ) | 4,173,542 | (5,906,739 | ) | (1,767,583 | ) | |||||||||
| Net (Loss) Income – Noncontrolling Interest | (713 | ) | (9,656 | ) | (4,669 | ) | (14,165 | ) | ||||||||
| Net (Loss) Income – attributed to 60 Degrees Pharmaceuticals, Inc. | $ | (2,159,785 | ) | $ | 4,183,198 | $ | (5,902,070 | ) | $ | (1,753,418 | ) | |||||
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The following table sets forth our results of operations as a percentage of revenue:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| Consolidated Statements of Operations Data: | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Product Revenues – net of Discounts and Rebates | 100.00 | % | 100.00 | % | 97.14 | % | 100.00 | % | ||||||||
| Service Revenues | - | - | 2.86 | - | ||||||||||||
| Product and Service Revenues, net | 100.00 | 100.00 | 100.00 | 100.00 | ||||||||||||
| Cost of Revenues | 82.55 | 139.09 | 70.79 | 256.70 | ||||||||||||
| Gross Profit (Loss) | 17.45 | (39.09 | ) | 29.21 | (156.70 | ) | ||||||||||
| Research Revenues | 9.47 | 147.62 | 11.46 | 64.88 | ||||||||||||
| Net Revenue (Loss) | 26.92 | 108.54 | 40.67 | (91.82 | ) | |||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and Development | 694.83 | 515.17 | 1,160.67 | 462.55 | ||||||||||||
| General and Administrative Expenses | 898.09 | 2,566.26 | 907.75 | 1,994.98 | ||||||||||||
| Total Operating Expenses | 1,592.92 | 3,081.43 | 2,068.42 | 2,457.54 | ||||||||||||
| Loss from Operations | (1,566.00 | ) | (2,972.89 | ) | (2,027.75 | ) | (2,549.36 | ) | ||||||||
| Interest Expense | (1.08 | ) | (78.35 | ) | (1.72 | ) | (1,783.69 | ) | ||||||||
| Derivative Expense | - | - | - | (312.55 | ) | |||||||||||
| Change in Fair Value of Derivative Liabilities | (41.92 | ) | 180.69 | 446.75 | 74.53 | |||||||||||
| Loss on Debt Extinguishment | - | (765.01 | ) | - | (962.91 | ) | ||||||||||
| Change in Fair Value of Promissory Note | - | 11,926.75 | - | 4,206.10 | ||||||||||||
| Other Income (Expense), net | 12.29 | (137.71 | ) | 15.02 | (54.08 | ) | ||||||||||
| Total Interest and Other Income (Expense), net | (30.72 | ) | 11,126.37 | 460.04 | 1,167.41 | |||||||||||
| (Loss) Income from Operations before Provision for Income Taxes | (1,596.72 | ) | 8,153.48 | (1,567.71 | ) | (1,381.94 | ) | |||||||||
| Provision for Income Taxes (Note 9) | 0.18 | 0.12 | 0.20 | 0.15 | ||||||||||||
| Net (Loss) Income including Noncontrolling Interest | (1,596.90 | ) | 8,153.36 | (1,567.91 | ) | (1,382.09 | ) | |||||||||
| Net (Loss) Income – Noncontrolling Interest | (0.53 | ) | (18.86 | ) | (1.24 | ) | (11.08 | ) | ||||||||
| Net (Loss) Income – attributed to 60 Degrees Pharmaceuticals, Inc. | (1,596.38 | )% | 8,172.22 | % | (1,566.67 | )% | (1,371.01 | )% | ||||||||
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Comparison of the Three Months Ended September 30, 2024, and 2023
Product Revenues - net of Discounts and Rebates, Cost of Revenues, Gross Profit (Loss), and Gross Margin
| Three Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2024 | 2023 | $ Change | % Change | ||||||||||||
| Product Revenues – net of Discounts and Rebates | $ | 135,293 | $ | 51,188 | $ | 84,105 | 164.31 | % | ||||||||
| Cost of Revenues | 111,687 | 71,196 | 40,491 | 56.87 | ||||||||||||
| Gross Profit (Loss) | $ | 23,606 | $ | (20,008 | ) | $ | 43,614 | (217.98 | )% | |||||||
| Gross Margin % | 17.45 | % | (39.09 | )% | ||||||||||||
Product Revenues - net of Discounts and Rebates
Our product revenues - net of discounts and rebates were $135,293 for the three months ended September 30, 2024, as compared to $51,188 for the three months ended September 30, 2023. For the three months ended September 30, 2024, our U.S. pharmaceutical distributor accounted for 92% of our total net product sales and Kodatef sales to our Australian distributor accounted for 8% of total net product sales (100% and 0% for the three months ended September 30, 2023, respectively). Domestic, commercial product sales are primarily driving increased sales volume during the period.
We offer discounts and rebates to the civilian U.S. supply chain distribution channel. We record sales when our 3PL partner transfers boxes into their title model. Discounts and rebates offered to our 3PL partner amount to 12% along with a $5,500 fixed monthly fee that started in 2023. The product is then transferred usually to one of the three large U.S. pharmaceutical distributors where rebates are 10%. Lastly, we have relationships with several large PBMs that allow patients to purchase Arakoda at a discount. The rebate associated with PBMs ranges from 30% to 41.25% depending on the amount of coverage provided. For the three months ended September 30, 2024, discounts and rebates were $122,862 compared to $76,441 for the three months ended September 30, 2023.
Arakoda entered the U.S. civilian supply chain in the third quarter of 2019. For the three months ended September 30, 2023, 550 boxes were sold to pharmacies and dispensaries. Sales volume increased by 140% to 1,319 boxes sold to pharmacies and dispensaries for the three months ended September 30, 2024. Based on IQVIA data, this growth in sales volume appears to be driven primarily by organic growth in the Lyme disease community, whose prescribers utilize Arakoda for treatment of babesiosis. The sales volume growth to pharmacies and dispensaries ties more closely to the growth in discounts and rebates previously discussed than our reported sales to our 3PL.
Kodatef sales to our distributor Biocelect in Australia for the three months ended September 30, 2024 were $10,691 ($0 for the three months ended September 30, 2023). Sales to Biocelect are currently subject to a profit share distribution once the original transfer price has been recouped. The most recent sale of boxes to Biocelect reached profit share at the end of Q1 2024. Biocelect reported approximately 130% year-over-year growth for the quarter, the equivalent of 414 boxes sold for the three months ended September 30, 2024, compared to 184 boxes for the three months ended September 30, 2023. As of September 30, 2024, Biocelect’s unsold inventory that remains subject to profit share was the equivalent of 726 boxes. While growth in Australia is similarly positive to that in the US, Biocelect has achieved that growth by competing directly with Malarone in terms of price in their market for the approved antimalarial prophylaxis indication. As of September 30, 2024, $11,037 of profit share was due to us ($0 as of December 31, 2023).
Arakoda sales volume is also showing signs of sales growth in Europe. We first shipped Arakoda to our distributor Scandinavian Biopharma (“SB”) in September 2022. For the three months ended September 30, 2024, SB reported 54 boxes sold (none the three months ended September 30, 2023). According to our distributor this is due to greater interest in treating babesiosis.
Cost of Revenues, Gross Profit (Loss), and Gross Margin
Cost of revenues was $111,687 for the three months ended September 30, 2024, as compared to $71,196 for the three months ended September 30, 2023. The increase in cost of goods sold is primarily driven by the increase in net product sales over the same periods. Despite the increase, the Gross Margin % increased significantly from (39.09%) for the three months ended September 30, 2023 to 17.45% for the three months ended September 30, 2024. This is primarily attributable to the fixed part of cost of goods. As the sales volume has increased, the gross margin has improved as the variable cost of goods of each unit sold is substantially less than the sales price.
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Other Operating Revenues
| Three Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2024 | 2023 | $ Change | % Change | ||||||||||||
| Research Revenues | $ | 12,818 | $ | 75,566 | $ | (62,748 | ) | (83.04 | )% | |||||||
The research revenues earned by us were $12,818 for the three months ended September 30, 2024, as compared to $75,566 for the three months ended September 30, 2023. Our research revenues for the three months ended September 30, 2023 consist entirely of projected research revenues from the Australian Tax Authority for research activities conducted in Australia. For the three months ended September 30, 2024, our research revenues relate primarily to initial funding earned from the new USAMMDA contract we were awarded in July 2024 to facilitate commercial validation of a new bottle and replacement blister packaging of Arakoda.
Operating Expenses
| Three Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2024 | 2023 | $ Change | % Change | ||||||||||||
| Research and Development | $ | 940,063 | $ | 263,703 | $ | 676,360 | 256.49 | % | ||||||||
| General and Administrative Expenses | 1,215,053 | 1,313,617 | (98,564 | ) | (7.50 | ) | ||||||||||
| Total Operating Expenses | $ | 2,155,116 | $ | 1,577,320 | $ | 577,796 | 36.63 | % | ||||||||
Research and Development
Research and development costs increased during the three months ended September 30, 2024 when compared to the three months ended September 30, 2023. Research and development costs incurred during the three months ended September 30, 2023 consisted of initiation costs related to our Phase IIB COVID-19 clinical trial, which was later suspended in the fourth quarter of 2023. Direct COVID-19-related trial costs represented 82% of the costs for the three months ended September 30, 2023 at $216,567 (less than 1% for the three months ended September 30, 2024 at $5,445). During the three months ended September 30, 2024, we recorded research and development expense of $600,000, representing 64% of the total costs, upon the delivery from Trevally of 8.8 kilograms of castanospermine. In January 2023, we issued Trevally 10,000 fully vested shares of our common stock as advance consideration for the services, which payment was deferred and capitalized until delivery of the completed research materials. We also incurred $270,497 in costs related to our babesiosis trial for tafenoquine during the three months ended September 30, 2024 ($0 during the three months ended September 30, 2023).
General and Administrative Expenses
For the three months ended September 30, 2024, our general and administrative expenses decreased by 7.5% or $98,564 from the three months ended September 30, 2023. During the three months ended September 30, 2024, we recorded higher compensation expenses due to accruals for performance bonuses payable to our executives, as well as higher salaries and benefits expense due to hiring a new Chief Commercial Officer in February 2024 at $171,948 and $171,353, respectively (compared to $0 and $123,672 for the three months ended September 30, 2023, respectively). However, the main driver of the decrease relates to stock-based compensation, which decreased from $458,266 for the three months ended September 30, 2023 to $15,246 for the three months ended September 30, 2024, as a result of certain options and restricted stock units granted to our directors and executives on the closing date of our IPO in July 2023, some of which were fully vested and thus immediately expensed on the IPO date.
Interest and Other Income (Expense), Net
| Three Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2024 | 2023 | $ Change | % Change | ||||||||||||
| Interest Expense | $ | (1,467 | ) | $ | (40,106 | ) | $ | 38,639 | (96.34 | )% | ||||||
| Change in Fair Value of Derivative Liabilities | (56,712 | ) | 92,490 | (149,202 | ) | (161.32 | ) | |||||||||
| Loss on Debt Extinguishment | - | (391,593 | ) | 391,593 | (100.00 | ) | ||||||||||
| Change in Fair Value of Promissory Note | - | 6,105,066 | (6,105,066 | ) | (100.00 | ) | ||||||||||
| Other Income (Expense), net | 16,623 | (70,490 | ) | 87,113 | (123.58 | ) | ||||||||||
| Total Interest and Other Income (Expense), net | $ | (41,556 | ) | $ | 5,695,367 | $ | (5,736,923 | ) | (100.73 | )% | ||||||
Interest Expense
For the three months ended September 30, 2024, we recognized $1,467 of interest expense ($40,106 for the three months ended September 30, 2023). The decrease in interest expense is the result of the settlement or conversion of a majority of our outstanding debt obligations upon the closing of our IPO in July 2023. Cash paid for interest was $2,193 and $171,807 for the three months ended September 30, 2024 and September 30, 2023, respectively.
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Change in Fair Value of Derivative Liabilities
For the three months ended September 30, 2024, we recognized a loss on the change in fair value of derivative liabilities of $56,712 compared to a gain of $92,490 for the three months ended September 30, 2023. For the three months ended September 30, 2024, derivative liabilities include the contingent milestone payment due to Knight upon a future sale of Arakoda or a Change of Control. For the three months ended September 30, 2023, derivative liabilities consisted of bridge shares, certain warrants, and embedded conversion features in our convertible notes. We use a probability-weighted discounted cash flow model or a Monte Carlo simulation model to estimate the fair value of these instruments.
Loss on Debt Extinguishment
For the three months ended September 30, 2023, we recognized a $391,593 net loss on debt extinguishment (none for the three months ended September 30, 2024). The decrease is related, in part, to a total $614,670 loss recognized upon extinguishment of our interim bridge financing notes, all of which were settled or converted upon our IPO in July 2023. The net amount for the three months ended September 30, 2023 was partially offset by a debt extinguishment gain of $223,077 recognized on conversion of the Xu Yu promissory note on the date of our IPO. There were no debt extinguishments recognized during the three months ended September 30, 2024.
Change in Fair Value of Promissory Note
For the three months ended September 30, 2023, we recognized a $6,105,066 gain related to the change in the fair value of the promissory note with Knight, which was held at fair value. The gain relates to the mark to market adjustment recognized immediately prior to the automatic conversion of the outstanding debt obligation into our equity shares upon the closing of our IPO. We no longer have any debt obligations measured at fair value on a recurring basis, hence we recorded a $0 change in fair value for the three months ended September 30, 2024.
Other Income (Expense), net
For the three months ended September 30, 2024, we recognized $16,623 in other income compared to $70,490 in other expense for the three months ended September 30, 2023. As a result of the IPO and recent equity offerings completed in 2024, we now earn interest income as we have invested certain cash proceeds in interest-bearing accounts and short-term certificates of deposit. We recognized interest income of $16,635 during the three months ended September 30, 2024 ($0 during the three months ended September 30, 2023).
Comparison of the Nine Months Ended September 30, 2024, and 2023
Product Revenues - net of Discounts and Rebates, Service Revenues, Cost of Revenues, Gross Profit (Loss), and Gross Margin
| Nine Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2024 | 2023 | $ Change | % Change | ||||||||||||
| Product Revenues – net of Discounts and Rebates | $ | 365,939 | $ | 127,892 | $ | 238,047 | 186.13 | % | ||||||||
| Service Revenues | 10,789 | - | 10,789 | N/A | ||||||||||||
| Product and Service Revenues, net | 376,728 | 127,892 | 248,836 | 194.57 | ||||||||||||
| Cost of Revenues | 266,688 | 328,293 | (61,605 | ) | (18.77 | ) | ||||||||||
| Gross Profit (Loss) | $ | 110,040 | $ | (200,401 | ) | $ | 310,441 | (154.91 | )% | |||||||
| Gross Margin % | 29.21 | % | (156.70 | )% | ||||||||||||
Product Revenues - net of Discounts and Rebates
Our product revenues - net of discounts and rebates were $365,939 for the nine months ended September 30, 2024, as compared to $127,892 for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, our U.S. pharmaceutical distributor accounted for 94% of our total net product sales and Kodatef sales to our Australian distributor accounted for 6% of total net product sales (100% and 0% for the nine months ended September 30, 2023, respectively). Domestic, commercial product sales are primarily driving increased sales volume during the period.
40
We offer discounts and rebates to the civilian U.S. supply chain distribution channel. We record sales when our 3PL partner transfers boxes into their title model. Discounts and rebates offered to our 3PL partner amount to 12% along with a $5,500 fixed monthly fee that started in 2023. The product is then transferred usually to one of the three large U.S. pharmaceutical distributors where rebates are 10%. Lastly, we have relationships with several large PBMs that allow patients to purchase Arakoda at a discount. The rebate associated with PBMs ranges from 30% to 41.25% depending on the amount of coverage provided. For the nine months ended September 30, 2024, discounts and rebates were $324,486 compared to $124,090 for the nine months ended September 30, 2023.
Arakoda entered the U.S. civilian supply chain in the third quarter of 2019. For the nine months ended September 30, 2023, 1,059 boxes were sold to pharmacies and dispensaries. Sales volume increased by 244% to 3,642 boxes sold to pharmacies and dispensaries for the nine months ended September 30, 2024. Based on IQVIA data, this growth in sales volume appears to be driven primarily by organic growth in the Lyme disease community, whose prescribers utilize Arakoda for treatment of babesiosis. The sales volume growth to pharmacies and dispensaries ties more closely to the growth in discounts and rebates previously discussed than our reported sales to our 3PL.
Kodatef sales to our distributor Biocelect in Australia for the nine months ended September 30, 2024 were $20,697 ($0 for the nine months ended September 30, 2023). Sales to Biocelect are currently subject to a profit share distribution once the original transfer price has been recouped. The most recent sale of boxes to Biocelect reached profit share at the end of Q1 2024. Biocelect reported 279% year-over-year growth, the equivalent of 1,489 boxes sold for the nine months ended September 30, 2024, compared to 393 boxes for the nine months ended September 30, 2023. As of September 30, 2024, Biocelect’s unsold inventory that remains subject to profit share was the equivalent of 726 boxes. While growth in Australia is similarly positive to that in the US, Biocelect has achieved that growth by competing directly with Malarone in terms of price in their market for the approved antimalarial prophylaxis indication. As of September 30, 2024, $11,037 of profit share was due to us ($0 as of December 31, 2023).
Arakoda sales volume is also showing signs of increase in Europe. We first shipped Arakoda to our distributor Scandinavian Biopharma in September 2022. For the nine months ended September 30, 2024, they reported 109 boxes sold (none the nine months ended September 30, 2023). According to our distributor this is due to greater interest in treating babesiosis.
Service Revenues
During the nine months ended September 30, 2024, we recognized $10,789 in service revenue in association with the final payment from the USAMMDA for storing Arakoda purchases ($0 for the nine months ended September 30, 2023). The revenue for the nine months ended September 30, 2024 is related to the final resolution of storage fees payable from the USAMMDA under the original development contract entered into in 2014. As the development contract ended on August 31, 2022, additional storage revenue is not expected in the near future.
Cost of Revenues, Gross Profit (Loss), and Gross Margin
Cost of revenues was $266,688 for the nine months ended September 30, 2024, as compared to $328,293 for the nine months ended September 30, 2023. While net product sales increased over the same periods, the decrease in cost of goods sold is primarily attributable to the fixed part of cost of goods. As the sales volume has increased, the gross margin has improved as the variable cost of goods of each unit sold is substantially less than the sales price. Additionally, write-downs for expired inventory were significantly higher during the nine months ended September 30, 2023 at $94,977, as compared to $18,490 during the nine months ended September 30, 2024. Due to these factors, the Gross Margin % increased significantly from (156.70%) for the nine months ended September 30, 2023 to 29.21% for the nine months ended September 30, 2024.
Other Operating Revenues
| Nine Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2024 | 2023 | $ Change | % Change | ||||||||||||
| Research Revenues | $ | 43,177 | $ | 82,974 | $ | (39,797 | ) | (47.96 | )% | |||||||
41
The research revenues earned by us were $43,177 for the nine months ended September 30, 2024, as compared to $82,974 for the nine months ended September 30, 2023. Our research revenues for the nine months ended September 30, 2023 consist entirely of projected research revenues from the Australian Tax Authority for research activities conducted in Australia at $82,974, compared to $29,821 for the nine months ended September 30, 2024. For the nine months ended September 30, 2024, we began to recognize research revenues related to initial funding earned from the new USAMMDA contract we were awarded in July 2024 to facilitate commercial validation of a new bottle and replacement blister packaging of Arakoda.
Operating Expenses
| Nine Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2024 | 2023 | $ Change | % Change | ||||||||||||
| Research and Development | $ | 4,372,571 | $ | 591,569 | $ | 3,781,002 | 639.15 | % | ||||||||
| General and Administrative Expenses | 3,419,747 | 2,551,426 | 868,321 | 34.03 | ||||||||||||
| Total Operating Expenses | $ | 7,792,318 | $ | 3,142,995 | $ | 4,649,323 | 147.93 | % | ||||||||
Research and Development
Research and development costs increased during the nine months ended September 30, 2024 when compared to the nine months ended September 30, 2023. Research and development costs incurred during the nine months ended September 30, 2023 consisted of initiation costs related to our Phase IIB COVID-19 clinical trial, which was later suspended in the fourth quarter of 2023. Direct COVID-19-related trial costs represent less than 1% of the total costs for the nine months ended September 30, 2024 at $25,817 and 85% of the costs for the nine months ended September 30, 2023 at $504,711. During the nine months ended September 30, 2024, we recorded research and development expense of $3,225,000, representing 74% of the total costs, related to share-based payments issued to vendors in January 2023 as advance consideration, which payments were initially deferred and capitalized. Kentucky Technology, Inc. delivered us a report on the potential development of SJ733 + tafenoquine in the second quarter of 2024 and Trevally completed the synthesis of 8.8 kilograms of castanospermine in the third quarter of 2024, resulting in $2,625,000 and $600,000, respectively, of research and development expense recognized for the nine months ended September 30, 2024. We also incurred $846,323 in costs related to our babesiosis trial for tafenoquine during the nine months ended September 30, 2024 ($0 during the nine months ended September 30, 2023).
General and Administrative Expenses
For the nine months ended September 30, 2024, our general and administrative expenses increased by 34.03% or $868,321 from the nine months ended September 30, 2023. During the nine months ended September 30, 2024, we recorded higher compensation expenses due to accruals for performance bonuses payable to our executives, as well as higher salaries and benefits expense due to hiring a new Chief Commercial Officer in February 2024 at $171,948 and $498,832, respectively (compared to $0 and $200,068 for the nine months ended September 30, 2023, respectively). Additionally, during the nine months ended September 30, 2024, we incurred $316,311 in legal and professional fees, $422,702 of insurance expenses, $684,808 of investor outreach expenses, and $226,024 of advertising and promotion expenses (up from $172,690, $164,361, $417,620 and $64,280 for the nine months ended September 30, 2023, respectively). These increases were partially offset by a significant decrease in stock-based compensation, which decreased from $458,266 for the nine months ended September 30, 2023 to $15,246 for the nine months ended September 30, 2024, as a result of certain options and restricted stock units granted to our directors and executives on the closing date of our IPO in July 2023, some of which were fully vested and thus immediately expensed on the IPO date.
Interest and Other Income (Expense), Net
| Nine Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2024 | 2023 | $ Change | % Change | ||||||||||||
| Interest Expense | $ | (6,490 | ) | $ | (2,281,191 | ) | $ | 2,274,701 | (99.72 | )% | ||||||
| Derivative Expense | - | (399,725 | ) | 399,725 | (100.00 | ) | ||||||||||
| Change in Fair Value of Derivative Liabilities | 1,683,034 | 95,324 | 1,587,710 | 1,665.59 | ||||||||||||
| Loss on Debt Extinguishment | - | (1,231,480 | ) | 1,231,480 | (100.00 | ) | ||||||||||
| Change in Fair Value of Promissory Note | - | 5,379,269 | (5,379,269 | ) | (100.00 | ) | ||||||||||
| Other Income (Expense), net | 56,569 | (69,169 | ) | 125,738 | (181.78 | ) | ||||||||||
| Total Interest and Other Income (Expense), net | $ | 1,733,113 | $ | 1,493,028 | $ | 240,085 | 16.08 | % | ||||||||
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Interest Expense
For the nine months ended September 30, 2024, we recognized $6,490 of interest expense ($2,281,191 for the nine months ended September 30, 2023). The decrease in interest expense is the result of the settlement or conversion of a majority of our outstanding debt obligations upon the closing of our IPO in July 2023. Cash paid for interest expense was $6,579 and $176,924 for the nine months ended September 30, 2024 and September 30, 2023, respectively.
Derivative Expense
For the nine months ended September 30, 2023, we recognized $399,725 of derivative expense in connection with the raising of $555,000 in net proceeds from our bridge funding in May 2023. We record derivative expense when the initial fair value of the related derivative liabilities exceeds the cash proceeds received. We did not record derivative expense for the nine months ended September 30, 2024 as we did not complete any debt financing transactions during the period.
Change in Fair Value of Derivative Liabilities
For the nine months ended September 30, 2024, we recognized a gain on the change in fair value of derivative liabilities of $1,683,034 compared to a gain of $95,324 for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, derivative liabilities include the contingent milestone payment due to Knight upon a future sale of Arakoda or a Change of Control. The fair value of the contingent milestone payment is inversely related to the net present value of future investments in the Company and anticipated timing to profitability within our budget models. For the nine months ended September 30, 2023, derivative liabilities consisted of bridge shares, certain warrants, and embedded conversion features in our convertible notes. We use a probability-weighted discounted cash flow model or a Monte Carlo simulation model to estimate the fair value of these instruments.
Loss on Debt Extinguishment
During the nine months ended September 30, 2024, we did not recognize a gain or loss on debt extinguishment ($1,231,480 loss recognized during the nine months ended September 30, 2023). The decrease is related, in part to the conversion of the cumulative outstanding debt pursuant to the Knight Debt Conversion Agreement in January 2023, which was accounted for as a debt extinguishment, as well as losses recognized upon extinguishment of our interim bridge financing notes, all of which were settled or converted upon our IPO in July 2023. The net amount for the nine months ended September 30, 2023 was partially offset by a debt extinguishment gain of $223,077 recognized on conversion of the Xu Yu promissory note on the date of our IPO.
Change in Fair Value of Promissory Note
For the nine months ended September 30, 2023, we recognized a $5,379,269 gain related to the change in fair value of the Convertible Knight Loan, which was held at fair value beginning on the modification date in January 2023. The gain relates to the mark to market adjustment recognized immediately prior to the automatic conversion of the outstanding debt obligation into our equity shares upon the closing of our IPO. We no longer have any debt obligations measured at fair value on a recurring basis, hence we recorded a $0 change in fair value for the nine months ended September 30, 2024.
Other Income (Expense), net
For the nine months ended September 30, 2024, we recognized $56,569 in other income compared to $69,169 in other expense for the nine months ended September 30, 2023. As a result of the IPO and recent equity offerings completed in 2024, we now earn interest income as we have invested certain cash proceeds in interest-bearing accounts and short-term certificates of deposit. We recognized interest income of $59,192 during the nine months ended September 30, 2024 ($0 during the nine months ended September 30, 2023). Additionally, for the nine months ended September 30, 2023, $48,236 was recognized in other expense due to a one-time write off of an uncollectible receivable from our 3PL for an uninvoiced return.
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Cash Flows
| Nine Months Ended September 30, | ||||||||||||||||
| 2024 | 2023 | $ Change | % Change | |||||||||||||
| Net Cash (Used In) Provided By: | ||||||||||||||||
| Operating Activities | $ | (4,009,871 | ) | $ | (4,479,242 | ) | $ | 469,371 | (10.48 | )% | ||||||
| Investing Activities | (1,887,016 | ) | (49,326 | ) | (1,837,690 | ) | 3,725.60 | |||||||||
| Financing Activities | 7,052,598 | 6,474,565 | 578,033 | 8.93 | ||||||||||||
| Effect of Exchange Rate Changes on Cash | 2,492 | 7,678 | (5,186 | ) | (67.54 | ) | ||||||||||
| Net Increase (Decrease) in Cash | $ | 1,158,203 | $ | 1,953,675 | $ | (795,472 | ) | (40.72 | )% | |||||||
Cash Used in Operating Activities
Net cash used in operating activities was $4,009,871 for the nine months ended September 30, 2024, as compared to $4,479,242 for the nine months ended September 30, 2023. Our net cash used in operating activities increased, primarily due to higher general and administrative expenses at $3,419,747 for the nine months ended September 30, 2024 ($2,551,426 for the nine months ended September 30, 2023), primarily due to higher compensation and related expenses, legal and professional fees, insurance expenses, investor outreach expenses, and advertising and promotion expenses, as discussed above. In addition, we incurred $846,323 in costs related to our planned babesiosis trial for tafenoquine during the nine months ended September 30, 2024 ($0 during the nine months ended September 30, 2023).
Cash Used in Investing Activities
Net cash used in investing activities was $1,887,016 for the nine months ended September 30, 2024, as compared to $49,326 for the nine months ended September 30, 2023. The increase in cash used in investing activities is primarily driven by purchases of short-term certificates of deposit for a total cost of $1,708,000 during the nine months ended September 30, 2024 ($0 during the nine months ended September 30, 2023) for the purposes of earning interest income. Additionally, purchases of computer and lab equipment totaled $103,773 during the nine months ended September 30, 2024 ($1,823 during the nine months ended September 30, 2023), and capitalized website development costs and patent costs totaled $25,374 and $49,869, respectively, for the nine months ended September 30, 2024 ($18,283 and $29,220 for the nine months ended September 30, 2023, respectively).
Cash Provided by Financing Activities
Net cash provided by financing activities was $7,052,598 for the nine months ended September 30, 2024, as compared to $6,474,565 for the nine months ended September 30, 2023. The increase in net cash provided by financing activities is primarily attributable to net proceeds of (i) $1,914,513 received for the sale of common stock and warrants in January 2024, (ii) $1,790,670 from the sale of common stock pursuant to the At-the-Market Sales Agreement in July and August 2024, and (iii) $3,439,502 received from the sale of warrants in our Private Placement offering that closed in September 2024, in each case partially offset by payment of deferred offering costs. Cash provided by financing activities for the nine months ended September 30, 2023 related to net proceeds of $6,454,325 generated from our IPO, which closed on July 14, 2023, as well as $1,131,771 received from the exercise of warrants, but partially offset by repayments of certain of our outstanding debt obligations in July 2023.
Effect of Exchange Rate Changes on Cash
Our foreign operations were small relative to U.S. operations for the nine months ended September 30, 2024, and 2023, thus effects of foreign exchange rate changes on cash have been minor.
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Critical Accounting Policies, Significant Judgments, and Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
We receive revenues from sales of our Arakoda product to the DoD and resellers in the U.S. and abroad. We record deferred revenues for any advances and then recognize revenue upon shipment to the retailer who orders product for a specific customer. We record a receivable for any amounts to be received pursuant to such sales. We record revenues from product sales at the net sales price, or “transaction price,” which may include estimates of variable consideration that result from anticipated product returns, generally based on historical return data.
Inventory
We report inventories at the lower of cost or net realizable value. Cost is comprised of direct materials and, where applicable, costs we incur in bringing the inventories to their present location and condition. We use the Specific Identification method per lot. A box price is calculated per lot number and sales are recognized by their lot number.
We regularly monitor our inventory levels to identify inventory that may expire or has a cost basis in excess of its estimated realizable value, and record write-downs for inventory that has expired, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected sales requirements. We charge any write-downs of inventories to Cost of Revenues in the Consolidated Condensed Statements of Operations and Comprehensive (Loss) Income.
Share-Based Payments
We measure compensation for all share-based payment awards granted to employees, directors, and nonemployees, based on the estimated fair value of the awards on the date of grant. For awards that vest based on continued service, the service-based compensation cost is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the awards. For service vesting awards with compensation expense recognized on a straight-line basis, at no point in time does the cumulative grant date value of vested awards exceed the cumulative amount of compensation expense recognized. The grant date is determined based on the date when a mutual understanding of the key terms of the share-based awards is established. We account for forfeitures as they occur.
We estimate the fair value of all stock option awards as of the grant date by applying the Black-Scholes option pricing model. The application of this valuation model involves assumptions, including the fair value of the common stock, expected volatility, risk-free interest rate, expected dividends and the expected term of the option. Due to the lack of a public market for our common stock prior to the IPO and lack of company-specific historical implied volatility data, we base our computations of expected volatility on the historical volatility of a representative group of public companies with similar characteristics of the Company, including stage of development and industry focus. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. We use the simplified method as prescribed by the SEC Staff Accounting Bulletin Topic 14, Share-Based Payment, to calculate the expected term for stock options, whereby, the expected term equals the midpoint of the weighted average remaining time to vest, vesting period and the contractual term of the options due to our lack of historical exercise data. The risk-free interest rate is based on U.S. Treasury securities with a maturity date commensurate with the expected term of the associated award. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock. The assumptions used in calculating the fair value of share-based awards represent our best estimates and involve inherent uncertainties and the application of significant judgment.
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We recognize compensation expense for restricted stock units (“RSUs”) with only service-based vesting conditions on a straight-line basis over the vesting period. Compensation cost for service-based RSUs is based on the grant date fair value of the award, which is the closing market price of our common stock on the grant date multiplied by the number of shares awarded.
For awards that vest upon a liquidity event or a change in control, the performance condition is not probable of being achieved until the event occurs. As a result, no compensation expense is recognized until the performance-based vesting condition is achieved, at which time the cumulative compensation expense is recognized. Compensation cost related to any remaining time-based service for share-based awards after the liquidity-based event is recognized on a straight-line basis over the remaining service period.
For fully vested, nonforfeitable equity instruments that are granted at the date we enter into an agreement for goods or services with a nonemployee, we recognize the fair value of the equity instruments on the grant date. The corresponding cost is recognized as an immediate expense or a prepaid asset and expensed over the service period depending on the specific facts and circumstances of the agreement with the nonemployee.
Derivative Liabilities
We assess the classification of our derivative financial instruments each reporting period, which formerly consisted of bridge shares, convertible notes payable, and certain warrants, and determined that such instruments qualified for treatment as derivative liabilities as they met the criteria for liability classification under ASC 815 (excluding certain warrants issued in connection with the IPO). As of September 30, 2024, our derivative financial instruments consist of contingent payment arrangements.
We analyze all financial instruments with features of both liabilities and equity under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 480, (“ASC 480”), Distinguishing Liabilities from Equity and FASB ASC Topic No. 815, Derivatives and Hedging (“ASC 815”). Derivative liabilities are adjusted to reflect fair value at each reporting period, with any increase or decrease in the fair value recorded in the results of operations (other income/expense) as change in fair value of derivative liabilities. We use a probability-weighted discounted cash flow model to estimate the fair value of these instruments.
Upon conversion or repayment of a debt or equity instrument in exchange for equity shares, where the embedded conversion option has been bifurcated and accounted for as a derivative liability (generally convertible debt and warrants), we record the equity shares at fair value on the date of conversion, relieve all related debt, derivative liabilities, and unamortized debt discounts, and recognize a net gain or loss on debt extinguishment, if any.
Equity or liability instruments that become subject to reclassification under ASC Topic 815 are reclassified at the fair value of the instrument on the reclassification date.
Off-Balance Sheet Arrangements
During 2024 and 2023, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
JOBS Act Accounting Election
In April 2012, the JOBS Act was enacted. Section 107(b) of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.
ITEM 4. CONTROLS AND PROCEDURES. DISCLOSURE CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Management has used the framework set forth in the report entitled “Internal Control-Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of our internal control over financial reporting. Based on that assessment, our management has identified certain material weaknesses in our internal control over financial reporting.
Our management concluded that as of September 30, 2024, our internal control over financial reporting was not effective, and that material weaknesses existed in the following areas as of September 30, 2024:
| (1) | we do not employ full time in-house personnel with the technical knowledge to identify and address some of the reporting issues surrounding certain complex or non-routine transactions. With respect to material, complex and non-routine transactions, management has and will continue to seek guidance from third-party experts and/or consultants to gain a thorough understanding of these transactions; |
| (2) | we have inadequate segregation of duties consistent with the control objectives including but not limited to the disbursement process, transaction or account changes, and the performance of account reconciliations and approval; and |
| (3) | we have ineffective controls over the period end financial disclosure and reporting process caused by insufficient accounting staff. |
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS
From time to time, claims are made against us in the ordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or more products or engaging in other activities. There were no reportable litigation events during the quarter ended September 30, 2024.
ITEM 1A. RISK FACTORS
As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item. In any event, there have been no material changes in our risk factors as previously disclosed in the Registration Statement.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 22, 2024, we issued 40,000 restricted shares of our common stock to Knight Therapeutics International S.A. (formerly known as Knight Therapeutics (Barbados) Inc.) (“Knight”) upon conversion of 1,291 shares of Series A Preferred Stock.
On July 26, 2024, we issued 33,334 restricted shares of our common stock to Knight upon conversion of 1,032 shares of Series A Preferred Stock.
The issuances of shares of common stock listed above were deemed exempt from registration under Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder in that the issuance of securities did not involve a public offering.
Securities Purchase Agreement
On September 4, 2024, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an institutional investor (the “Purchaser”), pursuant to which the Company agreed to issue and sell in a private placement offering (the “Private Placement”) (i) an aggregate of 2,898,551 pre-funded warrants (the “Pre-funded Warrants”), each having the right to purchase one share of common stock, par value $0.0001 per share (the “Common Stock”), at a price per Pre-funded Warrant equal to $1.379, the per share Purchase Price (as defined in the Purchase Agreement) less $0.001, the exercise price of the Pre-funded Warrants, (ii) series A warrants to purchase up to 2,898,551 shares of Common Stock (“Series A Warrants”) and series B warrants to purchase up to 2,898,551 shares of Common Stock (“Series B Warrants” and, collectively with Series A Warrants, the “Common Warrants”) for gross proceeds of approximately $4 million, before the deduction of placement agent fees and offering expenses. The closing of the Private Placement occurred on September 5, 2024.
The Pre-funded Warrants were sold, at the Purchaser’s election, to such Purchaser whose purchase of shares of Common Stock in the Private Placement would otherwise result in such Purchaser, together with its affiliates and certain related parties, beneficially own more than 4.99% (or, at such Purchaser’s option upon issuance 9.99%) of the Company’s outstanding Common Stock immediately following the consummation of the Private Placement. The Pre-Funded Warrants have an exercise price of $0.001 per share, will become exercisable upon issuance and remain exercisable until exercised in full.
The Common Warrants have an exercise price of $1.38 per share and will be exercisable beginning on the effective date of stockholder approval of the issuance of the shares of common stock upon exercise of the Common Warrants, which is November 6, 2024 (the “Stockholder Approval”). The Series A Warrants will expire five years from Stockholder Approval and the Series B Warrants will expire eighteen (18) months from Stockholder Approval.
A holder of a Common Warrant or Pre-funded Warrant will not have the right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% (or 9.99% at the election of the holder prior to the date of issuance) of the number of shares of Common Stock outstanding immediately after giving effect to such exercise (the “Beneficial Ownership Limitation”); provided, however, that upon sixty (60) days’ prior notice to the Company, the holder may increase or decrease the Beneficial Ownership Limitation, provided that in no event shall the Beneficial Ownership Limitation exceed 9.99%.
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H.C. Wainwright & Co., LLC (“Placement Agent”) acted as the exclusive placement agent in connection with the Private Placement under an engagement letter, dated August 30, 2024, as amended, between the Company and the Placement Agent (the “Engagement Letter”). Pursuant to the Engagement Letter, the Company agreed to pay the Placement Agent a cash fee equal to 7.5% of the aggregate gross proceed of the Private Placement and a management fee of 1.0% of the aggregate gross exercise price paid in cash with respect thereto. The Company also agreed to pay the Placement Agent $85,000 for non-accountable expenses. The Company also issued to Wainwright (or its designees) warrants (the “Placement Agent Warrants”) to purchase up to 217,391 shares of Common. The Placement Agent Warrants have an exercise price equal to $1.725 per share and are exercisable beginning on the effective date of the Stockholder Approval for five years from Stockholder Approval.
The Pre-Funded Warrants, Common Warrants and Placement Agent Warrants and the shares of our Common Stock issuable upon the exercise of the Pre-Funded Warrants, Common Warrants and Placement Agent Warrants have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), were not offered pursuant to the Registration Statement and were offered pursuant to the exemption provided in Section 4(a)(2) under the Securities Act and Rule 506(b) promulgated thereunder.
The Company agreed to indemnify the Placement Agent against certain liabilities relating to or arising out of the Placement Agent’s activities under the Engagement Letter and to contribute to payments that the Placement Agent may be required to make in respect of such liabilities.
The Company currently intends to use the proceeds from the Private Placement of approximately $4.0 million in gross proceeds, before deducting the placement agent’s fees and other offering expenses payable by the Company, and excluding the proceeds, if any, from the exercise of the Pre-Funded Warrants and Common Warrants, for working capital, general operations, commercialization activities related to Arakoda, and the Company’s research and development program.
Based in part upon the representations of the Purchaser in the Securities Purchase Agreement, the offering and sale of the securities issued in the Private Placement is exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), Rule 506 of Regulation D promulgated under the Securities Act and corresponding provisions of state securities or “blue sky” laws.
Registration Right Agreement
In connection with the Private Placement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Purchaser, pursuant to which, among other things, the Company is required to prepare and file with the Securities and Exchange Commission (the “SEC”) one or more registration statements to register for resale the shares of Common Stock issuable upon exercise of the Common Warrants and the Pre-Funded Warrants (the “Warrant Shares”). The Company is required to use best efforts to have such registration statement(s) (collectively, the “Registration Statement”) declared effective as promptly as possible thereafter, and in any event no later than 45 days following September 4, 2024, or, in the event of a “full review” by the SEC, 75 days following the date such additional Registration Statement is required to be filed hereunder.
Subsequently, the Company filed a registration statement on Form S-3 (File No. 333-282221) on September 19, 2024, which was declared effective by the Securities and Exchange Commission on September 30, 2024 (the “Registration Statement”). The Registration Statement covered the resale of shares of common stock underlying the Pre-Funded Warrants, Common Warrants and Placement Agent Warrants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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ITEM 5. OTHER INFORMATION
Securities Trading Plans
During the three months ended September 30, 2024,
none of our Section 16 officers or directors (as defined in Rule 16a-1(f) of the Exchange Act)
Subsequent Events
| ● | On October 1, 2024, we issued 206,551 shares of our common stock upon the exercise of 206,551 Pre-Funded Warrants issued September 2024, for aggregate cash proceeds of $207. |
| ● | On October 31, 2024, we issued 229,000 shares of our common stock upon the exercise of 229,000 Pre-Funded Warrants issued September 2024, for aggregate cash proceeds of $229. |
| ● | On November 6, 2024, we conducted a Special Meeting of Stockholders (the “Meeting”). Our stockholders of record at the close of business on September 20, 2024, the record date for the determination of stockholders entitled to vote at the Meeting, approved the proposals to (1) approve the exercise of the Series A Warrants, the Series B Warrants, and the September 2024 Agent Warrants (each as defined in Note 6 to the accompanying consolidated condensed financial statements) to purchase up to an aggregate of 6,014,493 shares of our common stock under applicable rules and regulations of the Nasdaq Stock Market LLC, (2) approve an amendment to the 2022 Equity Incentive Plan to increase the number of shares of common stock available for issuance by 500,000 shares, and (3) approve an amendment to our Certificate of Incorporation, to effect a reverse stock split of our common stock at a reverse stock split ratio ranging from 1:3 to 1:5 inclusive, as may be determined at the appropriate time by our Board of Directors in its sole discretion. |
| ● | In early November 2024, we received research and development updates in relation to three projects funded by the Company. North Carolina State University provided preliminary PCR testing data from patients with chronic fatigue symptoms and neurological problems. The data will be submitted for publication but is consistent with the prevalence of chronic babesiosis patients being substantially higher than the 10-year addressable market of 350,000 previously reported by the Company. North Carolina State University reported that enrollment in the canine babesiosis program had reached 50%, but no data was available yet. Monash University reported preliminary cell culture and animal data for the tafenoquine-Candida project. The data will be submitted for publication in a peer-reviewed journal but does not currently support moving forward with a clinical program focused on development of a parenteral formulation of tafenoquine for candidiasis. |
| ● | On November 12, 2024, our Board approved a one-off cash payment of $20,000 to each of the non-executive Directors in lieu of forfeiting the grant of restricted stock units that would have otherwise been granted for the second half of 2024. |
| ● | As of November 14, 2024, clinical trial NCT06207370 (evaluation of tafenoquine v placebo in patients hospitalized with severe babesiosis) had enrolled 6 of the minimum 24 patients required to trigger an interim analysis. We expect to complete enrollment prior to September 30, 2025. We have not yet enrolled patients in NCT06478641 (expanded access trial of tafenoquine in high-risk patients with persistent relapsing babesiosis). Trial NCT06656351 (Phase 2 study of tafenoquine for chronic babesiosis) has received comments from the FDA, an ethics committee, and an advisory board of prominent physicians familiar with chronic babesiosis. |
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ITEM 6. EXHIBITS
EXHIBIT INDEX
| * | Filed herewith. |
| ** | Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| 60 DEGREES PHARMACEUTICALS, INC. | |
| Dated: November 14, 2024 | /s/ Geoffrey Dow |
| Geoffrey Dow | |
|
Chief Executive Officer and President, Director (Principal Executive Officer) | |
| Dated: November 14, 2024 | /s/ Tyrone Miller |
| Tyrone Miller | |
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
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