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)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | ||
| (Address of principal executive offices) (Zip Code) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The | ||||
| The |
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 20, 2023, 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. Condensed Consolidated Financial Statements
60 DEGREES PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2023 (Unaudited) | 2022 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts Receivable | ||||||||
| Prepaid and Other | ||||||||
| Deferred Offering Costs | ||||||||
| Inventory, net (Note 3) | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment, net (Note 4) | ||||||||
| Other Assets: | ||||||||
| Right of Use Asset (Note 12) | ||||||||
| Intangible Assets, net (Note 5) | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable and Accrued Expenses | $ | $ | ||||||
| Lease Liability (Note 12) | ||||||||
| Deferred Compensation (Note 7) | ||||||||
| Related Party Notes, net (including accrued interest) (Note 8) | ||||||||
| Debenture (Note 8) | ||||||||
| SBA EIDL (including accrued interest) (Note 8) | ||||||||
| Promissory Notes (including accrued interest) (Note 8) | ||||||||
| Derivative Liabilities (Note 9) | ||||||||
| Derivative Liabilities - Related Parties (Note 9) | ||||||||
| Total Current Liabilities: | ||||||||
| Long-Term Liabilities: | ||||||||
| Deferred Compensation (Note 7) | ||||||||
| SBA EIDL (including accrued interest) (Note 8) | ||||||||
| Promissory Notes (including accrued interest) (Note 8) | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 12) | ||||||||
| SHAREHOLDERS’ EQUITY (DEFICIT): | ||||||||
| Preferred stock, $ | ||||||||
| Class A common stock, $ | ||||||||
| Additional Paid-in Capital | ||||||||
| Accumulated Other Comprehensive Income | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| 60P Shareholders’ Equity (Deficit): | ( | ) | ||||||
| Noncontrolling interest | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity (Deficit) | ( | ) | ||||||
| Total Liabilities and Shareholders’ Equity (Deficit) | $ | $ | ||||||
See accompanying notes to these unaudited consolidated condensed financial statements.
1
60 DEGREES PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Product Revenues – net of Discounts and Rebates | $ | $ | $ | $ | ||||||||||||
| Cost of Revenues | ||||||||||||||||
| Gross Revenue (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 | ( | ) | ( | ) | ||||||||||||
| Income (Loss) from Operations before Provision for Income Taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Provision for Income Taxes (Note 10) | ||||||||||||||||
| Net Income (Loss) including Noncontrolling Interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Net Loss – Noncontrolling Interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Income (Loss) – attributed to 60 Degrees Pharmaceuticals, Inc. | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive Income (Loss) | ||||||||||||||||
| Net Income (Loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized Foreign Currency Translation Gain (Loss) | ( | ) | ( | ) | ||||||||||||
| Total Comprehensive Income (Loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net Loss – Noncontrolling Interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Unrealized Foreign Currency Translation Loss from Noncontrolling Interest | ( | ) | ( | ) | ||||||||||||
| Comprehensive Income (Loss) – attributed to 60 Degrees Pharmaceuticals, Inc. | ( | ) | ( | ) | ( | ) | ||||||||||
| Cumulative dividends on Series A Preferred Stock | ( | ) | ( | ) | ||||||||||||
| Net Income (Loss) - attributed to common stockholders | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net Income (Loss) per Common Share: | ||||||||||||||||
| $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
See accompanying notes to these unaudited consolidated condensed financial statements.
2
60 DEGREES PHARMACEUTICALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ AND MEMBERS’ EQUITY (DEFICIT)
(UNAUDITED)
| For the Three and Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Members’ Equity | Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive Income | Total Shareholders’ Equity (Deficit) Attributable | Noncontrolling Interest on | Total Shareholders’ | |||||||||||||||||||||||||||||||||
| Units | Amount | Shares | Amount | Capital | Deficit | (Loss) | to 60P | Shareholders | Deficit | |||||||||||||||||||||||||||||||
| Balance—December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
| Net Foreign Translation Gain | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Net Income (Loss) | - | - | ( | ) | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance— March 31, 2022 (unaudited) | $ | - | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Business Combination: June 1, 2022 (60P LLC into 60P, Inc.) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock | ||||||||||||||||||||||||||||||||||||||||
| Net Foreign Translation Loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance— June 30, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
| Net Foreign Translation Loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance— September 30, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
| For the Three and Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Series
A Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive Income | Total
Shareholders’ Equity (Deficit) Attributable | Noncontrolling Interest on | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Loss) | to 60P | Shareholders | (Deficit) | |||||||||||||||||||||||||||||||
| Balance—December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
| Cancellation of common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock | ||||||||||||||||||||||||||||||||||||||||
| Net Foreign Translation Loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net Income (Loss) | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| 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 and 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) | $ | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
See accompanying notes to 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, | 2023 | 2022 | ||||||
| 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 Services | ||||||||
| Stock-based Compensation | ||||||||
| Loss on Debt Extinguishment | ||||||||
| Change in Fair Value of Derivative Liabilities | ( | ) | ||||||
| Derivative Expense | ||||||||
| Change in Fair Value of Promissory Note | ( | ) | ||||||
| Inventory Reserve | ( | ) | ||||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | ( | ) | ( | ) | ||||
| Prepaid and Other | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Accounts Payable and Accrued Liabilities | ( | ) | ( | ) | ||||
| Accrued Interest | ||||||||
| Reduction of Lease Liability | ( | ) | ( | ) | ||||
| Deferred Compensation | ( | ) | ||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Capitalization of Patents | ( | ) | ( | ) | ||||
| Purchases of Property and Equipment | ( | ) | ||||||
| Acquisition of Intangibles | ( | ) | ||||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payment of Deferred Offering Costs | ( | ) | ||||||
| Net proceeds from IPO and Over-Allotment | ||||||||
| Proceeds from the exercise of warrants | ||||||||
| Proceeds from issuance of Common Stock | ||||||||
| Proceeds from Notes Payable | ||||||||
| Proceeds from Notes Payable - Related Parties | ||||||||
| Repayment of Notes Payable | ( | ) | ||||||
| Advances from Related Parties | ||||||||
| Repayment of Related Party Advances | ( | ) | ||||||
| Net Cash Provided by Financing Activities | ||||||||
| Foreign Currency Translation Gain (Loss) | ( | ) | ||||||
| Change in Cash | ||||||||
| Cash—Beginning of Period | ||||||||
| Cash—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 | $ | $ | ||||||
| Common Stock Issued as Prepayment for Services | $ | $ | ||||||
| Additions to ROU Assets for Lease Renewal | $ | $ | ||||||
| Additions to Lease Liabilities for Lease Renewal | $ | $ | ||||||
| Conversion of 60P LLC Member Units to Common Stock | $ | $ | ||||||
| Debt Discount Recorded in Connection with Derivative Liabilities | $ | $ | ||||||
| Stock Issued for Payment of Deferred Compensation | $ | $ | ||||||
| Stock Issued for Acquisition of Intangibles | $ | $ | ||||||
| Fair Value of Warrants Issued to Underwriters | $ | $ | ||||||
| Reclassification of Liability-classified Warrants to Equity-classified | $ | $ | ||||||
See accompanying notes to 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 (“60P LLC”). 60 Degrees Pharmaceuticals, Inc. and its subsidiaries (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 COVID-19, fungal, tick-borne, 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.
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 “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. See Note 6 for further details.
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 financial statements are issued.
In view of these matters, continuation as a going concern is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and the success of its future operations. 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.
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 a business combination or other profitable investment may be achieved.
5
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of 60P and its subsidiaries 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 our opinion, include all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated condensed balance sheets, consolidated condensed statements of operations and other comprehensive income (loss), consolidated condensed statements of shareholders’ and member’s equity (deficit) and consolidated condensed statements of cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 due to various factors. These consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2022 and 2021 and related notes thereto as contained in the Company’s Registration Statement. Certain information and footnote disclosures that would substantially duplicate the disclosures contained in the Registration Statement have been omitted.
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, as well as the financial statements of 60P Singapore Pty Lte, a wholly owned subsidiary of 60P Australia Pty Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation. 60P Singapore Pty Lte was closed via dissolution as of March 31, 2022. 60P Singapore Pty Lte was originally set up to conduct research in Singapore. The entity had no assets and its liabilities were to both 60P Australia Pty Ltd, its direct owner, and 60P. Through consolidation accounting the closure of the business unit resulted in a currency exchange gain.
For entities that are consolidated, but not
On August 2, 2023, Geoffrey Dow assigned his interest
in 60P Australia Pty Ltd, of
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, deferred compensation, derivative liabilities, and valuation allowance for the deferred tax asset.
Gain/Loss on Debt Extinguishment
Gain or loss on debt extinguishment is generally recorded upon an extinguishment of a debt instrument or the conversion of certain of the Company’s convertible debt determined to have variable share settlement features. Gain or loss on extinguishment of debt is calculated as the difference between the reacquisition price and net carrying amount of the debt, which includes unamortized debt issuance costs and the fair value of any related derivative instruments. In the case of debt instruments for which the fair value option has been elected, the net carrying value is equal to its fair value on the date of extinguishment and no gain or loss is recognized.
6
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, 2023, 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 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. The Company uses a Monte Carlo Simulation 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.
Equity-Classified Warrants
The Company accounts for the Tradeable Warrants, the Non-tradeable Warrants, the Representative Warrants, and the Bridge Warrants (following the IPO, see Note 6) 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, and 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.
IPO and Over-Allotment
The Over-Allotment option granted to the underwriters was evaluated in accordance with the guidance in ASC 480 and ASC 815 and was determined to meet all of the criteria for equity classification. The Company allocated the proceeds from the sale of the IPO units (net of offering costs incurred at closing and deferred offering costs incurred prior to the IPO) between the common stock, the Tradeable Warrants, the Non-tradeable Warrants, and the Over-Allotment, using the relative fair value method.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, accounts receivable, inventory purchases, and borrowings.
Significant customers represent any customer whose business makes up 10% of receivables or revenues. 100% of receivables as of September 30, 2023, consisting of two significant customers at 78% and 22%, are outstanding from significant customers. At December 31, 2022, 98% of the Company’s receivables, consisting of three customers and two significant at 59% and 39%, were outstanding from significant customers. For the three months ended September 30, 2023, 100% of total net revenues (consisting of one significant customer) were generated by significant customers (100% for the three months ended September 30, 2022 consisting of three significant customers at 48%, 43%, and 9%). For the nine months ended September 30, 2023, 100% of the revenues were generated by the Company from significant customers, consisting of two customers at 72% and 28% (100% for the nine months ended September 30, 2022, consisting of three customers at 65%, 29%, and 6% respectively).
7
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. The US government has historically been the Company’s largest customer through a purchase support contract and a clinical study. Both of those activities ended during 2022 and near-term receivables and revenues from the government are not anticipated to be significant.
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”).
As of September 30, 2023,
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. Prepaid research and development costs are deferred and amortized over the service period as the services are provided.
The Company recorded $
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, 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. |
8
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 balance sheets and any change in fair value unrelated to credit risk is recorded in other income in the consolidated statements of operations. Changes in fair value related to credit risk are recognized in other comprehensive income. As a result of the completion of the IPO, all financial instruments for which the FVO was elected were extinguished. See Note 8 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, 2023, and December 31, 2022 include Derivative Liabilities, which are carried at fair value based on Level 3 inputs. See Note 9 for more information on Derivative Liabilities.
| September 30, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Promissory Notes (including accrued interest), at fair value | $ | $ | $ | $ | ||||||||||||
| Derivative Liabilities | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative Liabilities | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 financial statements of the group and the statement of financial position and equity of the company are presented in US dollars, which is the functional currency of the Company and the presentation currency for the consolidated financial statements.
For the purpose of presenting consolidated 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 in other income.
| Average Exchange Rate | ||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | As of | ||||||||||||||||||||||
| Currency | 2023 | 2022 | 2023 | 2022 | September 30, 2023 |
December 31, 2022 | ||||||||||||||||||
| 1 AUD = | ||||||||||||||||||||||||
| 1 SGD = | ||||||||||||||||||||||||
| *Through 4/30/2022 (account closure date) | ||||||||||||||||||||||||
9
Reclassifications
Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no material effect on the consolidated results of operations and comprehensive income (loss), shareholders’ and members’ equity (deficit), or cash flows.
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 11.
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 management’s 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 straight-line 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 equity instruments when they are granted. The corresponding cost is recognized as an immediate expense or a prepaid asset depending on the specific facts and circumstances of the agreement with the nonemployee.
During the nine months ended September 30, 2023
and 2022,
10
Net Income (Loss) per Common Share
Net Income (Loss) per Common Share is computed by dividing net income or loss by the weighted average number of common shares outstanding during each period. For the purposes of calculating the weighted average number of common shares outstanding for periods prior to the Merger (See Note 6), each of 60P LLC’s outstanding membership units as of June 1, 2022 have been retrospectively adjusted for the equivalent number of common shares issued pursuant to the Merger. The cumulative dividends accrued on the Series A Preferred Stock during the period are reflected as a reduction to net income (loss) in determining basic and diluted net earnings (loss) attributable to common stockholders.
For periods in which a loss is reported, diluted net loss per common share is the same as basic net loss per common share for those periods. Securities that could potentially dilute basic earnings per share in the future but were excluded from diluted calculation because the effect was anti-dilutive. The potential dilutive securities include: common stock warrants, stock options and unvested restricted stock units granted under the 2022 Plan.
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 with which 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.
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 20, 2023, which is the date the financial statements were issued. See Note 13.
Recently Issued and Adopted 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 these consolidated condensed financial statements.
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes from U.S. GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year. The Company adopted this pronouncement on January 1, 2022; however, the adoption of this standard did not have a material effect on the Company’s consolidated condensed financial statements.
11
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options.
This latter standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard.
Early adoption is permitted, including adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company’s adoption of this standard in 2022 did not have a material effect on the Company’s consolidated condensed financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with Accounting Standards Codification Topic 606. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. The Company’s adoption of ASU 2021-08 did not have an effect on its consolidated condensed financial statements.
3. INVENTORY
| September 30, 2023 | December 31, 2022 | |||||||
| Raw Material (API) | $ | $ | ||||||
| Packaging | ||||||||
| Finished Goods | ||||||||
| Clinical Trial Supplies | ||||||||
| Total Inventory | ||||||||
| Reserve for Expiring Inventory | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
12
4. PROPERTY AND EQUIPMENT
| September 30, 2023 | December 31, 2022 | |||||||
| Lab Equipment | $ | $ | ||||||
| Computer Equipment | ||||||||
| Furniture | ||||||||
| Property and Equipment, at Cost | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and Equipment, Net | $ | $ | ||||||
Depreciation expenses for Property and Equipment
for the nine months ended September 30, 2023 and 2022 were in the amount of $
5. INTANGIBLE ASSETS
| September 30, 2023 | December 31, 2022 | |||||||
| Patents | $ | $ | ||||||
| Website Development Costs | ||||||||
| Intangible Assets, at Cost | ||||||||
| Accumulated Amortization | ( | ) | ( | ) | ||||
| Intangible Assets, Net | $ | $ | ||||||
During the three months ended September 30, 2023
and 2022, the Company capitalized website development or related costs of $
| Period | Patents | Website Development Costs | ||||||
| 2023 (remaining three months) | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total | $ | $ | ||||||
The Company additionally has $
6. STOCKHOLDERS’ EQUITY
On June 1, 2022, 60P LLC entered into the Agreement
and Plan of Merger with 60 Degrees Pharmaceuticals, Inc., pursuant to which 60P LLC merged into 60 Degrees Pharmaceuticals, Inc. (the
“Merger”). The value of each outstanding member’s membership interest in 60P LLC was correspondingly converted into
common stock of 60 Degrees Pharmaceuticals, Inc., par value $
13
Pursuant to the Certificate of Incorporation of
60 Degrees Pharmaceuticals, Inc., the Company’s authorized shares consist of (a)
Common Stock
On June 30, 2022 the Company issued
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 13, 2023, the Company issued |
| ● | On July 14, 2023, the IPO closed, and the Company issued |
| o | The Company issued an aggregate of |
| o | The Company issued |
| o | The Company issued |
| o | The Company issued |
| ● | On July 14, 2023 the Company issued |
| ● | On July 17, 2023, the Company issued |
| ● | On July 25, 2023, the Company issued |
14
Common Stock Warrants
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
On July 12, 2023, the Company executed a Warrant Agent Agreement with Equity Stock Transfer, LLC, acting as warrant agent for the IPO, which sets forth the procedures for registering, transferring and exercising the Tradeable warrants and Non-tradeable warrants issued in connection with the IPO. The Company accounts for the Tradeable Warrants, the Non-tradeable Warrants, and the Representative Warrants (defined in Note 1) as equity-classified financial instruments.
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Total outstanding, June 30, 2023 | $ | |||||||||||
| Reclassified from derivative liabilities | ||||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Forfeited | - | |||||||||||
| Expired | - | |||||||||||
| Total outstanding, September 30, 2023 | $ | |||||||||||
| Total exercisable, September 30, 2023 | $ | |||||||||||
There were no warrant exercises, forfeitures,
or expirations prior to the IPO. During the three months ended September 30, 2023, the Company received aggregate cash proceeds of $
Series A Preferred Stock
As described in Note 8, as a result of the completion
of the IPO and as required under the terms of the Knight Debt Conversion Agreement, the Company converted the entirety of the accumulated
interest on the Convertible Knight Loan as of March 31, 2022 into
15
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 Seies 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. DEFERRED COMPENSATION
In 2020, the Company received consulting services
from Biointelect Pty Ltd. of Australia (“Biointelect”) with a value of $
Also in 2020, the Company entered into an agreement
with Latham Biopharma for contingent compensation. On June 17, 2022 the Company and Latham Biopharma agreed to convert the $
16
8. DEBT
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 $
Note, including Amendment
On October 11, 2017 the Company issued a promissory
note (“Note”) with an individual investor in the amount of $
At the Amendment date, the Company recorded a
discount of $
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
| Knight Therapeutics |
Note, including amendment |
Bridge Notes |
Total | |||||||||||||
| Promissory Notes (including accrued interest), at fair value | $ | $ | $ | $ | ||||||||||||
| Promissory Notes (including accrued interest) | ||||||||||||||||
| Less Current Maturities | ||||||||||||||||
| Long Term Promissory Notes | $ | $ | $ | $ | ||||||||||||
17
| Knight Therapeutics | Note, including amendment | Bridge Notes | Total | |||||||||||||
| Promissory Notes (including accrued interest) | $ | $ | $ | $ | ||||||||||||
| Less Current Maturities | - | |||||||||||||||
| Long Term Promissory Notes | $ | $ | $ | $ | ||||||||||||
Convertible Promissory Notes and Warrants
During May 2022, the Company executed promissory
notes having a face amount of $
During May 2023, the Company executed promissory
notes having an aggregate face amount of $
The Company performed an evaluation of the conversion features embedded in the Bridge Notes and the warrants and concluded that such instruments qualify for treatment as derivative liabilities under ASC 815 and require 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 statement of operations and comprehensive income (loss). See Note 9 for further details.
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, having an
aggregate face amount of $
18
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 9 for further details.
| 2022 Bridge Notes | Related Party Notes | 2023 Bridge Notes | ||||||||||
| Issuance date of promissory notes | May 2022 | May 2022 | May 2023 | |||||||||
| Maturity date of promissory notes | ||||||||||||
| Interest rate | % | % | % | |||||||||
| Default interest rate | % | % | % | |||||||||
| Collateral | ||||||||||||
| Conversion rate | ||||||||||||
| Face amount of notes | $ | $ | $ | |||||||||
| Less: unamortized debt discount | ( | ) | ( | ) | ||||||||
| Add: accrued interest on promissory notes | ||||||||||||
| Balance - December 31, 2022 | $ | $ | $ | |||||||||
| Face amount of notes | ||||||||||||
| Less: unamortized debt discount | - | |||||||||||
| Add: accrued interest on promissory notes | ||||||||||||
| Balance - September 30, 2023 | $ | $ | $ | |||||||||
| 1 - | |
| 2 - | |
For the nine months ended September 30, 2023 and
2022, the Company recorded amortization of debt discounts, including issuance costs, of $
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 $ |
19
| ● | 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 |
| ● | 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. Upon extinguishment, 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 | $ | |||
20
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.
Debenture
On April 24, 2019, 60P entered into the Knight
debenture of $
| September 30, 2023 | December 31, 2022 | |||||||
| Original Debenture | $ | $ | ||||||
| Unamortized debt discount | ( | ) | ||||||
| Debenture Prior to Accumulated Interest | ||||||||
| Accumulated Interest | ||||||||
| Debenture | $ | $ | ||||||
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 $
21
| Period | Principal Payments | |||
| 2023 (remaining three months) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
Due to the deferral, the Company is expected to
make a balloon payment of $
Related Party Advances
In March 2023, the Company received a $
9. 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 Note 8 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 on the date of the IPO. The Bridge Warrants (defined in Note 6) 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 the Bridge Warrants became fixed. The Company determined the event resulted in equity classification for the Bridge Warrants. Accordingly, the Company remeasured the warrant liabilities to fair value, and reclassified the warrants to additional paid-in capital on the IPO date. As of September 30, 2023, derivative liabilities consist of the contingent milestone payment due to Knight upon a future sale of Arakoda™ or a Change of Control (See Note 8). 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 2022 Bridge Notes and warrants, the Company determined a fair value on the commitment date (May
24, 2022) of $
| Commitment Date | May 24, 2022 | |||
| Fair value of derivative liabilities | $ | |||
| Less: face amount of debt | ( | ) | ||
| Derivative expense | $ | |||
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 $
22
| Commitment Date | May 8, 2023 | |||
| Fair value of derivative liabilities | $ | |||
| Less: face amount of debt | ( | ) | ||
| Derivative expense | $ | |||
| 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 | $ | - | $ | - | $ | - | $ | $ | ||||||||||||
| Bridge Shares | Warrants | Convertible Notes Payable | Total | |||||||||||||
| Derivative liabilities - December 31, 2021 | $ | - | $ | - | $ | - | $ | - | ||||||||
| Fair value - commitment date | ||||||||||||||||
| Fair value - mark to market adjustment | ( | ) | ||||||||||||||
| Derivative liabilities - June 30, 2022 | $ | $ | $ | $ | ||||||||||||
| Fair value - mark to market adjustment | ( | ) | ||||||||||||||
| Derivative liabilities - September 30, 2022 | $ | $ | $ | $ | ||||||||||||
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 income (loss). During the nine months ended September 30, 2023, the Company recorded a net change in the fair of derivative
liabilities of ($
23
On the respective commitment dates (Day 1 valuation), 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. 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.
At each subsequent reporting period, we have remeasured
the fair value of liability-classified bridge shares, warrants and embedded conversion features in convertible promissory notes using
the Monte Carlo simulation.
| Commitment Dates | May 2023 | May 2022 | ||||||
| Stock price | $ | $ | ||||||
| Volatility | % | % | ||||||
| Expected term (in years) - Notes | ||||||||
| Expected term (in years) - Warrants | ||||||||
| Risk-free interest rate | % | % | ||||||
| Dividend yield | % | % | ||||||
| IPO probability (prior to note maturity date) | % | % | ||||||
| Mark to Market | December 31, 2022 | |||
| Stock price | $ | |||
| Volatility | % | |||
| Expected term (in years) - Notes | ||||
| Expected term (in years) - Warrants | ||||
| Risk-free interest rate | % | |||
| Dividend yield | % | |||
| IPO probability (prior to note maturity date) | % | |||
10. 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, 2023 and 2022 due to losses. The Company recorded a provision
for income taxes for DC of $
11. SHARE-BASED COMPENSATION
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. As of September 30, 2023, the maximum shares available under the 2022 Plan is equal to
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 years from the grant date and vest over periods ranging from one to five years. The Company estimates the fair value of stock options on the grant date by applying the Black-Scholes option pricing valuation model.
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| 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
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
12. COMMITMENTS AND CONTINGENCIES
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 until March 31, 2024. The Company applies 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 liabilities. 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 agreement. 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.
| Undiscounted Cash Flows | ||||
| Discount rate | % | |||
| 2023 (remaining three months) | $ | |||
| 2024 | ||||
| Thereafter | ||||
| Total undiscounted minimum future payments | ||||
| Imputed interest | ( | ) | ||
| Total operating lease payments | ||||
| Short-term lease liabilities | ||||
| Long-term lease liabilities | $ | |||
| September 30, 2023 | ||||
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | % | |||
Operating lease costs were in the amount of $
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Board of Directors
In November and December 2022, the Company signed
agreements with four director nominees (Cheryl Xu, Paul Field, Charles Allen and Stephen Toovey) which come into effect on the date the
Company’s Registration Statement is declared effective. As described in Note 1, the Company’s Registration Statement was declared
effective on July 11, 2023. Each director is entitled to receive cash compensation of $
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.
Contingent Compensation
Prior to 2015 the Company agreed with certain
vendors, advisors and employees to deferred compensation that expires on December 31, 2023. The net amount of these contingent payments
is $
Following the Company’s IPO and the conversion
of the outstanding debt pursuant to the Knight Debt Conversion Agreement as discussed in Note 8, the Company is obligated to pay Knight
a contingent milestone payment of $
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, 2023, 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.
13. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through November 20, 2023, which is the date the financial statements were issued.
On October 6, 2023, the Company’s Board
of Directors decided that its subsidiary, 60P Australia Pty Ltd., will not re-submit its investigational new drug (“IND”)
application for ACLR8-LR, a Phase IIB study of tafenoquine compared to placebo in patients with mild to moderate COVID-19 disease and
low risk of disease progression. The decision was in response to recent comments received from the U.S. Food and Drug Administration (“FDA”).
As a result, the Company expects a return of the deposited funds from the contract research organization engaged for the suspended trial
of approximately $
The Company decided it will instead prepare to conduct a Phase IIA study of tafenoquine in hospitalized babesiosis patients. On November 1, 2023, the Company submitted a request for a Type C meeting with FDA under its malaria IND 129656. That meeting is scheduled for January 15, 2024.
On November 2, 2023, the Company received a letter
from The Nasdaq Capital Market stating that for the 30 consecutive business days ending on November 1, 2023, the Company’s common
stock had not maintained the minimum closing bid price of $
There have been no other events or transactions during this time which would have a material effect on these 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 condensed consolidated 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 the Registration Statement on Form S-1, as amended (File No. 269483) (the “Registration Statement”), initially filed with the Securities and Exchange Commission (the “SEC”) on January 31, 2023. 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 specialize in the cost-effective development and commercialization of small molecule therapeutics for infectious diseases. We have a single FDA-approved product Arakoda, for malaria prevention in travelers. This product is revenue-generating in the United States and foreign markets, but not yet profitable, primarily due to the lack of an active marketing campaign following its introduction into the U.S. supply chain in late 2019. The COVID-19 pandemic curtailed foreign travel and therefore any ability to raise financing to support an active marketing effort.
We believe that the pathway to profitability lies through establishment of additional therapeutic indications for Arakoda, active marketing of Arakoda for the malaria indication, the phased establishment of a commercial sales team, and in-licensing of additional complementary commercial or near commercial-stage products. To this end, we have made two important decisions. The first is to hire a Chief Commercial Officer who will lead our efforts to grow sales of Arakoda. The second, in light of the indefinite suspension of our COVID-19 study, we have instead begun planning activities to conduct a Phase II study of the Arakoda regimen of tafenoquine in hospitalized babesiosis patients in 2024. Other supporting activities referenced below and elsewhere in this document will be conducted as resources permit.
Business Developments
The following highlights material events or developments in our business during the quarter ended September 30, 2023:
| ● | In July 2023, we announced that the Canadian Intellectual Property Office (CIPO) has issued us a patent covering the use of novel regimens of tafenoquine for the prevention of malaria in malaria-naive individualsthe following events occurred:. |
| o | We entered into the Underwriting Agreement with WallachBeth Capital LLC (the “Underwriter”) relating to our initial public offering (“IPO”) of which consisted of the offering and sale of 1,415,095 units at a public offering price of $5.30 per unit, with each unit consisting of (i) one share of our common stock, (ii) one tradeable warrant having the right to purchase one share of our common stock at an exercise price of $6.095 per share and (iii) one non-tradeable warrant having the right to purchase one share of our common stock at an exercise price of $6.36 per share. We granted the Underwriter warrants to purchase a total of 84,906 shares of our common stock and also granted the Underwriter a 45-day over-allotment option to purchase up to 212,265 shares of our common stock at a price of $5.28 per share and/or 212,265 tradeable warrants at a price of $0.01 per tradeable warrant and/or 212,265 non-tradeable warrants at $0.01 per non-tradeable warrant, or any combination thereof. |
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| o | The shares of our common stock and tradeable warrants began trading on The Nasdaq Capital Market under the symbols “SXTP” and “SXTPW,” respectively. |
| o | The Underwriter partially exercised the over-allotment option and purchased an additional 100,644 tradeable warrants and 100,644 non-tradeable warrants. |
| o | We closed the IPO and received $6,454,325 in net proceeds from the IPO after deducting the underwriting discount and commission and other IPO expenses. |
| o | As a result of the effectiveness of the Registration Statement, we issued a total of 40,000 restricted shares of common stock to our directors, and in connection with the closing of the IPO, we (i) issued 29,245 restricted shares of our common stock to BioIntelect Pty Ltd as deferred equity compensation valued in the amount of $155,000, (ii) made debt repayments in the aggregate amount equal to approximately $1.95 million, (iii) issued 214,934 restricted shares of our common stock to Xu Yu as a result of the conversion of outstanding principal and accrued interest owed to Xu Yu; and (iv) issued 1,108,337 restricted shares of common stock and 80,965 shares of our Series A Preferred Stock to Knight Therapeutics International S.A. (formerly known as Knight Therapeutics (Barbados) Inc.) (“Knight”) upon conversion of debt owed to Knight. |
| o | We issued an aggregate of 184,447 shares of our common stock for cash proceeds totaling approximately $1.1 million upon exercise of (i) 31,447 bridge warrants at an exercise price of $5.83, (ii) 93,000 tradeable warrants at an exercise price of $6.095 and (iii) 60,000 non-tradeable warrants at an exercise price of $6.36. |
We announced that the Canadian Intellectual Property Office (CIPO) has issued us a patent covering the use of novel regimens of tafenoquine for the prevention of malaria in malaria-naive individuals.
| ● | In August 2023, we announced that the United States Patent and Trademark Office has awarded us a patent covering the use of tafenoquine for prevention of Plasmodium falciparum malaria. |
| ● | In September 2023, we announced that we withdrew our IND to determine whether moving forward with the COVID-19 study as originally planned was feasible since we believe that conducting a clinical trial in the United States was practically unfeasible, and it may be difficult to conduct a study in an ex U.S. jurisdiction that would be considered as a valid study by the FDA. |
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Key Factors Affecting our Performance
As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods, and our results of operations may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting our results of operations.
Known Trends and Uncertainties
Inflation
Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations during the periods presented.
Supply Chain
Our approved product, Arakoda, is manufactured in India. During the COVID-19 pandemic, our contract manufacturer experienced reduced capacity, which in theory, but not in practice, could have disrupted continuity of U.S. supply of Arakoda.
Geopolitical Conditions
In February 2022, Russia initiated significant military action against Ukraine. Russia’s invasion, the responses of countries and political bodies to Russia’s actions, and the potential for wider conflict. Following Russia’s actions, various countries, including the United States, Canada, the United Kingdom, Germany and France, as well as the European Union, issued broad-ranging economic sanctions against Russia. The sanctions consist of the prohibition of trading in certain Russian securities and engaging in certain private transactions, the prohibition of doing business with certain Russian corporate entities, large financial institutions, officials and persons and the freezing of Russian assets. The sanctions include a possible commitment by certain countries and the European Union to remove selected Russian banks from the Society for Worldwide Interbank Financial Telecommunications, commonly called “SWIFT,” the electronic network that connects banks globally, and imposed restrictive measures to prevent the Russian Central Bank from undermining the impact of the sanctions. A number of large corporations and U.S. states have also announced plans to curtail business dealings with certain Russian businesses.
The imposition of the current sanctions (and potential imposition of further sanctions in response to continued Russian military activity) and other actions undertaken by countries and businesses may adversely impact various sectors of the Russian economy, and the military action has severe impacts on the Ukrainian economy, including its exports and food production. The duration of ongoing hostilities and corresponding sanctions and related events cannot be predicted and may result in a negative impact on the markets and thereby may negatively impact our business, financial condition and results of operation.
In addition, in October 2023, geopolitical tensions escalated with the conflict in the Middle East, which has elevated the uncertainty of economic growth and stability in the U.S. and global markets, of which could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. Any such event may in turn have a material and adverse effect on our business, results of operations and financial position.
Effects of COVID-19
COVID-19 has globally resulted in loss of life, business closures, restrictions on travel, and widespread cancellation of social gatherings. There is considerable uncertainty around the impact of any future outbreaks of COVID-19. Therefore, COVID-19 may negatively impact our operating results.
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The extent to which any future COVID-19 outbreaks impact our business will depend on future developments, which are highly uncertain and cannot be predicted at this time, including:
| ● | new information which may emerge concerning the severity of the disease; |
| ● | the duration and spread of the outbreak; |
| ● | the severity of travel restrictions imposed by geographic areas in which we operate, mandatory or voluntary business closures; |
| ● | our ability to enroll patients; |
| ● | regulatory actions taken in response to the outbreak, which may impact merchant operations, consumer and merchant pricing, and our product offerings; |
| ● | other business disruptions that affect our workforce and supply chain; |
| ● | the impact on capital and financial markets; and |
| ● | actions taken throughout the world, including in markets in which we operate, to contain the COVID-19 outbreak or treat its impact. |
Any potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding any future outbreak of COVID-19 and the actions taken by government authorities and other entities to contain any future outbreak of COVID-19 or treat its impact, almost all of which are beyond our control. If the disruptions posed by COVID-19 or other matters of global concern continue for an extensive period of time, the operations of our business may be materially adversely affected.
To the extent the COVID-19 or a similar public health threat has an impact on our business, it is likely to also have the effect of heightening many of the other risks described in the “Risk Factors” section of the Registration Statement.
Seasonality
Our business could be affected by seasonal variations. For instance, we expect to experience higher sales in the second and third quarters of the fiscal year. However, taken as a whole, seasonality does not have a material impact on our financial results.
Foreign Currency
Our reporting currency is the U.S. dollar and our operations in Australia and Singapore use their local currency as their functional currencies. We are subject to the effects of exchange rate fluctuations with respect to any of such currency. The income statements of some of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation.
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 happened 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”).
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Cost of Revenues, Gross 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, inventory write-downs, labor and overhead.
Other Operating Revenues
Our research revenues have historically been derived mostly from a single, awarded research grant in the amount of $4,999,814 at the beginning of December 2020 (with an additional $720,000 awarded February 26, 2021) from the Joint Program Executive Office for Chemical, Biological, Radiological and Nuclear Defense (which may be referred to as “JPEO”) to study Arakoda in mild-to-moderate COVID-19 patients. A majority of the study was completed in 2021 with the planned lab data analysis and the submission of the final study report completed during the first nine months of 2022. Research revenue was recognized when research expenses against the JPEO grant were recognized at the end of each month. Research revenues do not exceed directly related research expenses for a given period as the grant did not include the general and administrative, overhead or profit components.
We also earn research revenues from the Australian Tax Authority for research activities conducted in Australia.
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 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 amortized over the service period, as the services are provided. We have also issued shares of our common stock in exchange for services to be used in our operations.
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 accrued interest on our outstanding debt obligations and related amortization of debt discounts and deferred issuance costs. Components of other expense include changes in the fair value of financial instruments, losses on extinguishments of debt, and other miscellaneous income (expense). We now have interest income as a result of the IPO as certain cash proceeds are invested in Federal Deposit Insurance Corporation backed interest bearing accounts.
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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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Product Revenues – net of Discounts and Rebates | $ | 51,188 | $ | 168,185 | $ | 127,892 | $ | 260,382 | ||||||||
| Cost of Revenues | 71,196 | 92,281 | 328,293 | 269,535 | ||||||||||||
| Gross Revenue (Loss) | (20,008 | ) | 75,904 | (200,401 | ) | (9,153 | ) | |||||||||
| Research Revenues | 75,566 | 150,262 | 82,974 | 259,669 | ||||||||||||
| Net Revenue (Loss) | 55,558 | 226,166 | (117,427 | ) | 250,516 | |||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and Development | 263,703 | 27,655 | 591,569 | 322,106 | ||||||||||||
| General and Administrative Expenses | 1,313,617 | 413,627 | 2,551,426 | 994,157 | ||||||||||||
| Total Operating Expenses | 1,577,320 | 441,282 | 3,142,995 | 1,316,263 | ||||||||||||
| Loss from Operations | (1,521,762 | ) | (215,116 | ) | (3,260,422 | ) | (1,065,747 | ) | ||||||||
| Interest Expense | (40,106 | ) | (1,215,978 | ) | (2,281,191 | ) | (2,883,714 | ) | ||||||||
| Derivative Expense | - | - | (399,725 | ) | (504,613 | ) | ||||||||||
| Change in Fair Value of Derivative Liabilities | 92,490 | (22,495 | ) | 95,324 | (23,496 | ) | ||||||||||
| 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 | (70,490 | ) | 3,172 | (69,169 | ) | (29,810 | ) | |||||||||
| Total Interest and Other Income (Expense), net | 5,695,367 | (1,235,301 | ) | 1,493,028 | (3,441,633 | ) | ||||||||||
| Income (Loss) from Operations before Provision for Income Taxes | 4,173,605 | (1,450,417 | ) | (1,767,394 | ) | (4,507,380 | ) | |||||||||
| Provision for Income Taxes | 63 | 250 | 189 | 750 | ||||||||||||
| Net Income (Loss) including Noncontrolling Interest | 4,173,542 | (1,450,667 | ) | (1,767,583 | ) | (4,508,130 | ) | |||||||||
| Net Loss – Noncontrolling Interest | (9,656 | ) | (3,172 | ) | (14,165 | ) | (1,454 | ) | ||||||||
| Net Income (Loss) – attributed to 60 Degrees Pharmaceuticals, Inc. | $ | 4,183,198 | $ | (1,447,495 | ) | $ | (1,753,418 | ) | $ | (4,506,676 | ) | |||||
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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Product Revenues – net of Discounts and Rebates | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | ||||||||
| Cost of Revenues | 139.09 | 54.87 | 256.70 | 103.52 | ||||||||||||
| Gross Revenue (Loss) | (39.09 | ) | 45.13 | (156.70 | ) | (3.52 | ) | |||||||||
| Research Revenues | 147.62 | 89.34 | 64.88 | 99.73 | ||||||||||||
| Net Revenue (Loss) | 108.54 | 134.47 | (91.82 | ) | 96.21 | |||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and Development | 515.17 | 16.44 | 462.55 | 123.71 | ||||||||||||
| General and Administrative Expenses | 2,566.26 | 245.94 | 1,994.98 | 381.81 | ||||||||||||
| Total Operating Expenses | 3,081.43 | 262.38 | 2,457.54 | 505.51 | ||||||||||||
| Loss from Operations | (2,972.89 | ) | (127.90 | ) | (2,549.36 | ) | (409.30 | ) | ||||||||
| Interest Expense | (78.35 | ) | (723.00 | ) | (1,783.69 | ) | (1,107.49 | ) | ||||||||
| Derivative Expense | - | - | (312.55 | ) | (193.80 | ) | ||||||||||
| Change in Fair Value of Derivative Liabilities | 180.69 | (13.38 | ) | 74.53 | (9.02 | ) | ||||||||||
| 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 | (137.71 | ) | 1.89 | (54.08 | ) | (11.45 | ) | |||||||||
| Total Interest and Other Income (Expense), net | 11,126.37 | (734.49 | ) | 1,167.41 | (1,321.76 | ) | ||||||||||
| Income (Loss) from Operations before Provision for Income Taxes | 8,153.48 | (862.39 | ) | (1,384.94 | ) | (1,731.06 | ) | |||||||||
| Provision for Income Taxes | 0.12 | 0.15 | 0.15 | 0.29 | ||||||||||||
| Net Income (Loss) including Noncontrolling Interest | 8,153.36 | (862.54 | ) | (1,382.09 | ) | (1,731.35 | ) | |||||||||
| Net Loss – Noncontrolling Interest | (18.86 | ) | (1.89 | ) | (11.08 | ) | (0.56 | ) | ||||||||
| Net Income (Loss) – attributed to 60 Degrees Pharmaceuticals, Inc. | 8,172.22 | % | (860.66 | )% | (1,371.01 | )% | (1,730.79 | )% | ||||||||
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Comparison of the Three Months Ended September 30, 2023, and 2022
Product Revenues - net of Discounts and Rebates, Cost of Revenues, Gross Revenue (Loss), and Gross Margin
| Three Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2023 | 2022 | $ Change | % Change | ||||||||||||
| Product Revenues – net of Discounts and Rebates | $ | 51,188 | $ | 168,185 | $ | (116,997 | ) | (69.56 | )% | |||||||
| Cost of Revenues | 71,196 | 92,281 | (21,085 | ) | (22.85 | ) | ||||||||||
| Gross Revenue (Loss) | $ | (20,008 | ) | $ | 75,904 | $ | (95,912 | ) | (126.36 | )% | ||||||
| Gross Margin % | (39.09 | )% | 45.13 | % | ||||||||||||
Product Revenues - net of Discounts and Rebates
Our product revenues – net of discounts and rebates were $51,188 for the three months ended September 30, 2023, as compared to $168,185 for the three months ended September 30, 2022. For the three months ended September 30, 2023, our U.S. pharmaceutical distributor accounted for 100% of our total net product sales (37% for the three months ended September 30, 2022). The decrease in gross product sales is primarily due to no sales of Arakoda/Kodatef internationally in the three months ended September 30, 2023. In the three months ended September 30, 2022, $105,840 in net sales was recognized internationally. Domestically, gross product revenues increased from $62,345 for the three months ended September 30, 2022 to $151,340 for the three months ended September 30, 2023.
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 are offered to our 3PL partner amounting to 11% along with a fixed monthly fee. The product is then transferred normally to one of the three large U.S. pharmaceutical distributors where rebates range from 10-15%. Lastly, we have relationships with several large pharmacy benefit managers (“PBMs”) that allow patients to purchase Arakoda at a discount. The rebate associated with PBMs ranges from 15% to 39.75% depending on the amount of coverage provided. For the three months ended September 30, 2023, discounts and rebates were $76,441 compared to $13,779 for the three months ended September 30, 2022.
Arakoda entered the U.S. civilian supply chain in the third quarter of 2019. For the three months ended September 30, 2022, 159 boxes were sold to pharmacies and dispensaries. Sales volume increased by 246% to 550 boxes to pharmacies and dispensaries for the three months ended September 30, 2023. This growth in sales volumes may be a combination of both natural organic growth, the reduction in the wholesale acquisition cost of $285 per box to $235 per box effective January 2023, and increased prescribing by doctors of Arakoda off-label for usage treatment of babesiosis. The sales volume growth to pharmacies and dispensaries ties to the growth in discounts and rebates previously discussed. Sales down the supply chain to end users increase discounts and rebates more than sales into the supply chain.
Kodatef sales to our distributor Biocelect in Australia for the three months ended September 30, 2023 were $0 ($87,840 for the three months ended September 30, 2022). Sales to Biocelect are currently subject to a profit share distribution once the original transfer price has been recouped. As of September 30, 2023, no profit share has been due to us and also ($0 for the three months ended September 30, 2022).
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Cost of Revenues, Gross Revenue (Loss), and Gross Margin
The cost of goods sold was $71,196 for the three months ended September 30, 2023, as compared to $92,281 for the three months ended September 30, 2022. The decrease in cost of goods sold is primarily due to the fact that in the three months ending on September 30, 2023 there were no COGS associated with international sales ($35,374 in international COGS for the three months ending September 30, 2022). The Gross Margin % fell to (39.09)% for the three months ended September 30, 2023 from 45.13% for the three months ended September 30, 2022. This is due to the current low sales volume and the fixed part of cost of goods. As the sales volume continues to grow the gross margin will improve as the variable cost of goods of each unit sold is substantially less than the sales price.
Other Operating Revenues
| Three Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2023 | 2022 | $ Change | % Change | ||||||||||||
| Research Revenues | $ | 75,566 | $ | 150,262 | (74,696 | ) | (49.71 | )% | ||||||||
The research revenues earned by us were $75,566 for the three months ended September 30, 2023, as compared to $150,262 for the three months ended September 30, 2022. Our research revenues for the period ended September 30, 2023 consists entirely of research revenues from the Australian Tax Authority for research activities conducted in Australia, whereas most of the revenue for the three months ended September 30, 2022 was from the remnants of the COVID-19 grant.
Operating Expenses
| Three Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2023 | 2022 | $ Change | % Change | ||||||||||||
| Research and Development | $ | 263,703 | $ | 27,655 | $ | 236,048 | 853.55 | % | ||||||||
| General and Administrative Expenses | 1,313,617 | 413,627 | 899,990 | 217.58 | ||||||||||||
| Total Operating Expenses | $ | 1,577,320 | $ | 441,282 | $ | 1,136,038 | 257.44 | % | ||||||||
Research and Development
Research and development costs increased during the three months ended September 30, 2023 when compared to the three months ended September 30, 2022. Research and development costs incurred during the three months ended September 30, 2022 related to our Phase II clinical trial to assess the safety and efficacy of Tafenoquine for the treatment of mild to moderate COVID-19 disease, which was completed in the third quarter of 2022. During the three months ended September 30, 2023, we incurred initial costs related to our Phase II B clinical trial, which has now been put on hold. Direct COVID-19-related trial costs are 82% of the costs for the three months ended September 30, 2023 at $216,567 and (78)% of the costs for the three months ended September 30, 2022 at $(21,507) due to a refund from the clinical research organization conducting the trial on our behalf.
General and Administrative Expenses
For the three months ended September 30, 2023, our general and administrative expenses increased by 217.58% or $899,990 from the three months ended September 30, 2022. During the three months ended September 30, 2023, we incurred significantly higher compensation expenses as a result of compensation agreements with our directors and executives, which came into effect on the date of our IPO. Pursuant to these agreements, we recognized $458,266 in stock-based compensation and $49,500 in cash compensation during the three months ended September 30, 2023 ($0 and $0 for the three months ended September, 30, 2022, respectively). Additionally, during the three months ended September 30, 2023, we incurred higher legal and professional fees, insurance expenses, and investor-related outreach expenses when compared to the three months ended September 30, 2022.
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Interest and Other Income (Expense), Net
| Three Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2023 | 2022 | $ Change | % Change | ||||||||||||
| Interest Expense | $ | (40,106 | ) | $ | (1,215,978 | ) | $ | 1,175,872 | (96.70 | )% | ||||||
| Change in Fair Value of Derivative Liabilities | 92,490 | (22,495 | ) | 114,985 | (511.16 | ) | ||||||||||
| Loss on Debt Extinguishment | (391,593 | ) | - | (391,593 | ) | NA | ||||||||||
| Change in Fair Value of Promissory Note | 6,105,066 | - | 6,105,066 | NA | ||||||||||||
| Other Income (Expense), net | (70,490 | ) | 3,172 | (73,662 | ) | (2,322.26 | ) | |||||||||
| Total Interest and Other Income (Expense), net | $ | 5,695,367 | $ | (1,235,301 | ) | $ | 6,930,668 | (561.05 | )% | |||||||
Interest Expense
For the three months ended September 30, 2023, we recognized $40,106 of interest expense ($1,215,978 for the three months ended September 30, 2022). The decrease in interest expense is the result of the settlement or conversion of our outstanding debt obligations upon the closing of our IPO on July 14, 2023. Cash paid for interest expense was $171,807 and $0 for the three months ended September 30, 2023 and September 30, 2022, respectively.
Change in Fair Value of Derivative Liabilities
For the three months ended September 30, 2023, we recognized a change in fair value of derivative liabilities of $92,490 and ($22,495) for the three months ended September 30, 2022.
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, 2022). The increase 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.
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. Our cumulative debt outstanding with Knight was not measured at fair value on a recurring basis prior to the Knight Debt Conversion Agreement executed in January 2023, hence we recorded a $0 change in fair value for the three months ended September 30, 2022.
Other Income (Expense), net
For the three months ended September 30, 2023, we recognized $70,490 in other expense compared to $3,172 in other income for the three months ended September 30, 2022. For the three 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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Comparison of the Nine Months Ended September 30, 2023 and 2022
Product Revenues - net of Discounts and Rebates, Cost of Revenues, Gross Loss, and Gross Margin
| Nine Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2023 | 2022 | $ Change | % Change | ||||||||||||
| Product Revenues - net of Discounts and Rebates | $ | 127,892 | $ | 260,382 | $ | (132,490 | ) | (50.88 | )% | |||||||
| Cost of Revenues | 328,293 | 269,535 | 58,758 | 21.80 | ||||||||||||
| Gross Loss | $ | (200,401 | ) | $ | (9,153 | ) | $ | (191,248 | ) | 2,089.46 | % | |||||
| Gross Margin % | (156.70 | )% | (3.52 | )% | ||||||||||||
Product Revenues - net of Discounts and Rebates
Our product revenues – net of discounts and rebates were $127,892 for the nine months ended September 30, 2023, as compared to $260,382 for the nine months ended September 30, 2022. For the nine months ended September 30, 2023, our Australian distributor accounted for 0% (34% for the nine months ended of September 30, 2022), and our U.S. distributor accounted for 100% of our total net product sales (59% for the nine months ended September 30, 2022). While our domestic sales volume increased over the same periods, the decrease is due to a reduction in international sales from $105,840 to none.
For the nine months ended September 30, 2023, discounts and rebates were $124,090 compared to $38,478 for the nine months ended September 30, 2022. This reflects both greater sales volume and the new contract with our 3PL partner at the beginning of 2023 in which both the percentage and fixed fee rebates increased.
Arakoda entered the U.S. civilian supply chain in the third quarter of 2019. For the nine months ended September 30, 2022, 386 boxes were sold to pharmacies and dispensaries. Sales volume increased 174% to 1,059 boxes to pharmacies and dispensaries for the nine months ended September 30, 2023. The increase in commercial sales volume reflects the response to the reduction of our wholesale acquisition cost of $285 per box to $235 per box effective January 2023 and increased prescribing by doctors of Arakoda off-label for usage treatment of babesiosis.
Kodatef sales to our distributor Biocelect in Australia for the nine months ended September 30, 2023 were none ($87,840 for the nine months ended September 30, 2022). Sales to Biocelect are currently subject to a profit share distribution once the original transfer price has been recouped. As of September 30, 2023, $54,166 was paid ($0 for the nine months ended September 30, 2022).
During the first nine months of 2022, we recorded our first sale of Arakoda/Kodatef to our European distributor Scandinavian Biopharma Distribution AB. We did not record sales of Arakoda/Kodatef to the distributor during the first nine months of 2023. Product will be distributed there on a named patient basis. As in Australia a profit distribution share is possible depending on the retail price established.
Cost of Revenues, Gross Loss, and Gross Margin
The cost of goods sold was $328,293 for the nine months ended September 30, 2023, as compared to $269,535 for the nine months ended September 30, 2022. The increase in cost of goods sold is primarily due to a greater allowance for expiring inventory. The Gross Margin % fell to (156.70)% for the nine months ended September 30, 2023 from (3.52)% for the nine months ended September 30, 2022. This is partially due to the fixed part of cost of goods. As the sales volume continues to grow the gross margin will improve as the variable cost of goods of each unit sold is substantially less than the sales price. However, right now the allowance required for expiring inventory provides the largest negative impact to Gross Margin.
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Other Operating Revenues
| Nine Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2023 | 2022 | $ Change | % Change | ||||||||||||
| Research Revenues | $ | 82,974 | $ | 259,669 | $ | (176,695 | ) | (68.05 | )% | |||||||
The research revenues earned by us were $82,974 for the nine months ended September 30, 2023, as compared to $259,669 for the nine months ended September 30, 2022. Our research revenues have historically been derived mostly from a single, awarded research grant in the amount of $4,999,814 at the beginning of December 2020 (with an additional $720,000 awarded in February of 2021) from the Joint Program Executive Office for Chemical, Biological, Radiological and Nuclear Defense (which may be referred to as “JPEO”) to study Arakoda in mild-to-moderate COVID-19 patients. A majority of the study was completed in 2021 with the planned lab data analysis and the submission of the final study report completed during the first nine months of 2022. We also earn research revenues from the Australian Tax Authority for research activities conducted in Australia. The research rebate revenue was $82,974 for the nine months ended September 30, 2023 compared to $14,499 during the nine months ended September 30, 2022.
Operating Expenses
| Nine Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2023 | 2022 | $ Change | % Change | ||||||||||||
| Research and Development | $ | 591,569 | $ | 322,106 | $ | 269,463 | 83.66 | % | ||||||||
| General and Administrative Expenses | 2,551,426 | 994,157 | 1,557,269 | 156.64 | ||||||||||||
| Total Operating Expenses | $ | 3,142,995 | $ | 1,316,263 | $ | 1,826,732 | 138.78 | % | ||||||||
Research and Development
Research and development costs increased during the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022. Research and development costs incurred during the nine months ended September 30, 2022 related to our Phase II clinical trial to assess the safety and efficacy of Tafenoquine for the treatment of mild to moderate COVID-19 disease, which was completed in the third quarter of 2022. During the nine months ended September 30, 2023, we incurred initial costs related to our Phase II B clinical trial, which has now been halted. Direct COVID-19-related trial costs are 85% of the costs for the nine months ended September 30, 2023 at $504,711 and 49% of the costs for the nine months ended September 30, 2022 at $157,892.
General and Administrative Expenses
For the nine months ended September 30, 2023, our general and administrative expenses increased by 156.64% or $1,557,269 over the nine months ended September 30, 2022. During the nine months ended September 30, 2023 we spent substantially more for legal, accounting, and audit fees at $669,010 (up from $186,280 for the nine months ended September 30, 2022). Additionally, during the nine months ended September 30, 2023, we incurred $417,620 of investor outreach expenses, $458,266 of stock-based compensation expense, $64,280 of advertising and promotion expenses, and $198,618 of pharmacovigilance monitoring costs (up from $10,100, $155,000, $5,731, and $48,000 for the nine months ended September 30, 2022, respectively).
Interest and Other Income (Expense), Net
| Nine Months Ended September 30, | ||||||||||||||||
| Consolidated Statements of Operations Data: | 2023 | 2022 | $ Change | % Change | ||||||||||||
| Interest Expense | $ | (2,281,191 | ) | $ | (2,883,714 | ) | $ | 602,523 | (20.89 | )% | ||||||
| Derivative Expense | (399,725 | ) | (504,613 | ) | 104,888 | (20.79 | ) | |||||||||
| Change in Fair Value of Derivative Liabilities | 95,324 | (23,496 | ) | 118,820 | (505.70 | ) | ||||||||||
| Loss on Debt Extinguishment | (1,231,480 | ) | - | (1,231,480 | ) | NA | ||||||||||
| Change in Fair Value of Promissory Note | 5,379,269 | - | 5,379,269 | NA | ||||||||||||
| Other Income (Expense), net | (69,169 | ) | (29,810 | ) | (39,359 | ) | 132.03 | |||||||||
| Total Interest and Other Income (Expense), net | $ | 1,493,028 | $ | (3,441,633 | ) | $ | 4,934,661 | (143.38 | )% | |||||||
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Interest Expense
For the nine months ended September 30, 2023, we recognized $2,281,191 of interest expense ($2,883,714 for the nine months ended September 30, 2022). The decrease in interest expense is the result of the settlement or conversion of our outstanding debt obligations upon the closing of our IPO on July 14, 2023. Cash paid for interest expense was $176,924 and $731 for the nine months ended September 30, 2023 and September 30, 2022, 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 recognized $504,613 of derivative expense during the nine months ended September 30, 2022 from the bridge funding raise in May 2022, generating $979,275 in net proceeds. The decrease in derivative expense is related to the initial fair value of the related derivative liabilities in excess of the cash proceeds received.
Change in Fair Value of Derivative Liabilities
For the nine months ended September 30, 2023, we recognized a net change in fair value of derivative liabilities of $95,324 and ($23,496) for the nine months ended September 30, 2022.
Loss on Debt Extinguishment
For the nine months ended September 30, 2023, we recognized a $1,231,480 net loss on debt extinguishment (none for the nine months ended September 30, 2022). The increase 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 net change in fair value of the Convertible Knight Loan from the modification date in January 2023 to the conversion of the outstanding debt obligation into our equity shares upon the closing of our IPO on July 14, 2023. Our cumulative debt outstanding with Knight was not measured at fair value on a recurring basis prior to the Knight Debt Conversion Agreement executed in January 2023, hence we recorded a $0 change in fair value for the nine months ended September 30, 2022.
Other Income (Expense), net
For the nine months ended September 30, 2023, we recognized $69,169 in other expense compared to $29,810 for the nine months ended September 30, 2022. 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.
Liquidity and Capital Resources
For the nine months ended September 30, 2023 and 2022, our net cash used in operating activities was $4,479,242 and $944,033, respectively and the cash balance was $2,218,540 as of September 30, 2023 ($264,865 as of December 31, 2022). Based on current internal projections, the return of the balance of funds from our CRO for the suspended COVID-19 trial of approximately $820,000, we estimate that we will have sufficient funds to remain viable through May 31, 2024 without optimistic assumptions. Our runway will be shorter if we make a decision to pay a deposit to a CRO for the planned Phase II Babesiosis study prior to an additional capital raise. 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.
To date, we have funded our operations through debt and equity financings.
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Going Concern
As of September 30, 2023, we had an accumulated deficit of $30,568,566. In their audit report for the fiscal year ended December 31, 2022, 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 consolidated financial statements for the twelve months ended December 31, 2022, and December 31, 2021, 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 have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. To date, we have not yet established an ongoing source of revenues and cash flows sufficient to cover our operating costs and allow us to continue as a going concern. These factors among others raise substantial doubt about our ability to continue as a going concern for at least one year from the date of issuance of the accompanying consolidated condensed financial statements.
Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as a going concern. Our consolidated 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, 2023:
| Payments Due By Period | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 Years | ||||||||||||||||
| Principal obligations on the debt arrangements | $ | 150,000 | $ | - | $ | 1,990 | $ | 6,731 | $ | 141,279 | ||||||||||
| Interest obligations on the debt arrangements | 116,230 | 8,772 | 24,326 | 10,813 | 72,319 | |||||||||||||||
| Operating leases | 26,800 | 26,800 | - | - | - | |||||||||||||||
| Purchase obligations | 271,602 | 271,602 | - | - | - | |||||||||||||||
| Total | $ | 564,632 | $ | 307,174 | $ | 26,316 | $ | 17,544 | $ | 213,598 | ||||||||||
Cash Flows
Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Net Cash Provided By (Used In): | ||||||||||||||||
| Operating Activities | $ | (4,479,242 | ) | $ | (944,003 | ) | $ | (3,535,239 | ) | 374.49 | % | |||||
| Investing Activities | (49,326 | ) | (1,488 | ) | (47,838 | ) | 3,214.92 | |||||||||
| Financing Activities | 6,474,565 | 1,290,335 | 5,184,230 | 401.77 | ||||||||||||
| Effect of Foreign Currency Translation on Cash Flow | 7,678 | (20,850 | ) | 28,528 | (136.82 | ) | ||||||||||
| Net Increase (Decrease) in Cash | $ | 1,953,675 | $ | 323,994 | $ | 1,629,681 | 503.00 | % | ||||||||
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Cash Used in Operating Activities
Net cash used in operating activities was $4,479,242 for the nine months ended September 30, 2023, as compared to $944,003 for the nine months ended September 30, 2022. Our net cash used in operating activities increased as a result of higher legal, accounting, and auditing fees totaling $669,010 and investor outreach expenses of $417,620 during the nine months ended September 30, 2023 ($186,268 and $10,100 for the nine months ended September 30, 2022, respectively). In addition, in August 2023 our subsidiary 60P Australia Pty Ltd. incurred start-up costs to open the first three clinical sites for its now halted COVID-19-tafenoquine Phase IIB treatment study.
Cash Used in Investing Activities
Net cash used in investing activities was $49,326 for the nine months ended September 30, 2023, as compared to $1,488 for the nine months ended September 30, 2022. The increase in net cash used in investing activities was due to higher costs paid for the acquisition of patents ($29,220 and $1,488 for the nine months ended September 30, 2023 and 2022, respectively), and higher cash paid for capitalized website development costs ($18,283 and $0 for the nine months ended September 30, 2023 and 2022, respectively).
Cash Provided by Financing Activities
Net cash provided by financing activities was $6,474,565 for the nine months ended September 30, 2023, as compared to $1,290,335 for the nine months ended September 30, 2022. The increase in net cash provided by financing activities is attributable 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, partially offset by repayments of certain of our outstanding debt obligations in July 2023.
Effect of Foreign Currency Translation on Cash Flow
Our foreign operations were small relative to U.S. operations for the nine months ended September 30, 2023 and September 30, 2022, thus effects of foreign currency translation have been minor.
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.
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, 2023, our derivative financial instruments consist of contingent payment arrangements.
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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 Monte Carlo Simulation 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), we record the equity shares at fair value on the date of conversion, relieves 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 to at the fair value of the instrument on the reclassification date.
Original Issue Discount
For certain notes issued, we may provide the debt holder with an original issue discount. The original issue discount is recorded as a debt discount, reducing the face amount of the note, and is amortized to interest expense over the life of the debt in the Consolidated Statements of Operations and Comprehensive Loss.
Debt Issuance Cost
Debt issuance costs paid to lenders or third parties are recorded as debt discounts and amortized to interest expense over the life of the underlying debt instrument in the Consolidated Statements of Operations and Comprehensive Loss, with the exception of certain debt for which we elected the fair value option.
Income Taxes
From January 1, 2022 to May 31, 2022, 60 Degrees Pharmaceuticals, LLC was a C-corporation for income tax purposes before the incorporation/merger into 60 Degrees Pharmaceuticals, Inc. on June 1, 2022. We account for income taxes under the liability method, and deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the deferred tax asset will not be realized in the following five years. We did not realize any benefits in the year ended December 31, 2022. Most of the deferred tax benefits are abroad and we do not project a profit in our subsidiary by 2026. We record interest, net of any applicable related income tax benefit, on potential income tax contingencies as a component of income tax expense.
We record tax positions taken or expected to be taken in a tax return based upon the amount that is more likely than not to be realized or paid, including in connection with the resolution of any related appeals or other legal processes. Accordingly, we recognize liabilities for certain unrecognized tax benefits based on the amounts that are more likely than not to be settled with the relevant taxing authority. We recognize interest and/or penalties related to unrecognized tax benefits as a component of income tax expense.
Off-Balance Sheet Arrangements
During 2023 and 2022, 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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Recent Accounting Pronouncements
The Financial Accounting Standards Board (the “FASB”) issues Accounting Standards Update (“ASUs”) to amend the authoritative literature in ASC. There have been a number of ASUs to date, that amend the original text of ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact on our consolidated financial statements.
In August 2020, FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity; Own Equity, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with our current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year. We adopted this pronouncement on January 1, 2022; however, the adoption of this standard did not have a material effect on our consolidated financial statements.
In May 2021, the FASB issued ASUs 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The adoption of this standard in 2022 did not have a material effect on our financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with Accounting Standards Codification Topic 606. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, and early adoption is permitted. The adoption of ASU 2021-08 did not have an effect on our financial statements.
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, 2023, our internal control over financial reporting was not effective, and that material weaknesses existed in the following areas as of September 30, 2023:
| (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, 2023.
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
(A) Unregistered Sales of Equity Securities
| ● | In July 2023, in connection with the effectiveness of our 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 “Registration Statement”), we issued a total of 40,000 restricted shares of common stock to the following directors and in the amounts listed: (i) Stephen Toovey (10,000 restricted shares of common stock), (ii) Charles Allen (10,000 restricted shares of common stock), (iii) Paul Field (10,000 restricted shares of common stock) and (iv) Cheryl Xu (10,000 restricted shares of common stock). |
| ● | In July 2023, pursuant to the Master Consultancy Agreement dated as of May 29, 2013 that we entered into with BioIntelect Pty Ltd (“BioIntelect”) and in connection with the closing of our initial public offering (“IPO”), we issued a total of 29,245 restricted shares of our common stock to BioIntelect as deferred equity compensation valued in the amount of $155,000. |
| ● | In July 2023, pursuant to the terms of the Equity Conversion Note dated as of October 11, 2017, as amended on December 23, 2017 and December 11, 2022 and in connection with the closing of the IPO, we converted the entirety of the related outstanding principal and accrued interest to 214,934 shares of our common stock at the conversion price equal to the IPO price and issued the common stock to Xu Yu. |
| ● | In July 2023, pursuant to the terms of the Debt Conversion Agreement dated as of January 9, 2023, as amended on January 19, 2023 and January 27, 2023 that we entered into with Knight Therapeutics International S.A. (formerly known as Knight Therapeutics (Barbados) Inc.) (“Knight”) and in connection with the closing of the IPO, we issued 1,108,337 restricted shares of common stock to Knight upon conversion of the cumulative outstanding principal as of March 31, 2022 (representing 19.9% of our outstanding common stock after giving effect to the IPO). In addition, we converted the accumulated interest as of March 31, 2022 and issued 80,965 shares of our Series A Preferred Stock to Knight. |
| ● | In July 2023, we issued 45,560 restricted shares of our common stock to Knight upon conversion of 2,162 shares of Series A Preferred Stock, at the conversion rate price detailed in Note 6 to the accompanying consolidated condensed financial statements. |
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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.
(B) Use of Proceeds
The Registration Statement for our IPO was declared effective by the SEC on July 11, 2023. The IPO consisted of 1,415,095 units, with each unit consisting of (i) one share of our common stock, (ii) one tradeable warrant having the right to purchase one share of our common stock at an exercise price of $6.095 per share and (iii) one non-tradeable warrant having the right to purchase one share of our common stock at an exercise price of $6.36 per share, at a public offering price of $5.30 per unit. On July 14, 2023, the IPO closed, and we received $6,454,325 in net proceeds from the IPO after deducting the underwriting discount and commission and other estimated IPO expenses payable by us.
There has been no material change in the planned use of proceeds from such use as described in the Registration Statement.
As of September 30, 2023, we have utilized approximately $4,409,000 of the net proceeds as follows:
| ● | $2,135,000 for working capital and general corporate purposes; |
| ● | $1,783,000 for debt repayment; and |
| ● | $491,000 research and development (clinical trials and related activities). |
(C) Issuer Purchases of Equity Securities
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
Subsequent Events
None.
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ITEM 6. EXHIBITS
EXHIBIT INDEX
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| # | Incorporated by reference to the same exhibit number in the Company’s Registration Statement, as amended (File No. 333-269483), initially filed with the Securities and Exchange Commission on January 31, 2023. |
| * | 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 20, 2023 | /s/ Geoffrey Dow |
| Geoffrey Dow | |
|
Chief Executive Officer and President, Director (Principal Executive Officer) | |
| Dated: November 20, 2023 | /s/ Tyrone Miller |
| Tyrone Miller | |
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
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