Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Prospective investors should read the following
discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes
and other financial information included elsewhere in this annual report. Some of the information contained in this discussion and analysis
or set forth elsewhere in this annual report, including information with respect to our plans and strategy for our business, includes
forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.”
This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere
in this report. In this discussion, we may use certain non-generally accepted accounting principles (GAAP) financial measures. An explanation
of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measures are included in this
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Investors should not consider
non-GAAP financial measures in isolation or as substitutes for financial information presented in compliance with GAAP.
1. Overview
We are a specialty pharmaceutical company with
a goal of using cutting-edge biological science and applied research to further develop and commercialize new therapies for the prevention
and treatment of infectious diseases. We have successfully achieved regulatory approval of Arakoda® (“Arakoda”), a malaria
preventative treatment that has been on the market since late 2019. Currently, 60P’s pipeline under development covers development
programs for vector-borne, fungal, and viral diseases utilizing three of the Company’s future products: (i) new products that contain
the Arakoda regimen of Tafenoquine; (ii) new products that contain Tafenoquine; and (iii) Celgosivir.
46
Following our initial public offering in July
2023, our initial strategic priority was to conduct a Phase IIB study that would have evaluated the potential of the Arakoda regimen
of Tafenoquine to accelerate disease recovery in COVID-19 patients with low risk of disease progression. In October 2023, we made a decision
to suspend this study. This was a consequence of advice previously received from the U.S. Food and Drug Administration (FDA), which we
interpreted to mean that the agency would not have granted clearance for the study to proceed unless we redesigned it to (i) enroll a
patient population in which receipt of Paxlovid or Lagevrio would be medically contraindicated, or (ii) compare Tafenoquine to placebo
in patients taking a “standard of care” regimen (defined by the FDA as Lagevrio or Paxlovid). The FDA’s position was
somewhat surprising given that neither Paxlovid nor Lagevrio is indicated for treatment of COVID-19 in low-risk patients. We determined
that conducting our study in an alternate population in the United States would be unfeasible, and that conducting an add-on-to standard
of care study might not be Phase III enabling. Accordingly, we made a decision to pivot back to continue commercialization of Arakoda
for malaria, and further evaluation of the Arakoda regimen of Tafenoquine for babesiosis and other diseases. We believe such an approach
is both less risky and less expensive.
Moving forward, our general strategy to achieve
profitability and grow shareholder value has three facets: (i) increase sales of Arakoda; (ii) conduct clinical trials to expand the
number of patients who can use Tafenoquine for new indications in the future; and (iii) reposition small molecule therapeutics with good
clinical safety profiles for new indications.
2. Components of Results of Operations
Product Revenues - net of Discounts and Rebates
We receive the majority of our product revenues
from sales of our Arakoda product to 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. Sales to resellers in the US are subject to considerable discounts and rebates
for services provided by our third-party logistics (“3PL”) partner and wholesalers and pharmacy benefit managers (“PBMs”).
Cost of Revenues, Gross Profit (Loss), and Gross Margin
Cost of revenues associated with our products
is primarily comprised of direct materials, shipping, manufacturing related costs incurred in the production process, serialization costs
and inventory write-downs due to expiration.
Other Operating Revenues
Other operating revenues for the periods presented
include research revenue earned from the Australian Tax Authority for research activities conducted in Australia. Beginning in the third
quarter of 2024, we began to recognize research revenues associated with our new contract with the United States Army Medical Materiel
Development Activity (USAMMDA) for Arakoda supply chain upgrade support. Research revenue under this contract is recognized when we incur
the direct costs eligible for reimbursement, up to the maximum allowable amount.
Operating Expenses
Research and Development
Research and development costs for the periods
presented primarily consist of contracted R&D services and costs associated with preparation for and conducting our Babesiosis trial
in 2024 and, in 2023, related to our halted COVID-19 clinical trial. We expense all research and development costs in the period in which
they are incurred. Payments made prior to the receipt of goods or services to be used in research and development are recognized as prepaid
assets and expensed over the service period as the services are provided. We have also issued shares of our common stock to vendors in
exchange for research and development services.
47
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
Prior to the IPO, our interest expense consisted
of interest accrued on our outstanding debt obligations and amortization of debt discounts and deferred issuance costs. Subsequently,
interest expense is mostly limited to a single, $150,000 SBA loan. Other components of other income and expense include changes in the
fair value of financial instruments, gains and losses on extinguishments of debt, and other miscellaneous income or expenses. We also
earn interest income from cash invested in interest-bearing accounts, as well as cash equivalents and short-term investments consisting
of certificates of deposits with original maturities ranging from three to six months.
3. Results of Operations
The following table sets forth our results of
operations for the periods presented:
For the Year Ended December 31,
Consolidated Statements of Operations Data: 2024 2023
Product Revenues – net of Discounts and Rebates $ 607,574 $ 253,573
Research Revenues 73,771 -
Operating Expenses:
Derivative Expense - (399,725 )
Change in Fair Value of Derivative Liabilities 1,665,966 (37,278 )
Loss on Debt Extinguishment - (1,231,480 )
Change in Fair Value of Promissory Note - 5,379,269
Loss from Operations before Provision for Income Taxes (7,955,413 ) (3,813,550 )
Provision for Income Taxes (Note 9) 250 250
Net Loss – Noncontrolling Interest (8,556 ) (48,098 )
48
The following table sets forth our results of
operations as a percentage of revenue:
For the Year Ended December 31,
Consolidated Statements of Operations Data: 2024 2023
Product Revenues – net of Discounts and Rebates 100.00 % 100.00 %
Research Revenues 12.14 -
Operating Expenses:
Derivative Expense - (157.64 )
Change in Fair Value of Derivative Liabilities 274.20 (14.70 )
Loss on Debt Extinguishment - (485.65 )
Change in Fair Value of Promissory Note - 2,121.39
Other Income (Expense), net 16.70 (32.78 )
Total Interest and Other Income (Expense), net 289.60 528.85
Loss from Operations before Provision for Income Taxes (1,309.37 ) (1,503.93 )
Provision for Income Taxes (Note 9) 0.04 0.10
Net Loss including Noncontrolling Interest (1,309.41 ) (1,504.02 )
Net Loss – Noncontrolling Interest (1.41 ) (18.97 )
4. Comparison of the Years Ended December
31, 2024, and 2023
Product Revenues - net of Discounts and Rebates, Cost of Revenues,
Gross Profit (Loss), and Gross Margin
For the Year Ended December 31,
Consolidated Statements of Operations Data: 2024 2023 $ Change % Change
Product Revenues - net of Discounts and Rebates
Our product revenues - net of discounts and rebates
were $607,574 for the year ended December 31, 2024, as compared to $253,573 for the year ended December 31, 2023. For the year ended
December 31, 2024, our U.S. pharmaceutical distributor accounted for 95% of our total net product sales and Kodatef sales to our Australian
distributor accounted for 5% of total net product sales (72% and 21% for the year ended December 31, 2023, respectively). Domestic commercial
product sales are primarily driving increased sales volume during the period.
49
We offer discounts and rebates to the civilian
U.S. supply chain distribution channel. We record sales when our 3PL partner transfers boxes into their title model. Discounts and rebates
offered to our 3PL partner amount to 12% (lower rates available upon reaching larger revenue tiers) along with a $5,500 fixed monthly
fee that started in 2023. The product is then transferred usually to one of the three large U.S. pharmaceutical distributors where rebates
are 10%. Lastly, we have relationships with several large pharmacy benefit managers (“PBMs”) that allow patients to purchase
Arakoda at a discount. The rebate associated with PBMs ranges from 30% to 41.25% depending on the amount of coverage provided. For the
year ended December 31, 2024, discounts and rebates were $476,218 compared to $216,031 for the year ended December 31, 2023.
Arakoda entered the U.S. civilian supply chain
in the third quarter of 2019. For the year ended December 31, 2023, 1,632 boxes were sold to pharmacies and dispensaries. Sales volume
increased by 214% to 5,119 boxes sold to pharmacies and dispensaries for the year ended December 31, 2024. Based on IQVIA data, this
growth in sales volume appears to be driven primarily by organic growth in the Lyme disease community, whose prescribers utilize Arakoda
for treatment of babesiosis.
Kodatef sales to our distributor Biocelect in
Australia for the year ended December 31, 2024 were $30,652 ($53,718 for the year ended December 31, 2023). Sales to Biocelect are currently
subject to a profit share distribution once the original transfer price has been recouped. The most recent sale of boxes to Biocelect
reached profit share at the end of Q1 2024. Biocelect reported approximately 105% year-over-year growth, the equivalent of 1,850 boxes
sold for the year ended December 31, 2024, compared to 903 boxes for the year ended December 31, 2023. As of December 31, 2024, Biocelect’s
unsold inventory that remains subject to profit share was the equivalent of 385 boxes. While growth in Australia is similarly positive
to that in the US, Biocelect has achieved that growth by competing directly with Malarone in terms of price in their market for the approved
antimalarial prophylaxis indication. As of December 31, 2024, $9,444 of profit share was due to us ($0 as of December 31, 2023).
Arakoda sales volume is also showing signs of
sales growth in Europe. We first shipped Arakoda to our distributor Scandinavian Biopharma (“SB”) in September 2022. For
the year ended December 31, 2024, SB reported 147 boxes sold (0 for the year ended December 31, 2023). According to our distributor,
this is due to greater interest in treating babesiosis.
Cost of Revenues, Gross Profit (Loss), and
Gross Margin
Cost of revenues was $384,765 for the year ended
December 31, 2024, as compared to $474,550 for the year ended December 31, 2023. While net product sales increased over the same periods,
the decrease in cost of goods sold is primarily attributable to the fixed part of cost of goods. As the sales volume has increased, the
gross margin has improved as the variable cost of goods of each unit sold is substantially less than the sales price. Additionally, write-downs
for expired inventory were significantly higher during the year ended December 31, 2023 at $191,111, as compared to $22,046 during the
year ended December 31, 2024. Due to these factors, the Gross Margin % increased significantly from (87.15%) for the year ended December
31, 2023 to 37.78% for the year ended December 31, 2024.
Other Operating Revenues
For the Year Ended December 31,
Consolidated Statements of Operations Data: 2024 2023 $ Change % Change
The research revenues earned by us were $73,771
for the year ended December 31, 2024, as compared to $0 for the year ended December 31, 2023. Our research revenues for the year ended
December 31, 2024 primarily relate to research revenues earned from the Australian Tax Authority for research expenses conducted in Australia,
and we earned $55,395 during the year ended December 31, 2024 ($0 during the year ended December 31, 2023). We did not earn research
revenues from the Australian Tax Authority in 2023 due to the cancellation of our COVID-19 trial, after which we made the decision not
to file for the research rebate. In 2024, we also began to recognize research revenues related to the new USAMMDA contract we were awarded
in July 2024 to facilitate commercial validation of a new bottle and replacement blister packaging of Arakoda.
Operating Expenses
For the Year Ended December 31,
Consolidated Statements of Operations Data: 2024 2023 $ Change % Change
50
Research and Development
Research and development costs increased during
the year ended December 31, 2024 when compared to the year ended December 31, 2023. Research and development costs incurred during the
year ended December 31, 2023 consisted of initiation costs related to our Phase IIB COVID-19 clinical trial, which was later suspended
in the fourth quarter of 2023. Direct COVID-19-related trial costs represent less than 1% of the total research and development costs
for the year ended December 31, 2024 at $16,247 and 83% of the costs for the year ended December 31, 2023 at $574,609. During the year
ended December 31, 2024, $3,225,000, or 65% of the total research and development costs, relate to share-based payments granted to two
vendors in January 2023, which payments were initially deferred and capitalized. Kentucky Technology, Inc. delivered us a report on the
potential development of SJ733 + tafenoquine in the second quarter of 2024 and Trevally completed the synthesis of 8.8 kilograms of castanospermine
in the third quarter of 2024, resulting in $2,625,000 and $600,000, respectively, of research and development expense recognized for the
year ended December 31, 2024. We also incurred $1,359,532 in costs related to our babesiosis trial for tafenoquine during the year ended
December 31, 2024 ($0 during the year ended December 31, 2023).
General and Administrative Expenses
For the year ended December 31, 2024, our general
and administrative expenses increased by 18.46% or $783,149 from the year ended December 31, 2023. During the year ended December 31,
2024, we recorded higher compensation expenses including $275,114 of bonus expense and $662,951 of salaries, taxes, and benefits expense,
respectively (compared to $0 and $492,780 for the year ended December 31, 2023, respectively) due to certain sales and performance bonuses
payable to our executives, and higher salaries due to hiring of our new Chief Commercial Officer in February 2024. Additionally, during
the year ended December 31, 2024, we incurred $410,016 in legal and professional fees, $549,912 of insurance expenses, $1,019,111 of
investor outreach expenses, and $433,884 of advertising and promotion expenses (up from $268,611, $304,581, $668,639, and $172,551 for
the year ended December 31, 2023, respectively). These were partially offset by a significant decrease in stock-based compensation, which
decreased from $528,926 for the year ended December 31, 2023 to $32,767 for the year ended December 31, 2024. The decrease is, in part,
due to a decrease in the average grant date fair value of stock-based awards granted in 2024 as compared to 2023, as well as certain
fully vested stock-based awards granted to our directors on the closing date of our IPO, and to our executives at the end of 2023.
Interest and Other Income (Expense), Net
For the Year Ended December 31,
Consolidated Statements of Operations Data: 2024 2023 $ Change % Change
Interest Expense
For the year ended December 31, 2024, we recognized
$7,912 of interest expense ($2,286,637 for the year ended December 31, 2023). The decrease in interest expense is the result of the settlement
or conversion of a majority of our outstanding debt obligations upon the closing of our IPO on July 14, 2023. Cash paid for interest
was $8,772 and $179,117 for the years ended December 31, 2024 and December 31, 2023, respectively.
51
Derivative Expense
For the year ended December 31, 2023, we recognized
$399,725 of derivative expense in connection with the raising of $555,000 in net proceeds from our bridge funding in May 2023. We record
derivative expense when the initial fair value of the related derivative liabilities exceeds the cash proceeds received. We did not record
derivative expense for the year ended December 31, 2024 as we did not complete any debt financing transactions during the period.
Change in Fair Value of Derivative Liabilities
For the year ended December 31, 2024, we recognized a net gain on the
change in fair value of derivative liabilities of $1,665,966 compared to a net loss of $37,278 for the year ended December 31, 2023. During
the year ended December 31, 2024, derivative liabilities include the contingent milestone payment due to Knight upon a future sale of
Arakoda or a Change of Control. The fair value of the contingent milestone payment is inversely related to the net present value of future
investments in the Company and anticipated timing to profitability within our budget models. During the year ended December 31, 2023,
derivative liabilities consisted of bridge shares, certain warrants, and embedded conversion features in our convertible notes, which
were each converted or reclassified to equity upon the closing of our IPO. We use a probability-weighted expected return method or a Monte
Carlo simulation model to estimate the fair value of these instruments.
Loss on Debt Extinguishment
For the year ended December 31, 2024, we did
not recognize a gain or loss on debt extinguishment ($1,231,480 loss recognized during the year ended December 31, 2023). The decrease
is related, in part to the conversion of the cumulative outstanding debt pursuant to the Knight Debt Conversion Agreement in January
2023, which was accounted for as a debt extinguishment, as well as losses recognized upon extinguishment of our interim bridge financing
notes, all of which were settled or converted upon our IPO in July 2023. The net amount for the year ended December 31, 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 year ended December 31, 2023, we recognized
a net gain of $5,379,269 related to the change in the fair value of the Convertible Knight Loan, which was held at fair value beginning
on the modification date in January 2023. The gain relates to the mark to market adjustment recognized immediately prior to the automatic
conversion of the outstanding debt obligation into our equity shares upon the closing of our IPO. We no longer have any debt obligations
measured at fair value on a recurring basis, hence we recorded a $0 change in fair value for the year ended December 31, 2024.
Other Income (Expense), net
For the year ended December 31, 2024, we recognized
$101,464 in other income compared to $83,116 in other expense for the year ended December 31, 2023. As a result of the IPO as well as
additional equity financing transactions completed in 2024, we have earned higher interest income from investing certain cash proceeds
in interest-bearing accounts and short-term certificates of deposit. We recognized interest income of $103,299 during the year ended
December 31, 2024 ($19,985 during the year ended December 31, 2023). Additionally, during the year ended December 31, 2024, we recognized
$10,789 in service revenue in association with the final payment from the USAMMDA for storing Arakoda purchases ($0 for the year ended
December 31, 2023), upon the final resolution of storage fees payable from the USAMMDA under the original development contract entered
into in 2014. As the development contract ended on August 31, 2022, additional storage revenue is not expected in the near future. Other
expense during the year ended December 31, 2023, was primarily related to net foreign exchange transaction losses as well as a one-time
write off of an uncollectible receivable from our 3PL for an uninvoiced return of $48,236.
52
5. Liquidity and Capital Resources
As of December 31, 2024, we had cash and cash
equivalents of $1,659,353 ($2,142,485 as of December 31, 2023). For the year ended December 31, 2024 and 2023, our net cash used in operating
activities was $5,648,088 and $4,542,910, respectively. To date, we have financed our operations primarily through the issuance of common
stock, warrants to purchase common stock, and proceeds from the issuance of convertible debt and promissory notes. Based on current internal
projections, taking into consideration the net proceeds of approximately $1.9 million received under the ATM Agreement, an additional
$5.127 million in cumulative net proceeds received from the September, 2024 Private Placement and 2025 offerings, and recent growth in
Arakoda sales, we estimate that we will have sufficient funds to remain viable through August 31, 2025, excluding the additional costs
of conducting the expanded access study for chronic babesiosis patients (currently being planned), and assuming no additional capital
raises. We cannot give assurance that we can increase our cash balances or limit our cash consumption and thus maintain sufficient cash
balances for our planned operations or future acquisitions. Future business demands may lead to cash utilization at levels greater than
recently experienced. We may need to raise additional capital in the future. However, we cannot assure you that we will be able to raise
additional capital on acceptable terms, or at all.
Going Concern
In their audit report for the fiscal year ended
December 31, 2024, our auditors have expressed their concern as to our ability to continue as a going concern. Our ability to continue
as a going concern is dependent upon our ability to generate cash flows from operations and obtain financing. The audited consolidated
financial statements for the years ended December 31, 2024, and December 31, 2023, respectively, included an explanatory note referring
to our recurring operating losses and expressing substantial doubt in our ability to continue as a going concern.
Our future results are subject to substantial
risks and uncertainties. Since our inception, we have not demonstrated the ability to generate enough revenues to date to cover operating
expenses and we have accumulated losses to date. To date, we have funded our operations primarily with proceeds from sales of common stock
and warrants for the purchase of common stock, sales of preferred stock, proceeds from the issuance of convertible debt and borrowings
under loan and security agreements.
Continuation as a going concern is dependent upon
our ability to meet our financial requirements, raise additional capital, and achieve gross profitability from our single marketed product.
To achieve profitability, we expect we will need to raise additional capital to fund our activities relating to commercial support for
our existing product and any future clinical research trials and operating activities. However, there can be no assurance that we
will ever achieve or maintain profitability. These conditions, among others, raise substantial doubt about our ability to continue as
a going concern for one year from the date these financial statements are issued.
We plan to fund our operations through third party
and related party debt/advances, private placement of restricted securities and the issuance of stock in a subsequent offering until such
a time as the business achieves profitability or a business combination may be achieved. However, there can be no assurance that we will
be successful in raising additional capital or that such capital, if available, will be on terms that are favorable to us. Debt financing
and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations,
or other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams,
research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our
common stock. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit,
reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates
even if we would otherwise prefer to develop and market such product candidates ourselves.
As such, we have concluded that such plans do
not alleviate the substantial doubt about our ability to continue as a going concern for one year from the date the accompanying financial
statements are issued.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction of obligations in the normal course of business, and
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.
53
Contractual Obligations
The following table summarizes our contractual obligations as of December
31, 2024:
Payments Due By Period
Total Less than 1 year 1-3 years 4-5 years More than 5 Years
Amounts related to contingent milestone payments
are not considered contractual obligations as they are contingent on the achievement of certain milestones. These contingent milestones
may or may not be achieved. We have not included any of these amounts in the table above as we cannot estimate or predict when, or if,
these amounts will become due.
Cash Flows
Year Ended December 31,
Net Cash (Used In) Provided By :
Cash Used in Operating Activities
Net cash used in operating activities was $5,648,088
for the year ended December 31, 2024, as compared to $4,542,910 for the year ended December 31, 2023. Our net cash used in operating
activities increased, in part due to higher general and administrative expenses of $5,024,985 for the year ended December 31, 2024 ($4,241,836
for the year ended December 31, 2023) primarily due to higher cash compensation and related expenses, legal and professional fees, insurance
expenses, investor outreach expenses, and advertising and promotion expenses, as discussed above. In addition, we incurred $1,304,183
in costs related to our planned babesiosis trial for tafenoquine during the year ended December 31, 2024 ($0 during the year ended December
31, 2023).
Cash Used in Investing Activities
Net cash used in investing activities was $1,889,114
for the year ended December 31, 2024, as compared to $115,888 for the year ended December 31, 2023. The increase in cash used in investing
activities is primarily driven by purchases of short-term certificates of deposit for a total cost of $1,708,000 during the year ended
December 31, 2024 ($0 during the year ended December 31, 2023), purchased for the purposes of earning interest income. Additionally,
purchases of computer and lab equipment totaled $103,773 during the year ended December 31, 2024 ($57,623 during the year ended December
31, 2023), and capitalized website development costs and patent costs totaled $25,374 and $51,967, respectively, for the year ended December
31, 2024 ($18,283 and $39,982 for the year ended December 31, 2023, respectively).
54
Cash Provided by Financing Activities
Net cash provided by financing activities was
$7,053,571 for the year ended December 31, 2024, as compared to $6,474,565 for the year ended December 31, 2023. The increase in net
cash provided by financing activities is primarily attributable to (i) net proceeds of $1,914,513 received for the sale of common stock
and warrants in January 2024, (ii) net proceeds of $1,790,670 from the sale of common stock pursuant to the At-the-Market Sales Agreement
in July and August 2024, and (iii) $3,439,502 received from the sale of warrants in our Private Placement offering that closed in September
2024, in each case partially offset by payment of deferred offering costs. Cash provided by financing activities for the year ended December
31, 2023 related to net proceeds of $6,454,325 generated from our IPO, which closed on July 14, 2023, as well as $1,131,771 received
from the exercise of warrants, but partially offset by repayments of certain of our outstanding debt obligations in July 2023.
Effect of Foreign Currency Translation on
Cash Flow
Our foreign operations were small relative to
U.S. operations for the years ended December 31, 2024 and December 31, 2023, thus effects of foreign currency translation have been minor.
6. Critical Accounting Policies, Significant
Judgments, and 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.
Revenue Recognition
We recognize revenue in accordance with FASB
ASC Topic No. 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are recognized when control is transferred
to customers in amounts that reflect the consideration we expect to be entitled to receive in exchange for those goods. Revenue recognition
is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification
of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price
to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied. As part
of the accounting for these arrangements, we may be required to make significant judgments, including identifying performance obligations
in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price
to each performance obligation.
Revenues from product sales are recorded at the
net sales price, or “transaction price,” which may include estimates of variable consideration that result from product returns.
We determine the amount of variable consideration by using either the expected value method or the most-likely-amount method. We include
the unconstrained amount of estimated variable consideration in the transaction price, which reflects the amount for which it is probable
that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate
the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjust our estimate
of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment. Reserves
are established for the estimates of variable consideration based on the amounts we expect to be earned or to be claimed on the related
sales.
We record U.S. commercial revenues as a receivable
when our American distributor transfers shipped product to their title model for 60P. Foreign sales to both Australia and Europe are
recognized as a receivable at the point product is shipped to distributor. The shipments to Australia and Europe are further subject
to profit sharing agreements for boxes sold to customers.
55
Inventory
We report inventories at the lower of cost or
net realizable value. Cost is comprised of direct materials and, where applicable, costs we incur in bringing the inventories to their
present location and condition. We use the Specific Identification method per lot. A box price is calculated per lot number and sales
are recognized by their lot number.
We regularly monitor our inventory levels to
identify inventory that may expire or has a cost basis in excess of its estimated realizable value, and record write-downs for inventory
that has expired, inventory that has a cost basis in excess of its expected net realizable value, and inventory in excess of expected
sales requirements. We charge any write-downs of inventories to Cost of Revenues in the Consolidated Statements of Operations and Comprehensive
Loss.
Share-Based Payments
We account for share-based payments in accordance
with ASC Subtopic 718, Compensation - Stock Compensation (“ASC 718”). We measure compensation for all share-based
payment awards granted to employees, directors, and nonemployees, based on the estimated fair value of the awards on the date of grant.
For awards that vest based on continued service, the service-based compensation cost is recognized on a straight-line basis over the
requisite service period, which is generally the vesting period of the awards. For service vesting awards with compensation expense recognized
on a straight-line basis, at no point in time does the cumulative grant date value of vested awards exceed the cumulative amount of compensation
expense recognized. The grant date is determined based on the date when a mutual understanding of the key terms of the share-based awards
is established. We account for forfeitures as they occur.
We estimate the fair value of all stock option
awards as of the grant date by applying the Black-Scholes option pricing model. The application of this valuation model involves assumptions,
including the fair value of the common stock, expected volatility, risk-free interest rate, expected dividends and the expected term
of the option. Due to the lack of a public market for our common stock prior to the IPO and lack of company-specific historical implied
volatility data, we base our computations of expected volatility on the historical volatility of a representative group of public companies
with similar characteristics of the Company, including stage of development and industry focus. The historical volatility is calculated
based on a period of time commensurate with the expected term assumption. We generally use the simplified method as prescribed by the
SEC Staff Accounting Bulletin Topic 14, Share-Based Payment, to estimate the expected term for stock options, whereby, the expected
term equals the midpoint of the weighted average remaining time to vest, vesting period and the contractual term of the options due to
our lack of historical exercise data. For certain options granted out-of-the-money, our best estimate of the expected term is the contractual
term of the award. The risk-free interest rate is based on U.S. Treasury securities with a maturity date commensurate with the expected
term of the associated award. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans
to pay any dividends on our common stock. The assumptions used in calculating the fair value of share-based awards represent our best
estimates and involve inherent uncertainties and the application of significant judgment.
We recognize compensation expense for restricted
stock units (“RSUs”) with only service-based vesting conditions on a straight-line basis over the vesting period. Compensation
cost for service-based RSUs is based on the grant date fair value of the award, which is the closing market price of our common stock
on the grant date multiplied by the number of shares awarded.
For awards that vest upon a liquidity event or
a change in control, the performance condition is not probable of being achieved until the event occurs. As a result, no compensation
expense is recognized until the performance-based vesting condition is achieved, at which time the cumulative compensation expense is
recognized. Compensation cost related to any remaining time-based service for share-based awards after the liquidity-based event is recognized
on a straight-line basis over the remaining service period.
For fully vested, nonforfeitable equity instruments
that are granted at the date we enter into an agreement for goods or services with a nonemployee, we recognize the fair value of the
equity instruments on the grant date. The corresponding cost is recognized as an immediate expense or a prepaid asset and expensed over
the service period depending on the specific facts and circumstances of the agreement with the nonemployee.
56
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 initially qualified for treatment as derivative liabilities as they met the criteria for liability
classification under ASC 815. As of December 31, 2024, our derivative financial instruments consist of contingent payment arrangements.
We analyze all financial instruments with features of both liabilities
and equity under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic
No. 480, Distinguishing Liabilities from Equity (“ASC 480”), and FASB ASC Topic No. 815, Derivatives and Hedging
(“ASC 815”). Derivative liabilities are adjusted to reflect fair value at each reporting period, with any increase or decrease
in the fair value recorded in the results of operations, as a component of other income or expense as change in fair value of derivative
liabilities. We use a Monte Carlo simulation model or a probability-weighted expected return method 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, relieve all
related debt, derivative liabilities, and unamortized debt discounts, and recognize a net gain or loss on debt extinguishment, if any.
Equity or liability instruments that become subject
to reclassification under ASC Topic 815 are reclassified at the fair value of the instrument on the reclassification date.
Off-Balance Sheet Arrangements
During 2024 and 2023, we did not have any relationships
with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been
established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
57
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.
Recent Accounting Pronouncements
From time to time, the FASB issues Accounting
Standards Update (“ASUs”) to amend the authoritative literature in the ASC. We regularly evaluate new ASUs to determine the
impact that these pronouncements may have on our consolidated financial statements. Other than the pronouncements listed below, management
believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, or (iii) are not applicable
to our consolidated financial statements or related disclosures.
In November 2023, the FASB issued ASU 2023-07,
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”) which expands annual
and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses
and segment profit or loss. ASU 2023-07 also requires entities with a single reportable segment to provide all segment disclosures under
ASC 280, including the new required disclosures under the ASU. We adopted ASU 2023-07 on a retrospective basis for the 2024 annual period,
and for interim periods beginning in 2025. The impact is limited to our financial statement disclosures, which are presented in Note
2 to the accompanying consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09,
Income Taxes (ASC 740): Improvements to Income Tax Disclosures (“ASU 2023-09”) which requires disaggregated information
about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. ASU 2023-09 is effective
for fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact that ASU 2023-09
will have on our financial statement disclosures.
In November 2024, the FASB issued ASU 2024-03,
Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation
of Income Statement Expenses (“ASU 2024-03”), which applies to all public business entities that file financial statements
with the SEC. The amendments in this ASU require public business entities to disclose on an annual and interim basis, disaggregated information
about certain income statement expense line items. The new standard is effective for fiscal years beginning after December 15, 2026,
with early adoption permitted. We are currently evaluating the impact that ASU 2024-03 will have on our financial statement disclosures.
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk.
We qualify as a smaller reporting company, as
defined by SEC Rule 229.10(f)(1) and are not required to provide the information required by this Item.
58
Item 8. Financial Statements
and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-2
Audited Consolidated Balance Sheets at December 31, 2024 and 2023 F-3
Notes to Audited Consolidated Financial Statements F-8
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
60 Degrees Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of 60 Degrees Pharmaceuticals, Inc. and subsidiary (“the Company”) as of December 31, 2024 and 2023, and the
related statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the years in the two-year
period ended December 31, 2024, and the related notes (collectively referred to as the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results
of its operations and its cash flows for each of the years in the two-year period ended December 31, 2024, in conformity with accounting
principles generally accepted in the United States of America.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements,
the Company has an accumulated deficit, recurring losses and expects future losses that raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding
these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RBSM LLP
PCAOB ID Number 587 We have served as the Company’s auditor since 2022.
Las Vegas, Nevada
F-2
60
DEGREES PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE
SHEETS
December 31, December 31,
ASSETS:
Current Assets:
Other Assets:
Right of Use Asset (Note 11) - 13,517
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities:
SBA EIDL (including accrued interest) (Note 7) 8,772 8,772
Long-Term Liabilities:
Commitments and Contingencies (Note 11)
SHAREHOLDERS’ EQUITY:
See accompanying notes
to these consolidated financial statements which are an integral part of these consolidated financial statements.
F-3
60 DEGREES PHARMACEUTICALS,
INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
For the Years Ended December 31,
Product Revenues – net of Discounts and Rebates $ 607,574 $ 253,573
Research Revenues 73,771 -
Operating Expenses:
Derivative Expense - (399,725 )
Change in Fair Value of Derivative Liabilities 1,665,966 (37,278 )
Loss on Debt Extinguishment - (1,231,480 )
Change in Fair Value of Promissory Note - 5,379,269
Loss from Operations before Provision for Income Taxes (7,955,413 ) (3,813,550 )
Provision for Income Taxes (Note 9) 250 250
Net Loss – Noncontrolling Interest (8,556 ) (48,098 )
Comprehensive Loss:
Unrealized Foreign Currency Translation (Loss) Gain (90 ) 61,853
Net Loss – Noncontrolling Interest (8,556 ) (48,098 )
Cumulative Dividends on Series A Preferred Stock (483,301 ) (220,714 )
Net Loss - attributed to common stockholders $ (8,430,498 ) $ (3,924,563 )
Net Loss per Common Share:
Weighted Average Number of Common Shares Outstanding
See accompanying notes to these consolidated
financial statements which are an integral part of these consolidated financial statements.
F-4
60 DEGREES PHARMACEUTICALS,
INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
For the Year Ended December 31, 2024
Issuance of shares for RSUs - - 4,270 - - - - - -
Net foreign translation loss - - - - - - (90 ) (90 ) - (90 )
F-5
For the Year Ended December 31, 2023
Cancellation of common stock - - (24,186 ) (2 ) 2 - - - - -
See accompanying notes to these consolidated
financial statements which are an integral part of these consolidated financial statements.
F-6
60 DEGREES
PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Amortization of Debt Discount - 669,148
Amortization of Note Issuance Costs - 67,728
Amortization of Capitalized Share-Based Payments 3,575,881 994,643
Share-Based Compensation to Vendors for Services - 212,605
Share-Based Compensation under Equity Incentive Plan 32,767 528,926
Loss on Debt Extinguishment - 1,231,480
Change in Fair Value of Derivative Liabilities (1,665,966 ) 37,278
Change in Fair Value of Promissory Note - (5,379,269 )
Write-offs of Capitalized Patents 108,424 -
Changes in Operating Assets and Liabilities:
Deferred Compensation - (100,000 )
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Short-Term Investments (1,708,000 ) -
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Exercise of Warrants - 1,131,771
Proceeds from Exercise of Pre-Funded Warrants 10,963 -
Proceeds from Notes Payable - 650,000
Repayment of Notes Payable - (1,611,111 )
Proceeds from Advances - Related Party - 250,000
Repayment of Related Party Advances - (250,000 )
Effect of Exchange Rate Changes on Cash 499 61,853
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid During the Year for Interest $ 8,772 $ 179,117
Cash paid During the Year for Income Taxes $ 2,000 $ 1,000
NONCASH INVESTING/FINANCING ACTIVITIES
Conversion of Debt into Common Stock $ - $ 7,989,598
Conversion of Debt into Series A Preferred Stock $ - $ 10,128,500
Conversion of Series A Preferred Stock into Common Stock $ 290,601 $ 270,460