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.
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 ArakodaTM 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”).
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 and inventory write-downs due
to expiry.
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 cover additional research beyond the scope of COVID-19.
We also earn research revenues from the Australian
Tax Authority for qualified research activities conducted in Australia.
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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 expensed over the service period as the services
are provided. We have also issued shares of our common stock in exchange for research and development services.
General and Administrative Expenses
Our general and administrative expenses primarily
consist of salaries, advertising and promotion expenses, professional services fees, such as consulting, audit, accounting and legal fees,
general corporate costs and allocated costs, including facilities, information technology and amortization of intangibles.
Interest and Other Income (Expense), Net
Interest expense consists of interest accrued
on our outstanding debt obligations and related amortization of debt discounts and deferred issuance costs. Other components of other
income (expense) include changes in the fair value of financial instruments, gains and 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.
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: 2023 2022
Product Revenues – net of Discounts and Rebates $ 253,573 $ 192,913
Operating Expenses:
Change in Fair Value of Derivative Liabilities (37,278 ) (10,312 )
Change in Fair Value of Promissory Note 5,379,269 -
Loss from Operations before Provision for Income Taxes (3,813,550 ) (6,177,284 )
Provision for Income Taxes 250 500
Net (Loss) Income – Noncontrolling Interest (48,098 ) 3,936
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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: 2023 2022
Product Revenues – net of Discounts and Rebates 100.00 % 86.43 %
Service Revenues - 13.57
Research Revenues - 129.03
Operating Expenses:
Change in Fair Value of Derivative Liabilities (14.70 ) (4.62 )
(Loss) Gain on Debt Extinguishment (485.65 ) 54.07
Change in Fair Value of Promissory Note 2,121.39 -
Total Interest and Other Income (Expense), net 528.85 (1,983.28 )
Loss from Operations before Provision for Income Taxes (1,503.93 ) (2,767.50 )
Provision for Income Taxes 0.10 0.22
Net Loss including Noncontrolling Interest (1,504.02 ) (2,767.73 )
Net (Loss) Income – Noncontrolling Interest (18.97 ) 1.76
Comparison of the Years Ended December 31, 2023, and 2022
Product Revenues - net of Discounts and Rebates, Service Revenues,
Cost of Revenues, Gross Loss, and Gross Margin
For the Year Ended December 31,
Consolidated Statements of Operations Data: 2023 2022 $ Change % Change
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Product Revenues - net of Discounts and Rebates
Our product revenues – net of discounts
and rebates were $253,573 for the year ended December 31, 2023, as compared to $192,913 for the year ended December 31, 2022. For the
year ended December 31, 2023, our U.S. pharmaceutical distributor accounted for 72% of our total net product sales and Kodatef sales to
our Australian distributor accounted for 21% of total net product sales (46% and 39% for the year ended December 31, 2022, respectively).
The increase in product sales is primarily due to increased sales volume during the period and was partially offset by the reduction of
our wholesale acquisition cost (sales price) of ArakodaTM (16 x 100 mg tablets) from $285 to $235 per box in January 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 12% along with a fixed monthly fee that started in 2023 (2% and no fixed fee in 2022). 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% (15 to 39.75% in 2022) depending on the amount of coverage provided. For the
year ended December 31, 2023, discounts and rebates were $216,031 compared to $59,552 for the year ended December 31, 2022.
Arakoda entered the U.S. civilian supply chain
in the third quarter of 2019. For the year ended December 31, 2022, 570 boxes were sold to pharmacies and dispensaries. Sales volume increased
by 186% to 1,632 boxes sold to pharmacies and dispensaries for the year ended December 31, 2023. This growth in sales volumes is a combination
of 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 more closely to the growth in discounts and rebates previously discussed than our reported sales to our 3PL.
Kodatef sales to our distributor Biocelect in
Australia for the year ended December 31, 2023 were $53,718 ($86,763 for the year ended December 31, 2022). Sales to Biocelect are currently
subject to a profit share distribution once the original transfer price has been recouped. As of December 31, 2023, no profit share has
been due to us ($0 as of December 31, 2022), though we did settle the historical profit share through September 30, 2022 for $24,486 (AUD$35,000)
on January 16, 2023.
Arakoda sales to our distributor Scandinavian
Biopharma in Europe for the year ended December 31, 2023 were $18,000 ($18,000 for the year ended December 31, 2022). The distributor
has also reported increased interest from consumers in Europe seeking treatment for Babesiosis.
Service Revenues
During the year ended December 31, 2022, we earned $30,295 from storing
Arakoda purchased by the United States Army Medical and Materiel Development Activity (USAMMDA), compared to $0 earned during the year
ended December 31, 2023. The service revenue contract from USAMMDA ended on August 31, 2022, though an insignificant amount was earned
on the contract in the beginning of 2024 in association with final payment of the storage revenue receivable from 2022.
Cost of Revenues, Gross Loss, and Gross Margin
Cost of revenues was $474,550 for the year ended December 31, 2023,
as compared to $432,370 for the year ended December 31, 2022. The increase in cost of goods sold is in part, due to the 31.44% increase
in product sales over the same periods, as well as higher write-offs for expired inventory, which increased to $191,111 for the year ended
December 31, 2023 (up from $162,222 for the year ended December 31, 2022). Despite higher write-offs, the Gross Margin % increased to
(87.15)% for the year ended December 31, 2023 from (93.71)% for the year ended December 31, 2022.
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Other Operating Revenues
For the Year Ended December 31,
Consolidated Statements of Operations Data: 2023 2022 $ Change % Change
The research revenues earned by us were $0 for
the year ended December 31, 2023, as compared to $288,002 for the year ended December 31, 2022. Our research revenues for the year ended
December 31, 2022 were primarily derived from remnants of a research grant received in 2021 to study Arakoda in mild-to-moderate COVID-19
patients. The study was completed in 2022, therefore we recognized $0 in research revenues from the COVID-19 grant during the year ended
December 31, 2023. We also earn research revenues from the Australian Tax Authority for research expenses conducted in Australia. The
revenue was $42,250 for the year ended December 31, 2022 compared to $0 for the year ended December 31, 2023. We had been accruing anticipated
research rebates quarterly but after the COVID-19 research cancellation, in the fourth quarter of 2023, we made the decision not to file
for the research rebate and reversed the previously accrued revenues and charged them to research and development.
Operating Expenses
For the Year Ended December 31,
Consolidated Statements of Operations Data: 2023 2022 $ Change % Change
Research and Development
Research and development costs increased during
the year ended December 31, 2023 when compared to the year ended December 31, 2022. Research and development costs incurred during the
year ended December 31, 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 year ended December 31, 2023, we incurred
initial costs related to our Phase II B clinical trial, which was then suspended in the fourth quarter of 2023. Direct COVID-19-related
trial costs are 83% of the costs for the year ended December 31, 2023 at $574,609 and 49% of the costs at $256,581 for the year ended
December 31, 2022.
General and Administrative Expenses
For the year ended December 31, 2023, our general and administrative
expenses increased by 225.36% or $2,938,114 from the year ended December 31, 2022. During the year ended December 31, 2023, we incurred
significantly higher compensation expenses as a result of compensation arrangements with our directors, which came into effect on the
date of our IPO, and year-end bonuses of restricted stock units to our executives. Pursuant to these arrangements, we recognized $528,926
in stock-based compensation expense and $99,000 in cash compensation to our directors during the year ended December 31, 2023 ($0 and
$0 for the year ended December 31, 2022, respectively). Additionally, during the year ended December 31, 2023, we incurred $969,581 in
accounting, audit, legal and professional fees, $304,581 of insurance expenses, and $668,639 of investor-related outreach expenses (up
from $656,089, $84,879, and $142 for the year ended December 31, 2022, respectively).
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Interest and Other Income (Expense), Net
For the Year Ended December 31,
Consolidated Statements of Operations Data: 2023 2022 $ Change % Change
Interest Expense
For the year ended December 31, 2023, we recognized
$2,286,637 of interest expense ($3,989,359 for the year ended December 31, 2022). 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 $179,117 and $2,193 for the years ended December 31, 2023 and December 31, 2022, respectively.
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 recognized
$504,613 of derivative expense during the year ended December 31, 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 proceeds received.
Change in Fair Value of Derivative Liabilities
For the year ended December 31, 2023, we recognized
a loss due to the change in fair value of derivative liabilities of $37,278 compared to $10,312 for the year ended December 31, 2022.
(Loss) Gain on Debt Extinguishment
For the year ended December 31, 2023, we recognized
a $1,231,480 net loss on debt extinguishment, compared to a $120,683 net gain on debt extinguishment for the year ended December 31, 2022.
The gain recognized for the year ended December 31, 2022 was due to our renegotiation of the Xu Yu promissory note in December 2022 to
add an equity conversion feature, which was accounted for under the debt extinguishment model. The loss for the year ended December 31,
2023 is related, in part to the exchange of the cumulative outstanding debt pursuant to the Knight Debt Conversion Agreement in January
2023, 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 promissory note with Knight, which was carried 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 year
ended December 31, 2022.
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Other Expenses, net
For the year ended December 31, 2023, we recognized $83,116 in other
expenses compared to $43,238 for the year ended December 31, 2022. During the year ended December 31, 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 year ended December 31, 2023 and 2022, our net cash used in
operating activities was $4,542,910 and $1,009,980, respectively and the cash balance was $2,142,485 as of December 31, 2023 ($264,865
as of December 31, 2022). To date, we have funded our operations through debt and equity financings. Based on current internal projections,
taking into consideration the net proceeds of approximately $1.9 million received in connection with the offering completed in January
2024, recent growth in Arakoda sales, and preparatory clinical trial activities, we estimate that we will have sufficient funds to remain
viable through October 31, 2024. We cannot give assurance that we can increase our cash balances or limit our cash consumption and thus
maintain sufficient cash balances for our planned operations or future acquisitions. Future business demands may lead to cash utilization
at levels greater than recently experienced. We may need to raise additional capital in the future. However, we cannot assure you that
we will be able to raise additional capital on acceptable terms, or at all.
Going Concern
As of December 31, 2023, we had an accumulated deficit of $32,580,850.
In their audit report for the fiscal year ended December 31, 2023, our auditors have expressed their concern as to our ability to continue
as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate cash flows from operations and
obtain financing.
The consolidated financial statements for the
years ended December 31, 2023, and December 31, 2022, respectively, included an explanatory note referring to our recurring operating
losses and expressing substantial doubt in our ability to continue as a going concern. The accompanying financial statements are prepared
on a going concern basis, which contemplates the realization of assets and the satisfaction of obligations in the normal course of business.
However, we have not demonstrated the ability to generate enough revenues to date to cover operating expenses and have accumulated losses
to date. This condition, among others, raises substantial doubt about our ability to continue as a going concern for one year from the
date these financial statements are issued.
In view of these matters, continuation as a going
concern is dependent upon our ability to meet financial requirements, raise additional capital, and achieve gross profitability from our
single marketed product. We plan to fund our operations through third party and related party debt/advances, private placement of restricted
securities and the issuance of stock in a subsequent offering until such a time as we are able to generate profitable operations or a
business combination may be achieved.
Our consolidated 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 December
31, 2023:
Payments Due By Period
Total Less than 1 year 1-3 years 3-5 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.
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Cash Flows
Year Ended December 31,
Net Cash Provided By (Used In):
Cash Used in Operating Activities
Net cash used in operating activities was $4,542,910 for the year ended
December 31, 2023, as compared to $1,009,980 for the year ended December 31, 2022. Our net cash used in operating activities increased
as a result of higher general and administrative expenses of $4,241,836 for the year ended December 31, 2023 ($1,303,722 for the year
ended December 31, 2022), primarily related to higher legal, accounting, and professional fees, and investor-related outreach expenses
preceding our IPO in July 2023. In addition, we paid more cash to settle our accounts payable and other accrued liabilities during the
year ended December 31, 2023 when compared to the year ended December 31, 2022.
Cash Used in Investing Activities
Net cash used in investing activities was $115,888 for the year ended
December 31, 2023, as compared to $60,133 for the year ended December 31, 2022. The increase in cash used in investing activities is primarily
attributable to higher purchases of property and equipment of $57,623 for the year ended December 31, 2023, as compared to $0 for the
year ended December 31, 2022.
Cash Provided by Financing Activities
Net cash provided by financing activities was
$6,474,565 for the year ended December 31, 2023, as compared to $1,221,706 for the year ended December 31, 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. Cash provided by financing activities for the year ended December 31, 2022 was primarily due to our interim bridge debt
financing raise in May 2022 and advances from related parties.
Effect of Foreign Currency Translation on
Cash Flow
Our foreign operations were small relative to
U.S. operations for the year ended December 31, 2023 and December 31, 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.
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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 measure compensation for all share-based payment
awards granted to employees, directors, and nonemployees, based on the estimated fair value of the awards on the date of grant. For awards
that vest based on continued service, the service-based compensation cost is recognized on a straight-line basis over the requisite service
period, which is generally the vesting period of the awards. For service vesting awards with compensation expense recognized on a straight-line
basis, at no point in time does the cumulative grant date value of vested awards exceed the cumulative amount of compensation expense
recognized. The grant date is determined based on the date when a mutual understanding of the key terms of the share-based awards is established.
We account for forfeitures as they occur.
We estimate the fair value of all stock option
awards as of the grant date by applying the Black-Scholes option pricing model. The application of this valuation model involves assumptions,
including the fair value of the common stock, expected volatility, risk-free interest rate, expected dividends and the expected term of
the option. Due to the lack of a public market for our common stock prior to the IPO and lack of company-specific historical implied volatility
data, we base our computations of expected volatility on the historical volatility of a representative group of public companies with
similar characteristics of the Company, including stage of development and industry focus. The historical volatility is calculated based
on a period of time commensurate with the expected term assumption. We use the simplified method as prescribed by the SEC Staff Accounting
Bulletin Topic 14, Share-Based Payment, to calculate the expected term for stock options, whereby, the expected term equals the
midpoint of the weighted average remaining time to vest, vesting period and the contractual term of the options due to our lack of historical
exercise data. The risk-free interest rate is based on U.S. Treasury securities with a maturity date commensurate with the expected term
of the associated award. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to
pay any dividends on our common stock. The assumptions used in calculating the fair value of share-based awards represent our best estimates
and involve inherent uncertainties and the application of significant judgment.
We recognize compensation expense for restricted
stock units (“RSUs”) with only service-based vesting conditions on a straight-line basis over the vesting period. Compensation
cost for service-based RSUs is based on the grant date fair value of the award, which is the closing market price of our common stock
on the grant date multiplied by the number of shares awarded.
For awards that vest upon a liquidity event or
a change in control, the performance condition is not probable of being achieved until the event occurs. As a result, no compensation
expense is recognized until the performance-based vesting condition is achieved, at which time the cumulative compensation expense is
recognized. Compensation cost related to any remaining time-based service for share-based awards after the liquidity-based event is recognized
on a straight-line basis over the remaining service period.
For fully vested, nonforfeitable equity instruments
that are granted at the date we enter into an agreement for goods or services with a nonemployee, we recognize the fair value of the equity
instruments on the grant date. The corresponding cost is recognized as an immediate expense or a prepaid asset and expensed over the service
period depending on the specific facts and circumstances of the agreement with the nonemployee.
Derivative Liabilities
We assess the classification of our derivative
financial instruments each reporting period, which formerly consisted of bridge shares, convertible notes payable, and certain warrants,
and determined that such instruments qualified for treatment as derivative liabilities as they met the criteria for liability classification
under ASC 815 (excluding certain warrants issued in connection with the IPO). As of December 31, 2023, our derivative financial instruments
consist of contingent payment arrangements.
We analyze all financial instruments with features
of both liabilities and equity under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic No. 480, (“ASC 480”), Distinguishing Liabilities from Equity and FASB ASC Topic No. 815, Derivatives and Hedging (“ASC
815”). Derivative liabilities are adjusted to reflect fair value at each reporting period, with any increase or decrease in the
fair value recorded in the results of operations (other income/expense) as change in fair value of derivative liabilities. We use a 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, 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.
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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. The District of Columbia (“DC”) taxes corporations on form D-20 (DC Corporation Franchise Tax Return) and
returns have a minimum tax due of $250 if gross receipts are at $1 million or less and $1,000 if above. The tax years that remain subject
to examination by major tax jurisdictions include the years ended December 31, 2020, 2021, 2022 and 2023.
60P Australia Pty Ltd. is subject to the taxes
of the Australian Taxation Office and 60P Singapore Pte Ltd. was subject to the taxes of the Inland Revenue Authority of Singapore prior
to its dissolution as of March 31, 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. In determining the need for a valuation allowance, we have given consideration to our
worldwide cumulative loss position when assessing the weight of the sources of taxable income that can be used to support the realization
of deferred tax assets.
We have assessed, on a jurisdictional basis, the
available means of recovering deferred tax assets, including the ability to carry-back net operating losses, the existence of reversing
temporary differences, the availability of tax planning strategies and available sources of future taxable income. On the basis of this
evaluation, we have determined that it is more likely than not that we will not recognize the benefits of the U.S. Federal, state and
net deferred tax assets, and, as a result, a full valuation allowance has been set against our net deferred tax assets as of December
31, 2023 and December 31, 2022.
During the ordinary course of business, there
are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties
based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that
certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves
in light of changing facts and circumstances, such as the outcome of tax examinations. As of December 31, 2023 and December 31, 2022,
we have not established any reserves for uncertain tax positions.
We recognize interest and penalties accrued related
to unrecognized tax benefits as income tax expense. During the years ended December 31, 2023 and 2022, we did not recognize interest and
penalties related to unrecognized tax benefits.
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’s 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 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 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.
In November 2023, the FASB issued 2023-07, Segment Reporting (Topic
280): Improvements to Reportable Segment Disclosures, which expands annual and interim disclosure requirements for reportable segments,
primarily through enhanced disclosures about significant segment expenses and segment profit or loss. The ASU also requires entities with
a single reportable segment to provide all segment disclosures under ASC 280, including the new required disclosures under the ASU. The
ASU is effective for all public entities with fiscal years beginning after December 15, 2023, and interim periods within fiscal years
beginning after December 15, 2024, with early adoption permitted. The ASU must be applied retrospectively. We are currently evaluating
the impact that ASU 2023-07 will have on our financial statement disclosures.
In December 2023, the FASB issued ASU 2023-09,
Income Taxes (ASC 740): Improvements to Income Tax Disclosures, which requires disaggregated information about a reporting entity’s
effective tax rate reconciliation as well as information on income taxes paid. ASU 2023-09 is effective for fiscal years beginning after
December 15, 2024, with early adoption permitted. We are currently evaluating the impact that ASU 2023-09 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.
52
Item 8. Financial Statements and Supplementary
Data.
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm F-2
Audited Consolidated Balance Sheets at December 31, 2023 and 2022 F-3
Notes to Audited Consolidated Financial Statements F-8
F-1
REPORTS 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. (formerly known as 60 Degrees Pharmaceuticals, LLC) and subsidiary (“the Company”)
as of December 31, 2023 and 2022, and the related statements of operations and comprehensive loss, shareholders’ and members’
deficit, and cash flows for each of the years in the two-year period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year
period ended December 31, 2023, 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:
Deferred Offering Costs - 68,629
Other Assets:
Long-Term Prepaid Expense 242,647 -
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Deferred Compensation (Note 7) - 325,000
Related Party Notes, net (including accrued interest) (Note 8) - 195,097
SBA EIDL (including accrued interest) (Note 8) 8,772 2,750
Promissory Notes (including accrued interest) (Note 8) - 16,855,887
Derivative Liabilities - Related Parties (Note 9) - 364,360
Long-Term Liabilities:
Deferred Compensation (Note 7) - 255,000
Promissory Notes (including accrued interest) (Note 8) - 1,109,783
Commitments and Contingencies (Note 12)
SHAREHOLDERS’ EQUITY (DEFICIT)
Total Liabilities and Shareholders’ Equity (Deficit) $ 7,783,771 $ 1,297,206
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 $ 253,573 $ 192,913
Operating Expenses:
Change in Fair Value of Derivative Liabilities (37,278 ) (10,312 )
Change in Fair Value of Promissory Note 5,379,269 -
Loss from Operations before Provision for Income Taxes (3,813,550 ) (6,177,284 )
Provision for Income Taxes (Note 10) 250 500
Net (Loss) Income – Noncontrolling Interest (48,098 ) 3,936
Comprehensive Loss:
Unrealized Foreign Currency Translation Gain (Loss) 61,853 (2,127 )
Net (Loss) Income – Noncontrolling Interest (48,098 ) 3,936
Cumulative Dividends on Series A Preferred Stock (220,714 ) -
Net Loss - attributed to common stockholders $ (3,924,563 ) $ (6,183,847 )
Net Loss per Common Share:
Basic and Diluted $ (0.99 ) $ (2.61 )
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’
AND MEMBERS’ EQUITY (DEFICIT)
For the Year Ended December 31, 2022
Units Amount Shares Amount Capital Deficit (Loss) to 60P Shareholders Deficit
F-5
For the Year Ended December 31, 2023
Shares Amount Shares Amount Capital Deficit (Loss) to 60P Shareholders (Deficit)
Cancellation of common stock - - (1,451,000 ) (145 ) 145 - - - - -
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 Capitalized Share-Based Payments 994,643 -
Share-Based Compensation to Vendors for Services 212,605 -
Share-Based Compensation under 2022 Equity Incentive Plan 528,926 -
Change in Fair Value of Derivative Liabilities 37,278 10,312
Change in Fair Value of Promissory Note (5,379,269 ) -
Changes in Operating Assets and Liabilities:
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment (57,623 ) -
Net Cash Used in Investing Activities (115,888 ) (60,133 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the Exercise of Warrants 1,131,771 -
Proceeds from Notes Payable - Related Parties - 305,000
Repayment of Notes Payable (1,611,111 ) -
Repayment of Related Party Advances (250,000 ) -
Foreign Currency Translation Gain (Loss) 61,853 (2,127 )
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid During the Year for Interest $ 179,117 $ 2,193
Cash paid During the Year for Income Taxes $ 1,000 $ 1,000
NONCASH INVESTING/FINANCING ACTIVITIES
Conversion of Debt into Common Stock $ 7,989,598 $ -
Conversion of Related Party Advance into Common Stock $ - $ 185,335
Conversion of Debt into Series A Preferred Stock $ 10,128,500 $ -
Conversion of Series A Preferred Stock into Common Stock $ 270,460 $ -
Capitalized Share-Based Payments to Vendors $ 4,916,555 $ -
Additions to ROU Assets for Lease Renewal $ 50,922 $ -
Additions to Lease Liabilities for Lease Renewal $ 50,570 $ -
Conversion of 60P LLC Member Units to Common Stock $ - $ 4,979,365
Stock Issued for Payment of Deferred Compensation $ 520,000 $ -
Stock Issued for Acquisition of Intangibles $ 33,895 $ -
Fair Value of Warrants Issued to Underwriters $ 301,416 $ -
See accompanying notes to these consolidated
financial statements which are an integral part of these consolidated financial statements.
F-7
60 DEGREES PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED 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 subsidiary (referred to collectively
as the “Company”, “60P”, or “60 Degrees Pharmaceuticals”) is a specialty pharmaceutical company that
specializes in the development and marketing of new medicines for the treatment and prevention of infectious diseases. 60P achieved FDA
approval of its lead product, ARAKODA® (tafenoquine), for malaria prevention, in 2018. Currently, 60P’s pipeline under development
covers development programs for tick-borne fungal and other viral diseases utilizing three of the Company’s future products: (i)
new products that contain the Arakoda regimen of tafenoquine; (ii) new products that contain tafenoquine; and (iii) celgosivir. The Company’s
headquarters are located in Washington, D.C., with a majority-owned subsidiary in Australia.
Initial Public Offering
On July 14, 2023, the Company closed its initial public offering consisting
of 1,415,095 units at a price of $5.30 per unit for $6,454,325 in net proceeds, after deducting the underwriting discount and commission
and other estimated offering expenses paid by the Company at closing (the “IPO”). Each unit consisted of one share of common
stock of the Company, par value $0.0001 per share, one tradeable warrant to purchase one share of common stock at an exercise price of
$6.095 per share (a “Tradeable Warrant”), and one non-tradeable warrant to purchase one share of the Company’s common
stock at an exercise price of $6.36 per share (a “Non-tradeable Warrant”). The Tradeable Warrants and Non-Tradeable Warrants
are immediately exercisable on the date of issuance and will expire five years from the date of issuance (July 12, 2023 to July 12, 2028).
The Company granted the underwriters a 45-day
over-allotment option to purchase up to 212,265 shares of the Company’s 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 (the “Over-Allotment”). On July 13, 2023, the underwriters partially exercised the Over-Allotment
and purchased an additional 100,644 Tradeable Warrants and 100,644 Non-tradeable Warrants. The Company also issued to the underwriters
warrants to purchase 84,906 shares of the Company’s common stock, at an exercise price of $5.83 per share, equal to 110% of the