60 Degrees Pharmaceuticals, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
60 Degrees Pharmaceuticals is a specialty pharmaceutical company developing and commercializing infectious-disease medicines. Its lead product, ARAKODA (tafenoquine), is FDA-approved for malaria prevention. The company also has development programs involving tafenoquine-based products and celgosivir for COVID-19, fungal, tick-borne and other viral diseases. The unaudited report covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Product revenue | $51,188 | $168,185 | $127,892 | $260,382 |
| Research revenue | $75,566 | $150,262 | $82,974 | $259,669 |
| Net revenue | $55,558 | $226,166 | $(117,427) | $250,516 |
| Gross profit/(loss) | $(20,008) | $75,904 | $(200,401) | $(9,153) |
| Gross margin | (39.1%) | 45.1% | (156.7%) | (3.5%) |
| Operating loss | $(1,521,762) | $(215,116) | $(3,260,422) | $(1,065,747) |
| Net income/(loss) attributable to 60P | $4,183,198 | $(1,447,495) | $(1,753,418) | $(4,506,676) |
| Net income/(loss) per common share | $0.77 | $(0.61) | $(0.55) | $(1.92) |
- Q3 product revenue decreased 69.6%, primarily because there were no international sales; U.S. product revenue increased, and pharmacy and dispensary volumes rose to 550 boxes from 159.
- Nine-month product revenue declined 50.9% because international sales fell to zero, while U.S. volume increased to 1,059 boxes from 386.
- Cost of revenues exceeded product revenue in both periods. The nine-month gross loss was adversely affected by inventory-related charges, including an allowance for expiring inventory.
- Operating expenses increased 257.4% in Q3 and 138.8% for the nine-month period. Nine-month research and development expense was $591,569 and general and administrative expense was $2,551,426.
- Q3 and nine-month net income were dominated by non-operating and largely non-cash items, including a $6.1 million Q3 and $5.4 million nine-month gain from the change in fair value of the Knight promissory note. The company remained loss-making at the operating level.
- Net cash used in operating activities was $4.48 million for the nine months ended September 30, 2023, compared with $944,003 in the prior-year period. Net cash used in investing activities was $49,326.
- Financing activities provided $6.47 million, including $6.45 million of net IPO proceeds and $1.13 million from warrant exercises, partly offset by debt repayments. Cash was $2.22 million at September 30, 2023, versus $264,865 at December 31, 2022.
- Total liabilities were $2.63 million at September 30, 2023, compared with $25.45 million at year-end 2022. Most promissory notes, the Knight debt and the debenture were converted, repaid or extinguished in connection with the IPO. Remaining debt principally consists of the SBA EIDL, with a balance of approximately $161,366 including accrued interest.
- The company reported shareholders’ equity of $6.52 million at September 30, 2023, compared with a deficit of $24.15 million at December 31, 2022. Accumulated deficit was $30.57 million.
Material changes versus the prior comparable period
- The company completed its IPO in July 2023, issuing 1,415,095 units at $5.30 per unit and receiving $6.45 million of net proceeds. The units included common stock and tradeable and non-tradeable warrants.
- Debt restructuring substantially changed the capital structure. Knight converted principal into 1,108,337 common shares and accumulated interest into 80,965 Series A preferred shares. Other notes were converted into common stock or settled for cash.
- At September 30, 2023, 5,799,535 common shares and 78,803 Series A preferred shares were outstanding. Approximately 3.16 million warrants were outstanding and exercisable, with a weighted-average exercise price of $6.17.
- Q3 operating losses widened substantially as revenue declined and post-IPO director, executive, legal, professional, investor-relations and other corporate costs increased.
- Research revenue declined as the prior U.S. government COVID-19 grant largely wound down. The company’s Q3 2023 research revenue consisted entirely of Australian Tax Authority-related research revenue.
- In August 2023, the company’s ownership of 60P Australia increased from 87.53% to 96.61% through the assignment of an interest to the company without consideration.
Guidance, outlook, risks and unusual items
- Management expects to focus on increasing ARAKODA sales, building a commercial sales capability, and pursuing additional indications and complementary products. No specific revenue or earnings guidance was provided.
- The company withdrew or suspended its COVID-19 development effort after FDA feedback and plans instead to prepare a Phase IIA study of tafenoquine in hospitalized babesiosis patients. Management stated that a Phase II study is planned for 2024, subject to resources and regulatory discussions.
- The company expects to receive approximately $820,000 from the clinical research organization for funds related to the suspended COVID-19 trial; $419,755 had been received by November 9, 2023.
- Management estimates available funds, including the expected CRO return, may support operations through May 31, 2024 without optimistic assumptions. The runway could be shorter if the company funds a deposit for the planned babesiosis study before raising additional capital.
- The financial statements contain substantial doubt about the company’s ability to continue as a going concern. Management expects to require additional debt, equity or other financing, but provides no assurance that financing will be available on acceptable terms.
- The company is exposed to customer and distributor concentration, reliance on a sole tafenoquine API supplier, international supply-chain and currency risks, regulatory and clinical-trial risks, and dependence on the commercial success of ARAKODA.
- Knight is entitled to a 3.5% royalty on specified net sales and a contingent $10 million milestone payment if ARAKODA is sold or a change of control occurs. The milestone derivative liability was $2.17 million at September 30, 2023.
- Nasdaq notified the company that its common stock had failed to maintain the $1.00 minimum closing bid price for 30 consecutive business days. The company received until April 30, 2024, subject to possible extensions, to regain compliance.
- Management concluded that internal control over financial reporting was not effective and identified material weaknesses involving complex transactions, segregation of duties and period-end reporting resources.
- The filing reports no material pending litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether ARAKODA sales growth, pricing and reimbursement changes can produce positive gross margins after discounts, rebates and inventory charges.
- The timing, cost and regulatory feasibility of the proposed babesiosis clinical study and whether the suspended COVID-19 program will generate additional recoveries or costs.
- The company’s cash burn, the timing of the expected CRO refund and the amount and terms of any required future financing.
- The potential dilution from approximately 3.16 million outstanding warrants, stock options, restricted stock units and Series A preferred stock conversion rights.
- The terms and valuation assumptions underlying the $2.17 million Knight contingent milestone derivative liability, the 3.5% royalty and the possible $10 million milestone payment.
- Progress toward Nasdaq bid-price compliance and the consequences if the company is unable to regain compliance.
- Remediation of the disclosed material weaknesses in internal control over financial reporting.