60 Degrees Pharmaceuticals, Inc. — Q2 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 is also developing tafenoquine and celgosivir programs for COVID-19, fungal, tick-borne and other viral diseases.
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023. The company operates primarily in the United States and through its majority-owned Australian subsidiary. It is a smaller reporting company and emerging growth company.
Financial performance and key metrics
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Product revenue | $59,532 | $45,173 | $76,704 | $92,197 |
| Net revenue/(loss) revenue | $(121,329) | $(49,687) | $(172,985) | $24,350 |
| Gross loss | $(124,445) | $(41,947) | $(180,393) | $(85,057) |
| Gross margin | (209.04)% | (92.86)% | (235.18)% | (92.26)% |
| Operating loss | $(787,996) | $(686,919) | $(1,738,660) | $(850,631) |
| Net loss attributable to 60 Degrees | $(3,336,555) | $(2,146,899) | $(5,936,616) | $(3,059,181) |
| Net loss per share | $(1.40) | $(0.96) | $(2.54) | $(1.31) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(726,168) | $(636,944) |
- Second-quarter product revenue increased 31.8%, primarily from higher U.S. sales volume, while six-month product revenue declined 16.8% because of a lower wholesale acquisition cost, expiring inventory returns and a change in geographic mix.
- U.S. distributor sales represented 100% of second-quarter product revenue. For the six-month period, Australia represented 71% and the United States 29% of product revenue.
- U.S. patient sales increased to 335 boxes in the second quarter from 134 boxes in the prior-year quarter, and to 516 boxes for the six months from 225 boxes.
- Cost of revenues increased 111.2% in the quarter and 45.0% for the six months, primarily reflecting inventory expiration and related reserves. Net inventory was $465,515 at June 30, 2023, including a $275,701 reserve.
- Research and development expense was $203,872 in the quarter and $327,866 for the six months. General and administrative expense was $462,795 in the quarter and $1,237,809 for the six months.
- Interest and other expense increased to $2,555,532 in the quarter and $4,202,339 for the six months. Key items included interest expense, bridge-financing derivative expense, the fair-value loss on the Knight promissory note and a $839,887 debt-extinguishment loss recorded in the first quarter.
Liquidity, capital structure and debt
- Cash declined to $19,070 at June 30, 2023 from $264,865 at December 31, 2022. Total assets were $7,358,738 and total liabilities were $30,235,587, resulting in total shareholders’ deficit of $22,876,849.
- Six-month operating cash use was $726,168, investing cash use was $21,419 and financing activities provided $503,456. Cash decreased by $245,795 during the period.
- Current liabilities were $28,862,838, including $23,539,996 of promissory notes carried at fair value, $2,446,091 of derivative liabilities and $1,105,122 of other current promissory notes.
- As of June 30, 2023, contractual obligations included $28,656,775 of debt principal, $186,021 of debt interest, $39,470 of operating lease obligations and $1,353,321 of purchase obligations.
- Management stated that the recurring losses and insufficient operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments that could be required if the company is unable to continue operating.
Material changes, outlook and unusual items
- In January 2023, the company amended its Knight Therapeutics debt arrangements, accounted for as a debt extinguishment, and elected fair-value accounting for the resulting debt. This produced an $839,887 loss on extinguishment and a $725,797 cumulative fair-value loss through June 30, 2023.
- In May 2023, the company raised bridge financing with a face amount of $722,222 and net proceeds of $555,000. The related derivative valuation generated $399,725 of derivative expense.
- The company issued 1,443,000 common shares to vendors during the first six months of 2023 for services rendered or to be provided. It also recorded $7,215,000 of noncash common-stock consideration for services.
- Management’s primary operating objective for the second half of 2023 was to conduct a Phase II B clinical study of ARAKODA for COVID-19 outpatients. The filing states that positive Phase II data were published in June 2023 and that larger studies were planned.
- After quarter-end, the company completed its initial public offering on July 14, 2023, issuing 1,415,095 units at $5.30 per unit and receiving approximately $6,454,300 in net proceeds. Each unit included one common share and two warrants.
- The IPO triggered significant debt conversions: Knight converted $10,770,037 of principal into 1,108,337 common shares and $8,096,486 of accrued interest into 80,965 Series A preferred shares. Other notes also converted or were paid, including approximately $1.95 million of bridge and related-party principal and $1.16 million of the Xu Yu note.
- Management estimated that the IPO proceeds and warrant exercises could fund operations through March 31, 2024, conditional on eligibility for Australian research and development tax rebates and the ability to borrow against those rebates. Management stated that additional financing may still be required.
- The company reported material weaknesses in internal control over financial reporting related to complex transactions, segregation of duties and insufficient accounting personnel. Management concluded that controls were not effective as of June 30, 2023.
Key risks and contingencies
- The company has limited revenue, recurring losses and a substantial accumulated deficit. Profitability depends on increased ARAKODA sales, future marketing investment, clinical success and additional financing.
- Revenue is highly concentrated: one customer generated 100% of product revenue in the second quarter and for the six-month period. The company also relies on exclusive distributors and a sole supplier for tafenoquine API.
- ARAKODA sales are subject to substantial distributor, wholesaler and pharmacy-benefit-manager discounts and rebates. The U.S. Department of Defense procurement contract has expired, and the filing does not anticipate significant near-term government revenue.
- The planned COVID-19 Phase II B study remains subject to funding, enrollment, regulatory and clinical risks. The company authorized approximately $1.0 million of start-up costs for the first three clinical sites after quarter-end.
- Debt conversion and warrant terms may cause substantial dilution. Knight received common and preferred shares, and the IPO and related transactions materially increased shares and potential shares outstanding.
- Manufacturing, supply-chain, foreign-exchange, regulatory, future COVID-19, geopolitical and clinical-trial disruptions could adversely affect operations.
Investor verification checklist
- Verify the post-IPO share count, Series A preferred shares, outstanding warrants and options, including subsequent warrant exercises and Knight conversions.
- Reconcile the use of approximately $6.45 million of IPO proceeds against the company’s stated operating plans and near-term cash requirements.
- Assess whether Australian research and development tax rebates and related borrowing are available, as the company’s stated cash runway depends partly on those assumptions.
- Review the Phase II B COVID-19 study protocol, enrollment progress, funding commitments, regulatory status and clinical milestones.
- Monitor product sales, gross margins, inventory expiration reserves and customer concentration.
- Review remediation of the reported material weaknesses in internal control over financial reporting.
- Confirm the financial impact of post-quarter-end debt conversions, including the expected approximately $9.6 million gain related to the Knight conversion and other estimated conversion gains or losses.