60 Degrees Pharmaceuticals, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
60 Degrees Pharmaceuticals is a specialty pharmaceutical company developing and commercializing medicines for infectious diseases. Its marketed product is ARAKODA (tafenoquine), approved for malaria prevention. The pipeline includes tafenoquine-based products and celgosivir for tick-borne, fungal, and viral diseases. The company operates primarily in the United States and through a majority-owned Australian subsidiary.
This unaudited Form 10-Q covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023. The company is a smaller reporting company and emerging growth company. Its common stock and warrants trade on Nasdaq under SXTP and SXTPW.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Product revenue, net | $105,674 | $17,172 | +515% |
| Service revenue | $10,789 | $0 | New in 2024 |
| Product and service revenue | $116,463 | $17,172 | +578% |
| Research revenue | $29,631 | $4,292 | +590% |
| Net revenue, including research revenue | $80,657 | $(51,656) | Improved by $132,313 |
| Gross profit/(loss) | $51,026 | $(55,948) | Improved by $106,974 |
| Gross margin | 43.81% | (325.81%) | Improved |
| Operating expenses | $1,412,316 | $899,008 | +57% |
| Loss from operations | $(1,331,659) | $(950,664) | Loss increased |
| Net income/(loss) attributable to 60P | $430,470 | $(2,600,061) | Improved by $3,030,531 |
| Net income/(loss) per common share | $0.03 | $(1.13) | Improved |
| Cash used in operating activities | $(1,140,438) | $(412,678) | Use increased by $727,760 |
The reported Q1 2024 net income was materially affected by a $1.74 million non-cash gain from the change in fair value of derivative liabilities, primarily related to the contingent Knight milestone payment. Excluding this unusual fair-value item, the company remained loss-making at the operating level.
Balance sheet, debt, and liquidity
- Cash increased to $2.895 million at March 31, 2024 from $2.142 million at December 31, 2023.
- Total assets were $8.379 million, compared with $7.784 million at year-end 2023.
- Total liabilities declined to $1.254 million from $2.986 million, primarily due to the reduction in derivative liabilities from $2.307 million to $566 thousand.
- The remaining SBA COVID-19 EIDL liability was $158,232, including $8,772 current and $149,460 long term. The loan bears interest at 3.75% and is secured by the company’s tangible and intangible personal property.
- Accounts payable and accrued expenses were $529,449.
- Financing activities provided $1.903 million in Q1 2024, principally from the January 2024 common stock and warrant offering. The offering generated approximately $1.9 million of net proceeds, and exercise of pre-funded warrants generated $4,995.
- The company reported substantial doubt about its ability to continue as a going concern and stated that existing funds are projected to support operations through October 31, 2024, based on current assumptions.
Material changes versus the prior comparable period
- Product revenue increased substantially, driven primarily by U.S. commercial sales of ARAKODA. Pharmacy and dispensary volume increased to 1,022 boxes from 183 boxes, or approximately 458%.
- U.S. pharmaceutical distribution accounted for 99% of Q1 2024 product sales. Australian product revenue was $1,004, compared with $36,438 in Q1 2023.
- Discounts and rebates increased to $94,869 from $25,499, reflecting the company’s commercial distribution arrangements.
- Gross margin improved to 43.81% from negative 325.81%, as higher sales volume absorbed relatively fixed costs.
- Research and development expense increased 172% to $337,182, primarily due to preparation for the planned tafenoquine babesiosis trial. Babesiosis-related costs were $186,091.
- General and administrative expense increased 39% to $1.075 million, including higher audit, legal, professional, insurance, advertising, and director compensation costs.
- Operating cash use increased despite revenue growth, reflecting higher operating expenses and clinical-trial preparation costs.
- The common share count increased significantly following the January 2024 offering and warrant exercises. The company had 11,762,578 common shares outstanding at March 31, 2024, compared with 5,810,089 at December 31, 2023.
- Prior-period debt-related charges largely disappeared following the 2023 IPO-related settlement and conversion of debt. Q1 2024 interest expense was $1,402, compared with $1.141 million in Q1 2023.
Guidance, outlook, risks, and unusual items
- Management expects existing cash, recent financing proceeds, Arakoda sales growth, and current operating assumptions to fund the company through October 31, 2024. This is not a guarantee and additional capital may be required.
- The FDA provided comments on the proposed tafenoquine babesiosis trial protocol on April 26, 2024. The company plans to address the questions and recommendations and continue preparations for patient enrollment later in 2024.
- The company has an accumulated deficit of $32.150 million and has not generated sufficient revenue to cover operating expenses. Management expects to pursue additional debt, equity, private-placement, or related-party financing.
- Key commercial risks include dependence on ARAKODA as the single marketed product, customer and distributor concentration, substantial discounts and rebates, competition, and reliance on a sole supplier for tafenoquine active pharmaceutical ingredient.
- At March 31, 2024, one American pharmaceutical distributor represented 99% of accounts receivable, and significant customers represented 90% of total net revenue.
- The company is obligated to pay Knight Therapeutics a contingent $10 million milestone payment if ARAKODA is sold or a change of control occurs. The liability was valued at $565,949 at March 31, 2024.
- The U.S. Army license requires royalties of 3% of qualifying net sales below $35 million and 5% above $35 million, plus specified milestone payments. A $75,000 sales-based milestone liability was accrued.
- Management reported that internal control over financial reporting was not effective as of March 31, 2024, citing weaknesses in technical accounting resources, segregation of duties, and the period-end reporting process.
- On April 1, 2024, Trevally agreed to return 120,000 shares for no consideration and complete previously agreed services by June 30, 2024. On April 9, 2024, the company issued 499,538 shares upon pre-funded warrant exercises for $4,995.
Important facts for investors to verify
- Whether ARAKODA sales growth continues and translates into sustainable gross profit and positive operating cash flow.
- The timing, design, regulatory status, funding requirements, and enrollment start for the planned babesiosis clinical trial.
- The company’s ability to raise additional capital before projected cash exhaustion and the potential dilution from future equity financings and outstanding warrants.
- The magnitude and timing of the contingent $10 million Knight milestone payment and related royalty obligations.
- The concentration of revenue and receivables among a small number of distributors and the effect of discounts, rebates, and profit-sharing arrangements.
- Progress in remediating the material weaknesses in internal control over financial reporting.
- The effect of the 11.1 million outstanding warrants and other potential equity awards on future ownership dilution.