# 60 Degrees Pharmaceuticals, Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [60 Degrees Pharmaceuticals, Inc.](/companies/sxtp.md) (CIK 1946563)
- Form: 10-Q
- Filed: 2024-05-15
- Accepted by EDGAR: May 15, 2024, 11:56 ET
- Period: 2024-03-31
- Accession: 0001213900-24-043323
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1946563/000121390024043323/ea0205748-10q_60degrees.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1946563/000121390024043323/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $116.5k | us-gaap:Revenues |
| Cost of revenue | 3 months, 2024-01-01 to 2024-03-31 | $65.4k | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2024-01-01 to 2024-03-31 | $51.0k | us-gaap:GrossProfit |
| Research and development | 3 months, 2024-01-01 to 2024-03-31 | $337.2k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | −$1.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $1.4k | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $63 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $430.5k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.03 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.03 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 10,124,517 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | −$1.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2024-03-31 | $2.9m | us-gaap:Cash |
| Current assets | at 2024-03-31 | $7.9m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $8.4m | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $1.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $1.3m | us-gaap:Liabilities |
| Long-term debt | at 2024-03-31 | $150.0k | us-gaap:LongTermDebt |
| Current portion of debt | at 2024-03-31 | $8.8k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2024-03-31 | $7.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,176 characters.

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and the other information set forth in certain of our filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on April 1, 2024. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the SEC.

### 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 Arakoda® 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 expiration.

### 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.

### 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 Babesiosis trial in 2024 and, in 2023 related to 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 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 also earn interest income as a result of cash invested in Federal Deposit Insurance Corporation backed interest bearing accounts.

### Results of Operations

#### Three Months Ended March 31, 2024, and 2023

The following table sets forth our results of operations for the periods presented:

| Consolidated Statements of Operations Data: | Three Months Ended March 31, 2024 | 2023 |
| --- | ---: | ---: |
| Product Revenues – net of Discounts and Rebates | $105,674 | $17,172 |
| Service Revenues | 10,789 | - |
| Product and Service Revenues, net | 116,463 | 17,172 |
| Cost of Revenues | 65,437 | 73,120 |
| Gross Profit (Loss) | 51,026 | (55,948) |
| Research Revenues | 29,631 | 4,292 |
| Net Revenue (Loss) | 80,657 | (51,656) |
| Operating Expenses: |  |  |
| Research and Development | 337,182 | 123,994 |
| General and Administrative Expenses | 1,075,134 | 775,014 |
| Total Operating Expenses | 1,412,316 | 899,008 |
| Loss from Operations | (1,331,659) | (950,664) |
| Interest Expense | (1,402) | (1,141,429) |
| Change in Fair Value of Derivative Liabilities | 1,740,847 | (5,134) |
| Loss on Debt Extinguishment | - | (839,887) |
| Change in Fair Value of Promissory Note | - | 339,052 |
| Other Income | 20,262 | 591 |
| Total Interest and Other Income (Expense), net | 1,759,707 | (1,646,807) |
| Net Income (Loss) before Provision for Income Taxes | 428,048 | (2,597,471) |
| Provision for Income Taxes | 63 | 63 |
| Net Income (Loss) including Noncontrolling Interest | 427,985 | (2,597,534) |
| Net (Loss) Gain – Noncontrolling Interest | (2,485) | 2,527 |
| **Net Income (Loss) – attributed to 60 Degrees Pharmaceuticals, Inc.** | **$430,470** | **$(2,600,061)** |

27

The following table sets forth our results of operations as a percentage of revenue:

| Consolidated Statements of Operations Data: | Three Months Ended March 31, 2024 | 2023 |
| --- | ---: | ---: |
| Product Revenues – net of Discounts and Rebates | 90.74% | 100.00% |
| Service Revenues | 9.26 | - |
| Product and Service Revenues, net | 100.00 | 100.00 |
| Cost of Revenues | 56.19 | 425.81 |
| Gross Profit (Loss) | 43.81 | (325.81) |
| Research Revenues | 25.44 | 24.99 |
| Net Revenue (Loss) | 69.26 | (300.82) |
| Operating Expenses: |  |  |
| Research and Development | 289.52 | 722.07 |
| General and Administrative Expenses | 923.15 | 4,513.24 |
| Total Operating Expenses | 1,212.67 | 5,235.31 |
| Loss from Operations | (1,143.42) | (5,536.13) |
| Interest Expense | (1.20) | (6,647.04) |
| Change in Fair Value of Derivative Liabilities | 1,494.76 | (29.90) |
| Loss on Debt Extinguishment | - | (4,891.03) |
| Change in Fair Value of Promissory Note | - | 1,974.45 |
| Other Income | 17.40 | 3.44 |
| Total Interest and Other Income (Expense), net | 1,510.96 | (9,590.07) |
| Net Income (Loss) before Provision for Income Taxes | 367.54 | (15,126.20) |
| Provision for Income Taxes | 0.05 | 0.37 |
| Net Income (Loss) including Noncontrolling Interest | 367.49 | (15,126.57) |
| Net (Loss) Gain – Noncontrolling Interest | (2.13) | 14.72 |
| **Net Income (Loss) – attributed to 60 Degrees Pharmaceuticals, Inc.** | **369.62%** | **(15,141.28)%** |

### Comparison of the Three Months Ended March 31, 2024 and 2023

### Product Revenues - net of Discounts and Rebates, Service Revenues, Cost of Revenues, Gross Profit (Loss), and Gross Margin

| Consolidated Statements of Operations Data: | Three Months Ended March 31, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Product Revenues – net of Discounts and Rebates | $105,674 | $17,172 | $88,502 | 515.39% |
| Service Revenues | 10,789 | - | 10,789 | N/A |
| Product and Service Revenues, net | 116,463 | 17,172 | 99,291 | 578.21 |
| Cost of Revenues | 65,437 | 73,120 | (7,683) | (10.51) |
| Gross Profit (Loss) | $51,026 | $(55,948) | $106,974 | (191.20)% |
| Gross Margin % | 43.81% | (325.81)% |  |  |

#### Product Revenues - net of Discounts and Rebates

Our product revenues - net of discounts and rebates were $105,674 for the three months ended March 31, 2024, as compared to $17,172 for the three months ended March 31, 2023. For the three months ended March 31, 2024, our U.S. pharmaceutical distributor accounted for 99% of our total net product sales and Kodatef sales to our Australian distributor accounted for 1% of total net product sales ((112%) and 212% for the three months ended March 31, 2023, respectively). Domestic, commercial product sales are primarily driving increased sales volume during the period.

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% 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 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 three months ended March 31, 2024, discounts and rebates were $94,869 compared to $25,499 for the three months ended March 31, 2023.

Arakoda® entered the U.S. civilian supply chain in the third quarter of 2019. For the three months ended March 31, 2023, 183 boxes were sold to pharmacies and dispensaries. Sales volume increased by 458% to 1,022 boxes sold to pharmacies and dispensaries for the three months ended March 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. 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 three months ended March 31, 2024 were $1,004 ($36,438 for the three months ended March 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 270% year-over-year growth, the equivalent of 665 boxes sold for the three months ended March 31, 2024, compared to 179.5 boxes for the three months ended March 31, 2023. As of March 31, 2024, Biocelect’s unsold inventory that remains subject to profit share was the equivalent of 1,549 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 March 31, 2024, $1,004 of profit share was due to us ($0 as of December 31, 2023).

#### Service Revenues

During the three months ended March 31, 2024, we recognized $10,789 in service revenue in association with the final payment from the United States Army Medical and Materiel Development Activity (USAMMDA) for storing Arakoda® purchases ($0 for the three months ended March 31, 2023). The revenue for the three months ended March 31, 2024 is related to the final resolution of storage fees payable from the USAMMDA. As the contract ended on August 31, 2022, additional storage revenue is not expected in the near future.

#### Cost of Revenues, Gross Profit (Loss), and Gross Margin

Cost of revenues was $65,437 for the three months ended March 31, 2024, as compared to $73,120 for the three months ended March 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 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. Due to these factors, the Gross Margin % increased significantly from (325.81%) to 43.81%.

#### Other Operating Revenues

| Consolidated Statements of Operations Data: | Three Months Ended March 31, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Research Revenues | $29,631 | $4,292 | $25,339 | 590.38% |

The research revenues earned by us were $29,631 for the three months ended March 31, 2024, as compared to $4,292 for the three months ended March 31, 2023. Our research revenues for the periods presented consist entirely of projected research revenues from the Australian Tax Authority for research activities conducted in Australia.

#### Operating Expenses

| Consolidated Statements of Operations Data: | Three Months Ended March 31, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Research and Development | $337,182 | $123,994 | $213,188 | 171.93% |
| General and Administrative Expenses | 1,075,134 | 775,014 | 300,120 | 38.72 |
| Total Operating Expenses | $1,412,316 | $899,008 | $513,308 | 57.10% |

#### Research and Development

Research and development costs increased during the three months ended March 31, 2024 when compared to the three months ended March 31, 2023. Research and development costs incurred during the three months ended March 31, 2023 consisted of initiation costs related to our Phase IIB COVID-19 clinical trial, which was then suspended in the fourth quarter of 2023. As such, we incurred $940 of COVID-19-related trial costs for the three months ended March 31, 2024 ($105,527 for the three months ended March 31, 2023). We incurred $186,091 in costs related to our planned babesiosis trial for tafenoquine during the three months ended March 31, 2024 ($0 during the three months ended March 31, 2023).

#### General and Administrative Expenses

For the three months ended March 31, 2024, our general and administrative expenses increased by 38.72% or $300,120 from the three months ended March 31, 2023. During the three months ended March 31, 2024, we incurred higher compensation expenses as a result of compensation arrangements with our directors, which came into effect in July 2023. Pursuant to these arrangements, we recognized $49,500 in cash compensation to our directors during the three months ended March 31, 2024 ($0 for the three months ended March 31, 2023). Additionally, during the three months ended March 31, 2024, we incurred $208,005 in audit, legal and professional fees, $147,920 of insurance expenses, and $104,064 of sales, advertising and promotion expenses (up from $80,750, $21,093, and $36,604 for the three months ended March 31, 2023, respectively).

### Interest and Other Income (Expense), Net

| Consolidated Statements of Operations Data: | Three Months Ended March 31, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Interest Expense | $(1,402) | $(1,141,429) | $1,140,027 | (99.88)% |
| Change in Fair Value of Derivative Liabilities | 1,740,847 | (5,134) | 1,745,981 | (34,008.20) |
| Loss on Debt Extinguishment | - | (839,887) | 839,887 | (100.00) |
| Change in Fair Value of Promissory Note | - | 339,052 | (339,052) | (100.00) |
| Other Income | 20,262 | 591 | 19,671 | 3,328.43 |
| **Total Interest and Other Income (Expense), net** | **$1,759,707** | **$(1,646,807)** | **$3,406,514** | **(206.86)%** |

#### Interest Expense

For the three months ended March 31, 2024, we recognized $1,402 of interest expense ($1,141,429 for the three months ended March 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 initial public offering (“IPO”) on July 14, 2023. Cash paid for interest expense was $2,193 and $2,193 for the three months ended March 31, 2024 and March 31, 2023, respectively.

#### Change in Fair Value of Derivative Liabilities

For the three months ended March 31, 2024, we recognized a gain on the change in fair value of derivative liabilities of $1,780,847 compared to a loss of ($5,134) for the three months ended March 31, 2023. For the three months ended March 31, 2024, derivative liabilities include the contingent milestone payment due to Knight upon a future sale of Arakoda® or a Change of Control. We use a Monte-Carlo simulation model to estimate the fair value of this derivative liability, which uses assumptions such as the timing and probability of discrete potential exit scenarios, forward interest rate curves, and discount rates based on implied and market yields. The fair value is inversely related to the net present value of future investments into the Company and anticipated timing to profitability within our budget models. For the three months ended March 31, 2023, derivative liabilities consisted of bridge shares, certain warrants, and embedded conversion features in our convertible notes.

#### Loss on Debt Extinguishment

The $839,887 loss on debt extinguishment for the three months ended March 31, 2023 relates to the conversion of the cumulative outstanding debt pursuant to the Knight Debt Conversion Agreement in January 2023. As previously discussed, a majority of our debt obligations were settled or converted into equity on the closing of our IPO in the third quarter of 2023. There were no extinguishments of debt during the three months ended March 31, 2024.

#### Change in Fair Value of Promissory Note

For the three months ended March 31, 2023, we recognized a $339,052 gain related to the change in fair value of the promissory note with Knight, which was measured at fair value on a recurring basis beginning in January 2023. Upon the closing of the IPO, the promissory note converted into equity shares in full satisfaction of the outstanding principal and accrued interest. As such, the debt is no longer outstanding and hence we recorded a $0 change in fair value for the three months ended March 31, 2024.

#### Other Income

For the three months ended March 31, 2024, we recognized $20,262 in other income compared to $591 for the three months ended March 31, 2023. As a result of the IPO, we now earn interest income as certain cash proceeds are invested in Federal Deposit Insurance Corporation backed interest bearing accounts. During the three months ended March 31, 2024, we recognized interest income of $21,888 ($1,985 during the three months ended March 31, 2023).

### Liquidity and Capital Resources

For the three months ended March 31, 2024 and 2023, our net cash used in operating activities was $1,140,438 and $412,678, respectively and the cash balance was $2,894,700 as of March 31, 2024 ($2,142,485 as of December 31, 2023). 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 March 31, 2024, we had an accumulated deficit of $32,150,380. 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 audited 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 consolidated condensed 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 consolidated condensed 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 condensed 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 March 31, 2024:

|  | Total | Payments Due By Period Less than 1 year | 1-3 years | 4-5 years | More than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Principal obligations on debt arrangements | $150,000 | $- | $1,498 | $6,631 | $141,871 |
| Interest obligations on debt arrangements | 110,697 | 8,772 | 16,046 | 10,913 | 74,966 |
| Accounts payable and accrued expenses | 529,449 | 529,449 | - | - | - |
| Total | $790,146 | $538,221 | $17,544 | $17,544 | $216,837 |

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

| Net Cash Provided By (Used In): | Three Months Ended March 31, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Operating Activities | $(1,140,438) | $(412,678) | $(727,760) | 176.35% |
| Investing Activities | (9,814) | (3,292) | (6,522) | 198.12 |
| Financing Activities | 1,903,291 | 182,388 | 1,720,903 | 943.54 |
| Effect of Exchange Rate Changes on Cash | (824) | (1,290) | 466 | (36.12) |
| Net Increase (Decrease) in Cash | $752,215 | $(234,872) | $987,087 | (420.27)% |

#### Cash Used in Operating Activities

Net cash used in operating activities was $1,140,438 for the three months ended March 31, 2024, as compared to $412,678 for the three months ended March 31, 2023. Our net cash used in operating activities increased, primarily due to higher general and administrative expenses at $1,075,134 for the three months ended March 31, 2024 ($775,014 for the three months ended March 31, 2023), primarily due to higher audit, legal, and professional fees, insurance expenses, and advertising and promotion costs, as discussed above. In addition, we incurred higher research and development costs at $337,182 for the three months ended March 31, 2024 ($123,994 for the three months ended March 31, 2023), primarily related to launch activities for our tafenoquine-babesiosis trial.

#### Cash Used in Investing Activities

Net cash used in investing activities was $9,814 for the three months ended March 31, 2024, as compared to $3,292 for the three months ended March 31, 2023. The increase in cash used in investing activities is primarily due to cash paid of $9,088 for capitalized website development costs for the three months ended March 31, 2024 associated with enhancements to the functionality of our corporate website ($0 for the three months ended March 31, 2023), partially offset by lower capitalized patent costs of $726 for the three months ended March 31, 2024 ($3,292 for the three months ended March 31, 2023).

#### Cash Provided by Financing Activities

Net cash provided by financing activities was $1,903,291 for the three months ended March 31, 2024, as compared to $182,388 for the three months ended March 31, 2023. The increase in net cash provided by financing activities is largely attributable to net proceeds of $1,914,495 in connection with our common stock and warrant offering received on January 31, 2024. Cash provided by financing activities for the three months ended March 31, 2023 was due to advances from related parties totaling $200,000, partially offset by deferred offering costs paid prior to our IPO of $17,612.

#### Effect of Foreign Currency Translation on Cash

Our foreign operations were small relative to U.S. operations for the three months ended March 31, 2024 and March 31, 2023, 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. We record revenues from product sales at the net sales price, or “transaction price,” which may include estimates of variable consideration that result from anticipated product returns, generally based on historical return data.

#### 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 Condensed Consolidated Statements of Operations and Comprehensive Income (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 March 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, (“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.

### 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.

### 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.

## Market risk

As filed, 273 characters.

As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act of 1934, as amended and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.

## Controls and procedures

As filed, 2,178 characters.

#### Evaluation of Disclosure Controls and Procedures

Management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Management has used the framework set forth in the report entitled “Internal Control—Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of our internal control over financial reporting. Based on that assessment, our management has identified certain material weaknesses in our internal control over financial reporting.

Our management concluded that as of March 31, 2024, our internal control over financial reporting was not effective, and that material weaknesses existed in the following areas as of March 31, 2024:

(1) we do not employ full time in-house personnel with the technical knowledge to identify and address some of the reporting issues surrounding certain complex or non-routine transactions. With respect to material, complex and non-routine transactions, management has and will continue to seek guidance from third-party experts and/or consultants to gain a thorough understanding of these transactions;

(2) we have inadequate segregation of duties consistent with the control objectives including but not limited to the disbursement process, transaction or account changes, and the performance of account reconciliations and approval; and

(3) we have ineffective controls over the period end financial disclosure and reporting process caused by insufficient accounting staff.

#### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 410 characters.

As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item. In any event, there have been no material changes in our risk factors as previously disclosed in the Registration Statement.

Filed May 15, 2024.
Source: SEC EDGAR, the filing index for accession 0001213900-24-043323. Last ingested by Listed: Nov 6, 2026, 12:18 ET. No prices; not investment advice.