60 Degrees Pharmaceuticals, Inc.: Form 10-Q for the period ended Jun 30, 2024

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 consolidated condensed 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.

Overview

We are a specialty pharmaceutical company with a goal of using cutting-edge biological science and applied research to further develop and commercialize new therapies for the prevention and treatment of infectious diseases. We have successfully achieved regulatory approval of Arakoda® (“Arakoda”), a malaria preventative treatment that has been on the market since late 2019. Currently, 60P’s pipeline under development covers development programs for vector-borne, fungal, and 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.

Following our initial public offering in July 2023, our initial strategic priority was to conduct a Phase IIB study that would have evaluated the potential of the Arakoda regimen of Tafenoquine to accelerate disease recovery in COVID-19 patients with low risk of disease progression. In October 2023, we made a decision to suspend this study. This was a consequence of advice previously received from the U.S. Food and Drug Administration (FDA), which we interpreted to mean that the Agency would not have granted clearance for the study to proceed unless we redesigned it to (i) enroll a patient population in which receipt of Paxlovid or Lagevrio would be medically contraindicated, or (ii) compare Tafenoquine to placebo in patients taking a “standard of care” regimen (defined by the FDA as Lagevrio or Paxlovid). The FDA’s position was somewhat surprising given that neither Paxlovid nor Lagevrio is indicated for treatment of COVID-19 in low-risk patients. We determined that conducting our study in an alternate population in the United States would be unfeasible, and that conducting an add-on-to standard of care study might not be Phase III enabling. Accordingly, the Company made a decision to pivot back to continue commercialization of Arakoda for malaria, and further evaluation of the Arakoda regimen of Tafenoquine for babesiosis and other diseases. We believe such an approach is both less risky and less expensive.

Moving forward, our general strategy to achieve profitability and grow shareholder value has three facets: (i) increase sales of Arakoda; (ii) conduct clinical trials to expand the number of patients who can use Tafenoquine for new indications in the future; and (iii) reposition small molecule therapeutics with good clinical safety profiles for new indications.

Business Developments

The following highlights significant business developments in our business during the quarter ended June 30, 2024.

• On April 26, 2024, the FDA provided comments on the protocol of our planned clinical trial that will study the use of tafenoquine in treating babesiosis, submitted to the FDA in February 2024. The comments did not require us to change the trial design or protocol in a material way, and thus we have continued actions to initiate patient enrollment.
• On May 10, 2024, we entered into a sponsored research agreement with North Carolina State University to conduct a study to evaluate the incidence of Babesia infection amongst archived blood samples from patients with chronic fatigue and neurocognitive problems. The research is expected to be completed by May 31, 2025.
• On May 29, 2024, we signed a clinical trial agreement with Tufts Medicine, Inc. (“Tufts”), to conduct the world’s first clinical trial evaluating the efficacy and safety of tafenoquine in treating patients who have acute babesiosis. Subsequently, we opened our first clinical site on June 13, 2024. The first patient in the trial was enrolled on June 25, 2024.

Reverse Stock Split and Nasdaq Delisting Notice

In February 2024, we received a letter from the Listing Qualifications Department of the Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, for the last 30 consecutive business days, our common stock had not maintained a minimum closing bid price of $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), we were provided an initial period of 180 calendar days, or until August 26, 2024 (the “Compliance Period”), to regain compliance with the Bid Price Rule. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for a minimum of 10 consecutive trading days, unless extended by Nasdaq under Nasdaq Rule 5810(c)(3)(H), prior to August 26, 2024. At the 2024 Annual Meeting of Stockholders in July 2024, our stockholders approved an amendment to our Certificate of Incorporation to effect reverse stock split of our common stock at a range of ratios between 1:5 to 1:12 inclusive, and on July 19, 2024, our Board of Directors approved the implementation of the reverse stock split at a ratio of 1:12 (the “Reverse Stock Split”). The Reverse Stock Split is effective as of August 12, 2024 (See Item 5 - Other Information; Subsequent Events).

As of the effective time of the Reverse Stock Split, every twelve (12) issued and outstanding shares of our common stock was automatically combined and converted into one (1) issued and outstanding share of common stock, with no change to the par value, reducing the number of shares of common stock outstanding from 21,219,937 shares to 1,768,337 shares. The Reverse Stock Split did not change the authorized number of shares of common stock or preferred stock. Proportional adjustments were made to the number of shares of common stock issuable upon exercise or conversion of our equity awards, warrants, and other equity instruments convertible into common stock, as well as the respective exercise prices, if applicable in accordance with the terms of the instruments. No fractional shares of common stock were issued in connection with the Reverse Stock Split and all fractional shares were rounded up to the nearest whole share with respect to outstanding shares of common stock. Unless otherwise noted, all references to numbers of shares of our common stock and per share information presented in this Quarterly Report on Form 10-Q have been retroactively adjusted, as appropriate, to reflect the Reverse Stock Split.

We cannot assure that the Reverse Stock Split will sufficiently increase our stock price and trade at a price that is equal to at least $1.00 per share for a period of 10 consecutive days prior to August 26, 2024. If we do not regain compliance with the Bid Price Rule during the Compliance Period, and we are not deemed eligible for an additional compliance period, our common stock may be subject to delisting.

Our stock continues to be listed on The Nasdaq Capital Market under the symbol “SXTP.” The notice from Nasdaq has no immediate effect on the listing or trading of our common stock on The Nasdaq Capital Market and does not affect our business, operations, or reporting requirements with the SEC.

At-the-Market Sales Agreement

On July 12, 2024, we filed a shelf registration statement on Form S-3 (File No. 333-280796) containing a (i) base prospectus covering the offering, issuance and sale by us of up to $15,000,000 of our common stock, preferred stock, warrants, debt securities and units and (ii) sales agreement prospectus (“Prospectus Supplement”) covering the offering, issuance and sale by us of up to a maximum aggregate offering price of $1,253,603 (which amount was included in the $15,000,000 aggregate offering price set forth in the base prospectus) of our common stock that may be issued and sold under the At-The-Market Issuance Sales Agreement dated as of July 12, 2024 (the “ATM Agreement”), that we entered into with WallachBeth Capital LLC, as sales agent. The Prospectus Supplement was subsequently amended on July 22, 2024, July 24, 2024, July 26, 2024, and August 2, 2024, to increase the maximum aggregate offering price under the ATM Agreement to $1,774,640, $1,890,705, $2,190,416, and $2,295,192, respectively. Between July 19, 2024 and August 1], 2024, we sold a total of 677,819 shares pursuant to the ATM Agreement and Prospectus Supplement, as amended, and obtained proceeds of $1,994,583 (See Item 5 - Other Information; Subsequent Events).

Liquidity and Capital Resources

For the six months ended June 30, 2024 and 2023, our net cash used in operating activities was $2,328,650 and $726,168, respectively and the cash balance was $1,576,602 as of June 30, 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, an additional $2.0 million received through the ATM sales agreement under the S-3 filed that became effective on July 18, 2024, and recent growth in Arakoda sales, we estimate that we will have sufficient funds to remain viable through March 31, 2025, excluding the additional costs of [i] the Arakoda commercial pilot program, [ii] the variable cost of patient recruitment in our tafenoquine-babesiosis hospital study, and [iii] the cost of conducting the expanded access study for chronic babesiosis patients (currently being planned). 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 June 30, 2024, we had an accumulated deficit of $36,323,135. 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 June 30, 2024:

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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.

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 occurred 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 Profit (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 include the general and administrative, overhead or profit components. We also earn research revenues from the Australian Tax Authority for 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), net 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

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

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

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Comparison of the Three Months Ended June 30, 2024, and 2023

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

Product Revenues - net of Discounts and Rebates

Our product revenues - net of discounts and rebates were $124,972 for the three months ended June 30, 2024, as compared to $59,532 for the three months ended June 30, 2023. For the three months ended June 30, 2024, our U.S. pharmaceutical distributor accounted for 92% of our total net product sales and Kodatef sales to our Australian distributor accounted for 7% of total net product sales (100% and 0% for the three months ended June 30, 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 June 30, 2024, discounts and rebates were $106,755 compared to $22,151 for the three months ended June 30, 2023.

Arakoda entered the U.S. civilian supply chain in the third quarter of 2019. For the three months ended June 30, 2023, 335 boxes were sold to pharmacies and dispensaries. Sales volume increased by 288% to 1,301 boxes sold to pharmacies and dispensaries for the three months ended June 30, 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 June 30, 2024 were $9,002 ($0 for the three months ended June 30, 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 1,414% year-over-year growth for the quarter, the equivalent of 410 boxes sold for the three months ended June 30, 2024, compared to 29 boxes for the three months ended June 30, 2023. As of June 30, 2024, Biocelect’s unsold inventory that remains subject to profit share was the equivalent of 1,139 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 June 30, 2024, $9,002 of profit share was due to us ($0 as of December 31, 2023).

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

Cost of revenues was $89,564 for the three months ended June 30, 2024, as compared to $183,977 for the three months ended June 30, 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 the 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. Additionally, write-downs for expired inventory were significantly higher during the three months ended June 30, 2023 at $111,220, as compared to $16,684 during the three months ended June 30, 2024. Due to these factors, the Gross Margin % increased significantly from (209.04%) for the three months ended June 30, 2023 to 28.33% for the three months ended June 30, 2024.

Other Operating Revenues

The research revenues earned by us were $728 for the three months ended June 30, 2024, as compared to $3,116 for the three months ended June 30, 2023. Our research revenues for the periods presented consist primarily of projected research revenues from the Australian Tax Authority for research activities conducted in Australia.

Operating Expenses

Research and Development

Research and development costs increased during the three months ended June 30, 2024 when compared to the three months ended June 30, 2023. Research and development costs incurred during the three months ended June 30, 2023 consisted of initiation costs related to our Phase IIB COVID-19 clinical trial, which was later suspended in the fourth quarter of 2023. Direct COVID-19-related trial costs represent 1% of the costs for the three months ended June 30, 2024 at $19,432 and 90% of the costs for the three months ended June 30, 2023 at $182,887. During the three months ended June 30, 2024, we recorded research and development expense of $2,625,000, representing 85% of the total costs, upon the delivery from Kentucky Technology, Inc. of their report on the potential development of SJ733 + tafenoquine. Pursuant to the services agreement executed in January 2023, we issued Kentucky Technology, Inc. 43,750 fully vested shares of our common stock, which payment was deferred and capitalized until delivery of the report. We also incurred $389,735 in costs related to our planned babesiosis trial for tafenoquine during the three months ended June 30, 2024 ($0 during the three months ended June 30, 2023).

General and Administrative Expenses

For the three months ended June 30, 2024, our general and administrative expenses increased by 144.07% or $666,765 from the three months ended June 30, 2023. During the three months ended June 30, 2024, we incurred higher compensation expenses as a result of compensation arrangements with our directors, which came into effect in July 2023, as well as hired a new Chief Commercial Officer in February 2024. As such, we recognized $236,520 in compensation and related expenses during the three months ended June 30, 2024 ($76,396 for the three months ended June 30, 2023). Additionally, during the three months ended June 30, 2024, we incurred $145,504 in legal and professional fees, $137,252 of insurance expenses, $266,266 of investor outreach expenses, and $74,315 of advertising and promotion expenses (up from $89,127, $16,129, $56,908, and $39,061 for the three months ended June 30, 2023, respectively).

Interest and Other Income (Expense), Net

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Interest Expense

For the three months ended June 30, 2024, we recognized $3,621 of interest expense ($1,099,656 for the three months ended June 30, 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 IPO in July 2023. Cash paid for interest expense was $2,193 and $2,193 for the three months ended June 30, 2024 and June 30, 2023, respectively.

Derivative Expense

For the three months ended June 30, 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 record derivative expense when the initial fair value of the related derivative liabilities exceeds the cash proceeds received. We did not record derivative expense for the three months ended June 30, 2024 as we did not complete any debt financing transactions during the period.

Change in Fair Value of Derivative Liabilities

For the three months ended June 30, 2024, we recognized a loss on the change in fair value of derivative liabilities of $1,101 compared to a gain of $7,968 for the three months ended June 30, 2023. For the three months ended June 30, 2024, derivative liabilities include the contingent milestone payment due to Knight upon a future sale of Arakoda or a Change of Control. For the three months ended June 30, 2023, derivative liabilities consisted of bridge shares, certain warrants, and embedded conversion features in our convertible notes. We use a probability-weighted discounted cash flow model or a Monte Carlo simulation model to estimate the fair value of these instruments.

Change in Fair Value of Promissory Note

For the three months ended June 30, 2023, we recognized a $1,064,849 loss 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 June 30, 2024.

Other Income, net

For the three months ended June 30, 2024, we recognized $19,684 in other income compared to $730 for the three months ended June 30, 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 June 30, 2024, we recognized interest income of $20,669 ($0 during the three months ended June 30, 2023).

Comparison of the Six Months Ended June 30, 2024, and 2023

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

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Product Revenues - net of Discounts and Rebates

Our product revenues - net of discounts and rebates were $230,646 for the six months ended June 30, 2024, as compared to $76,704 for the six months ended June 30, 2023. For the six months ended June 30, 2024, our U.S. pharmaceutical distributor accounted for 95% of our total net product sales and Kodatef sales to our Australian distributor accounted for 4% of total net product sales (29% and 71% for the six months ended June 30, 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 six months ended June 30, 2024, discounts and rebates were $201,624 compared to $47,649 for the six months ended June 30, 2023.

Arakoda entered the U.S. civilian supply chain in the third quarter of 2019. For the six months ended June 30, 2023, 516 boxes were sold to pharmacies and dispensaries. Sales volume increased by 350% to 2,323 boxes sold to pharmacies and dispensaries for the six months ended June 30, 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 six months ended June 30, 2024 were $10,006 ($0 for the six months ended June 30, 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 514% year-over-year growth, the equivalent of 1,075 boxes sold for the six months ended June 30, 2024, compared to 209 boxes for the six months ended June 30, 2023. As of June 30, 2024, Biocelect’s unsold inventory that remains subject to profit share was the equivalent of 1,139 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 June 30, 2024, $9,002 of profit share was due to us ($0 as of December 31, 2023).

Service Revenues

During the six months ended June 30, 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 six months ended June 30, 2023). The revenue for the six months ended June 30, 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 $155,001 for the six months ended June 30, 2024, as compared to $257,097 for the six months ended June 30, 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 the 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. Additionally, write-downs for expired inventory were significantly higher during the six months ended June 30, 2023 at $116,611, as compared to $17,325 during the six months ended June 30, 2024. Due to these factors, the Gross Margin % increased significantly from (235.18%) for the six months ended June 30, 2023 to 35.80% for the six months ended June 30, 2024.

Other Operating Revenues

The research revenues earned by us were $30,359 for the six months ended June 30, 2024, as compared to $7,408 for the six months ended June 30, 2023. Our research revenues for the periods presented consist primarily of projected research revenues from the Australian Tax Authority for research activities conducted in Australia.

Operating Expenses

Research and Development

Research and development costs increased during the six months ended June 30, 2024 when compared to the six months ended June 30, 2023. Research and development costs incurred during the six months ended June 30, 2023 consisted of initiation costs related to our Phase IIB COVID-19 clinical trial, which was later suspended in the fourth quarter of 2023. Direct COVID-19-related trial costs represent 1% of the total costs for the six months ended June 30, 2024 at $20,372 and 88% of the costs for the six months ended June 30, 2023 at $288,144. During the six months ended June 30, 2024, we recorded research and development expense of $2,625,000, representing 76% of the total costs, upon the delivery from Kentucky Technology, Inc. of their report on the potential development of SJ733 + tafenoquine. Pursuant to the services agreement executed in January 2023, we issued Kentucky Technology, Inc. 43,750 fully vested shares of our common stock, which payment was deferred and capitalized until the report was delivered. We also incurred $575,826 in costs related to our planned babesiosis trial for tafenoquine during the six months ended June 30, 2024 ($0 during the six months ended June 30, 2023).

General and Administrative Expenses

For the six months ended June 30, 2024, our general and administrative expenses increased by 78.11% or $966,885 from the six months ended June 30, 2023. During the six months ended June 30, 2024, we incurred higher compensation expenses as a result of compensation arrangements with our directors, which came into effect in July 2023, as well as hired a new Chief Commercial Officer in February 2024. As such, we recognized $426,479 in compensation and related expenses during the six months ended June 30, 2024 ($76,396 for the six months ended June 30, 2023). Additionally, during the six months ended June 30, 2024, we incurred $229,975 in legal and professional fees, $277,473 of insurance expenses, $448,429 of investor outreach expenses, and $178,379 of advertising and promotion expenses (up from $92,877, $37,222, $221,447, and $75,665 for the six months ended June 30, 2023, respectively).

Interest and Other Income (Expense), Net

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Interest Expense

For the six months ended June 30, 2024, we recognized $5,023 of interest expense ($2,241,085 for the six months ended June 30, 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 IPO in July 2023. Cash paid for interest expense was $4,386 and $4,386 for the six months ended June 30, 2024 and June 30, 2023, respectively.

Derivative Expense

For the six months ended June 30, 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 record derivative expense when the initial fair value of the related derivative liabilities exceeds the cash proceeds received. We did not record derivative expense for the six months ended June 30, 2024 as we did not complete any debt financing transactions during the period.

Change in Fair Value of Derivative Liabilities

For the six months ended June 30, 2024, we recognized a gain on the change in fair value of derivative liabilities of $1,739,746 compared to a gain of $2,834 for the six months ended June 30, 2023. For the six months ended June 30, 2024, derivative liabilities include the contingent milestone payment due to Knight upon a future sale of Arakoda or a Change of Control. The fair value of the contingent milestone payment is inversely related to the net present value of future investments in the Company and anticipated timing to profitability within our budget models. For the six months ended June 30, 2023, derivative liabilities consisted of bridge shares, certain warrants, and embedded conversion features in our convertible notes. We use a probability-weighted discounted cash flow model or a Monte Carlo simulation model to estimate the fair value of these instruments.

Loss on Debt Extinguishment

During the six months ended June 30, 2024, we did not recognize a gain or loss on debt extinguishment ($839,887 loss recognized during the six months ended June 30, 2023). The decrease is related to the conversion of the cumulative outstanding debt pursuant to the Knight Debt Conversion Agreement which occurred in January 2023.

Change in Fair Value of Promissory Note

For the six months ended June 30, 2023, we recognized a $725,797 loss 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 six months ended June 30, 2024.

Other Income, net

For the six months ended June 30, 2024, we recognized $39,946 in other income compared to $1,321 for the six months ended June 30, 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 six months ended June 30, 2024, we recognized interest income of $42,557 ($0 during the six months ended June 30, 2023).

Cash Flows

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Cash Used in Operating Activities

Net cash used in operating activities was $2,328,650 for the six months ended June 30, 2024, as compared to $726,168 for the six months ended June 30, 2023. Our net cash used in operating activities increased, primarily due to higher general and administrative expenses at $2,204,694 for the six months ended June 30, 2024 ($1,237,809 for the six months ended June 30, 2023), primarily due to higher compensation and related expenses, legal and professional fees, insurance expenses, investor outreach expenses, and advertising and promotion expenses, as discussed above. In addition, we incurred $575,826 in initiation costs related to our planned babesiosis trial for tafenoquine during the six months ended June 30, 2024 ($0 during the six months ended June 30, 2023).

Cash Used in Investing Activities

Net cash used in investing activities was $140,373 for the six months ended June 30, 2024, as compared to $21,419 for the six months ended June 30, 2023. The increase in cash used in investing activities is primarily due to cash paid for purchases of computer and lab equipment totaling $90,000 during the six months ended June 30, 2024 ($0 during the six months ended June 30, 2023), as well as cash paid of $22,075 for capitalized website development costs for the six months ended June 30, 2024 associated with enhancements to the functionality of our corporate website ($6,000 for the six months ended June 30, 2023), and capitalized patent costs of $28,298 for the six months ended June 30, 2024 ($15,419 for the six months ended June 30, 2023).

Cash Provided by Financing Activities

Net cash provided by financing activities was $1,902,426 for the six months ended June 30, 2024, as compared to $503,456 for the six months ended June 30, 2023. The increase in net cash provided by financing activities is largely attributable to net proceeds of $1,914,513 in connection with our common stock and warrant offering received on January 31, 2024, partially offset by payment of offering costs. Cash provided by financing activities for the six months ended June 30, 2023 was primarily related to the gross cash value raised from the bridge financing on May 8, 2023 of $650,000, partially offset by deferred offering costs paid prior to our IPO of $146,544.

Effect of Exchange Rate Changes on Cash

Our foreign operations were small relative to U.S. operations for the six months ended June 30, 2024, and 2023, thus effects of foreign exchange rate changes on cash 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 Consolidated Condensed 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 June 30, 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 probability-weighted discounted cash flow model to estimate 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.

As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act 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.

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 June 30, 2024, our internal control over financial reporting was not effective, and that material weaknesses existed in the following areas as of June 30, 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.

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 on Form S-3 (File No. 333-280796), originally filed with the U.S. Securities and Securities Exchange Commission (“SEC”) on July 12, 2024.