Debt

9 Months Ended

12 Months Ended

Sep. 30, 2023

Dec. 31, 2022

Debt [Abstract]

DEBT

8. DEBT

Knight Therapeutics, Inc.

On December 27, 2019 the Company restructured its cumulative borrowing with its senior secured lender, Knight Therapeutics, Inc. (‘Knight’), into a note for the principal amount of $6,309,823 and accrued interest of $4,160,918 and a debenture of $3,483,851 (collectively, the ‘Knight Loan’). The Knight Loan had a maturity date of December 31, 2023. The principal and accrued interest portion of the Knight Loan bear an annual interest rate of 15%, compounded quarterly, whereas the debenture had a 9% interest rate until April 23, 2023 at which point interest ceased accruing. As of December 31, 2022, the aggregate outstanding balance of the Knight Loan was $20,596,595. In January 2023, the Company and Knight executed the Knight Debt Conversion Agreement, pursuant to which the parties agreed to add a conversion feature to the cumulative outstanding Knight Loans, which was accounted for as a debt extinguishment, described further below.

Note, including Amendment

On October 11, 2017 the Company issued a promissory note (“Note”) with an individual investor in the amount of $750,000. The Note matures 60 days after the Knight Loans are repaid. The Note originally bore an interest rate of 5% from inception for the first six months and 10% per annum thereafter both compounded quarterly. On December 11, 2022, the Company and the individual investor amended the Note (“the Amendment”). The Amendment added a provision to automatically convert the outstanding principal and accumulated interest through March 31, 2022 into common shares in the event the Company consummates an IPO. The Amendment also provides the lender the option to convert the outstanding principal and accumulated interest through March 31, 2022 into equity shares of the Company at the maturity date, which option shall expire 30 days after maturity. Cumulative interest after March 31, 2022 will be forfeited should the lender elect to convert the Note into equity.

At the Amendment date, the Company recorded a discount of $120,683 related to the excess fair value of the Note and incurred costs with third parties directly related to the Amendment of $1,767, which are being amortized over the remaining life of the debt using the effective interest method. Amortization of the discount on the Note for the three months ended September 30, 2023 and 2022 was $3,869 and $0, respectively ($52,628 and $0 for the nine months ended September 30, 2023 and 2022, respectively). Interest expense related to the Note, for the three months ended September 30, 2023 and 2022 was $4,944 and $29,429, respectively ($66,558 and $85,242 for the nine months ended September 30, 2023 and 2022, respectively).

As a result of the completion of the IPO and as required under the terms of the Note, including the Amendment, the outstanding principal and accrued interest through March 31, 2022 converted to 214,934 shares of our common stock at a conversion rate equal to the IPO price, in full satisfaction of the outstanding debt obligation. The Company recognized a debt extinguishment gain of $223,077 upon conversion, representing the difference (i) the reacquisition price, consisting of the fair value of the common shares issued, and (ii) the net carrying value of the debt, inclusive of unamortized discounts and issuance costs, on the date of conversion.

Promissory notes are summarized as follows at September 30, 2023:

	Knight Therapeutics		Note, including amendment		Bridge Notes		Total
Promissory Notes (including accrued interest), at fair value	$	-	$	-	$	-	$	-
Promissory Notes (including accrued interest)		-		-		-		-
Less Current Maturities		-		-		-		-
Long Term Promissory Notes	$	-	$	-	$	-	$	-

Promissory notes are summarized as follows at December 31, 2022:

	Knight Therapeutics		Note, including amendment		Bridge Notes		Total
Promissory Notes (including accrued interest)	$	16,319,986	$	1,109,783	$	535,901	$	17,965,670
Less Current Maturities		16,319,986		-		535,901		16,855,887
Long Term Promissory Notes	$	-	$	1,109,783	$	-	$	1,109,783

Convertible Promissory Notes and Warrants

During May 2022, the Company executed promissory notes having a face amount of $888,889. The notes contained an original issue discount of 10% ($88,889) and debt issuance costs of $91,436, resulting in net proceeds of $708,564. These notes bear interest at 10% with a default interest rate of 15% and are unsecured. The notes were due at the earlier of one year from the issuance date or the closing of an IPO (the “2022 Bridge Notes”). In connection with the issuance of the 2022 Bridge Notes, the Company agreed to issue common stock to each noteholder equivalent to 100% of the face amount of the note divided by the IPO price per share. Additionally, each of these note holders were entitled to receive five-year (5) fully vested warrants upon the closing of the IPO, with an exercise price of 110% of the IPO price (See Note 6). In May 2023, the maturity date for the 2022 Bridge Notes was extended for an additional two months. In exchange for extension of the maturity date, the Company agreed to additional cash payments totaling $22,222 due to the holders of the 2022 Bridge Notes at maturity (the “Extension Payments”).

During May 2023, the Company executed promissory notes having an aggregate face amount of $722,222. The notes contained an original issue discount of 10% ($72,222) and the Company incurred debt issuance costs of $95,000, resulting in net proceeds to the Company of $555,000. These notes bear interest at 10% with a default interest rate of 15% and are unsecured. The notes were due at the earlier of one-year from the issuance date or the closing of an IPO (the “2023 Bridge Notes”). In connection with the issuance of the 2023 Bridge Notes, the Company also agreed to issue common stock to each note holder equivalent to 100% of the face amount of the note divided by the IPO price per share. Additionally, each of these noteholders were entitled to receive five-year (5) fully vested warrants upon the closing of the IPO, with an exercise price of 110% of the IPO price.

The Company performed an evaluation of the conversion features embedded in the Bridge Notes and the warrants and concluded that such instruments qualify for treatment as derivative liabilities under ASC 815 and require bifurcation from the host contract. Derivative liabilities are carried at fair value at each balance sheet date, and any changes in fair value are recognized in the accompanying consolidated condensed statement of operations and comprehensive income (loss). See Note 9 for further details.

As a result of the completion of the IPO and as required under the terms of the 2022 and 2023 Bridge Notes, the Company issued the holders 303,982 shares of common stock, determined by the outstanding principal balance of each note divided by the IPO price. In addition, the Company made cash payments to the holders of the 2022 and 2023 Bridge Notes totaling $1,749,488 for the outstanding principal, accrued interest and Extension Payments (2022 Bridge Notes only), in full settlement of the outstanding debt obligations. The embedded derivative liability (conversion feature) was marked to market on the settlement date, and the Company recognized a debt extinguishment loss of $614,670 upon settlement, representing the difference between (i) the reacquisition price, consisting of cash and shares, and (ii) the net carrying value of the debt including associated derivative liabilities on the date of conversion.

Related Party Notes

During May 2022, the Company executed convertible promissory notes with the Company’s Chief Executive Officer and a family member related to the Chief Executive Officer, having an aggregate face amount of $338,889. The notes contain an original issue discount of 10% ($33,888) and debt issuance costs of $34,289, resulting in net proceeds of $270,711. These notes bear interest at 6% with a default interest rate of 15% and are unsecured. The notes were due at the earlier of one-year (1) from the issuance date or the closing of an IPO (the “Related Party Notes”). In May 2023, the maturity date for the Related Party Notes was extended for an additional two months. In exchange for extension of the maturity date, the Company agreed to additional cash payments totaling $8,472 due to the holders of the Related Party Notes at maturity (the “Extension Payments”). Upon the closing of the IPO, these notes were mandatorily convertible at a conversion rate determined at a 20% discount to the IPO price, discussed further below. Additionally, each of these note holders received five-year (5) fully vested warrants upon the closing of the IPO, with an exercise price of 90% of the IPO price.

The Company performed an evaluation of the conversion features embedded in the Related Party Notes and the warrants and concluded that such instruments qualified for treatment as derivative liabilities under ASC 815 and required bifurcation from the host contract. See Note 9 for further details.

Bridge Notes and Related Party Notes are summarized as follows at September 30, 2023 and December 31, 2022:

	2022 Bridge Notes			Related Party Notes			2023 Bridge Notes
Issuance date of promissory notes		May 2022			May 2022			May 2023
Maturity date of promissory notes		1			1			1
Interest rate		10	%		6	%		10	%
Default interest rate		15	%		15	%		15	%
Collateral		Unsecured			Unsecured			Unsecured
Conversion rate		2			2			2
Face amount of notes	$	888,889		$	338,889		$	-
Less: unamortized debt discount		(407,555	)		(155,443	)		-
Add: accrued interest on promissory notes		54,567			11,651			-
Balance - December 31, 2022	$	535,901		$	195,097		$	-
Face amount of notes		-			-			-
Less: unamortized debt discount		-			-			-
Add: accrued interest on promissory notes		-			-			-
Balance - September 30, 2023	$	-		$	-		$	-

1- earlier of 1 year from date of issuance or closing of IPO.

2- see discussion above for (a) and (b)

For the nine months ended September 30, 2023 and 2022, the Company recorded amortization of debt discounts, including issuance costs, of $670,550 and $453,063, respectively.

As a result of the completion of the IPO and as required under the terms of the Related Party Notes, the entirety of the outstanding principal balance converted to 79,926 shares of common stock at a conversion rate equal to 80% of the IPO price, fully satisfying the Company’s obligations with respect to the principal amount. In addition, the Company made cash payments to the related party holders totaling $31,968 in full settlement of the outstanding accrued interest and Extension Payments. The Company recognized a final mark to market adjustment of the embedded derivative liability (conversion feature), and as a result, no gain or loss was recognized on the debt extinguishment.

Knight Debt Conversion

On January 9, 2023, and in two subsequent amendments, the Company and Knight Therapeutics agreed to extinguish Knight’s debt in the event of an IPO. Key points of this agreement are as follows:

● The Parties agreed to fix Knight’s cumulative debt to the value as it stood on March 31, 2022, which consisted of $10,770,037 in principal and $8,096,486 in accumulated interest should the Company execute an IPO that results in gross proceeds of at least $7,000,000 prior to December 31, 2023. Should an IPO not occur by January 1, 2024 then all terms of the original debt would resume including any interest earned after March 31, 2022.

● The Parties agreed to convert the fixed principal amount into (i) that number of shares of common stock equal to dividing the principal amount by an amount equal to the offering price of the common stock in the IPO discounted by 15%, rounding up for fractional shares, in a number of common shares up to 19.9% of the Company’s outstanding common stock after giving effect of the IPO; (ii) the Company will make a milestone payment of $10 million to Knight if, after the date of a Qualifying IPO, the Company sells Arakoda™ or if a Change of Control (as per the definition included in the original loan agreement dated on December 10, 2015) occurs, provided that the purchaser of Arakoda™ or individual or entity gaining control of the Borrower is not the Lender or an affiliate of the Lender; (iii) following the License and Supply agreement dated on December 10, 2015 and subsequently amended on January 21, 2019, an expansion of existing distribution rights to tafenoquine/Arakoda™ to include COVID-19 indications as well as malaria prevention across the Territory as defined in said documents, subject to US Army approval; and (iv) Company will retain Lender or an affiliate to provide financial consulting services, management, strategic and/or regulatory advice of value $30,000 per month for five years (the parties will negotiate the terms of that consulting agreement separately in good faith).

● The parties agreed to convert the accrued interest into that number of shares of a new class of preferred stock (the “Preferred Stock”) by dividing the fixed accumulated interest by $100.00, then rounding up. The Preferred Stock shall have the following rights, preferences, and designations: (i) have a 6% cumulative dividend accumulated annually on March 31; (ii) shall be non-voting stock; (iii) are not redeemable, (iv) be convertible to shares of common stock at a price equal to the lower of (1) the price paid for the shares of common stock in the initial public offering and (2) the 10 day volume weighted average share price immediately prior to conversion; and (v) conversion of the preferred stock to common shares will be at the Company’s sole discretion. Notwithstanding the foregoing, the Preferred Stock shall not be converted into shares of common stock if as a result of such conversion Knight will own 19.9% or more of our outstanding common stock.

● In addition to the conversion of the debt, for a period commencing on January 1, 2022 and ending upon the earlier of 10 years after the Closing or the conversion or redemption in full of the Preferred Stock, Company shall pay Lender a royalty equal to 3.5% of the Company’s net sales (the “Royalty”), where “Net Sales” has the same meaning as in the Company’s license agreement with the U.S. Army for tafenoquine. Upon success of the Qualified IPO, the Company shall calculate the royalty payable to Knight at the end of each calendar quarter. The Company shall pay to Knight the royalty amounts due with respect to a given calendar quarter within fifteen (15) business days after the end of such calendar quarter. Each payment of royalties due to Knight shall be accompanied by a statement specifying the total gross sales, the net sales and the deductions taken to arrive to net sales. For clarification purposes, the first royalty payment will be performed following the above instructions, on the first calendar quarter in which the Qualified IPO takes place and will cover the sales for the period from January 1, 2022 until the end of said calendar quarter.

The Company evaluated the January 9, 2023 exchange agreement in accordance with ASC 470-50 and concluded that the debt qualified for debt extinguishment because a substantial conversion feature was added to the debt terms. Upon extinguishment, the Company recorded a loss upon extinguishment in the amount of $839,887 and elected to recognize the new debt under the ASC 825 fair value option until it is settled.

A reconciliation of the beginning and ending balances for the Convertible Knight Note, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows for the three and nine months ended September 30, 2023:

	Convertible Knight Note, at fair value
Promissory Notes, at fair value at December 31, 2022	$	-
Fair value at modification date - January 9, 2023		21,520,650
Fair value - mark to market adjustment		(339,052	)
Accrued interest recognized		634,243
Promissory Notes, at fair value at March 31, 2023	$	21,815,841
Fair value - mark to market adjustment		1,064,849
Accrued interest recognized		659,306
Promissory Notes, at fair value at June 30, 2023	$	23,539,996
Fair value - mark to market adjustment		(6,105,066	)
Extinguishment of Promissory Notes		(17,434,930	)
Promissory Notes, at fair value at September 30, 2023	$	-

As a result of the completion of the IPO and as required under the terms of the Knight Debt Conversion Agreement, the cumulative outstanding principal as of March 31, 2022 converted to 1,108,337 shares of common stock (representing 19.9% ownership of the Company’s common stock after giving effect to the IPO). In addition, the entirety of the accumulated interest as of March 31, 2022 converted into 80,965 shares of Series A Preferred Stock at the conversion rate detailed above, in full satisfaction of the Company’s obligations with respect to the accumulated interest. Upon consummation of the IPO and under the terms of the Knight Debt Conversion Agreement, the Company became obligated to the contingent milestone payments and the accumulated Royalty discussed above, which value was included in the reacquisition price of the debt upon extinguishment. The Company recognized a final mark-to-market adjustment of $6,106,066 to adjust the Convertible Knight Loan to its fair value on the date of settlement, and as a result, no gain or loss was recognized on the debt extinguishment.

The Company performed an evaluation of the contingent payment features and concluded that the contingent milestone payment is a freestanding financial instrument that meets the definition of a derivative under ASC 815, and accordingly, the fair value of the derivative liability is marked to market each reporting period until settled. The future Royalty payment due to Knight was determined to be an embedded component of the Series A Preferred Stock, however is exempt from derivative accounting under the ASC 815 scope exception for specified volumes of sales or service revenues. Therefore, the Company accrues a royalty expense within cost of sales as sales are made.

Debenture

On April 24, 2019, 60P entered into the Knight debenture of $3,000,000 with an original issue discount of $2,100,000, which was being amortized using the effective interest method. The Company subsequently restructured the Knight Loans, including the debenture, pursuant to the Knight Debt Conversion Agreement (see above). $13,696 of the original issue discount was amortized to interest expense in 2023 prior to the amendment ($368,091 during the nine months ended September 30, 2022) and the unamortized original issue discount at September 30, 2023 was $0 ($279,061 at December 31, 2022) as a result of the debt conversion (discussed above), which was accounted for as a debt extinguishment.

The Knight debenture as of September 30, 2023 and December 31, 2022 consisted of the following:

	September 30, 2023		December 31, 2022
Original Debenture	$	-	$	3,000,000
Unamortized debt discount		-		(279,061	)
Debenture Prior to Accumulated Interest		-		2,720,939
Accumulated Interest		-		1,555,670
Debenture	$	-	$	4,276,609

SBA COVID-19 EIDL

On May 14, 2020, the Company received COVID-19 EIDL lending from the Small Business Administration (SBA) in the amount of $150,000. The loan bears interest at an annual rate of 3.75% calculated on a monthly basis. The Company was committed to make $731 monthly payments first due June 4, 2021. On March 31, 2021, the SBA announced the deferment period has been extended an additional eighteen months. Thus, the Company was first obligated to start making interest payments of $731 on November 4, 2022. The balance as of September 30, 2023 is $161,366 ($163,022 at December 31, 2022). The current maturity at September 30, 2023 is $8,772 and the long-term liability is $152,594 ($2,750 and $160,272 at December 31, 2022, respectively).

The current future payment obligations of the principal are as follows:

Period	Principal Payments
2023 (remaining three months)	$	-
2024		-
2025		-
2026		-
2027		2,804
Thereafter		147,196
Total	$	150,000

Due to the deferral, the Company is expected to make a balloon payment of $32,383 to be due on 10/12/2050.

Related Party Advances

In March 2023, the Company received a $200,000 short term advance from the Geoffrey S. Dow Revocable Trust. In April 2023, the Company received $50,000 as a short-term advance from management. The Geoffrey S. Dow Revocable Trust contributed $23,000 and Tyrone Miller contributed $27,000. On May 11, 2023, these short term advances were refunded in full for an aggregate amount of $250,000.

8. DEBT

Promissory Notes

On December 27, 2019 the Company restructured its cumulative borrowing with its senior secured lender, Knight Therapeutics, Inc, into a note for the principal amount of $6,309,823 and accrued interest of $4,160,918 and a debenture of $3,483,851, collectively referred to as the ‘Knight Loan’. The Knight Loan matures on December 31, 2023. The Knight Loan bears an annual interest rate of 15% compounded quarterly. Under the Knight Loan, the Company is required to pay the lender 15% of cumulative gross profits of above $7,000,000. At the end of December 31, 2022, the Company had reached cumulative gross profits of $1,583,231 ($1,790,744 at December 31, 2021).

On October 11, 2017 the Company issued a promissory note (“Note”) with an individual investor in the amount of $750,000. The Note matures 60 days after the Knight Loan is repaid. The Note bore an interest rate of 5% from inception for the first six months and 10% per annum thereafter both compounded quarterly on a calendar basis. The lender has an option to convert the Note into equity in the Company at the maturity date and will have 30 days from maturity to exercise this option. Cumulative interest would have originally been forfeited prior to the Amendment (discussed below), should the lender have elected to convert the Note into equity.

On December 11, 2022, the Company and the individual investor amended the Note (“the Amendment”). The Amendment added a provision to automatically convert the outstanding principal and accumulated interest through March 31, 2022 into common shares in the event the Company consummates an IPO. The Amendment also provides the lender the option to convert the outstanding principal and accumulated interest through March 31, 2022 into equity in the Company at the maturity date and will have 30 days from maturity to exercise this option. Cumulative interest after March 31, 2022 will be forfeited should the lender elect to convert the Note into equity. The Company evaluated the Amendment and determined that it constitutes an extinguishment as the option to convert interest through March 31, 2022 is considered the addition of a substantive conversion option. Accordingly, the Amendment resulted in extinguishment accounting and a corresponding extinguishment gain of $120,683, which represents the difference between the carrying value of the Note just prior to the Amendment and the fair value of the Note just after the Amendment. The extinguishment accounting resulted in a fair value of the Note, including the Amendment of $1,099,578. The discount of $120,683 and costs incurred with third parties directly related to the Amendment of $1,767 will be amortized over the remaining life of the debt using the effective interest method. Amortization of the discount on the Note for the year ended December 31, 2022 was $4,955 ($0 in 2021). Interest expense related to the Note, including the Amendment, for the year ended December 31, 2022 was $115,546 ($104,558 in 2021).

Promissory notes are summarized as follows at December 31, 2022:

	Knight Therapeutics		Note, including amendment		Bridge Notes		Total
Promissory Notes and Interest less Discounts		16,319,986		1,109,783		535,901		17,965,670
Less Current Maturities		16,319,986		-		535,901		16,855,887
Long Term Promissory Notes		-		1,109,783		-		1,109,783

Promissory notes are summarized as follows at December 31, 2021:

	Knight Therapeutics		Note, including amendment		Total
Promissory Notes and Interest less Discounts		14,085,333		1,111,731		15,197,064
Less Current Maturities		-		-		-
Long Term Promissory Notes		14,085,333		1,111,731		15,197,064

Debenture

On April 24, 2019 60P entered into the Knight debenture of $3,000,000 with an original issue discount (“OID”) of $2,100,000. The OID is being amortized using the effective interest method. The Company subsequently restructured the Knight Loan (see Subsequent Events footnote 13). $500,103 of the original issue discount was amortized to interest expense during the twelve months ended December 31, 2022 ($431,625 during twelve months ended December 31, 2021) and the unamortized original issue discount at December 31, 2022 was $279,061 ($779,164 at December 31, 2021

	December 31, 2022			December 31, 2021
Original Debenture	$	3,000,000		$	3,000,000
Unamortized debt discount		(279,061	)		(779,164	)
Debenture Prior to Accumulated Interest		2,720,939			2,220,836
Accumulated Interest		1,555,670			1,167,734
Debenture	$	4,276,609		$	3,388,570

SBA COVID-19 EIDL

On May 14, 2020, the Company received COVID-19 EIDL lending from the Small Business Administration (SBA) in the amount of $150,000. The loan bears interest at an annual rate of 3.75% calculated on a monthly basis. The Company was committed to make $731 monthly payments first due June 4, 2021. On March 31, 2021, the SBA announced the deferment period has been extended an additional eighteen months. Thus, the Company was first obligated to start making payments of $731 on November 4, 2022. The current balance is $163,022 for the year ended December 31, 2022 ($159,161 at December 31, 2021). The current maturity is $2,750 and the long-term liability is $160,272. The current future payment obligations of the principal are as follows:

Period	Principal Payments
2023	$	-
2024		-
2025		-
2026		250
2027		3,211
Thereafter		146,539
Total	$	150,000

Due to the deferral, the Company is expected to make a balloon payment of $32,283 to be due on 10/12/2050.