Shuttle Pharmaceuticals Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) should be read in conjunction with our unaudited financial statements and the related notes thereto included elsewhere in this quarterly report. The MD&A contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this quarterly report. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors.

Overview

Founded by Georgetown University Medical School faculty members, Shuttle Pharmaceuticals Holdings, Inc. is a discovery and development stage pharmaceutical company leveraging our proprietary technology to develop novel therapies that are designed to cure cancer. Originally formed as Shuttle Pharmaceuticals, LLC in 2012, our goal is to extend the benefits of cancer treatments by leveraging insights into cancer therapy with surgery, radiation therapy, chemotherapy and immunotherapy. While there are several therapies being developed with the goal of curing cancer, one of the most effective and proven approaches to this is radiation therapy (RT). We are developing a pipeline of products designed to address the limitations of the current standard of cancer therapies. We believe that our product candidates will enable us to deliver cancer treatments that are safer, more reliable and at a greater scale than that of the current standard of care.

Operations to date have focused on continuing our research and development efforts to advance Ropidoxuridine clinical testing and improved drug formulation, to advance HDAC6 inhibitor (SP-2-225) preclinical development, and complete SBIR contract work on predictive biomarkers of radiation response, as well as prostate cell lines for health disparities research. We received Small Business Innovation Research (“SBIR”) contract funding from the National Institutes of Health (“NIH”) for the aforementioned projects. The clinical development of Ropidoxuridine has shown drug bioavailability and a maximum tolerated dose has been established for use in Phase II clinical trials. TCG GreenChem, Inc. (“TCG GreenChem”), with whom we have contracted for process research, development and cGMP compliant manufacture of IPdR, has successfully completed the initial manufacturing campaign for the active pharmaceutical ingredient (API) of Ropidoxuridine for use in the Company’s upcoming Phase II clinical trial in brain cancer patients undergoing radiation therapy. Shuttle has been working concomitantly with TCG GreenChem to manufacture API and University of Iowa Pharmaceuticals to develop the formulation and packaging of the drug product into capsules for clinical use. Both activities have now been completed. In addition, Shuttle received a positive response from the Type B pre-IND meeting with the FDA and is following the guidance provided by the FDA for the proposed Phase II clinical trial. With this, the Company believes it remains on track to commence its Phase II clinical study in the fourth quarter of 2023. The radiation biomarker project and the health disparities project have been completed and the company is following up with plans for clinical validation and potential commercialization. Changes in operational, administrative, legal and professional expenses related to our operations are set forth in more detail in the discussion below.

Results of Operations

Comparison of the three months ended September 30, 2023 and 2022

The following table summarizes the results of our operations:

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Research and Development, net of contract expense reimbursements. Research and development (“R&D”) expense was $1,140,307 for the three months ended September 30, 2023, as compared to $669,038 for three months ended September 30, 2022. The increase of $471,269, or 70%, is primarily related to the Company increasing R&D spending as a result of having received funding from the Company’s initial public offering in the third quarter of fiscal 2022 and, the convertible note issued during the period ended March 31, 2023.

Compensation related expenses were $395,235 in the three months ended September 30, 2023 as compared to $200,541 in the three months ended September 30, 2022. Compensation related expenses increased from 29.7% of total R&D in the three months ended September 30, 2022 to 34.7% for the three months ended September 30, 2023. Subcontract work made up 66.6% of total R&D expenses in the three months ended September 30, 2022 and 60.0% of total R&D expenses during the three months ended September 30, 2023.

General and Administrative Expenses. General and Administrative expenses in the three months ended September 30, 2023 increased by $88,560, or 108%, from $81,864 in the three months ended September 30, 2022 to $170,424 in the three months ended September 30, 2023. The increase in general and administrative expenses was primarily due to increases in insurance expenses of $21,731, director fees of $31,250 and advertising costs of $34,550, which increased expenses were offset by reduced corporate filing fees of $27,200.

Legal and Professional Expenses. During the three months ended September 30, 2023, legal and professional expenses increased by $217,850 or 309%. The increase in legal and professional fees was primarily due to increases in our expenses related to our public filing requirements, contracts and financing related work.

Other Income Expense. Other expense was $193,608 for the three months ended September 30, 2023, which consisted of $623,465 in interest expense on convertible loans, interest income of $20,765, loss on settlement of convertible debt of $43,414, change in marketable securities of $9,606, and a gain on change in fair value of derivative liabilities of $442,900. Other expense was $176,957 for the three months ended September 30, 2022, which consisted of $604,716 in interest expense, $13,725 in interest expense on related party loans, gain on settlement of accounts payable of $328,687 and change in fair value of derivative liability of $112,767.

Comparison of the nine months ended September 30, 2023 and 2022

The following table summarizes the results of our operations:

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Research and Development, net of contract expense reimbursements. R&D expense was $3,084,488 for the nine months ended September 30, 2023, as compared to $1,260,276 less the final $211,455 reimbursement from the Topic 345: Predictive Biomarkers of Prostate Cancer NIH contract for a net of $1,048,821 for the nine months ended September 30, 2022. The increase of $2,035,667, or 194%, is primarily related to the Company increasing R&D spending as a result of funding received from the Company’s initial public offering in the third quarter of fiscal 2022 and the convertible note issued during the first quarter of fiscal 2023 and the $211,455 reimbursement received in the same period in the prior year.

Compensation related expenses were $1,468,277 in the nine months ended September 30, 2023 as compared to $727,421 in the nine months ended September 30, 2022. Compensation related expenses decreased from 57.7% of total R&D, excluding reimbursements, in the nine months ended September 30, 2022 to 47.6% for the nine months ended September 30, 2023. Subcontract work made up 35.7% of total R&D expenses, excluding reimbursements, in the nine months ended September 30, 2022 and 48.3% of total R&D expenses during the nine months ended September 30, 2023. Other general R&D expenses, including supplies and rent were 6.6% in the nine months ended September 30, 2022 and 4.1% in the nine months ended September 30, 2023.

General and Administrative Expenses. General and Administrative expenses in the nine months ended September 30, 2023 increased by $347,631, or 332%, from $104,711 in the nine months ended September 30, 2022 to $452,342 in the nine months ended September 30, 2023 primarily due to increases in insurance expenses of $93,494, director fees of $100,000, advertising expenses of $88,361 and corporate filing fees of $27,120.

Legal and Professional Expenses. During the nine months ended September 30, 2023, legal and professional expenses increased by $412,770 or 63%. The increase in legal and professional fees was primarily due to increases in our expenses related to public filing requirements, contract work and financing activities.

Other Income Expense. Other expense was $342,665 for the nine months ended September 30, 2023, which consisted of $1,952,147 in interest expense on convertible loans, $6,825 in interest expense on related party loans, interest income of $56,720, finance fee on convertible loans of $104,245, loss on settlement of convertible debt of $477,221, gain on sale of marketable securities of $1,744, unrealized gain on marketable securities of $21,134, and a gain on change in fair value of derivative liabilities of $2,118,175. Other expense was $464,049 for the nine months ended September 30, 2022, which consisted of $920,660 in interest expense, $39,108 in interest expense on related party loans and gains on change in derivative liability of $94,025, gain on settlement of accounts payable of $328,687 and forgiveness of Paycheck Protection Program note payable of $73,007.

Liquidity and Capital Resources

Our capital needs to date have been met by funds raised through our initial public offering and a subsequent convertible note offering, private placement offerings of our securities, as well as through contributions from existing stockholders, SBIR contracts and other grants. In the nine months ended September 30, 2023, we raised a net total of $3,590,000 after finder’s fees through the sale of convertible notes and warrants. In the year ended December 31, 2022, we raised a total of $10,672,908 through the sale of shares of common stock, convertible notes, and warrants. In addition, since inception, we have received a total of $5,531,722 in SBIR contracts and other grants received primarily through the NIH.

We believe that we will continue to expend substantial resources for the foreseeable future in relation to completion of clinical development and regulatory preparedness of our product candidates, preparations for a commercial launch of our product candidates, if approved by the FDA, and development of any other current or future product candidates we may choose to develop. These expenditures will include costs associated with research and development, conducting preclinical studies and clinical trials, obtaining marketing approvals, and, if we are not able to enter into planned collaborations, manufacturing and supply as well as marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any drug development process is highly uncertain, we cannot reasonably estimate the actual amounts necessary to complete the development and commercialization of our current product candidates, if approved, or future product candidates that may be developed, if any.

There can be no assurance that additional financing will be available to us when needed, on favorable terms or otherwise. Moreover, any such additional financing may dilute the interests of existing stockholders. The absence of additional financing, when needed, could cause us to delay implementation of our business plan in whole or in part, curtail our business activities and seriously harm our business and our prospects.

Balance Sheet Data:

As of September 30, 2023, total current assets were $6,995,608 and total current liabilities were $810,437, resulting in working capital of $6,185,171. As of December 31, 2022, total current assets were $8,578,351 and total current liabilities were $975,676, resulting in a working capital of $7,602,675. The current assets primarily resulted from $3,590,000 net cash received from the issuance of a convertible note payable and $783,608 repaid for a related party notes ($685,473 in principal and $98,135 of accrued interest), for net cash provided by issuance and settlement of notes for the period of $2,904,527. Additionally, we continued progress on our R&D programs during the period ended September 30, 2023. The decrease in current liabilities is primarily due to the current portion of the $4,300,000 convertible note which is $462,825, accrued interest of $106,578 an increase in accounts payable of $63,255, offset by the reduction of $783,608 in related party notes payable and accrued interest.

Cash Flows from Operating Activities

To date, we have not generated positive cash flows from operating activities. For the nine months ended September 30, 2023, net cash flows used in operating activities was $4,518,973, consisting of a net loss of $4,952,223, increased by a gain on change in derivative liabilities of $2,118,175, offset by amortization of debt discount of $1,654,724, loss on settlement of convertible debt of $477,221, accrued interest settled with common stock of $294,927, stock-based compensation of $95,438 and further reduced by a net change in working capital of $47,165. For the nine months ended September 30, 2022, net cash flows used in operating activities was $2,030,587, consisting of a net loss of $2,277,539, reduced by depreciation expense of $4,484, gain on change in warrant liability of $94,025, amortization of debt discount of $885,505, stock-based compensation of $356,733, gain on forgiveness of the PPP loan of $73,007, gain on settlement of accounts payable of $328,687 and a net change in working capital of $516,676.

Cash Flows from Investing Activities

For the nine months ended September 30, 2023, we invested in trading marketable securities for $2,977,714 and received $80,000 in proceeds from disposition of marketable securities and purchased $19,046 of equipment. For the nine months ended September 30, 2022, we had no investing activities.

Cash Flows from Financing Activities

For the nine months ended September 30, 2023, we received a net of $3,590,000 from the sale and issuance of convertible notes payable and warrants and repaid $685,473 in related party notes payable. For the nine months ended September 30, 2022, we received $10,045,513 from the issuance of common shares and $650,715 from the issuance of convertible notes and repaid $50,000 of notes payable.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our financial statements included elsewhere in this registration statement, we believe that the following accounting policies are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Our most critical accounting policies and estimates relate to the following:

• Research and Development Expenses
• Operating Lease Accounting
• Fair Value of Financial Instruments

Research and Development

Research and development expenses are expensed as incurred and, prior to our initial public offering in September 2022, have historically been offset by contract receivable payments from an NIH SBIR contract that has supported our scientific research. This is stated in the financials as research and development-net of contract expense reimbursements.

Operating Lease Right-of-use Assets and Operating Lease Liability

Operating lease right-of-use assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value is our incremental borrowing rate, estimated to be 10.48%, as the interest rate implicit in most of our leases is not readily determinable. Operating lease expense is recognized on a straight-line basis over the lease term.

Fair Value of Financial Instruments

We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For derivative financial instruments that are accounted for as equity, the derivative instrument is initially recorded at its fair value and recorded to additional paid in capital. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.

For our derivative financial instruments classified as a liability, the Company used a Monte Carlo valuation model to value the derivative instruments at inception and on subsequent valuation dates. The Monte Carlo simulation uses an implied VWAP for valuation. The implied VWAP was backsolved by setting the summation of the parts (e.g., derivatives and debt without derivatives) equal to the cash proceeds. For our derivative financial instruments classified as equity, the Company used a Black Scholes valuation model, to calculate the fair value on issuance date, without revaluation.

The use of Monte Carlo and Black Scholes valuation models require key inputs, some of which are based on estimates and judgements by management and/or external consultants. Any change to these key inputs could produce significantly higher or lower fair value measurements.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules, regulations and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure.

In the preparation of our Quarterly Report on Form 10-Q for the period ended September 30, 2023, we identified certain deficiencies in our internal controls over financial reporting related to the following financial reporting areas to be material weaknesses: accounting policy and documentation of management’s contemplation of the accounting treatment and implications over significant unusual transactions, and adequate controls over financials statement close process and financial reporting reviews. Based on this evaluation, as a result of our material weaknesses in internal controls over financial reporting, management concluded that our disclosure controls and procedures were not effective as of September 30, 2023.

Changes in Internal Controls

In connection with our continued monitoring and maintenance of our controls procedures as part of the implementation of Section 404 of the Sarbanes-Oxley Act, we continue to review and improve the effectiveness of our internal controls. The following changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period ending September 30, 2023 or subsequent to the date the Company completed its evaluation, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting were:

(1) Automation and electronic data interfaces of banking and payroll systems with our accounting system to improve accuracy, efficiency, and timeliness of reporting;

(2) Reorganization of, and additional procedures for, recordkeeping;

(3) Additional segregated monthly review and month end close procedures to identify errors or omissions in recording transactions;

(4) Addition of accounting staff supervised by an experienced financial reporting company to improve preparation of financial statements in accordance with GAAP; and

(5) Segregation of approval and review of financial transactions.

(6) Implementation of a more rigorous schedule to accommodate additional analyses related to convertible notes.

Management will continue to monitor and evaluate the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and are committed to taking further action and implementing additional improvements as necessary.