Notes
to Unaudited Condensed Consolidated Financial Statements
March
31, 2023
Note
1 – Organization and Liquidity
Organization
and Line of Business
The
Company was formed as Shuttle Pharmaceuticals, LLC, in the State of Maryland on December 18, 2012. On August 12, 2016, the Company filed
articles of conversion with the state of Maryland to convert from an LLC to a C corporation, at which time the Company changed its name
to Shuttle Pharmaceuticals, Inc. (“Shuttle”). In connection with the conversion the Company issued 45,000,000
shares of common stock in exchange for 100%
of the outstanding membership interests in Shuttle
prior to conversion. On June 4, 2018, Shuttle completed a reverse merger with Shuttle Pharmaceuticals Holdings, Inc. (then known as Shuttle
Pharma Acquisition Corp, Inc.), a Delaware corporation (the “Company”), pursuant to which Shuttle, our operating entity,
became a wholly owned subsidiary of the Company.
The
Company’s primary purpose is to develop and commercialize unique drugs for the sensitization of cancers and protection of normal
tissues, with the goal of improving outcomes for cancer patients receiving radiation therapy. Shuttle has deployed its proprietary technology
to develop novel cancer immunotherapies, producing a pipeline of selective HDAC inhibitors for cancer and immunotherapy applications.
The Company’s HDAC platform is designed to target candidate molecules with potential roles in therapeutics beyond cancer, including
autoimmune, inflammatory, metabolic, neurological and infectious diseases. The Company’s Ropidoxuridine product, which is used
with radiation therapy to sensitize cancer cells, was funded by a Small Business Innovation Research (“SBIR”) contract provided
by, the National Cancer Institute (“NCI”), a unit of the National Institutes of Health (“NIH”). Ropidoxuridine
has been further developed though the Company’s collaborations with scientists at the University of Virginia for use in combination
with proton therapy to improve patient survival. Historically, the Company has been working on developing products through NIH grants,
including a product to predict late effects of radiation with metabolite biomarkers and develop prostate cancer cell lines in health
disparities research.
The
production and marketing of the Company’s products and its ongoing research and development activities will be and are subject
to extensive regulation by numerous governmental authorities in the United States. Prior to marketing in the United States, any products
or combination of products developed by the Company must undergo rigorous preclinical (animal) and clinical (human) testing and an extensive
regulatory approval process implemented by the Food and Drug Administration (“FDA”) under the Food, Drug and Cosmetic Act.
There can be no assurance that the Company will not encounter problems in clinical trials that will cause the Company or the FDA to delay
or suspend clinical trials.
The
Company’s success will depend in part on its ability to obtain patents and product license rights, maintain trade secrets, and
operate without infringing on the proprietary rights of others, both in the United States and other countries. There can be no assurance
that patents issued to or licensed by the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection or competitive advantages to the Company now or in the future.
Liquidity
The
Company has incurred losses since inception and a net loss of $975,097
during the three months ended March 31, 2023.
However, in September 2022, the Company completed its initial public offering, selling equity in the Company, which generated net proceeds
of $10,022,193.
Additionally, in January 2023, the Company entered into a Convertible Note agreement with a principal value of $4,300,000
with an institutional investor, providing $3,590,000
in net proceeds. Consequently, the Company’s
existing cash resources and the cash received from the equity offering are expected to provide sufficient funds to carry out the Company’s
planned operations through the second half of 2024.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial statements and with the instructions to Form 10-Q
and Rule 8-03 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not
contain all information and notes required by accounting principles generally accepted in the United States of America for annual financial
statements. A complete discussion of the Company’s significant accounting policies is included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2022.
In
the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the
adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31,
2023 and the results of operations and cash flows for the periods presented. The accompanying condensed consolidated financial statements
of the Company have not been audited by the Company’s independent registered public accounting firm, except that the year-end condensed
consolidated balance sheet was derived from audited financial statements. The results of operations for the three months ended March
31, 2023 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited condensed
consolidated financial statements should be read in conjunction with the financial statements and related notes thereto for the year
ended December 31, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2023.
Basis
of Consolidation
The
financial statements have been prepared on a consolidated basis with those of the Company’s wholly-owned subsidiary, Shuttle Pharmaceuticals,
Inc. All intercompany transactions and balances have been eliminated.
Reclassifications
Certain
prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on
the reported results of operations.
Use
of Estimates
The
preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly
evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience, and various
other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources.
The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there
are material differences between the estimates and the actual results, future results of operations will be affected. Significant estimates
in the accompanying financial statements valuation of derivatives, and the valuation allowance on deferred tax assets.
Cash
and Cash Equivalents
Cash
and cash equivalents include cash in banks and money market funds with maturities of less than three months from inception, which are
readily convertible to known amounts of cash and which, in the opinion of management, are subject to an insignificant risk of loss in
value. As of March 31, 2023 and December 31, 2022, cash and cash equivalents consisted of the following:
Schedule
of Cash and Cash Equivalents
| |
March
31, | | |
December
31, | |
| |
2023 | | |
2022 | |
Cash | |
$ | 6,107,873 | | |
$ | 5,411,378 | |
Money
market funds | |
| 1,061,395 | | |
| 3,005,825 | |
| |
$ | 7,169,268 | | |
$ | 8,417,203 | |
Periodically,
the Company may carry cash balances at financial institutions more than the federally insured limit of $250,000
per institution. The amount in excess of the
FDIC insurance as of March 31, 2023, was approximately $6,667,000.
The Company has not experienced losses on these accounts and management believes, based upon the quality of the financial institutions,
that the credit risk with regard to these deposits is not significant.
Marketable
Securities
Our
investments in debt securities are carried at fair value. Investments in debt securities that are not classified as held-to-maturity
are carried at fair value and classified as either trading or available-for-sale. Realized and unrealized gains and losses on trading
debt securities are charged to income and unrealized gains and losses on available-for-sale debt securities are included in other comprehensive
income or loss.
The
marketable securities held by the Company, are classified as trading marketable securities, had an outstanding balance of $2,991,771,
and $0 as
of March 31, 2023 and December 31, 2022, respectively. During the three months ended March 31, 2023 and 2022, the Company recognized
interest income of $12,889 and
$0,
and unrealized gains of $38,062
and $0,
respectively.
Fair
Value of Financial Instruments
The
Company follows accounting guidelines on fair value measurements for financial instruments measured on a recurring basis, as well as
for certain assets and liabilities that are initially recorded at their estimated fair values. Fair Value is defined as the exit price,
or the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
as the measurement date. The Company uses the following three-level hierarchy that maximizes the use of observable inputs and minimizes
the use of unobservable inputs to value its financial instruments:
|
● |
Level
1: Observable inputs such as unadjusted quoted prices in active markets for identical instruments. |
|
|
|
|
● |
Level
2: Quoted prices for similar instruments that are directly or indirectly observable in the marketplace. |
|
|
|
|
● |
Level
3: Significant unobservable inputs which are supported by little or no market activity and that are financial instruments whose values
are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which
the determination of fair value requires a significant judgment or estimation. |
Financial
instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair
value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety
requires it to make judgments and consider factors specific to the asset or liability. The use of different assumptions and/or estimation
methodologies may have a material effect on estimated fair values. Accordingly, the fair value estimates disclosed, or initial amounts
recorded may not be indicative of the amount that the Company or holders of the instruments could realize in a current market exchange.
The
carrying amounts of the Company’s financial instruments including cash and cash equivalents, prepaid expenses, accounts payable
and accrued liabilities approximate fair value due to the short-term maturities of these instruments.
Set
out below are the Company’s financial instruments that are required to be remeasured at fair value on a recurring basis and their
fair value hierarchy as of March 31, 2023 (none for December 31, 2022):
Schedule
of Fair Value, Assets and Liabilities Measured on Recurring Basis
March
31, 2023 | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Carrying
Value | |
Assets | |
| | | |
| | | |
| | | |
| | |
Marketable securities: | |
| | | |
| | | |
| | | |
| | |
United States Treasury Bonds | |
$ | 2,991,771 | | |
| - | | |
| - | | |
$ | 2,991,771 | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Derivative liabilities (Notes 6, 8) | |
$ | - | | |
$ | - | | |
$ | 1,390,000 | | |
$ | 1,390,000 | |
Derivative
Financial Instruments
The
Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. 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 our derivative
financial instruments, the Company used a Monte Carlo valuation model to value the derivative instruments at inception and on subsequent
valuation dates. 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. Derivative liabilities are classified in the balance sheet as current or
non-current based on whether or not net-cash settlement or conversion of the instrument could be required within twelve (12) months of
the balance sheet date.
Research
and Development Expenses
Research
and development expenses are charged to expense as incurred. Research and development expenses include, but are not limited to, product
development, clinical and regulatory expenses, payroll and other personnel expenses, materials, supplies, related subcontract expenses,
and consulting costs. In September of 2022, TCG GreenChem, Inc. (“TCG GreenChem”) was contracted for process research, development
and cGMP compliant manufacture of IPdR. The total project cost is $1,500,000
to be paid in four milestone payments. To date,
the company has made two payments as follows; the first payment of $450,000
was paid during the quarter ended September 30,
2022, pursuant to which TCG GreenChem commenced work on the project, and the second milestone payment of $300,000
was paid during the three months ended March
31, 2023. The remaining two payments will be made following completion of the related milestones.
Regarding
the accounting treatment for reimbursements, GAAP provides limited guidance on the accounting for government grants received by for-profit
companies. We understand there is more than one acceptable alternative for the accounting treatment – a reduction of costs, a deferred
credit to be amortized, revenue or other income. The Company has concluded that reimbursements are more akin to a reduction of costs
and applies reimbursements against incurred research costs.
Net
Loss Per Common Stock
Net
loss per share of common stock requires presentation of basic earnings per share on the face of the statements of operations for all
entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic earnings per share
computation. In the accompanying financial statements, basic loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the year. Diluted earnings per share is computed by dividing net income by the weighted
average number of shares of common stock and potentially dilutive outstanding shares of common stock during the period to reflect the
potential dilution that could occur from common shares issuable through contingent share arrangements, stock options and warrants unless
the result would be antidilutive.
The
dilutive effect of restricted stock units subject to vesting and other share-based payment awards is calculated using the “treasury
stock method,” which assumes that the “proceeds” from the exercise of these instruments are used to purchase common
shares at the average market price for the period. The dilutive effect of convertible securities is calculated using the “if-converted
method.” Under the if-converted method, securities are assumed to be converted at the beginning of the period, and the resulting
common shares are included in the denominator of the diluted calculation for the entire period being presented.
For
the three months ended March 31, 2023 and 2022, the following common stock equivalents were excluded from the computation of diluted
net loss per share as the result of the computation was anti-dilutive.
Schedule
of Anti-dilutive Securities Excluded from Computation of Earnings Per Share
| |
2023 | | |
2022 | |
| |
Three Months Ended | |
| |
March
31, | |
| |
2023 | | |
2022 | |
Convertible notes | |
| 1,893,128 | | |
| - | |
Series A preferred stock | |
| - | | |
| 97,062 | |
Warrants | |
| 1,446,155 | | |
| 48,532 | |
Restricted stock units | |
| 23,724 | | |
| - | |
Total | |
| 3,363,007 | | |
| 145,594 | |
Recent
Accounting Pronouncements
The
Company has considered all recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have
a material impact on its financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under
the circumstances.
Note
3 – Property and Equipment, Net
Property
and equipment consisted of the following:
Schedule
of Property and Equipment Net
| |
March
31, | | |
December
31, | |
| |
2023 | | |
2022 | |
Office Furniture and equipment | |
$ | 8,861 | | |
$ | 8,861 | |
Laboratory equipment | |
| 118,605 | | |
| 118,605 | |
Property and equipment, gross | |
| 127,466 | | |
| 127,466 | |
Less accumulated depreciation | |
| (116,362 | ) | |
| (114,874 | ) |
Property and equipment,
net | |
$ | 11,104 | | |
$ | 12,592 | |
Depreciation
expense for the three months ended March 31, 2023 and 2022, were $1,488
and $1,450,
respectively.
Note
4 – Leases
Operating
lease right-of-use (“ROU”) assets and liabilities are recognized at the present value of the future lease payments as of
the lease commencement date. The
interest rate used to determine the present value is our incremental borrowing rate, estimated to be 10%, 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.
The
Company currently has a lease agreement which allows for the use of a laboratory facility for a monthly payment of $6,480.
The laboratory lease commenced on October
1, 2018, with the first payment due January 1, 2019,
and expires on October 31, 2023.
A security deposit of $6,480 is
being held for the duration of the lease term.
The
following summarizes the right-of use asset and lease information for the Company’s operating lease:
Schedule
of Right-of Use Asset and Lease Information About Operating Lease
| |
2023 | | |
2022 | |
| |
Three
Months Ended | |
| |
March
31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Operating
lease cost | |
$ | 17,544 | | |
$ | 17,544 | |
| |
| | | |
| | |
Other
information | |
| | | |
| | |
Cash
paid for operating cash flows from operating leases | |
$ | 19,440 | | |
$ | 18,873 | |
Right-of-use
assets obtained in exchange for new operating lease liability | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Weighted-average
remaining lease term — operating leases (year) | |
| 0.56 | | |
| 1.56 | |
Weighted-average
discount rate — operating leases | |
| 10 | % | |
| 10 | % |
Future
non-cancelable minimum lease payments under the operating lease liability as of March 31, 2023, are as follows:
Schedule
of Future Non-cancelable Minimum Lease Payments Under the Operating Lease Liability
Year
Ended December 31, | |
Total | |
2023
(remaining nine months) | |
$ | 45,360 | |
Thereafter | |
| - | |
Total
future minimum lease payments | |
| 45,360 | |
Less:
imputed interest | |
| (727 | ) |
Operating
lease liability | |
$ | 44,633 | |
The
Company entered into a new lease agreement for a new office and laboratory space on February 16, 2023, with base rent of $7,206
per month for a period of 64 months, which increases
at
the rate of 3% per year, with a target
commencement date of June 1, 2023. A deposit
of $7,206
is being held for the duration of the agreement.
Note
5 – Notes Payable-Related Party
On
December 1, 2020, the Company consolidated all of the outstanding loans owed to an officer of the Company and to his spouse, resulting
in the following two loans: (i) a single loan from the spouse of an officer of the Company, dated December 1, 2020, with a principal
balance of $,
bearing interest at the rate of per annum, with a maturity date of ; and (ii) a single loan owed to an officer
of the Company in the principal amount of $139,229,
bearing interest at the rate of 7.5%
per annum, with a maturity date of December
31, 2021. In
December of 2021 the maturity dates of these loans were further extended to June 30, 2022. In July of 2022, the notes were extended to
June 30, 2023. During the period ended March 31,
2023, the consolidated loan from the spouse of an officer, with a principal balance of $426,243
and total accrued interest of $64,917
was fully settled in cash. As a result, as of
March 31, 2023, the remaining note payable balance was $162,557
including $139,229
in principal and $23,328
in accrued interest.
On
June 21, 2021, the Company entered into a loan from the spouse of an officer of the Company in the amount of $(principal) with an interest rate of per annum due , due at maturity. .
During the period ended March 31, 2023, the loan was fully settled in cash for $,
including $of principal and $of accrued interest.
Note
6 – Convertible Notes and Notes Payable
Alto
Opportunity Master Fund, SPC
On
January 11, 2023, the Company entered into a securities purchase agreement (the “SPA”) with Alto Opportunity Master
Fund, SPC – Segregated Master Portfolio B, a Cayman entity (the “Investor”), pursuant to which the Company sold to
the Investor a $4,300,000 convertible
note (the “Alto Convertible Note”) and warrant (the “Warrant”) to purchase 1,018,079 shares
of common stock, in exchange for gross proceeds of $3,935,000 million
(the “Investment Amount”). The Alto Convertible Note matures on Mach 11, 2025, but may be extended at the option of the
noteholder. The Alto Convertible Note amortizes on a monthly basis and the Company can make such monthly amortization payments in
cash or, subject to certain equity conditions, in registered shares of Common Stock or a combination thereof. Installments may be
deferred by the noteholder, resulting in a variable interest rate. However, the effective interest rate is approximately 250%
based on the internal rate of return calculated on a series of cash flow that occur at regular intervals. For equity repayment, the
Alto Convertible Note is convertible into shares of Common Stock at price per share equal to the lower of (i) $2.35 (ii) 90% of the
three lowest daily VWAPs of the 15 trading days prior to the payment date or (iii) 90% of the VWAP of the trading day prior to
payment date. The noteholder may convert at any time at a
fixed price of $2.35
per share. The noteholder has an acceleration of installment amount conversion option (the “Acceleration Option”),
whereby the noteholder with certain share percentage limitations, can convert to common stock any outstanding installment amount at
an amount equal to the installment amount plus five times (5x) the installment amount at any time. The Company has determined the
Acceleration Option is an embedded derivative within the host instrument and has bifurcated it from the host instrument and recorded
as a derivative liability valued at $1,442,000,
using a Monte Carlo simulation model (Note 8). The Convertible Note is repayable over 26 months and bears interest at the rate of 5% per
annum. Additionally, the note contains certain redemption options and “Make Whole” provisions.
In
conjunction with entry into the SPA, the Company entered into a series of related agreements, including a security agreement (the “Security
Agreement”), an intellectual property security agreement (the “IP Security Agreement”) and a subsidiary guaranty (the
“Subsidiary Guaranty”). The security agreements and guaranty allow, among other things, for the Investor to have a security
interest in and place a lien on all of the Company’s assets and intellectual property until such time as the Note is paid off.
In addition, the SPA called for the Company to enter into a springing deposit account control agreement (the “Springing DACA”),
which would allow the Investor to assume control of the Company’s bank account exclusively with regard to any funds remaining outstanding
and collect on any remaining amounts owed to the Investor under Convertible Note through such bank account in the event the Company defaults
on repayment. As such, the Company established a separate bank account in which it deposited the Investment Amount and pursuant to which
the Company, the Investor and the bank holding the Investment Amount entered into the Springing DACA agreement.
Boustead
Securities, LLC (“Boustead”) served as a placement agent for the Convertible Note and Warrant offering and received $345,000
cash compensation and a warrant to purchase 71,266
shares of Common Stock, exercisable at $2.35
per share. The warrant was determined to be an
equity instrument valued on a non-recurring basis. The Company used the Black
Scholes valuation model using a term of 5
years, volatility of 110%,
a risk free rate of 3.53%
for a value of $99,543.
The
Company allocated the finance costs related to the Boustead placement agent fee of $345,000,
based on the relative fair market values of the convertible note and warrants issued. The allocation of the financing costs applied $232,027
to the debt component as a debt discount that
is being amortized to interest expense over the term of the Convertible Note, $104,245
to the warrant derivative liability component,
expensed in finance fee, and $8,727
to the equity warrant as a reduction in additional
paid in capital.
The
Company allocated the original discount of $300,000,
legal fees of $65,000,
$215,000
for additional interest fees on day 1 added to note principal, $1,442,000
for the accelerated conversion feature, and $1,288,543 for
the fair value of warrants, to the debt component resulting in an additional $3,310,543 debt
discount that is being amortized to interest expense over the term of the Convertible Note.
During
the three months ended March 31, 2023, the Company recorded interest expense of $599,331,
which included amortization of debt discount of $463,052
as interest expense and repaid $20,142
of accrued interest and $66,150
of principal.
Note
7 – Stockholders’ Equity
Common
Stock
During
the three months ended March 31, 2023, the Company issued 50,998
shares of Common Stock to settle $66,150
of principal and $20,142
of interest on a convertible note and incurred
$18,254 of
loss on settlement.
Warrants
In
connection with the January 2023 Alto Convertible Note, Boustead was granted warrants to purchase 71,266
shares of common stock, at an exercise price of $2.35
per
share (Note 6).
A
summary of activity regarding all warrants issued for the three months ended March 31, 2023, were as follows:
Schedule
of Warrants Activity
| |
Number of | | |
Weighted Average | | |
Weighted Average | |
| |
warrants | | |
Exercise
Price | | |
Life
(years) | |
Outstanding, December 31, 2022 | |
| 356,810 | | |
$ | 3.92 | | |
| 2.79 | |
Granted | |
| 1,089,345 | | |
$ | 2.35 | | |
| 4.00 | |
Outstanding, March 31, 2023 | |
| 1,446,155 | | |
$ | 2.74 | | |
| 3.48 | |
The
intrinsic value of the warrants as of March 31, 2023 is $0.
All of the outstanding warrants are exercisable as of March 31, 2023.
Equity
Incentive Plan
Our
2018 Equity Incentive Plan (the “2018 Plan”) provides for equity incentives to be granted to our employees, executive officers
or directors and to key advisers and consultants. Equity incentives may be in the form of stock options with an exercise price of not
less than the fair market value of the underlying shares as determined pursuant to the 2018 Equity Incentive Plan, restricted stock awards,
other stock-based awards, or any combination of the foregoing. The 2018 Equity Incentive Plan is administered by the Company’s
compensation committee. We have reserved 3,000,000
shares of our common stock for issuance under
the 2018 Equity Incentive Plan. As of March 31, 2023, 418,854
shares have been granted under the 2018 Equity
Incentive Plan.
Restricted
Stock Units
We
may grant restricted stock units (“RSU”) under our 2018 Plan. Restricted stock units are bookkeeping entries representing
an amount equal to the fair market value of one share of our common stock. Subject to the provisions of our 2018 Plan, the administrator
determines the terms and conditions of restricted stock units, including the vesting criteria and the form and timing of payment. Notwithstanding
the foregoing, the administrator, in its sole discretion, may accelerate the time at which any restrictions will lapse or be removed.
On
August 16, 2019, five individuals were appointed to the Board of Directors of the Company to serve as directors. Each individual entered
into an agreement outlining the terms of their service as a director and pursuant to which they would each receive a grant of $75,000
worth of restricted stock units issuable under
the Company’s 2018 Equity Incentive Plan. The RSUs vested annually in one third increments from the date of appointment. Under
the terms of the director agreements, the Company has also agreed to pay each director $25,000
per annum, payable in equal quarterly installments
commencing 90 days following the Company becoming a publicly reporting company under the Securities Exchange Act of 1934, as amended.
During
the three months ended March 31, 2023 and 2022, pursuant to the agreements with directors and officers, compensation expense for the
RSUs of $8,333
and $166,533
was included in compensation, respectively.
As
of March 31, 2023, there was $52,778
of RSU unrecognized compensation cost related
to non-vested share-based compensation arrangements which is expected to be recognized by the end of December 31, 2024.
A
summary of activity regarding the Restricted Stock Units issued follows:
Schedule
of Restricted Stock Units (RSUs)
| |
Number
of RSUs | | |
Weighted
Average Grant Date Fair Value Per RSU | |
Outstanding, December 31, 2022 | |
| 99,273 | | |
$ | 15.06 | |
Vested | |
| (75,549 | ) | |
| - | |
Outstanding, March
31, 2023 | |
| 23,724 | | |
$ | 2.81 | |
Note
8 – Derivative Liabilities
Fair
Value Assumptions Used in Accounting for Derivative Liabilities
ASC
815 requires us to assess the fair market value of derivative liabilities at the end of each reporting period and recognize any change
in the fair market value as other income or expense.
In
January 2023, in connection with the Alto Convertible Note, the Company issued warrants to purchase 1,018,079
shares of Common Stock at an exercise price of
$2.35
per share, valued at $1,189,000. The Company determined our
derivative liabilities from the warrants issued for the Alto convertible note do not satisfy the classification as equity instruments
due to the existence of certain net cash settlement and down round provisions that are not within the sole control of the Company. Conversion
and exercise prices may be lowered if the Company issues securities at lower prices in the future.
The
Company determined our derivative liability from the noteholder’s Acceleration Option for the Alto Convertible Note is not
clearly and closely related to the host, and accounted for it as a bifurcated derivative liability.
We
classified these derivative liabilities as a Level 3 fair value measurement and used the Monte Carlo pricing model to calculate the fair
value as of January 11, 2023 ($2,631,000
included in debt discount) and March 31, 2023
($1,390,000).
Key inputs for the simulation are summarized below. The Monte Carlo simulation uses an implied VWAP for the 1/11/23 valuation date. The
implied VWAP was backsolved by setting the summation of the parts (e.g. derivatives and debt without derivatives) equal to the cash proceeds.
The simulation was then iterated and manipulated to solve for the implied share price, which was approximately $1.58/share (or an approximate
14% discount to the quoted market VWAP on 1/11/23).
In a simulation, the starting
VWAP (in this case, the $1.58) is the basis for the rest of the share price analysis. The share price is then grown at the risk-free rate
(e.g. this analysis is performed in a risk-neutral framework) but with volatility applied to the simulated price. Our analysis simulates
the random walk of the daily equity VWAP within the volatility, time, and growth rate parameters. The simulation produces a future value
conclusion, which is then discounted back at the appropriate discount rate.
The Backsolve method was used for the 1/11/23 measurement because it
was determined that the $1.84 VWAP quoted price was not market. This was determined after the initial conclusions were deemed
unreasonable because of the low debt value produced by the $1.84 starting price. It was assumed that the only reasonable indication
of a true market price was the convertible debt. Therefore, we had to backsolve for the implied price using the debt value. Changes
to these inputs could produce a significantly higher or lower fair value measurement.
The
key inputs for the Monte Carlo simulation on January 11, 2023 and March 31, 2023, were as follows:
Net cash settlement and down round inputs - warrants
Schedule
of Monte Carlo Simulation Assumption
Key Valuation
Inputs | |
January
11, 2023 | |
Annualized volatility | |
| 92.5%
- 147.3 | % |
Risk-free interest rate | |
| 3.78%
- 4.73 | % |
Implied VWAP * | |
$ | 1.58 | |
Dividend yield | |
| 0 | % |
Exercise price | |
$ | 2.35 | |
Probability of fundamental transaction | |
| 5%
- 25 | % |
Date of fundamental transaction | |
| 1
year to
4
years | |
* | Based on a Monte Carlo simulation analysis of 75,000 iterations |
Key Valuation
Inputs | |
March
31, 2023 | |
Annualized volatility | |
| 86.1%
- 135.2 | % |
Risk-free interest rate | |
| 3.73%
- 4.64 | % |
Implied VWAP * | |
$ | 1.31 |
Dividend yield | |
| 0 | % |
Exercise price | |
$ | 2.35 | |
Probability of fundamental transaction | |
| 5%
- 25 | % |
Date of fundamental transaction | |
| 1
year to
3.79
years | |
* | Based on a Monte Carlo simulation analysis of 75,000 iterations |
Acceleration Option
feature inputs
Key Valuation Inputs | |
| January 11, 2023 | |
Discount rate | |
| 55%
- 65 % | |
Risk-free interest rate | |
| 3.90% - 4.84 % | |
Implied VWAP * | |
$ | 1.58
| |
Date of acceleration | |
| 0.1 year to 2 years | |
* | Based on a Monte Carlo simulation analysis of 75,000 iterations |
Key Valuation Inputs | |
March 31, 2023 | |
Discount rate | |
| 55% - 65 % | |
Risk-free interest rate | |
| 3.73% - 4.64 % | |
Implied VWAP | |
$ |
1.31
| |
Discount | |
| 19 | % |
Date of acceleration | |
| 0.3 year to 2 years | |
* | Based on a Monte Carlo simulation analysis of 75,000 iterations |
The
following table summarizes the changes in the derivative liabilities during the three months ended March 31, 2023 and 2022:
Schedule
of Derivative Liabilities
Fair
Value Measurements Using Significant Observable Inputs (Level 3) |
Balance - December 31, 2022 | |
$ | - | |
Addition of new derivatives recognized as debt
discounts for warrants | |
| 1,189,000 | |
Addition of new derivatives recognized as debt discounts for Acceleration
Option | |
| 1,442,000 | |
Gain on change in fair
value of the derivative | |
| (1,241,000 | ) |
Balance - March 31, 2023 | |
$ | 1,390,000 | |
Fair
Value Measurements Using Significant Observable Inputs (Level 3) |
Balance - December 31, 2021 | |
$ | 94,025 | |
Gain on change in fair
value of the derivative | |
| (39,650 | ) |
Balance - March 31, 2022 | |
$ | 54,375 | |
Note
9 – Subsequent Events
Management
evaluated all additional events subsequent to the balance sheet date through the date the unaudited interim condensed consolidated financial
statements were issued and determined that the following items were required to be disclosed.
On
April 19, 2023, the Company issued 150,660
shares of common stock to settle $110,250
of principal and $58,021
of accrued interest at a conversion price of
$1.1169
on a convertible note held by Alto Opportunity
Master Fund, SPC – Segregated Master Portfolio B (“Alto”).
On
May 10, 2023, in order to clarify certain portions of the
SPA, originally dated January 11, 2023, between the Company, its subsidiary, Shuttle Pharmaceuticals, Inc. (“Shuttle
Pharma”) and Alto, in its capacity as the registered holder of a $4.3
million convertible note and warrant to purchase 1,018,079
shares of common stock issued by the Company, the Company entered into an amendment agreement (the “Amendment Agreement”) with Alto. Under the Amendment Agreement, the Company, Shuttle Pharma and Alto amended the
transaction documents related to the Alto Convertible Note and Warrant as follows: (i)
amended and restated Section 2 of the Alto Warrant so as to remove a provision that would have potentially required an adjustment to
the number of warrant shares exercisable under the Warrant, (ii) stipulated that the Company would obtain majority shareholder
approval to issue up to an additional $10 million in convertible notes (the “Subsequent Notes”) and warrants (the
“Subsequent Warrants”) equal to 42.5% of the outstanding principal value of the Subsequent Notes, which Subsequent Notes
and Subsequent Warrants would be sold to Alto on substantially the same terms as the existing Alto Note and Alto Warrant (each as
amended by the Amendment Agreement) and upon conversion and/or exercise would cause the potential issuance of in excess of 19.9% of
the Company’s issued and outstanding stock, (iii) that, upon obtaining majority stockholder approval, the Company would file a
Schedule 14C related to such potential issuance of the shares of common stock related to the potential sale of the Subsequent Notes
and Subsequent Warrants to Alto within 30 calendar days of entry into the Amendment Agreement, and (iv) stipulated that Alto would
release $1,500,000 in cash collateral to the Company, with $1,000,000 to be released to the Company immediately upon singing of the
Amendment Agreement and $500,000 to be released upon the Company’s filing of the Schedule 14C. The Company obtained
majority stockholder consent to the potential sale of the Subsequent Notes and Subsequent Warrants to Alto in advance of entry into
the Amendment Agreement.
On May 8, 2023, the Company received notice that Shuttle
Pharma’s U.S. Patent Application No. 16/475,999 had been approved by the U.S. Patent and Trademark Office (“USPTO”) and
that Shuttle Pharma will be issued U.S. Patent No. 11,654,157, “Methods And Compositions For Cancer Therapies That Include Delivery
Of Halogenated Thymidines And Thymidine Phosphorylase Inhibitors In Combination With Radiation.” The USPTO will issue the patent
on May 23, 2023, after which time the patent will be downloadable from the USPTO’s website.