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First Capital Investment

Filed: 16 Nov 20, 4:18pm

 

  

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

COMMISSION FILE NUMBER 814-01137

 

STHEALTH CAPITAL INVESTMENT CORP.
(Exact name of registrant as specified in its charter)

 

Maryland 47-1709055
(State or Other Jurisdiction of
Incorporation or Organization)
 (I.R.S. Employer Identification No.)

 

680 5th Avenue New York, NY, 21st Floor 10019
(Address of Principal Executive Offices) (Zip Code)

 

212-601-2769
(Issuer’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each classTrading symbol(s)Name of each exchange
on which registered
Common stock, par value $0.001 per shareN/ANot registered on any exchange at this time
Preferred stock, par value $0.001 per shareN/ANot registered on any exchange at this time

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

As of November 16, 2020, the Company had 3,894,191 shares of its common stock, $0.001 par value per share, outstanding. 

 

 

 

 

 

STHEALTH CAPITAL INVESTMENT CORP.
FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020

 

INDEX

 

 PAGE
PART I - FINANCIAL INFORMATION1
Item 1. Financial Statements1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations11
Item 3. Quantitative and Qualitative Disclosure About Market Risk13
Item 4. Controls and Procedures13
PART II – OTHER INFORMATION14
Item 1. Legal Proceedings14
Item 1A. Risk Factors14
Item 2. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities14
Item 3. Defaults Upon Senior Securities14
Item 4. Mine Safety Disclosures14
Item 5. Other Information14
Item 6. Exhibits14
SIGNATURES15
EXHIBIT INDEX 

  

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

StHealth Capital Investment Corp.
Balance Sheets

 

  September 30,  December 31, 
  2020  2019 
Current Assets  (Unaudited)     
Current Assets        
Investment securities, net $4,080,468  $3,590,000 
Cash  665,253   2,303,516 
Prepaid expense  4,000   34,858 
Other current assets  42,876   32,944 
Total current assets  4,792,597   5,961,318 
Property plant and equipment  27,529   34,028 
Total assets $4,820,126  $5,995,346 
         
Liabilities and stockholders' equity        
Liabilities:        
Accounts payable $261,732  $365,035 
Accrued expenses  25,000   22,000 
Accrued expenses - related party  148,826   89,506 
Total liabilities  435,558   476,541 
         
Net Asset Value  4,384,568   5,518,805 
         
Composition of net assets        
Preferred stock, par value $.001 per share; 50,000,000 shares authorized, none issued and outstanding      
Common stock, par value $.001 per share; 550,000,000 shares authorized, 3,894,191and 3,874,191 shares issued and outstanding, respectively  3,895   3,875 
Additional paid-in capital  12,726,235   12,681,255 
Accumulated deficit  (8,345,562)  (7,166,325)
Net assets  4,384,568   5,518,805 
Net asset value per share of common stock $1.13  $1.42 

 

The accompanying notes are an integral part of these unaudited financial statements. 

 

 1

 

 

StHealth Capital Investment Corp.
Statements of Operations
(Unaudited)

  

  Three Months Ended  Three Months Ended  Nine Months Ended  Nine Months Ended 
  September 30, 2020  September 30, 2019  September 30, 2020  September 30, 2019 
Investment Income                
Interest income $4,977  $3,216  $34,964  $24,879 
Operating expenses                
General and administrative  59,929   71,471   200,408   111,159 
Management fee – related party  21,376   16,750   59,320   37,000 
Professional fees  254,848   262,367   678,382   465,892 
Total operating expenses  336,153   350,588   938,110   614,051 
                 
Net investment loss  (331,176)  (347,372)  (903,146)  (589,172)
                 
Realized and unrealized gain (loss)                
Net realized gain (loss) on investments  271,722      (82,659)   
Net unrealized gain (loss) on asset valuation  (254,599)  (399,618)  (193,432)  262,565 
Total net realized and unrealized gain (loss) on
investments
  17,123   (399,618)  (276,091)  262,565 
                 
Net decrease in net assets resulting from operations
investments
 $(314,053) $(746,990) $(1,179,237) $(326,607)
                 
Net decrease in net assets resulting from operations (Loss per Share) - basic and diluted $(0.08) $(0.26) $(0.30) $(0.18)
                 
Weighted average common shares outstanding - basic and diluted  3,894,191   2,831,673   3,891,417   1,835,481 

 

The accompanying notes are an integral part of these unaudited financial statements. 

 

 2

 

 

StHealth Capital Investment Corp.
Statements of Stockholders’ Equity
(Unaudited)

 

Three months ended September 30, 2020 and 2019 

 

  Shares  Dollars 
  Common  Preferred  Common  Preferred  Additional  Accumulated    
  Shares  Shares  Shares  Shares  Paid-in Capital  Deficit  Total 
Balance - June 30, 2020  3,894,191     $3,895  $  $12,726,235  $(8,031,509) $4,698,621 
Net decrease in net assets resulting from operations                 (314,053)  (314,053)
Balance - September 30, 2020  3,894,191      3,895      12,726,235   (8,345,562)  4,384,568 
                             
Balance - June 30, 2019  2,084,258     $2,085  $  $9,461,171  $(6,275,385) $3,187,871 
Sale of common stock  1,761,430       1,761       3,168,813       3,170,574 
Net decrease in net assets resulting from operations                 (746,990)  (746,990)
Balance - September 30, 2019  3,845,688     $3,846  $  $12,629,984  $(7,022,375) $5,611,455 

 

Nine months ended September 30, 2020 and 2019

 

  Shares  Dollars 
  Common  Preferred  Common  Preferred  Additional  Accumulated    
  Shares  Shares  Shares  Shares  Paid-in Capital  Deficit  Total 
Balance - December 31, 2019  3,874,191     $3,875  $  $12,681,255  $(7,166,325) $5,518,805 
Sale of common stock  20,000      20      44,980      45,000 
Net decrease in net assets resulting from operations                 (1,179,237)  (1,179,237)
Balance - September 30, 2020  3,894,191     $3,895  $  $12,726,235  $(8,345,562) $4,384,568 
                             
Balance - December 31, 2018  840,627     $841  $  $7,562,259  $(6,695,768) $867,332 
Sale of common stock  3,005,061       3,005       5,067,725       5,070,730 
Net decrease in net assets resulting from operations                 (326,607)  (326,607)
Balance - September 30, 2019  3,845,688     $3,846  $  $12,629,984  $(7,022,375) $5,611,455 

The accompanying notes are an integral part of these unaudited financial statements. 

 

 3

 

 

StHealth Capital Investment Corp.
Statements of Changes in Net Assets
(Unaudited)

 

  Nine Months Ended  Nine Months Ended 
  September 30, 2020  September 30, 2019 
Operations        
Net investment loss  (903,146)  (589,172)
Net realized gain (loss) on investments  (82,659)  262,565 
Net change in unrealized depreciation on investments  (193,432)   
Net decrease in net assets resulting from operations  (1,179,237)  (326,607)
         
Capital share transactions        
Reinvestment of stockholder distributions        
Sales of common stock  45,000   5,070,730 
Net increase in net assets resulting from capital share
transactions
  45,000   5,070,730 
         
Total increase (decrease) in net assets  (1,134,237)  4,744,123 
Net assets at beginning of period  5,518,805   867,332 
Net assets at end of period $4,384,568  $5,611,455 

 

The accompanying notes are an integral part of these unaudited financial statements. 

 

 4

 

 

StHealth Capital Investment Corp.
Statements of Cash Flows
(Unaudited)

 

  Nine Months Ended  Nine Months Ended 
  September 30, 2020  September 30, 2019 
Cash flows from operating activities:        
Net decrease in net assets resulting from operations $(1,179,237) $(326,607)
Adjustments to reconcile net decrease in net assets resulting from operations to net:        
Net unrealized loss (gain)on investment valuation  193,432   (262,183)
Net realized loss on investments  82,659    
Depreciation  10,278   1,350 
Changes in operating assets and liabilities:        
Cash paid for investment  (3,918,535)  (1,900,000)
Proceeds from sale of investment  3,175,154   250,000 
Prepaid expenses  30,858   (16,670)
Other receivables  (33,110)  (47,944)
Accounts payable  (103,303)  (153,237)
Accrued liabilities  3,000   (13,351)
Accrued expenses - related party  59,320   37,000 
Cash used by operating activities  (1,679,484)  (2,431,642)
         
Cash flows from investing activities:        
Purchase of fixed assets  (3,779)  (38,594)
Cash used by investing activities  (3,779)  (38,594)
         
Cash flows from financing activities:        
Proceeds from sale of common stock  45,000   5,070,730 
Cash provided by financing activities  45,000   5,070,730 
         
Net increase (decrease) in cash  (1,638,263)  2,600,494 
Cash, beginning of period  2,303,516   14,766 
Cash, end of period $665,253  $2,615,260 
         
Cash paid for interest $  $ 
Cash paid for taxes $  $ 
Supplemental schedule of noncash financial activities:      
   Accrued interest’s conversion into investment $23,178  $ 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

 5

 

 

StHealth Capital Investment Corp.
Notes to Financial Statements
For the three and nine months ended September 30, 2020 and 2019
(Unaudited)

 

Note 1. Nature of the Business

 

StHealth Capital Investment Corp. (formerly First Capital Investment Corporation and Freedom Capital Corporation) (the “Company”), was incorporated under the general corporation laws of the State of Maryland on June 19, 2014. The Company is a non-diversified, closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and that intends to elect to be treated for federal income tax purposes, and intends to qualify annually thereafter, as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

 

Note 2. Summary of Significant Accounting Policies

 

Basis of PresentationThe accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions for Form 10Q and Article 10 of Regulation SX. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company’s interim unaudited financial statements should be read in conjunction with its audited financial statements as of and for the year ended December 31, 2019 included in the Company’s annual report on Form 10K for the year ended December 31, 2019. Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The September 30, 2020 balance sheet and schedule of investments are derived from the Company’s audited financial statements as of and for the year ended December 31, 2019. The Company is considered an investment company under GAAP and follows the accounting and reporting guidance applicable to investment companies under Accounting Standards Codification, or ASC, Topic 946, Financial Services—Investment Companies. 

 

Valuation of Portfolio Investments: The Company intends to determine the net asset value of its investment portfolio each quarter. The board of directors also reviews and approves the valuation for each period end. Securities that are publicly traded will be valued at the reported closing price on the valuation date. Securities that are not publicly-traded will be valued at fair value as determined in good faith by the Company’s board of directors - in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures (“ASC Topic 820”).  ASC Topic 820 defines fair value, establishes a framework used to measure fair value, and requires disclosures for fair value measurements, including the categorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs.  ASC Topic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. In connection with that determination, the Company expects that the Adviser will provide the Company’s board of directors with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.

 

Reclassifications: Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Note 3. Going Concern

 

For the nine months ended September 30, 2020, the Company incurred a net decrease in net assets resulting from operations of $1,179,237 and have an accumulated deficit of $8,345,562. These circumstances raise substantial doubt as to the Company’s ability to continue as a going concern. Currently, the Company has launched a capital raising program led by a Broker Dealer acting as the Dealer Manager and arranging a syndicate of several additional Broker Dealers who will also sell our securities. During the nine months ended September 30, 2020, the Company issued 20,000 shares of its common stock and received gross proceeds of $50,000, at a price of $2.50 per share. There were 10% commission cost and therefore net proceeds in cash were $45,000. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern

 

Note 4. Compensation of the Advisor

 

On August 7, 2018, the Company held its 2018 Annual Meeting of shareholders at which meeting the new Investment Advisory and Administrative Services Agreement by and between the Company and StHealth Capital Advisors was approved.

 

The Company will pay the Adviser a fee for its services under the New Advisory Agreement consisting of two components — a base management fee and an incentive fee based on the Company’s performance. The cost of both the base management fee payable to the Adviser and any incentive fees it earns will ultimately be borne by the Shareholders.

 

 6

 

 

Base Management Fee. The base management fee will be payable quarterly in arrears and will be calculated at an annual rate of 2.0% of the Company’s average monthly gross assets during such period. The base management fee may or may not be taken in whole or in part at the discretion of the Adviser. All or any part of the base management fee not taken as to any quarter will be deferred without interest and may be taken in such other quarter as the Adviser shall determine. The base management fee for any partial month or quarter will be appropriately prorated.

 

During the nine months ended September 30, 2020 and 2019, the base management fee was accrued for the advisor in the amounts of $59,320 and $37,000, respectively.

 

Incentive Fee. Under the New Advisory Agreement, the incentive fee consists of two parts. The first part, which the Company refers to as the subordinated incentive fee on interest or dividend income, will be calculated and payable quarterly in arrears based upon the Company’s “pre-incentive fee net investment income” for the immediately preceding quarter. The subordinated incentive fee on interest or dividend income will be subject to a quarterly hurdle rate, or the rate of return that must be met before incentive fees are payable to the Adviser, expressed as a rate of return on adjusted capital for the most recently completed calendar quarter, of 0.496% (2.0% annualized), subject to a “catch up” feature. For this purpose, “pre-incentive fee net investment income” means interest income, dividend income and any other income (including any other fees, other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses reimbursed to the Adviser under the New Advisory Agreement and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero-coupon securities), accrued income that the Company has not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. The calculation of the subordinated incentive fee on interest or dividend income for each quarter is as follows:

 

 No subordinated incentive fee on interest or dividend income is payable to the Adviser in any calendar quarter in which the Company’s pre-incentive fee net investment income does not exceed the hurdle rate of 0.496%;

 

 100% of the Company’s pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 0.619% in any calendar quarter (2.5% annualized) is payable to the Adviser. The Company refers to this portion of its pre-incentive fee net investment income (which exceeds the hurdle rate but is less than or equal to 0.619%) as the “catch-up.” The “catch-up” provision is intended to provide the Adviser with an incentive fee of 20.0% on all of the Company’s pre-incentive fee net investment income when its pre-incentive fee net investment income reaches 0.619% in any calendar quarter; and

 

 20.0% of the amount of the pre-incentive fee net investment income, if any, that exceeds 0.619% in any calendar quarter (2.5% 10-Qized) is payable to the Adviser once the hurdle rate is reached and the catch-up is achieved (20.0% of all pre-incentive fee net investment income thereafter is allocated to the Adviser).

 

The second part of the incentive fee, which the Company refers to as the incentive fee on capital gains, will be determined and payable in arrears as of the end of each quarter (or upon termination of the New Advisory Agreement). This fee will equal 20.0% of the Company’s incentive fee capital gains, which will equal the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. Incentive fees not paid at the end of the calendar year in which they were earned will accrue until such time when the management chooses to pay them.

 

No incentive fee was earned for the nine months ended September 30, 2020 and 2019.

 

Note 5. Expense Reimbursement

 

The Company’s primary operating expenses will be the payment of advisory fees and other expenses under the New Advisory Agreement approved at the Shareholder’s Meeting on August 7, 2018, interest expense from financing facilities and other expenses necessary for its operations. Its investment advisory fee will compensate the Adviser for its work in identifying, evaluating, negotiating, executing, monitoring and servicing the Company’s investments. The Company will bear all other expenses of its operations and transactions, including (without limitation) fees and expenses relating to:

 

 corporate and organization expenses relating to offerings of its common stock, subject to limitations included in the New Advisory Agreement;
 the cost of calculating its net asset value, including the cost of any third-party pricing or valuation services;

 

 7

 

 

 the cost of effecting sales and repurchases of shares of its common stock and other securities;
 investment advisory fees;

 

 fees payable to third parties relating to, or associated with, making investments and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments;
 interest payments on the Company’s debt or related obligations;
 research and market data (including news and quotation equipment and services, and any computer hardware and connectivity hardware (e.g, telephone and fiber optic lines) incorporated into the cost of obtaining such research and market data);
 transfer agent, administrator and custodial fees;
 fees and expenses associated with marketing efforts;
 federal and state registration fees;
 federal, state and local taxes;
 fees and expenses of directors not also serving in an executive officer capacity for the Company or the Adviser;
 costs of proxy statements, Shareholders’ reports, notices and other filings;
 fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums;
 direct costs such as printing, mailing, long distance telephone and staff;
 fees and expenses associated with accounting, corporate governance, independent audits and outside legal costs;
 costs associated with the Company’s reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws, including compliance with the Sarbanes-Oxley Act;
 brokerage commissions for the Company’s investments;
 costs associated with the Company’s chief financial officer and chief compliance officer; and
 rent or depreciation, utilities, capital equipment or other costs of the Adviser’s own administrative items
 all other expenses incurred by the Adviser, or the Company in connection with administering its business, including expenses incurred by the Adviser, in performing administrative services for the Company and administrative personnel paid by the Adviser, to the extent they are not controlling persons of the Adviser or any of its affiliates, subject to the limitations included in the New Advisory Agreement.

 

Subject to the limitations on reimbursement of the Adviser, the Corporation, either directly or through reimbursement to the Adviser, shall bear all other costs and expenses of its operations and transactions, including expenses deemed to be “organization and offering expenses” of the Corporation for purposes of Conduct Rule 2310(a)(12) of the Financial Industry Regulatory Authority, such expenses, exclusive of commissions, the dealer manager fee and any discounts, are hereinafter referred to as “Organization and Offering Expenses”; corporate and organizational expenses relating to offerings of shares of Common Stock, subject to limitations included in the Investment Advisor Agreement.

 

During the nine months ended September 30, 2020 and 2019, $68,798 and $31,925 was paid to the advisor for expense reimbursement, respectively. $68,798 and $31,925 related party fees are included in general and administrative expenses on the face of statements of operations.

 

Note 6. Capital Raising

 

During the nine months ended September 30, 2020, the Company issued 20,000 shares of its common stock and received gross proceeds of $50,000, at a price of $2.50 per share. There were 10% commission cost and therefore net cash proceeds to the Company were $45,000.

 

Note 7. Investments 

 

Description of Investments

 

During the nine months ended September 30, 2020 and 2019, the Company deployed approximately $3,919,000 and $1,900,000 in proceeds from its public offering in several investments in portfolio companies, respectively, which are described below:

 

Portfolio Company Security Type Initial
Close
 Industry Cost basis
at inception ($)
 Carry value
at 12/31/19 ($)
 Carry value
at 9/30/20 ($)
Equity            
Orchestra BioMed, Inc. Preferred Stock Series B 5/10/18  BioMed   1,100,000   1,650,000   1,650,000 
Orchestra BioMed, Inc. Preferred Stock Series B-1 4/3/19  BioMed   900,000   900,000   900,000 
AzurRx BioPharma Inc Common Stock 7/18/19  BioMed   1,000,000   1,040,000   —   
AzurRx BioPharma Inc Warrant 1/9/20  BioMed   169,286   —     97,195 
AzurRx BioPharma Inc Preferred Stock and Warrant Series B 7/16/20  BioMed   523,178   —     523,178 
AzurRx BioPharma Inc Exchange Warrant 7/16/20  BioMed   70,972   —     55,598 
Other Trading Securities Common Stock and Options 1/17/20  BioMed   720,465   —     654,497 
Convertible Note                    
AzurRx BioPharma Inc Convertible Note 1/9/20  BioMed   330,714   —     —   
Naha Health LLC Convertible Note 

5/3/20

 

  BioMed   200,000   —     200,000 
Total         $5,014,615  $3,590,000  $4,080,468 

 

Current Status of Investments

 

 Orchestra BioMed Inc. (“Orchestra”)

 

On May 10, 2018, the Company purchased its initial investment of 220,000 shares of preferred stock series B of Orchestra at $5.00 per share price. The shares are convertible into common stock at any time on a 1-for-1 exchange, are eligible for a future 2-for -1 exchange pending 100% participation in a follow-on offering, automatically convert into common stock upon a firm commitment underwritten public offering of at least $16,000,000, can vote alongside common holders on an as-converted basis, have registration rights, no redemption right, has piggyback registration right, and do not pay a dividend. Upon any liquidation, dissolution or winding up of the Company, the holders of Series B Preferred shall be entitled to receive, in preference to the shares of common stock or other junior securities of the Company, the stated value of $5.00 per share of Series B Preferred, and thereafter shall participate on an as converted basis prorate with the holders of common stock in any further distributions. In March 2019, Orchestra announced 1-for-2 reverse split, as a result, 220,000 shares of the preferred stock we currently hold is convertible into 110,000 shares of common stock.

 

 8

 

 

On April 3, 2019, the Company purchased 60,000 Series B-1 Preferred shares of Orchestra Biomed (OBIO) at $15.00 per share. The shares are convertible into common stock at any time on a 1-for-1 exchange, are eligible for a future 2-for-1 exchange pending 100% participation in a follow-on offering, automatically convert into common stock upon a firm-commitment underwritten public offering of at least $16,000,000, can vote alongside common holders on an as-converted basis, no redemption right, has piggyback registration rights and do not pay a dividend. Upon any liquidation, dissolution or winding-up of the Company, the holders of Series B-1 Preferred shall be entitled to receive, in preference to the shares of common stock or other junior securities of the Company, the stated value of $15.00 per share of Series B-1 Preferred, and thereafter shall participate on an as- converted basis pro-rata with the holders of Common Stock in any further distributions.

 

On April 3, 2019, the Company revalued the shares of preferred stock series B it holds at an equivalence of 110,000 shares of common stock of $15.00 per as-converted basis, and recorded a $550,000 increase in value as gain on asset valuation.

 

The Company determined that no value changes since April 3, 2019 till September 30, 2020.

 

AzurRx BioPharma Inc.

 

In July 2019, the Company purchased 1,000,000 shares of common stock of AZURRX Biopharma, Inc. (NASDAQ: AZRX). During the nine months ended September 30, 2020, the Company sold all common shares for $607,161, recorded an unrealized loss of $40,000, and realized a loss of $392,839.

 

On January 9, 2020 the Company purchased from AZRX a convertible note in the amount of $500,000 which is convertible into 515,464 shares of AZRX common stock. The convertible notes mature on September 20, 2020 and accrue interest at a rate of 9% per annum. The $500,000 notional amount of convertible note come with warrants to purchase an additional 257,732 shares of AZRX common stock, equal to 50% of the shares underlying the convertible note. The warrant expiry is December 20, 2024. Each note is convertible, at the option of the holder, into shares of the Company’s common stock at a price of $0.97 per share, and the warrants have an exercise price of $1.07 per share.

 

The convertible note is classified available for sale according to ASC 320 Investments—Debt and Equity Securities. At the time of purchase, the fair value of the convertible note was determined to be $330,714 using allocation of proceeds and the beneficial conversion feature were determined to be $231,959, and prior to the exchange, the fair value of the convertible note was determined to be $500,000 including beneficial conversion of $0. The fair value of warrants was determined to be $169,286 using Black-Scholes method on the date of purchase. On September 30, 2020, the fair value of the note and warrants was $0 and $97,195, respectively. During the nine months ended September 30, 2020, the unrealized loss on these securities was $72,091 and the realized gain was $169,286.

 

On July 16, 2020, the Company entered into a private placement offering with AZRX whereby the Company exchanged the convertible note with a principal balance of $500,000 and accrued interest of $23,178, into 67.945205 shares of Series B Convertible Preferred Stock, together with a Series B Warrants to purchase 339,726 shares of Common Stock at an exercise price of $0.85 per share with the exercise term of 5 years from issuance date. The Series B Convertible Preferred Stock had a par value $0.0001 per share, and is convertible into 679,452 shares of the Company’s common stock at per share at $0.77 per share. In connection with the Private Placement, the company also received Exchange Warrant to purchase 128,886 shares of Common Stock at an exercise price of $0.85 per share with the exercise term of 5 years from issuance date.

 

On the date of exchange the fair value of the 67.945205 shares of Series B Convertible Preferred Stock and Series B Warrants was determined to be $523,178 using fair market value, and the fair value on these as of September 30, 2020 was $523,178. During the nine months ended September 30, 2020, There was no realized gain or loss recorded associated with the exchanged convertible note, and no unrealized gain or loss recorded on these Series B Convertible Preferred Stock and Series B Warrants.

 

Also, on the date of the exchange the Exchange Warrant was valued at $70,972 using the Black-Scholes method and has been recorded as a realized gain during the quarter ended September 30, 2020, and the fair value was $55,598 as of September 30, 2020. During the nine months ended September 30, 2020, the unrealized loss on these was $15,374.

 

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During the nine months ended September 30, 2020, the Company recorded an aggregate realized gain of $240,258 associated with the note and Exchange Warrants, and recorded a total unrealized loss from these securities in the amount of $87,465. During the nine months ended September 30, 2020, interest income was $23,178.

 

Naha Health LLC

 

In May 2020, the Company purchased from Naha Health LLC a convertible promissory note in the amount of $200,000 at a conversion price of $41.67 per Common Membership Interest. The fair value of the conversion feature was not determinable, since Naha Health LLC is a private company. The convertible note matures on the fourth anniversary and accrues interest at a rate of 6% per annum. The note is recorded at cost of $200,000 at purchase date. The Company determined that the fair value of the note did not change from purchase date to September 30, 2020. During the nine months ended September 30, 2020, interest income was $4,932 under this note.

 

During the nine months ended September 30, 2020, the Company entered into two amendments with Naha Health LLC, in which the Company is planning to fund an additional $200,000 by November 30, 2020.

 

Other Trading Securities

 

Investments in other trading securities at fair value consisted of the following at September 30, 2020 and the unrealized gain and loss during the nine months ended September 30, 2020:

 

  Cost Unrealized Gain (Loss) Fair Value
Common stocks $738,861  $(64,363) $674,498 
Options  (18,397)  (1,604  (20,001)
Total other trading securities, at fair value $720,464  $(65,967) $654,497 

 

The Company realized a net gain of $69,922 from other trading securities sold during the nine months ended September 30, 2020, which was recorded in net realized gain or loss under other comprehensive income.

 

Note 8. Subsequent Events

 

Conversion of AzurRx BioPharma Inc. Series B Convertible Preferred Stock

 

Subsequent to the period ended September 30, 2020 the Company elected to convert 67.945205 shares of AZRX Series B Convertible Preferred Stock into 679,452 shares of AZRX common stock, along with additional common shares related to accrued and unpaid dividends earned to and including the date of conversion.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our results of operations and financial condition for the quarters ended September 30,2020 and 2019 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the period ended December 31, 2019, as filed with the SEC on March 30, 2020. See “Special Note Regarding Forward Looking Statements.”

 

Results of Operations

 

Three months Ended September 30, 2020 Compared to Three months Ended September 30, 2019

 

Interest Income

 

Our interest income for the three months ended September 30, 2020 was $4,977, compared to $3,216 for the three months ended September 30, 2019.

 

General and Administrative

 

Our general and administrative expenses for the three months ended September 30, 2020 were $59,929, a decrease of $11,542 or 16% as compared to $71,471 for the three months ended September 30, 2019. The decrease in general and administrative expenses was primarily due to decrease in marketing expense. During the three months ended September 30, 2020, $25,822 was paid to a related party for administrative costs, compared to $31,925 for the three months ended September 30, 2019 (see note 5).

 

Management fee – related party

 

Our related party management fees for the three months ended September 30, 2020 were $21,376, compared to $16,750 for the three months ended September 30, 2019 (see Note 4).

 

Professional Fees

 

Our professional fees for the three months ended September 30, 2020 were $254,848, a decrease of $7,519 or 3% as compared to $262,367 for the three months ended September 30, 2019. The decrease in professional fees was primarily due to decrease in audit, investor relations and board member fees.

 

Net realized and unrealized gain (loss) on investments

 

Our net realized gain on investment for the three months ended September 30, 2020 was $271,722, compared to $0 for the three months ended September 30, 2019. Please refer to Note 7. Investments, for further detail.

Our net unrealized loss on investment for the three months ended September 30, 2020 was $254,599, compared to loss of $399,618 for the three months ended September 30, 2019. Please refer to Note 7. Investments, for further detail.

 

Net Decrease in Net Assets Resulting from Operations

 

As a result of the foregoing, for the three months ended September 30, 2020, we recorded a net decrease in net assets resulting from operations of $314,053 compared to a net decrease in net assets resulting from operations of $746,990 for the three months ended September 30, 2019.

 

Nine months Ended September 30, 2020 Compared to Nine months Ended September 30, 2019

 

Interest Income

 

Our interest income for the nine months ended September 30, 2020 was $34,964, compared to $24,879 for the nine months ended September 30, 2019.

 

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General and Administrative

 

Our general and administrative expenses for the nine months ended September 30, 2020 were $200,408, an increase of $89,249 or 80% as compared to $111,159 for the nine months ended September 30, 2019. An increase in general and administrative expenses was primarily due to increase in rent expense. During the nine months ended September 30, 2020, $68,798 was paid to a related party for outside service fees, compared to $31,925 for the nine months ended September 30, 2019 (see Note 5).

 

Management fee – related party

 

Our related party management fees for the nine months ended September 30, 2020 were $59,320, compared to $37,000 for the nine months ended September 30, 2019 (see Note 4).

 

Professional Fees

 

Our professional fees for the nine months ended September 30, 2020 were $678,382, an increase of $212,490 or 46% as compared to $465,892 for the nine months ended September 30, 2019. An increase in professional fees was primarily due to increase in legal, accounting and outside services fees.

 

Net realized and unrealized gain (loss) on investments

 

Our net realized loss on investment for the nine months ended September 30, 2020 was $82,659, compared to $0 for the nine months ended September 30, 2019 (see note 7).

 

Our net unrealized loss on investment for the nine months ended September 30, 2020 was $193,432, compared to gain of $262,565 for the nine months ended September 30, 2019 (see note 7).

.

Net Decrease in Net Assets Resulting from Operations

 

As a result of the foregoing, for the nine months ended September 30, 2020, we recorded a net decrease in net assets resulting from operations of $1,179,237 compared to a net decrease in net assets resulting from operations of $326,607 for the nine months ended September 30, 2019.

 

Liquidity and Capital Resources

 

Operating Activities

 

During the nine months ended September 30, 2020, we used $1,679,484 of cash in operating activities primarily as a result of our net decrease in net assets resulting from operations of $1,179,237, loss on investments of $276,091, depreciation of $10,278 and net changes in operating assets and liabilities of $(786,616), including $3,918,535 paid for investments and proceeds from sale of investment of $3,175,154.

 

During the nine months ended September 30, 2019, we used $2,431,642 of cash in operating activities primarily as a result of our net decrease in net assets resulting from operations of $326,607, gain on investments of $262,183 and net changes in operating assets and liabilities of $(1,844,202), including $1,900,000 paid for investments and $250,000 in proceeds from sale of investments.

 

Investing Activities

 

During the nine months ended September 30, 2020, the Company used $3,779 in investing activities for purchase of fixed assets.

 

During the nine months ended September 30, 2020, the Company used $38,594 in investing activities for purchase of fixed assets.

 

Financing Activities

 

During the nine months ended September 30, 2020, financing activities provided $45,000 in proceeds from issuance of common stock.

 

During the nine months ended September 30, 2019, financing activities provided $5,070,730 in proceeds from issuance of common stock.

 

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Going Concern

 

For the nine months ended September 30, 2020, the Company incurred a net decrease in net assets resulting from operations of $1,179,237 and have an accumulated deficit of $8,345,562. These circumstances raise substantial doubt as to the Company’s ability to continue as a going concern. Currently, the Company has launched a capital raising program led by a Broker Dealer acting as the Dealer Manager and arranging a syndicate of several additional Broker Dealers who will also sell our securities. During the nine months ended September 30, 2020, the Company issued 20,000 shares of its common stock and received gross proceeds of $50,000, at a price of $2.50 per share. There were 10% commission cost and therefore net proceeds in cash were $45,000. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Off-Balance Sheet Transactions

 

At September 30, 2020, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

As a smaller reporting company, we are not required to provide the information required by this Item 3.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, management performed, with the participation of our principal executive and principal financial officers, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Based on the evaluation, our principal executive and principal financial officers concluded that, as of September 30, 2020, our disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our 10-Q or interim financial statements will not be prevented or detected on a timely basis. We identified the following material weakness as of September 30, 2020: insufficient personnel resources within the accounting function to segregate the duties over financial transaction processing and reporting.

 

To remediate our internal control weakness, management intends to implement the following measures:

 

 Add sufficient accounting personnel to properly segregate duties and to effect a timely, accurate preparation of the financial statements.

 

 Develop and maintain adequate written accounting policies and procedures.

 

The additional hiring is contingent upon our efforts to obtain additional funding and the results of our operations. Management expects to secure funds in the coming fiscal year but provides no assurances that it will be able to do so.

 

Changes in Internal Control over Financial Reporting

 

There were no changes to our internal control over financial reporting or in other factors that could affect these controls during the nine months ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, our management is currently seeking to improve our controls and procedures in an effort to remediate the deficiency described above. 

  

 

 

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PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

We are not currently a party to any pending legal proceedings that we believe will have a material adverse effect on our business or financial condition. We may, however, be subject to various claims and legal actions arising in the ordinary course of business from time to time.

 

Item 1A.  Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the period ended December 31, 2019, as filed with the Securities and Exchange Commission on March 30, 2020. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by any forward-looking statements contained in this report.

 

Item 2. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None. 

 

Item 6. Exhibits

 

Exhibit
Number
 Description
31.1 Certification of Periodic Report by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of Periodic Report by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of Periodic Report by Chief Executive Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.2 Certification of Periodic Report by Chief Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

101The following materials from the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Balance Sheets, (ii) the Condensed Statements of Operations, (iii) the Condensed Statement of Changes in Partners’ Capital, (iv) the Condensed Statements of Cash Flows, and (v) related notes.

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SIGNATURES

  

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 STHEALTH CAPITAL INVESTMENT CORP.
    
Date: November 16, 2020   
  By:/s/ Derek Taller
   

Derek Taller
Chief Executive Officer

(Principal Executive Officer)

Date: November 16, 2020 
 By:/s/ Frederick Alger Boyer, Jr.
  

Frederick Alger Boyer, Jr.

Chief Financial Officer

(Principal Accounting and Financial Officer)

 

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