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 MARCH 31, 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 class	Trading symbol(s)	Name of each exchange on which registered
Common stock, par value $0.001 per share	N/A	Not registered on any exchange at this time
Preferred stock, par value $0.001 per share	N/A	Not 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 filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller 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 May 15, 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 THREE MONTHS ENDED MARCH 31, 2020

 

INDEX

 

	PAGE
PART I - FINANCIAL INFORMATION	1
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3. Quantitative and Qualitative Disclosure About Market Risk	13
Item 4. Controls and Procedures	13
PART II – OTHER INFORMATION	14
Item 1. Legal Proceedings	14
Item 1A. Risk Factors	14
Item 2. Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities	14
Item 3. Defaults Upon Senior Securities	14
Item 4. Mine Safety Disclosures	14
Item 5. Other Information	14
Item 6. Exhibits	15
SIGNATURES	16
EXHIBIT INDEX

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

StHealth Capital Investment Corp.
Balance Sheets

 

		March 31,				December 31,
		2020				2019
Current Assets		(unaudited)
Current Assets
Investment securities, net		$	4,002,101			$	3,590,000
Cash			1,032,289				2,303,516
Prepaid expense			22,555				34,858
Other current assets			48,054				32,944
Total current assets			5,104,999				5,961,318
Property plant and equipment			34,591				34,028
Total assets		$	5,139,590			$	5,995,346
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable		$	339,314			$	365,035
Accrued expenses			19,000				22,000
Accrued expenses - related party			109,124				89,506
Total liabilities			467,438				476,541
Net Asset Value			4,672,152				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, 3,894,191 and 3,874,191 shares issued and outstanding, respectively			3,895				3,875
Additional paid-in capital			12,726,235				12,681,255
Accumulated deficit			(8,057,978	)			(7,166,325	)
Net assets			4,672,152				5,518,805
Net asset value per share of common stock		$	1.20			$	1.42

 

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

 

 

 

StHealth Capital Investment Corp.
Statements of Operations
(Unaudited)

 

		Three Months Ended				Three Months Ended
		March 31, 2020				March 31, 2019
Investment Income
Interest income		$	15,948			$	19,324
Operating expenses
General and administrative			66,332				14,088
Management fee – related party			19,618				6,500
Professional fees			175,820				87,024
Total operating expenses			261,770				107,612
Net investment loss			(245,822	)			(88,288	)
Realized and unrealized gain (loss)
Gain (loss) on asset valuation			(645,831	)			112,183
Total net realized and unrealized gain (loss) on investments			(645,831	)			112,183
Net increase (decrease) in net assets resulting from operations investments		$	(891,653	)		$	23,895
Net increase (decrease) in net assets resulting from operations (Earnings per Share) - basic and diluted		$	(0.23	)		$	0.02
Weighted average common shares outstanding - basic and diluted			3,885,836				960,470

 

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

 

 

 

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

 

		Shares								Dollars
		Common				Preferred				Common				Preferred				Additional				Accumulated
		Shares				Shares				Shares				Shares				Paid-in Capital				Deficit				Total
Balance - December 31, 2018			840,627				—			$	841			$	—			$	7,562,259			$	(6,695,768	)		$	867,332
Sale of common stock			611,965				—				612				—				825,543				—				826,155
Net increase in net assets resulting from operations			—				—				—				—				—				23,895				23,895
Balance - March 31, 2019			1,452,592				—			$	1,453			$	—			$	8,387,802			$	(6,671,873	)		$	1,717,382
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			—				—				—				—				—				(891,653	)			(891,653	)
Balance - March 31, 2020			3,894,191				—			$	3,895			$	—			$	12,726,235			$	(8,057,978	)		$	4,672,152

 

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

 

 

 

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

 

		Three Months Ended				Three Months Ended
		March 31, 2020				March 31, 2019
Operations
Net investment loss		$	(245,822	)		$	(88,288	)
Net change in unrealized appreciation (depreciation) on investments			(645,831	)			112,183
Net increase (decrease) in net assets resulting from operations			(891,653	)			23,895
Capital share transactions
Sales of common stock			45,000				826,155
Net increase in net assets resulting from capital share transactions			45,000				826,155
Total increase (decrease) in net assets			(846,653	)			850,050
Net assets at beginning of period			5,518,805				867,332
Net assets at end of period		$	4,672,152			$	1,717,382

 

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

 

 

 

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

 

		Three Months Ended				Three Months Ended
		March 31, 2020				March 31, 2019
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations		$	(891,653	)		$	23,895
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net:
Unrealized loss (gain) on investment valuation			645,831				(112,183	)
Depreciation			3,216				—
Changes in operating assets and liabilities:
Prepaid expenses			12,303				4,560
Other current assets			(15,110	)			(15,000	)
Accounts payable			(25,721	)			(3,629	)
Accrued expenses			(3,000	)			1,251
Accrued expenses - related party			19,618				6,500
Cash used by operating activities			(254,516	)			(94,606	)
Cash flows from investing activities:
Cash paid for investment			(1,057,932	)			—
Purchase of fixed assets			(3,779	)			—
Net procced from sale of investment			—				250,000
Cash provided (used) by investing activities			(1,061,711	)			250,000
Cash flows from financing activities:
Proceeds from sale of common stock			45,000				826,155
Cash provided by financing activities			45,000				826,155
Net increase (decrease) in cash			(1,271,227	)			981,549
Cash, beginning of period			2,303,516				14,766
Cash, end of period		$	1,032,289			$	996,315
Cash paid for interest		$	—			$	—
Cash paid for taxes		$	—			$	—

 

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

 

 

 

StHealth Capital Investment Corp.
Notes to Financial Statements
For the three months ended March 31, 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 Presentation: The 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 three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The March 31, 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.

 

Note 3. Going Concern

 

For the three months ended March 31, 2020, the Company incurred a net decrease in net assets resulting from operations of $891,653 and have an accumulated deficit of $8,057,978. 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 three months ended March 31, 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.

 

 

 

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 three months ended March 31, 2020 and 2019, the base management fee was accrued for the advisor in the amounts of $19,618 and $6,500, 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 three months ended March 31, 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;
	●	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 three months ended March 31, 2020 and 2019, $10,034 and $0 was paid to the advisor for expense reimbursement, respectively. $10,034 related party outside services fees are included in general and administrative expenses on the face of statements of operations.

 

Note 6. Capital Raising

 

During the three months ended March 31, 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

 

a) Description of Investments

 

During the three months ended March 31, 2020 and 2019, the Company deployed approximately $1,060,000 and $0 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 3/31/20 ($)
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				580,000
Lumos Pharma, Inc.		Common Stock		1/17/20		Major Pharmaceuticals			499,505				—				236,581
Vir Biotechnology, Inc.		Common Stock		3/26/20		Biotechnology: Biological Products			17,011				—				17,066
Amarin Corporation plc		Common Stock		3/30/20		Major Pharmaceuticals			41,416				—				40,000
AzurRx BioPharma Inc		Warrant		1/9/20		BioMed			—				—				78,454
Convertible Note
AzurRx BioPharma Inc		Convertible Note		1/9/20		BioMed			500,000				—				500,000
Total								$	4,057,932			$	3,590,000			$	4,002,101

 

 

 

b)   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.

 

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.

 

AzurRx BioPharma Inc.

 

In July 2019, the Company purchased 1,000,000 shares of common stock of AZURRX Biopharma, Inc. (NASDAQ: AZRX). As of March 31, 2020, the closing price was $0.58, the Company recorded an unrealized loss of $460,000 related to the decrease in the value of the common stock purchased.

 

On January 9, 2020 the Company purchased from AzuRx a convertible note in the amount of $500,000 which are 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 notes come with warrants to purchase an additional 257,732 shares of AZRX common stock, equal to 50% of the shares underlying the convertible notes. 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 debt is classified available for sale according to ASC 320 Investments—Debt and Equity Securities.  The fair value of the convertible note was determined to be $731,959 using the market price as of the date of purchase, Company recorded an unrealized gain of $231,959. During the three months ended March 31, 2020, the Company recorded an unrealized loss of $231,959. As of March 31, 2020, the fair value of the convertible note was $500,000. The fair value of warrants was determined to be $255,940 using Black-Scholes method on the date of purchase, and the Company recorded an unrealized gain of $255,940. During the three months ended March 31, 2020, the Company recorded an unrealized loss of $177,486 based on the change of the market price from the day of purchase to March 31, 2020. As of March 31, 2020, the fair value of the warrants was $78,454.

 

 

 

Lumos Pharma, Inc. (formerly NewLink Genetics, Inc.)

 

In January 2020, the Company purchased 250,501 shares of NewLink Genetics, Inc. (formerly NASDAQ: NLNK) through a series of open market purchases. Subsequent to the purchase of common shares, NewLink completed a merger with Lumos Pharma, Inc. (NASDAQ: LUMO), and all outstanding shares of NewLink Genetics, Inc. have become shares in Lumos Pharma, Inc. Due to a split of shares in the transaction, the 250,501 shares in NewLink Genetics, Inc. now represent 27,833 shares in Lumos Pharma, Inc. As of March 31, 2020, the closing price was $8.50, the Company recorded an unrealized loss of $262,924 related to the decrease in the value of the common stock purchased.

 

Vir Biotechnology, Inc.

 

In March 2020, the Company purchased 498 shares of common stock of Vir Biotechnology, Inc. (NASDAQ: VIR). As of March 31, 2020, the closing price was $34.27, the Company recorded an unrealized gain of $55 related to the increase in the value of the common stock purchased.

 

Amarin Corporation plc

 

In March 2020, the Company purchased 10,000 shares of common stock of Amarin Corporation plc (NASDAQ: AMRN). As of March 31, 2020, the closing price was $4.00, the Company recorded an unrealized loss of $1,416 related to the decrease in the value of the common stock purchased.

 

Note 8. Subsequent Event

 

Subsequent to March 31, 2020, the Company purchased from Naha Health LLC a convertible promissory note in the amount of $200,000 at a conversion price of $39.5835807 per Common Membership Interest. The convertible note matures on the fourth anniversary and accrues interest at a rate of 6% per annum.

 

 

 

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 March 31,2020 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 March 31, 2020 Compared to Three Months Ended March 31, 2019

 

Interest Income

 

Our interest income for the three months ended March 31, 2020 was $15,948, compared to $19,324 for the three months ended March 31, 2019.

 

General and Administrative

 

Our general and administrative expenses for the three months ended March 31, 2020 were $66,332, an increase of $52,244 or 371% as compared to $14,088 for the three months ended March 31, 2019. An increase in general and administrative expenses was primarily due to increase in rent expense. During the three months ended March 31, 2020, $10,034 was paid to a related party for administrative costs (see note 5).

 

Management fee – related party

 

Our related party management fees for the three months ended March 31, 2020 were $19,618, compared to $6,500 for the three months ended March 31, 2019.

 

Professional Fees

 

Our professional fees for the three months ended March 31, 2020 were $175,820, an increase of $88,796 or 102% as compared to $87,024 for the three months ended March 31, 2019. An increase in professional fees was primarily due to increase in audit, accounting and outside services fees.

 

Gain on Investment Valuation

 

Our total loss on investment for the three months ended March 31, 2020 was $645,831, compared to gain of $112,183 for the three months ended March 31, 2019.

 

Net Decrease in Net Assets Resulting from Operations

 

As a result of the foregoing, for the three months ended March 31, 2020, we recorded a net decrease in net assets resulting from operations of $891,653 compared to a net increase in net assets resulting from operations of $23,895 for the three months ended March 31, 2019.

 

Liquidity and Capital Resources

 

Operating Activities

 

During the three months ended March 31, 2020, we used $254,516 of cash in operating activities primarily as a result of our net decrease in net assets resulting from operations of $891,653 offset by loss on investments of $645,831, depreciation of $3,216 and net changes in operating assets and liabilities of $(11,910).

 

During the three months ended March 31, 2019, we used $94,606 of cash in operating activities primarily as a result of our net increase in net assets resulting from operations of $23,895 offset by gain on investments of $112,183 and net changes in operating assets and liabilities of $6,318.

 

 

 

Investing Activities

 

During the three months ended March 31, 2020, the Company used $1,061,711 in investing activities, including $1,057,932 paid for investments and $3,779 for purchase of fixed assets.

 

During the three months ended March 31, 2019, investing activities provided $250,000 in proceeds from sale of investments.

 

Financing Activities

 

During the three months ended March 31, 2020, financing activities provided $45,000 in proceeds from issuance of common stock.

 

During the three months ended March 31, 2019, financing activities provided $826,155 in proceeds from issuance of common stock.

 

Going Concern

 

For the three months ended March 31, 2020, the Company incurred a net decrease in net assets resulting from operations of $891,653 and have an accumulated deficit of $8,057,978. 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 three months ended March 31, 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 March 31, 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 March 31, 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 March 31, 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 three months ended March 31, 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. 

 

 

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)

 

 

 

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: May 15, 2020
		By:	/s/ Derek Taller
			Derek Taller Chief Executive Officer (Principal Executive Officer)

 

Date: May 15, 2020
	By:	/s/ Frederick Alger Boyer, Jr
		Frederick Alger Boyer, Jr. Chief Financial Officer (Principal Accounting and Financial Officer)