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

 

FORM 10-Q

 

☒

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

FOR THE QUARTERLY PERIOD ENDED JUNESEPTEMBER 30, 2021

OR

 

OR

 

☐

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

FOR THE TRANSITION PERIOD FROM                      TO

 

 

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 5th5th Avenue New York, NY, 21st21st 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 exchange on which registered
Common stockn/aRegistrant is non-traded business development company. Common stock is not registered on any exchange.
Preferred stockn/aRegistrant is non-traded business development company. Preferred stock is not registered on any exchange.

 

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 December 1,13, 2021, the Company had 4,534,191 shares of its common stock, $0.001 par value per share, outstanding.

 

 

 

 

 

TABLE OF CONTENTS

  

 PAGEPAGE(S)
 
PART I –- FINANCIAL INFORMATION 
 
Item 1. Financial StatementsF-1
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsF-13
  
Item 3. Quantitative and Qualitative Disclosure About Market Risk F-17
Item 4. Controls and ProceduresF-18
  
Item 4. Controls and Procedures F-18
PART II – OTHER INFORMATION 
  
Item 1. Legal Proceedings F-18
Item 1A. Risk FactorsF-19
  
Item 1A. Risk FactorsF-19
Item 2. Recent Sales of Unregistered Securities; Use of Proceeds from Registered SecuritiesF-19
  
Item 3. Defaults Upon Senior SecuritiesF-19
  
Item 4. Mine Safety DisclosuresF-19
  
Item 5. Other InformationF-19
  
Item 6. ExhibitsF-19
  
SIGNATURES 
  
EXHIBIT INDEX 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

StHealth Capital Investment Corp.Corp

 

Three and SixNine Months Ended JuneSeptember 30, 2021 and 2020

 

Index to the Condensed Financial Statements

Contents Page (s)
   
Condensed Balance Sheets as of JuneSeptember 30, 2021 (Unaudited) and December 31, 2020 F-2
   
Unaudited Condensed Statements of Operations for the three and sixnine months ended JuneSeptember 30, 2021 and 2020 F-3
   
Unaudited Condensed Statements of Changes in Stockholders’ equity for the three and sixnine months ended JuneSeptember 30, 2021 and 2020 F-4
   
Unaudited Condensed Statements of Changes in Net Assets for the sixnine months ended JuneSeptember 30, 2021 and 2020 F-5
   
Unaudited Condensed Statements of Cash Flows for the sixnine months ended JuneSeptember 30, 2021 and 2020 F-6
   
Schedules of Investments as of JuneSeptember 30, 2021 (Unaudited) and December 31, 2020 F-7
   
Unaudited Condensed Notes to the Condensed Financial Statements F-8


F-1

StHealth Capital Investment Corp.
Condensed Balance Sheets

 

  As of  As of 
  June 30, 2021  December 31, 2020 
Assets  (Unaudited)     
Investment securities, net $1,063,000  $2,173,000 
Cash and cash equivalents  1,582,000   896,000 
Prepaid expenses  2,000   10,000 
Other current assets  39,000   37,000 
Total current assets  2,686,000   3,116,000 
         
Property and equipment, net  17,000   24,000 
Total assets  2,703,000   3,140,000 
         
Liabilities        
Accounts payable  247,000   308,000 
Accrued expenses  36,000   79,000 
Accrued expenses – related party  185,000   168,000 
Total liabilities  468,000   555,000 
         
Net assets $2,235,000  $2,585,000 
         
Commitments and contingencies  —   — 
         
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 shares issued and outstanding  4,000   4,000 
Additional paid-in capital  12,726,000   12,726,000 
Accumulated deficit  (10,495,000)  (10,145,000)
Net assets  2,235,000   2,585,000 
Net asset value per share of common stock $0.57  $0.66 

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


StHealth Capital Investment Corp.
Unaudited Condensed Statements of Operations

  Three Months Ended
June 30,		  

Six Months Ended

June 30,

 
  2021  2020  2021  2020 
Investment Income                
Interest income $—  $14,000  $—  $30,000 
                 
Operating expenses                
Professional fees  184,000   248,000   441,000   424,000 
Management fee – related party  6,000   18,000   17,000   38,000 
General and administrative  88,000   74,000   166,000   140,000 
Total operating expenses  278,000   340,000   624,000   602,000 
                 
Net investment loss  (278,000)  (326,000)  (624,000)  (572,000)
                 
Realized and unrealized gain (loss) on investments                
Net realized loss on investments  (96,000)  (354,000)  (75,000)  (354,000)
Net unrealized gain on investments  19,000   707,000   337,000   61,000 
Total net realized and unrealized gain (loss) on investments  (77,000)  353,000   262,000   (293,000)
                 
Other income  12,000   —   12,000   — 
                 
Net increase (decrease) in net assets resulting from operations $(343,000) $27,000  $(350,000) $(865,000)
                 
Net increase (decrease) in net assets resulting from operations per common share – basic and diluted $(0.09) $0.01  $(0.09) $(0.22)
                 
Weighted average common shares outstanding – basic and diluted  3,894,191   3,894,191   3,894,191   3,890,015 
  As of  As of 
  September 30, 2021  December 31, 2020 
Assets  (Unaudited)     
Investment securities, net $1,290,000  $2,173,000 
Cash and cash equivalents  1,323,000   896,000 
Prepaid expenses  —   10,000 
Other current assets  39,000   37,000 
Total current assets  2,652,000   3,116,000 
         
Property and equipment, net  13,000   24,000 
Total assets  2,665,000   3,140,000 
         
Liabilities        
Accounts payable  205,000   308,000 
Accrued expenses  99,000   79,000 
Accrued expenses – related party  205,000   168,000 
Total liabilities  509,000   555,000 
         
Net assets $2,156,000  $2,585,000 
         
Commitments and contingencies  —   — 
         
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 shares issued and outstanding  4,000   4,000 
Additional paid-in capital  12,726,000   12,726,000 
Accumulated deficit  (10,574,000)  (10,145,000)
Net assets  2,156,000   2,585,000 
Net asset value per share of common stock $0.55  $0.66 

 

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

 

F-2

StHealth Capital Investment Corp.
Unaudited Condensed Statements of Operations

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2021   2020  2021  2020 
Investment Income                
Interest income $—   5,000  $—  $35,000 
                 
Operating expenses                
Professional fees  108,000   255,000   549,000   679,000 
Management fee – related party  20,000   21,000   37,000   59,000 
General and administrative  45,000   60,000   211,000   200,000 
Total operating expenses  173,000   336,000   797,000   938,000 
                 
Net investment loss  (173,000)  (331,000)  (797,000)  (903,000)
                 
Realized and unrealized gain (loss) on investments                
Net realized gain (loss) on investments  71,000   271,000   (4,000)  (83,000) 
Net unrealized gain (loss) on investments  23,000   (254,000)  360,000   (193,000)
Total net realized and unrealized gain (loss) on investments  94,000   17,000   356,000   (276,000)
                 
Other income  —   —   12,000   — 
                 
Net decrease in net assets resulting from operations $(79,000)  (314,000) $(429,000) $(1,179,000)
                 
Net decrease in net assets resulting from operations per common share - basic and diluted $(0.02)  (0.08) $(0.11) $(0.30)
                 
Weighted average common shares outstanding - basic and diluted  3,894,191   3,894,191   3,894,191   3,891,417 

F-3

 

StHealth Capital Investment Corp.
Unaudited Condensed Statements of Changes in Stockholders’ Equity
For the Three and SixNine Months Ended JuneSeptember 30, 2021 and 2020

 

       Additional       
  Preferred stock  Common stock  Paid-in  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
Balance, December 31, 2020  —  $—   3,894,191  $4,000  $12,726,000  $(10,145,000) $2,585,000 
Net decrease in net assets resulting from operations  —   —   —   —   —   (7,000)  (7,000)
Balance, March 31, 2021  —   —   3,894,191   4,000   12,726,000   (10,152,000)  2,578,000 
Net decrease in net assets resulting from operations  —   —   —   —   —   (343,000)  (343,000)
Balance, June 30, 2021  —  $—   3,894,191  $4,000  $12,726,000  $(10,495,000) $2,235,000 

 Preferred stock Common stock  Additional  Accumulated    
  Shares  Amount  Shares  Amount  Paid-in Capital  Deficit  Total 
Balance, December 31, 2020  —   $—   3,894,191  $ 4,000   $12,726,000  $ (10,145,000)  $2,585,000 
Net decrease in net assets resulting from operations  —   —   —   —   —   (7,000)  (7,000)
Balance, March 31, 2021  —   —   3,894,191   4,000   12,726,000   (10,152,000)  2,578,000 
Net decrease in net assets resulting from operations  —   —   —   —   —   (343,000)  (343,000)
Balance, June 30, 2021  —  $—   3,894,191  $4,000  $12,726,000  $(10,495,000) $2,235,000 
Net decrease in net assets resulting from operations  —   —   —   —   —   (79,000)  (79,000)
Balance, September 30, 2021  —  $—   3,894,191  $4,000  $12,726,000  $(10,574,000) $2,156,000 

 

     Additional     
 Preferred stock Common stock Paid-in Accumulated   Preferred stock Common stock Additional Accumulated   
 Shares Amount Shares Amount Capital Deficit Total  Shares  Amount  Shares  Amount  Paid-in Capital  Deficit  Total 
Balance, December 31, 2019  —  $—   3,874,191  $4,000  $12,681,000  $(7,166,000) $5,519,000  — $—  3,874,191 $4,000 $12,681,000 $(7,166,000) $5,519,000 
Sale of common stock          20,000   —   45,000   —   45,000       20,000  —  45,000 —  45,000 
Net decrease in net assets resulting from operations  —   —   —   —   —   (892,000)  (892,000)  —  —  —  —  —  (892,000)  (892,000)
Balance, March 31, 2020  —   —   3,894,191   4,000   12,726,000   (8,058,000)  4,672,000  — —  3,894,191 4,000 12,726,000 (8,058,000) 4,672,000 
Net increase in net assets resulting from operations  —   —   —   —   —   27,000   27,000   —  —  —  —  —  27,000  27,000 
Balance, June 30, 2020  —  $—   3,894,191  $4,000  $12,726,000  $(8,031,000) $4,699,000  — $— 3,894,191  $4,000  $12,726,000  $(8,031,000)  $4,699,000 
Net decrease in net assets resulting from operations  —  —  —  —  —  (314,000)  (314,000)
Balance, September 30, 2020  —  $—  3,894,191 $4,000 $12,726,000 $(8,345,000) $4,385,000 

 

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


F-4

StHealth Capital Investment Corp.
Unaudited Condensed Statements of Changes in Net Assets
For the SixNine Months Ended JuneSeptember 30,

 

 2021 2020  2021  2020 
Operations             
Net investment loss $(624,000) $(572,000)  $(797,000)  $(903,000)
Net realized loss on investments  (75,000)  (354,000) (4,000) (83,000) 
Net unrealized gain on investments  337,000   61,000 
Net change in unrealized gain (loss) on investments 360,000 (193,000)
Other income  12,000   —   12,000   — 
Net decrease in net assets resulting from operations  (350,000)  (865,000)  (429,000)  (1,179,000)
             
Capital share transactions             
Sales of common stock  —   45,000   —   45,000 
Net increase in net assets resulting from capital share transactions  —   45,000   —   45,000 
             
Total decrease in net assets  (350,000)  (820,000) (429,000) (1,134,000) 
Net assets at beginning of period  2,585,000   5,519,000   2,585,000   5,519,000 
Net assets at end of period $2,235,000  $4,699,000  $2,156,000  $4,385,000 

 

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


F-5

StHealth Capital Investment Corp.
Unaudited Condensed Statements of Cash Flows
For the SixNine Months Ended June 31,September 30,

 

 2021 2020  2021  2020 
Cash Flows from Operating Activities             
Net decrease in net assets resulting from operations $(350,000) $(865,000) $(429,000) $(1,179,000)
Adjustments to reconcile net decrease in net assets resulting from operations to net:             
Net realized loss from the sale of investments  75,000   354,000  4,000 83,000 
Net unrealized gain on investments  (337,000)  (61,000)
Net unrealized loss (gain) on investments (360,000)  193,000 
Depreciation expense 11,000 10,000 
Gain on settlement of accounts payable  (12,000)  —  (12,000) — 
Depreciation expense  7,000   7,000 
Changes in operating assets and liabilities:             
Cash paid for purchase of investment  (2,864,000)  (1,836,000) (3,827,000) (3,919,000)
Cash received from sale of investment  4,236,000   1,273,000  5,066,000 3,175,000 
Prepaid expenses  8,000   16,000  10,000 31,000 
Other current assets  (2,000)  (28,000) (2,000) (33,000)
Accounts payable  (49,000)  (97,000) (91,000) (103,000)
Accrued expenses  (43,000)  —  20,000 3,000 
Accrued expenses – related party  17,000   38,000 
Accrued expenses - related party  37,000   59,000 
Net Cash Provided by (Used in) Operating Activities  686,000   (1,199,000)  427,000   (1,680,000)
             
Cash Flows from Investing Activities             
Acquisition of property and equipment  —   (4,000)  —  (4,000)
Cash Used in Investing Activities  —   (4,000)  —  (4,000)
             
Cash Flows from Financing Activities             
Proceeds from sale of common stock  —   45,000   —  45,000 
Cash Provided by Financing Activities  —   45,000   —  45,000 
             
Net increase (decrease) in Cash  686,000   (1,158,000) 427,000 (1,639,000) 
Cash, beginning of period  896,000   2,303,000   896,000  2,304,000 
Cash, end of period $1,582,000  $1,145,000  $1,323,000 $665,000 
             
Supplemental disclosure of cash flow information:             
Cash paid for interest $—  $—  $— $— 
Cash paid for taxes $—  $—  $— $— 
     
Noncash investing and financing activities:     
Accrued interest’s conversion into investment $— $24,000 

 

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


F-6

StHealth Capital Investment Corp.
Schedules of Investments

 

 As of June 30, 2021 (Unaudited)  As of September 30, 2021 (Unaudited) 
Portfolio Investments Cost Basis Value  Cost Basis  Value 
Orchestra BioMed, Inc., Preferred Stock Series B $1,100,000  $473,000  $ 1,100,000 $ 473,000 
Orchestra BioMed, Inc., Preferred Stock Series B-1  900,000   305,000  900,000 305,000 
Dash Therapeutics, Inc. 50,000 50,000 
Other Trading Securities, Common Stock and Options  274,000   285,000   428,000  

462,000

 
 $2,274,000  $1,063,000  $2,478,000 $1,290,000 

 

  As of December 31, 2020 
Portfolio Investments Cost Basis  Value 
Orchestra BioMed, Inc., Preferred Stock Series B $ 1,100,000  $ 473,000 
Orchestra BioMed, Inc., Preferred Stock Series B-1  900,000   305,000 
First Wave BioPharma, Inc., Warrant  169,000   144,000 
First Wave BioPharma, Inc., Common stock, Preferred Stock and Warrant Series B  523,000   893,000 
First Wave BioPharma, Inc., Exchange Warrant  71,000   82,000 
Other Trading Securities, Common Stock and Options  319,000   276,000 
  $3,082,000  $2,173,000 

 

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


F-7

StHealth Capital Investment Corp.
Notes to Unaudited Condensed Financial Statements
For the Three and SixNine Months ended JuneSeptember 30, 2021 and 2020

 

Note 1 –- Nature of the Business and Summary of Significant Accounting Policies

 

StHealth Capital Investment Corp. (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”), for which it believes it qualified for as of January 2021 however has not yet filed documents with the IRS.

  

Basis of Presentation: The accompanying unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The Company is an investment company, as defined under U.S. GAAP, and applies accounting and reporting guidance in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 946, Financial Services – Investment Companies.

Unaudited Interim Financial Information: These unaudited interim condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”("GAAP"). In our opinion, the unaudited interim condensed financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of JuneSeptember 30, 2021, our results of operations for the three and sixnine months ended JuneSeptember 30, 2021 and 2020, and our cash flows for the sixnine months ended JuneSeptember 30, 2021 and 2020. The results of operations for the three and sixnine months ended JuneSeptember 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021. These unaudited interim condensed financial statements should be read in conjunction with the financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC.

 

Valuation of Portfolio Investments: The Company intends to determine the net asset value of its investment portfolio each quarter. The Company’s 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 820 – Fair Value Measurements and Disclosures (“ASC 820”). Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and ASC 820-10-50 details the disclosures that are required for items measured at fair value.

 

The Company may have various financial instruments that must be measured under the new fair value standard including cash, promissory notes payable. The Company’sCompany's financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

 

●Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The fair value of the Company’s cash is based on quoted prices and therefore classified as Level 1.
Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The fair value of the Company's cash is based on quoted prices and therefore classified as Level 1.

 

●Level 2 – Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

●Level 3 – Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

 

Cash, security deposit, prepaid expenses and accrued expenses reported on the balance sheet are estimated by management to approximate fair market value due to their short-term nature.

 


Revenue Recognition for Interest Income: Revenue from investment securities such as interest income is recognized as earned on an accrual basis to the extent that such amounts are expected to be collected. Generally, when a loan becomes past due, or if the Company’s qualitative assessment indicates that the debtor is unable to service its debt or other obligations, the Company will place the loan on non-accrual status and cease recognizing interest income on that loan for financial reporting purposes until the borrower has demonstrated the ability and intent to pay contractual amounts due. However, the Company will remain contractually entitled to this interest. If interest payments are later received on non-accrual loans, then they are restored to accrual status when past due principal and interest are paid assuming in management’s judgment they are likely to remain current. Realized gains or losses on investments are determined by calculating the difference between the net proceeds from the disposition and the amortized cost basis of the investments, without regard to unrealized gains or losses previously recognized. Realized gains or losses on the sale of investments are calculated using the specific identification method. The Company reports changes in fair value of investments as a component of the net unrealized gain (loss) on investments in the Statements of Operations.

F-8

 

Going Concern, Removal of Qualification: The Company’s condensed financial statements have been prepared assuming that it will continue as a going concern. As of JuneSeptember 30, 2021 and as of December 1,13, 2021, the date that our condensed financial statements for the three and sixnine months ended JuneSeptember 30, 2021 were published, management reviewed its available cash and projected annual spend for normal operations of the Company. Upon managements’ review it was determined that the available cash for normal operations was in excess of 12 months of anticipated spending for that same period from the date of the filing of this Report. Management believes that its cash and marketable securities available for operations of nearly $1,582,000$1,323,000 and $1,063,000$1,290,000 as of JuneSeptember 30, 2021, and the limited need for operating capital, there is limited risk of it being unable to operate for 12 months from the date this form 10-Q was published. Notwithstanding current book losses management is confident of its portfolio and its future prospects.

 

New Accounting Pronouncements: Changes to accounting principles are established by the Financial Accounting Standards Board’s (“FASB”) in the form of Accounting Standards Update (“ASU”) to the FASB’s Codification. We consider the applicability and impact of all ASUs on our financial position, results of operations, cash flows, or presentation thereof.

 

The Company reviewed all recently issued pronouncement in 2021, but not yet effective, and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on the Company’s financial condition or the results of its operations.

 

Note 2. Compensation of the Advisor

 

The Company pays StHealth Capital Advisors (“Advisor”) a fee for its services under the investment advisory and administrative services agreement (“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 Advisor 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 gross investments during such period. The base management fee may or may not be taken in whole or in part at the discretion of the Advisor. The base management fee for any partial month or quarter will be appropriately prorated.

 

During the three and sixnine months ended JuneSeptember 30, 2021, base management fee in the amounts of $6,000$5,000 and $13,000,$18,000, was accrued for the Advisor. During the three and sixnine months ended JuneSeptember 30, 2020, the Company accrued base management fee of $18,000$21,000 and $38,000,$59,000, respectively. Base management fee is included in management fee – related party on the face of statements of operations.

 


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 Advisor, 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 Advisor 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 Advisor in any calendar quarter in which the Company’s pre-incentive fee net investment income does not exceed the hurdle rate of 0.496%;

F-9

 

 ●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 Advisor. 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 Advisor 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 Advisor 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 Advisor).

 

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.

 

Incentive fee amounting to nil$15,000 and $4,000$19,000 was accrued for the three and sixnine months ended JuneSeptember 30, 2021. During the three and sixnine months ended JuneSeptember 30, 2020, there was no accrual for incentive fee. Incentive fee is included in management fee – related party on the face of statements of operations.

 

As of JuneSeptember 30, 2021 and December 31, 2020, the Advisor was owed $185,000$205,000 and $168,000, respectively. This is recorded under Accrued expenses – related party in the balance sheets.

 

Note 3. Expense Reimbursement

 

The Company’s primary operating expenses will be the payment of advisory fees and other expenses under the New Advisory Agreement, interest expense from financing facilities and other expenses necessary for its operations. The investment advisory fee will compensate the Advisor 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 Advisor;
 ●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 Advisor’s own administrative items


 ●all other expenses incurred by the Advisor, or the Company in connection with administering its business, including expenses incurred by the Advisor, in performing administrative services for the Company and administrative personnel paid by the Advisor, to the extent they are not controlling persons of the Advisor or any of its affiliates, subject to the limitations included in the New Advisory Agreement.

 

F-10

Subject to the limitations on reimbursement of the Advisor, the Corporation, either directly or through reimbursement to the Advisor, 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 and sixnine months ended JuneSeptember 30, 2021, $40,000nil and $110,000 was paid to the Advisor for expense reimbursements. The Company paid expense reimbursements amounting to $48,000$36,000 and $58,000 for$94,000 during the three and sixnine months ended JuneSeptember 30, 2020. During the three and sixnine months ended JuneSeptember 30, 2021, expense reimbursements are included in professional fees on the face of statements of operations. During the three and sixnine months ended JuneSeptember 30, 2020, expense reimbursements are included in general and administrative expenses on the face of statements of operations.

 

Note 4 –- Capital Raising

 

There were no shares issued during the sixnine months ended JuneSeptember 30, 2021.

 

During the sixnine months ended JuneSeptember 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 5 –- Investments

 

Description of Investments

 

During the sixnine months ended JuneSeptember 30, 2021, the Company deployed approximately $2,864,000$3,827,000 in several investments in portfolio companies which are described below:

 

Portfolio Company Security Type Initial
Close		 Industry  Cost basis
at inception ($)		  Carry value
at 12/31/20 ($)		  Carry value
at 6/30/21 ($)		  Security Type Initial
Close		 Industry Cost basis
at inception ($)		 Carry value
at 12/31/20 ($)		 Carry value
at 9/30/21 ($)
Equity                              
Orchestra BioMed, Inc. Preferred Stock Series B 5/10/18  BioMed  $1,100,000  $473,000  $473,000  Preferred Stock Series B 5/10/18 BioMed  $1,100,000  $473,000  $473,000 
Orchestra BioMed, Inc. Preferred Stock Series B-1 4/3/19  BioMed   900,000   305,000   305,000  Preferred Stock Series B-1 4/3/19 BioMed 900,000 305,000 305,000 
First Wave BioPharma, Inc. Warrant 1/9/20  BioMed   169,000   144,000   —  Warrant 1/9/20 BioMed 169,000 144,000 — 
First Wave BioPharma, Inc. Warrant Series B 7/16/20  BioMed   523,000   893,000   —  Warrant Series B 7/16/20 BioMed 523,000 893,000 — 
First Wave BioPharma, Inc. Exchange Warrant 7/16/20  BioMed   71,000   82,000   —  Exchange Warrant 7/16/20 BioMed 71,000 82,000 — 
First Wave BioPharma, Inc. Common stock 2/9/21  BioMed   276,000   —   —  Common stock 2/9/21 BioMed 276,000 — — 
Naha Health LLC Convertible Note Convertible Note 5/4/20  BioMed   213,000   —   —  Convertible Note 5/4/20 BioMed 213,000 — — 
Dash Therapeutics, Inc. Preferred Stock 7/23/21 BioMed $50,000 − $50,000 
Other Trading Securities Common Stock and Options 1/17/20  Multiple   274,000   276,000   285,000  Common Stock and Options 1/17/20 Multiple 428,000 276,000 462,000 
Total       $3,526,000  $2,173,000  $1,063,000         $3,730,000 $2,173,000 $1,290,000 

 


F-11

Current Status of Investments

 

Orchestra BioMed Inc. (“Orchestra”)

 

On December 31, 2020, a non-affiliated specialist revalued the shares of Series B Preferred at $473,000, a reduced value of $4.30 per share.share, and the Company recorded a $1,177,000 decrease in value as an unrealized loss on asset valuation. The Company has determined that there is no change in the fair value of the shares of Series B Preferred as of JuneSeptember 30, 2021.

 

On December 31, 2020, based on a third-party specialist’s valuation report the Company revalued the shares of Series B-1 Preferred at a fair value of $305,000. Upon inquiry with Orchestra’s management, the$305,000 and recorded a $595,000 decrease in value as an unrealized loss on asset valuation. The Company has determined that there is no change in the fair value of the shares of Series B-1 Preferred as of JuneSeptember 30, 2021.

First Wave BioPharma Inc. (“First Wave”, formerly AzurRx BioPharma Inc.)

 

AzurRx BioPharma, Inc. changed its corporate name to First Wave BioPharma, Inc. (“First Wave”) and changed its ticker symbol to “FWBI” effective September 22, 2021.

 

In January 2021, an aggregate of 697,210 shares of First Wave with fair value of $676,000 as of December 31, 2020 were sold for an aggregate amount of $672,000. Realized loss of $4,000 is recognized in the unaudited statements of operations.

 

In February 2021, First Wave Warrants B and Warrants Exchange aggregating to 468,592 common stock warrants with fair value of $571,000 were exercised for 468,592 shares of common stock with $398,000 payment in cash. The common stock was later sold for an aggregate amount of $999,000. Realized gain of $30,000 and unrealized gain of $272,000 is recognized in the unaudited statements of operations.

 

In February 2021, 257,732 First Wave warrants with fair value of $334,000 were exercised for 257,732 shares of common stock with $469,000 payment in cash. Realized loss of $141,000 and unrealized gain of $191,000 is recognized in the unaudited statements of operations.

 

During the first quarter of 2021, unrealized loss of $124,000 was recognized for the 257,732 remaining shares of common stock in the unaudited statements of operations. In April 2021, the Company sold the 257,732 remaining shares of common stock with fair value of $346,000 for $240,000. Net realized loss amounted to $106,000 is recognized in the unaudited statements of operations. As of JuneSeptember 30, 2021, the Company does not hold any investments in First Wave.

 

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 $39.58 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.

 

During April 15, 2021, the Company purchased additional convertible promissory note in the amount of $13,000. The Company was unable to verify certain financial data of Naha and determined that the fair value of the note should be valued at zero at the reporting date of JuneSeptember 30, 2021 and December 31, 2020. Unrealized loss of $13,000 was recognized in the unaudited statements of operationsoperations.

 

Dash Therapeutics, Inc.

In July 2021, the Company purchased 1,200 shares of Dash Therapeutics, Inc. Preferred stock for $50,000 at $41.67 per share. The Company has determined that there is no change in the fair value of the shares of preferred stock as of September 30, 2021.

Other Trading Securities

 

Investments in other trading securities at fair value consisted of the following at JuneSeptember 30, 2021 and the unrealized gain and loss during the sixnine months ended JuneSeptember 30, 2021:

 

 Cost  Unrealized Gain (Loss)  Fair Value  Cost Unrealized Gain (Loss) Fair Value
Common stocks $386,000  $(24,000) $362,000  $481,000 $(15,000) $466,000 
Options  (112,000)  35,000   (77,000)  (53,000) 49,000 (4,000)
Total other trading securities, at fair value $274,000  $11,000  $285,000  $428,000 $34,000 $462,000 

 

F-12

The Company realized a net gain of $10,000$71,000 and $146,000$217,000 from other trading securities sold during the three and sixnine months ended JuneSeptember 30, 2021. During the three and sixnine months ended JuneSeptember 30, 2020, the Company realized a net gain of $38,000$32,000 and $70,000 from other trading securities sold. Net realized gain (loss)or loss is recorded in the unaudited condensed statements of operations.

 


The table below summarizes the transactions for the sixnine months ended JuneSeptember 30, 2021 and year ended December 31, 2020:

 

 June 30, December 31,  September 30, December 31, 
 2021  2020  2021 2020 
Balances at beginning of year $2,173,000  $3,590,000  $2,173,000 $3,590,000 
Additions  2,864,000   5,009,000  3,827,000 5,009,000 
Sale of marketable securities  (4,236,000)  (4,752,000) (5,066,000) (4,752,000)
Change in fair value  262,000   (1,674,000)  356,000  (1,674,000)
Balances at end of year $1,063,000  $2,173,000  $1,290,000 $2,173,000 

 

Additions for December 31, 2020 includes $24,000 accrued interest that were converted into investment.

 

Note 6 –- Subsequent events

Subsequent to the period ended June 30, 2021, the Company purchased 1,200 shares of Dash Therapeutics, Inc. Preferred stock for $50,000 at $41.67 per share.

 

Subsequent to period ended JuneSeptember 30, 2021, the Company is authorized to commence a private placement with targeted offering amount of $5,000,000. As of December 1,13, 2021, 640,000 shares of common stock at $2.50 per share were subscribed for a total amount of $1,600,000.

 

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

 

The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Except as otherwise specified, references to “we,” “us,” “our,” or the “Company” refer to StHealth Capital Investment Corp.

 

Forward-Looking Statements

 

This quarterly report on Form 10-Q contains forward-looking statements that involve substantial known and unknown risks, uncertainties and other factors. Undue reliance should not be placed on such statements. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our company, our current and prospective portfolio investments, our industry, our beliefs and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including:

 

our future operating results;
our business prospects and the prospects of our portfolio companies;
changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including changes from the impact of the COVID-19 pandemic;
the ability of StHealth Capital Advisors LLC (our “Investment Advisor”) to locate suitable investments for us and to monitor and administer our investments;
risk associated with possible disruptions in our operations or the economy generally;
the timing of cash flows, if any, from the operations of the companies in which we invest;
risk associated with possible disruptions in our operations or the economy generally;
the ability of the companies in which we invest to achieve their objectives, including as a result of the current COVID-19 pandemic;
our ability to continue to effectively manage our business due to the disruptions caused by the current COVID-19 pandemic;
the dependence of our future success on the general economy and its effect on the industries in which we invest;
our ability to qualify and maintain our qualification as a BDC and as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”);
the adequacy, availability and pricing of our financing sources and working capital;
actual or potential conflicts of interest with the Investment Advisor and its affiliates;

F-13

●our future operating results;

●our business prospects and the prospects of our portfolio companies;

●changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including changes from the impact of the COVID-19 pandemic;

●the ability of StHealth Capital Advisors LLC (our “Investment Advisor”) to locate suitable investments for us and to monitor and administer our investments;

●risk associated with possible disruptions in our operations or the economy generally;

●the timing of cash flows, if any, from the operations of the companies in which we invest;

●risk associated with possible disruptions in our operations or the economy generally;

●the ability of the companies in which we invest to achieve their objectives, including as a result of the current COVID-19 pandemic;

●our ability to continue to effectively manage our business due to the disruptions caused by the current COVID-19 pandemic;

●the dependence of our future success on the general economy and its effect on the industries in which we invest;

●our ability to qualify and maintain our qualification as a BDC and as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”);

●the adequacy, availability and pricing of our financing sources and working capital;

●actual or potential conflicts of interest with the Investment Advisor and its affiliates;

●our contractual arrangements and relationships with third parties;

●interest rate volatility, loss of key personnel, and the illiquid nature of our investments; and

●the risks, uncertainties and other factors we identify elsewhere in this quarterly report on Form 10-Q.
our contractual arrangements and relationships with third parties;
interest rate volatility, loss of key personnel, and the illiquid nature of our investments; and
the risks, uncertainties and other factors we identify elsewhere in this quarterly report on Form 10-Q.

 


Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of the assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this quarterly report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified elsewhere in this quarterly report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly report on Form 10-Q. Moreover, we assume no duty and do not undertake to update the forward-looking statements.

 

Liquidity and Capital Resources

  For the Six Months Ended
June 30,		 
  2021  2020 
       
Net cash provided by (used in) operating activities $686,000  $(1,199,000)
Net cash used in investing activities  —   (4,000)
Net cash provided by financing activities  —   45,000 
Increase (decrease) in Cash during the Period  868,000   (1,158,000)
Cash, Beginning of Period  896,000   2,303,000 
Cash, End of Period $1,582,000  $1,145,000 

 

  

For the Nine Months Ended

September 30,

 
  2021  2020 
Net cash from operating activities $427,000  $(1,680,000)
Net cash from investing activities  −   (4,000) 
Net cash from financing activities  −   45,000 
Increase (decrease) in Cash during the Period  427,000   (1,639,000)
Cash, Beginning of Period  896,000   2,304,000 
Cash, End of Period $1,323,000  $665,000 

Operating Activities

 

During the sixnine months ended JuneSeptember 30, 2021, our cash provided by operations was $686,000$427,000 compared to cash used in operation of $1,199,000$1,680,000 for the sixnine months ended JuneSeptember 30, 2020. The cash provided from operations during the sixnine months ended JuneSeptember 30, 2021 was due primarily to our cash received from sale of investments being greater than the cash used for the purchase of investments.

 

Investing Activities

 

There are no investing-related activities during the sixnine months ended JuneSeptember 30, 2021. During the sixnine months ended JuneSeptember 30, 2020, the Company used $4,000 for purchase of fixed assets.

 

Financing Activities

 

There are no financing-related activities during the sixnine months ended JuneSeptember 30, 2021. During the sixnine months ended JuneSeptember 30, 2020, financing activities provided $45,000 in proceeds from issuance of common stock.

 

Results of Operations

 

Three and sixnine months Ended JuneSeptember 30, 2021 Compared to Three and sixnine months Ended JuneSeptember 30, 2020

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2021   2020  2021  2020 
Investment Income                
Interest income $—   5,000  $—  $35,000 
                 
Operating expenses                
Professional fees  108,000   255,000   549,000   679,000 
Management fee – related party  20,000   21,000   37,000   59,000 
General and administrative  45,000   60,000   211,000   200,000 
Total operating expenses  173,000   336,000   797,000   938,000 
                 
Net investment loss  (173,000)  (331,000)  (797,000)  (903,000)
                 
Realized and unrealized gain (loss) on investments                
Net realized gain on investments  71,000   271,000   (4,000)  (83,000) 
Net unrealized gain on investments  23,000   (254,000)  360,000   (193,000)
Total net realized and unrealized gain (loss) on investments  94,000   17,000   356,000   (276,000)
                 
Other income  —   —   12,000   — 
                 
Net decrease in net assets resulting from operations $(79,000)  (314,000) $(429,000) $(1,179,000)

 

  Three Months Ended
June 30,		  Six Months Ended
June 30,		 
  2021  2020  2021  2020��
Investment Income                
Interest income $—  $14,000  $—  $30,000 
                 
Operating expenses                
Professional fees  184,000   248,000   441,000   424,000 
Management fee – related party  6,000   18,000   17,000   38,000 
General and administrative  88,000   74,000   166,000   140,000 
Total operating expenses  278,000   340,000   624,000   602,000 
                 
Net investment loss  (278,000)  (326,000)  (624,000)  (572,000)
                 
Realized and unrealized gain (loss) on investments                
Net realized loss on investments  (96,000)  (354,000)  (75,000)  (354,000)
Net unrealized gain on investments  19,000   707,000   337,000   61,000 
Total net realized and unrealized gain (loss) on investments  (77,000)  353,000   262,000   (293,000)
                 
Other income  12,000   —   12,000   — 
                 
Net increase (decrease) in net assets resulting from operations $(343,000) $27,000  $(350,000) $(865,000)


F-14

Interest Income

 

Our interest income for the three and sixnine months ended JuneSeptember 30, 2021 was nil, compared to $14,000$5,000 and $30,000$35,000 for the three and sixnine months ended JuneSeptember 30, 2020. During the three and sixnine months ended JuneSeptember 30, 2021, the Company had no interest income producing investments.

 

Professional Fees

 

Our professional feefees for the three and sixnine months ended JuneSeptember 30, 2021 was $184,000$108,000 and $441,000,$549,000 as compared to $248,000 and $424,000 for the three and sixnine months ended JuneSeptember 30, 2020.2020 of $255,000 and $679,000. The increase in professional fees was primarily due to the increase inlower expenses related to accounting, investor relations, legal expenses and consulting services, wherein less due diligence requirementswas needed forduring the Company’s compliance obligationsthree months ended September 30, 2021 compared to evaluate an increased number of investment opportunities.the previous period.

 

Management fee – related party

 

Our related party management fee for the three and sixnine months ended JuneSeptember 30, 2021 was $6,000$20,000 and $17,000,$37,000, compared to $18,000$21,000 and $38,000$59,000 for the three and sixnine months ended JuneSeptember 30, 2020. Management fee is calculated at an annual rate of 2% of the Company’s total investment plus an annual rate of 20% of the realized gains as of the reporting period. During the quarter ended JuneSeptember 30, 2021, the Company sold of investments which resulted to the decrease in the total investment on which management fees are calculated.

General and Administrative

 

Our general and administrative expense for the three and sixnine months ended JuneSeptember 30, 2021 was $88,000$45,000 and $166,000,$211,000, as compared to $74,000$60,000 and $140,000$200,000 for the three and sixnine months ended JuneSeptember 30, 2020, respectively. During the quarternine months ended JuneSeptember 30, 2021, the Company incurred expenses to set up an audio-visual conference system and improve the current IT system integration, email management and data room set up. During the three months ended September 30, 2021, the Company incurred less general and administrative expenses due to the completion of the improvements initiated during the first half of the year.

 

Net realized gain (loss) on investments

 

During the three and six months ended June 30, 2021, we recognized net realized loss of $96,000 and $75,000 from the sale of investments in various portfolios. We realized lossgain on sale of investments amounting to $354,000$71,000 and $271,000 during the three and six months ended JuneSeptember 30, 2020.2021 and 2020, respectively.Our net realized loss on investment for the nine months ended September 30, 2021 and 2020 was $4,000 and $83,000, respectively. The increase is primarily due to a more strategic approach with regards to sale of investments in various portfolio companies.

 

Net unrealized gain (loss) on investments

 

Our netNet unrealized gain on investment for the three and six months ended JuneSeptember 30, 2021 was $19,000 and $337,000,$23,000 as compared to gainnet unrealized loss of $707,000 and $61,000$254,000 for the three and six months ended JuneSeptember 30, 2020. Net unrealized gain on investment for the nine months ended September 30, 2021 was $360,000 as compared to net unrealized loss of $193,000 for the nine months ended September 30, 2020. The overall increase in the investment valuation is due to the appreciation in the fair market value of the securities.

 

Net Decrease in Net Assets Resulting from Operations

 

As a result of the foregoing, for the three months ended JuneSeptember 30, 2021, we recorded a net decrease in net assets resulting from operations of $343,000$79,000 as compared to net increasedecrease in net assets resulting from operations of $27,000$314,000 for the three months ended JuneSeptember 30, 2020. For the sixnine months ended JuneSeptember 30, 2021, we recorded a net decrease in net assets resulting from operations of $350,000$429,000 compared to a net decrease in net assets resulting from operations of $865,000$1,179,000 for the sixnine months ended JuneSeptember 30, 2020.

 

F-15

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, gains and losses. Changes in the economic environment, financial markets, credit worthiness of portfolio companies and any other parameters used in determining such estimates could cause actual results to differ materially. In addition to the discussion below, our critical accounting policies are further described in the notes to the financial statements.

 


Fair Value Measurements

 

The Company follows guidance in ASC 820, Fair Value Measurement (“ASC 820”), where fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are determined within a framework that establishes a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish a classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the information available. The inputs or methodology used for valuing assets or liabilities may not be an indication of the risks associated with investing in those assets or liabilities.

 

ASC 820 classifies the inputs used to measure these fair values into the following hierarchy:

 

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date.
●•Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date.

●Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

●Level 3: Unobservable inputs for the asset or liability.
Level 3: Unobservable inputs for the asset or liability.

 

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The level assigned to the investment valuations may not be indicative of the risk or liquidity associated with investing in such investments. Because of the inherent uncertainties of valuation, the values reflected in the financial statements may differ materially from the values that would be received upon an actual disposition of such investments.

 

As of JuneSeptember 30, 2021, $285,000$462,000 or 27%36% of the Company’s investments were classified as Level 1, and $778,000$828,000 or 73%64% of the Company’s investments were classified as Level 3.

 

Investment Valuation Process

 

The Company determines the net asset value of the investment portfolio each quarter. The Board of Directors will establish a valuation committee to assist it in establishing guidelines and making recommendations to the Board of Directors regarding the valuation of the investments. The valuation committee will be comprised of all of the Company’s independent directors and certain of the Advisor’s investment professionals.

 

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 Board of Directors. In connection with that determination, the Company expects that the Advisor will provide the Board of Directors with portfolio company valuations which will be 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.

 

With respect to investments for which market quotations are not readily available, the Company intends to undertake a multi-step valuation process each quarter, as described below:

 

F-16

 ● the Company’s quarterly valuation process will begin with the Advisor’s management team providing a preliminary valuation of each portfolio company or investment to the Company’s valuation committee, which valuation may be obtained from an independent valuation firm, if applicable;
 ●preliminary valuation conclusions will then be documented and discussed with the valuation committee;
 ●the valuation committee will review the preliminary valuation and the Advisor’s management team, together with the Company’s independent valuation firm, if applicable, will respond and supplement the preliminary valuation to reflect any comments provided by the valuation committee; and
 ●the Board of Directors will discuss valuations and determine the fair value of each investment in the portfolio in good faith based on various statistical and other factors, including the input and recommendation of the Advisor, the valuation committee and any third-party valuation firm, if applicable.

 


Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to the Company’s financial statements will refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on the Company’s financial statements. Below is a description of factors that the Board of Directors may consider when valuing the debt and equity investments.

 

Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, the Company may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that the Board of Directors may consider include the borrower’s ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing the Company’s debt investments.

 

For convertible debt securities, fair value will generally approximate the fair value of the debt plus the fair value of an option to purchase the underlying security (the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.

 

The equity interests in portfolio companies for which there is no liquid public market will be valued at fair value. The Board of Directors, in its analysis of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.

 

The Board of Directors may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. The Board of Directors may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value. Generally, the value of the equity interests in public companies for which market quotations are readily available will be based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale will typically be valued at a discount from the public market value of the security.

 

If the Company receives warrants or other equity-linked securities at nominal or no additional cost in connection with an investment in a debt security, the Board of Directors will allocate the cost basis in the investment between the debt securities and any such warrants or other equity-linked securities received at the time of origination. The Board of Directors will subsequently value these warrants or other equity-linked securities received at fair value.

 

The fair values of the investments will be determined in good faith by the Board of Directors in consultation with management. The Board of Directors will be solely responsible for the valuation of the portfolio investments at fair value as determined in good faith pursuant to the Company’s valuation policy and consistently applied valuation process. The Company intends to value all of the Level 2 and Level 3 assets by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end provided by independent third-party pricing services and screened for validity by such services. For investments for which the third-party pricing service is unable to obtain quoted prices, the Company intends to obtain bid and ask prices directly from dealers who make a market in such investments. To the extent that the Company holds investments for which no active secondary market exists and, therefore, no bid and ask prices can be readily obtained, the Company’s valuation committee intends to utilize an independent third-party valuation service to value such investments.

 

The Company will periodically benchmark the bid and ask prices it receive from the third-party pricing services and/or dealers, as applicable, and valuations received from the third-party valuation service against the actual prices at which the Company purchases and sell the investments. The Company believes that these prices will be reliable indicators of fair value. The Company’s valuation committee and Board of Directors will review and approve the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation process.

 

F-17

Off-Balance Sheet Arrangements

 

Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any off-balance sheet financings or liabilities.

 

Item 3.Quantitative and Qualitative Disclosure About Market Risk

 

We are subject to financial market risks, including changes in interest rates and the valuations of our investment portfolio. Uncertainty with respect to the economic effects of the COVID-19 pandemic has introduced significant volatility in the financial markets, and the effects of this volatility could materially impact our market risks, including those listed below.

 


Investment valuation risk

 

Because there is not a readily available market value for some of the investments in our portfolio, we value those portfolio investments at fair value as determined in good faith by our board of directors based on, among other things, the input of our management and audit committee and independent valuation firms that have been engaged at the direction of the management of our invested companies to assist in the valuation a portfolio investment without a readily available market quotation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned.

 

Interest Rate Risk

 

Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates. Because we do not fund any of our investments with borrowings, our net investment income is not affected by the difference between the rate at which we invest and the rate at which we borrow. If we do borrow money to support our investments, we intend to regularly measure our exposure to interest rate risk, and would determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates.

 

Item 4.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective to ensure that the information relating to our Company, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of continuing material weaknesses in our internal control over financial reporting identified in our Annual Report on Form 10-K for the year ended December 31, 2020.

 

We continue to work toward full remediation of these material weaknesses. We expect that the remediation of these material weaknesses in our internal control over financial reporting will remediate the weakness in our disclosure controls and procedures.

 

Changes in Internal Control  Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act) that occurred during the three and six monthnine-month period ended JuneSeptember 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

F-18

PART II—OTHER INFORMATION

 

Item 1.Legal Proceedings

 

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material adverse effect upon our financial condition or results of operations.

 


Item 1A.Risk Factors

 

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2020.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable. There has been no sale of unregistered equity securities during the three and sixnine months ended JuneSeptember 30, 2021.

 

Item 3.Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

Item 5.Other Information

 

None.

 

Item 6.Exhibits

F-19

 

SIGNATURES

  

Pursuant to the requirements 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 on December 1,13, 2021.

 

 STHEALTH CAPITAL INVESTMENT CORP.
   
   
 By:/s/Derek Taller
  

Derek Taller
Chief Executive Officer and

Acting Chief Financial Officer

 

 

 

 

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)