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Table of Contents

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 June 30, 2020

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: 001-37997

SACHEM CAPITAL CORP.

(Exact name of registrant as specified in its charter)

New York

81-3467779

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

698 Main Street, Branford, CT 06405

(Address of principal executive offices)

(203) 433-4736

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

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

Title of each class

 

Ticker symbol(s)

 

Name of each exchange on which registered

Common Shares, par value $.001 per share

 

SACH

 

NYSE American LLC

7.125% Notes due 2024

SCCB

NYSE American LLC

6.875% Notes due 2024

SACC

NYSE American LLC

As of August 6, 2020, the Issuer had a total of 22,117,301 common shares, $0.001 par value per share, outstanding.

Table of Contents

SACHEM CAPITAL CORP.

TABLE OF CONTENTS

Part I

FINANCIAL INFORMATION

Page Number

Item 1.

Financial Statements (unaudited)

Balance Sheets as of June 30, 2020 and December 31, 2019

1

Statements of Comprehensive Income for the Three-Month and Six-Month Periods Ended June 30, 2020 and 2019

2

Statements of Changes in Shareholders’ Equity for the Three-Month and Six-Month Periods Ended June 30, 2020 and 2019

3

Statements of Cash Flows for the Six-Month Periods Ended June 30, 2020 and 2019

5

Notes to Financial Statements (unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

23

Item 4.

Controls and Procedures

23

Part II

OTHER INFORMATION

Item 6.

Exhibits

24

SIGNATURES

26

EXHIBITS

i

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q includes forward-looking statements. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words “anticipate,” “estimate,” “expect,” “project,” “plan,” “seek,” “intend,” “believe,” “may,” “might,” “will,” “should,” “could,” “likely,” “continue,” “design,” and the negative of such terms and other words and terms of similar expressions are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We disclaim any duty to update any of these forward-looking statements after the date of this report to confirm these statements in relationship to actual results or revised expectations.

All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this report. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.

Unless the context otherwise requires, all references in this quarterly report on Form 10-Q to “Sachem Capital,” “we,” “us” and “our” refer to Sachem Capital Corp., a New York corporation.

ii

Table of Contents

PART I.        FINANCIAL INFORMATION

Item 1.    FINANCIAL STATEMENTS

SACHEM CAPITAL CORP.

BALANCE SHEETS

June 30, 2020

December 31, 2019

    

(Unaudited)

    

(Audited)

Assets

 

  

 

  

Assets:

 

  

Cash and cash equivalents

$

4,647,973

$

18,841,937

Investments

15,961,433

15,949,802

Mortgages receivable

 

111,430,500

 

94,348,689

Interest and fees receivable

 

1,557,092

 

1,370,998

Other receivables

 

116,397

 

141,397

Due from borrowers

 

1,243,580

 

840,930

Prepaid expenses

 

73,175

 

24,734

Property and equipment, net

 

1,377,992

 

1,346,396

Deposits on property and equipment

 

 

71,680

Real estate owned

 

7,023,382

 

8,258,082

Deferred financing costs

 

16,258

 

16,600

Total assets

$

143,447,782

$

141,211,245

Liabilities and Shareholders' Equity

 

 

Liabilities:

 

 

Notes payable (net of deferred financing costs of $2,451,618 and $2,687,190)

$

55,711,382

$

55,475,810

Mortgage payable

 

775,901

 

784,081

Accounts payable and accrued expenses

 

301,715

 

249,879

Other loans

257,845

Security deposits held

 

13,416

 

7,800

Advances from borrowers

 

1,012,201

 

848,268

Deferred revenue

 

858,885

 

1,205,740

Notes payable

 

65,402

 

75,433

Accrued interest

 

3,272

 

3,416

Total liabilities

 

59,000,019

 

58,650,427

Commitments and Contingencies

Shareholders' equity:

 

  

 

  

Preferred shares - $.001 par value; 5,000,000 shares authorized; no shares issued

 

 

Common stock - $.001 par value;100,000,000 shares authorized; 22,117,301 issued and outstanding

 

22,117

 

22,117

Paid-in capital

 

83,806,169

 

83,856,308

Accumulated other comprehensive income (loss)

35,189

(50,878)

Retained earnings (accumulated deficit)

584,288

(1,266,729)

Total shareholders' equity

 

84,447,763

 

82,560,818

Total liabilities and shareholders' equity

$

143,447,782

$

141,211,245

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

1

Table of Contents

SACHEM CAPITAL CORP.

STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

Three Months Ended

Six Months

June 30, 

Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Revenue:

Interest income from loans

$

3,265,677

$

2,315,325

$

6,167,083

$

5,066,405

Interest income on investments

33,162

130,678

Loss (gain) on sale of investment securities

(8,925)

437,159

Origination fees, net

 

647,499

 

340,823

 

1,158,555

 

705,540

Late and other fees

 

21,099

 

140,537

 

35,880

 

187,033

Processing fees

 

39,665

 

41,805

 

86,123

 

76,600

Rental income, net

 

29,456

 

47,255

 

40,184

 

72,904

Other income

 

283,009

 

179,391

 

567,283

 

296,531

Net gain on sale of real estate

 

 

 

 

7,149

Total revenue

 

4,310,642

 

3,065,136

 

8,622,945

 

6,412,162

Operating costs and expenses:

Interest and amortization of deferred financing costs

 

1,152,302

 

452,406

 

2,302,255

 

1,073,454

Compensation, fees and taxes

383,968

465,193

724,355

849,420

Stock based compensation

4,107

4,107

8,214

8,214

Professional fees

 

110,104

 

70,215

 

242,413

 

154,222

Other expenses and taxes

 

6,534

 

17,139

 

35,238

 

31,332

Exchange fees

 

 

11,219

 

7,272

 

21,507

Expense in connection with termination of LOC

779,641

779,641

Impairment

245,000

495,000

Net loss on sale of real estate

4,460

Depreciation

 

14,688

 

18,164

 

30,971

 

25,667

General and administrative expenses

 

127,460

 

103,909

 

267,674

 

269,358

Total operating costs and expenses

 

2,044,163

 

1,921,993

 

4,117,852

 

3,212,815

Net income

2,266,479

1,143,143

4,505,093

3,199,347

Other comprehensive income

Unrealized gain on investment securities

221,449

86,067

Comprehensive income

$

2,487,928

$

1,143,143

$

4,591,160

$

3,199,347

Basic and diluted net income per common share outstanding:

Basic

$

0.10

$

0.06

$

0.20

$

0.19

Diluted

$

0.10

$

0.06

$

0.20

$

0.19

Weighted average number of common shares outstanding:

Basic

 

22,117,301

 

18,499,531

 

22,117,301

 

17,144,104

Diluted

 

22,117,301

 

18,499,531

 

22,117,301

 

17,144,104

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

2

Table of Contents

SACHEM CAPITAL CORP.

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

    

FOR THE THREE MONTHS ENDED JUNE 30, 2020

    

  

Accumulated

(Accumulated

Additional

Other

Deficit)

 

Common

 

Paid in

 

Comprehensive

 

Retained

    

Shares

    

Amount

    

Capital

    

Income/(Loss)

    

Earnings

    

Totals

Balance, April 1, 2020

 

22,117,301

$

22,117

$

83,802,062

$

(186,260)

$

(1,682,191)

$

81,955,728

Stock based compensation

 

4,107

 

4,107

Unrealized gain on marketable securities

 

221,449

 

221,449

Net income

 

2,266,479

 

2,266,479

Balance, June 30, 2020

 

22,117,301

$

22,117

$

83,806,169

$

35,189

$

584,288

$

84,447,763

    

FOR THE THREE MONTHS ENDED JUNE 30, 2019

    

  

Accumulated

(Accumulated

Additional

Other

Deficit)

Common

Paid in

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Income/(Loss)

    

Earnings

    

Totals

Balance, April 1, 2019

 

15,950,256

$

15,950

$

55,424,167

$

$

1,650,721

$

57,090,838

Sales of stock through ATM

 

2,955,330

 

2,956

 

13,229,756

 

13,232,712

Stock based compensation

 

4,107

 

4,107

Dividends

 

(2,054,727)

 

(2,054,727)

Net income

 

1,143,143

 

1,143,143

Balance, June 30, 2019

 

18,905,586

$

18,906

$

68,658,030

$

$

739,137

$

69,416,073

3

Table of Contents

FOR THE SIX MONTHS ENDED JUNE 30, 2020

Accumulated

(Accumulated

Additional 

Other

Deficit)

Common

Paid in

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Income/(Loss)

    

Earnings

    

Totals

Balance, January 1, 2020

 

22,117,301

$

22,117

$

83,856,308

$

(50,878)

$

(1,266,729)

$

82,560,818

Offering costs-ATM

 

(58,353)

(58,353)

Stock based compensation

8,214

8,214

Unrealized gain on marketable securities

86,067

86,067

Dividends paid

(2,654,076)

(2,654,076)

Net income

4,505,093

4,505,093

Balance, June 30, 2020

 

22,117,301

$

22,117

$

83,806,169

$

35,189

$

584,288

$

84,447,763

FOR THE SIX MONTHS ENDED JUNE 30, 2019

Accumulated

(Accumulated 

Additional

Other

Deficit) 

Common

Paid in

Comprehensive

Retained 

    

Shares

    

Amount

    

Capital

    

Income/(Loss)

    

Earnings

    

Totals

Balance, January 1, 2019

 

15,438,621

$

15,439

$

53,192,859

$

$

(405,483)

$

52,802,815

Sales of stock through ATM

 

3,466,965

 

3,467

15,456,957

 

 

 

15,460,424

Stock based compensation

8,214

8,214

Dividends

(2,054,727)

(2,054,727)

Net income

3,199,347

3,199,347

Balance, June 30, 2019

 

18,905,586

$

18,906

$

68,658,030

$

$

739,137

$

69,416,073

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

4

Table of Contents

SACHEM CAPITAL CORP.

STATEMENTS OF CASH FLOW

(unaudited)

Six Months

Ended June 30, 

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

4,505,093

$

3,199,347

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of deferred financing costs

 

235,913

 

94,323

Depreciation expense

 

30,971

 

25,667

Stock based compensation

 

8,214

 

8,214

Impairment loss

 

495,000

 

Loss(gain) on sale of real estate

4,460

(7,149)

Abandonment of office furniture

12,000

Costs in connection with termination of line of credit

439,446

Realized gain on investments

(437,159)

Changes in operating assets and liabilities:

(Increase) decrease in:

Escrow deposits

 

 

12,817

Interest and fees receivable

 

(186,094)

 

(449,809)

Other receivables

 

25,000

 

25,000

Due from borrowers

 

(597,776)

 

780,320

Prepaid expenses

 

(48,441)

 

(48,013)

Deposits on property and equipment

 

71,680

 

(177,481)

(Decrease) increase in:

Due to note purchaser

 

 

(176,619)

Accrued interest

 

(144)

 

Accounts payable and accrued expenses

 

51,836

 

(5,706)

Deferred revenue

 

(346,855)

 

50,088

Advances from borrowers

 

163,933

 

(54,560)

Total adjustments

 

(529,462)

 

528,538

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

3,975,631

 

3,727,885

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of investments

(17,428,603)

Proceeds from the sale of investments

17,940,198

Proceeds from sale of real estate owned

 

1,762,775

 

264,809

Acquisitions of and improvements to real estate owned

 

(1,027,533)

 

(342,598)

Purchase of property and equipment

 

(62,567)

 

(165,263)

Security deposits held

5,616

Principal disbursements for mortgages receivable

 

(42,303,747)

 

(28,516,128)

Principal collections on mortgages receivable

25,417,062

21,098,466

NET CASH USED FOR INVESTING ACTIVITIES

 

(15,696,799)

 

(7,660,714)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from line of credit

 

42,720,829

Repayment of line of credit

 

 

(69,939,952)

Proceeds from notes sold to shareholder

 

 

1,017,000

Principal payments on mortgage payable

(8,181)

(2,947)

Principal payments on notes payable

(10,031)

Dividends paid

 

(2,654,076)

 

(4,679,293)

Financing costs incurred

(58,353)

(12,113)

Proceeds from other loans

 

257,845

 

Proceeds from mortgage payable

795,000

Repayment of mortgage payable

(290,984)

Proceeds from notes payable, net

71,820

Issuance of common stock ATM, net

15,460,427

Gross proceeds from issuance of fixed rate notes

23,000,000

Financing costs incurred in connection with fixed rate notes

(1,270,000)

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

 

(2,472,796)

 

6,869,787

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(14,193,964)

 

2,936,958

CASH AND CASH EQUIVALENTS- BEGINNING OF YEAR

 

18,841,937

 

158,860

CASH AND CASH EQUIVALENTS - END OF PERIOD

$

4,647,973

$

3,095,818

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

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SACHEM CAPITAL CORP.

STATEMENTS OF CASH FLOW (Continued)

(unaudited)

Six months

Ended June 30, 

    

2020

    

2019

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION

Taxes paid

$

$

Interest paid

$

2,066,341

$

979,131

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

Real estate acquired in connection with the foreclosure of certain mortgages, inclusive of interest and other fees receivable, during the period ended June 30, 2019 amounted to $1,962,669.

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

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SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020

1.    The Company

Sachem Capital Corp. (the “Company”), a New York corporation, specializes in originating, underwriting, funding, servicing and managing a portfolio of first mortgage loans. The Company offers short term (i.e., one to three years), secured, loans (sometimes referred to as “hard money” loans) to real estate owners and investors to fund their acquisition, renovation, development, rehabilitation or improvement of properties located primarily in Connecticut. The properties securing the Company’s loans are generally classified as residential or commercial real estate and, typically, are held for resale or investment. Each loan is secured by a first mortgage lien on real estate and may also be secured with additional collateral, such as other real estate owned by the borrower or its principals or a pledge of the ownership interests in the borrower by the principals thereof, as well as personal guarantees by the principals of the borrower. The Company does not lend to owner occupants. The Company’s primary underwriting criteria is a conservative loan to value ratio. In addition, the Company may make opportunistic real estate purchases apart from its lending activities. The Company believes it qualifies and has operated as a real estate investment trust since 2017.

2.    Significant Accounting Policies

Unaudited Financial Statements

The accompanying unaudited financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for the interim periods are not necessarily indicative of the operating results to be attained in the entire fiscal year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates are based on (a) assumptions that consider the Company’s past experience, (b) projections regarding the Company’s future operations and (c) general financial market and local and general economic conditions. Actual amounts could differ from those estimates.

Cash and Cash Equivalents

The Company considers all demand deposits, cashier’s checks, money market accounts and certificates of deposit with an original maturity of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents at various financial institutions. The account balances typically exceed the Federal Deposit Insurance Corporation insurance coverage, and, as a result, there is a concentration of credit risk related to amounts on deposit. The Company does not believe that the risk is significant.

Allowance for Loan Loss

The Company reviews each loan on a quarterly basis and evaluates the borrower’s ability to pay the monthly interest, the borrower’s likelihood of executing the original exit strategy, as well as the loan-to-value (LTV) ratio. Based on the analysis, management determines if any provisions for impairment of loans should be made and whether any loan loss reserves are required.

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SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020

Fair Value Measurements

The framework for measuring fair value provides a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820 are described as follows:

Level 1Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company can access.

Level 2Inputs to the valuation methodology include:

quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in inactive markets;
inputs other than quoted prices that are observable for the asset or liability; and
inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (i.e., contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Property and Equipment

Land and building acquired in December 2016 to serve as the Company’s office facilities is stated at cost. The building is being depreciated using the straight-line method over its estimated useful life of 40 years. Expenditures for repairs and maintenance are charged to expense as incurred. The Company relocated its entire operations to this property in March 2019.

Impairment of long-lived assets

The Company continually monitors events or changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted cash flows is less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair market value of the assets.

Deferred Financing Costs

Costs incurred by the Company in connection with the public offering of its unsecured, unsubordinated notes, described in Note 6 - Notes Payable -- are being amortized over the term of the respective Notes.

Revenue Recognition

Interest income from the Company's loan portfolio is earned, over the loan period and is calculated using the simple interest method on principal amounts outstanding. Generally, the Company's loans provide for interest to be paid monthly in arrears. The Company does not accrue interest income on mortgages receivable that are more than 90 days past due.

Origination fee revenue, generally 2%- 5% of the original loan principal amount, is collected at loan funding and is recognized ratably over the contractual life of the loan in accordance with ASC 310.

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SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020

Income Taxes

The Company believes it qualifies as a Real Estate Investment Trust (REIT) for federal income tax purposes and made the election to be taxed as a REIT when it filed its 2017 federal income tax return. As a REIT, the Company is required to distribute at least 90% of its taxable income to its shareholders on an annual basis. The Company’s qualification as a REIT depends on its ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code of 1986, as amended, relating to, among other things, the sources of its income, the composition and values of its assets, its compliance with the distribution requirements applicable to REITs and the diversity of ownership of its outstanding common shares. So long as it qualifies as a REIT, the Company, generally, will not be subject to U.S. federal income tax on its taxable income distributed to its shareholders. However, if it fails to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal income tax at regular corporate rates and may also be subject to various penalties and may be precluded from re-electing REIT status for the four taxable years following the year during in which it lost its REIT qualification.

The Company follows the provisions of FASB ASC Topic 740-10 “Accounting for Uncertainty in Income Taxes”, which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and disclosure required. Under this standard, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. Should the Company become liable for interest and penalties related to unrecognized tax benefits, such amounts would be included in interest expense. The Company has determined that there are no uncertain tax positions requiring accrual or disclosure in the accompanying financial statements as of June 30, 2020.

Earnings Per Share

Basic and diluted earnings per share are calculated in accordance with FASB ASC 260 “Earnings Per Share”. Under ASC 260, basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the potential dilution from the exercise of stock options and warrants for common shares using the treasury stock method. The numerator in calculating both basic and diluted earnings per common share for each period is the reported net income.

Recent Accounting Pronouncements

In May 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief," which requires that entities use a new forward looking "expected loss" model that generally will result in the earlier recognition of an allowance for credit losses. This ASU allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The Company adopted both ASU 2016-13 and ASU 2019-05 effective January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU modifies ASC 740 to remove certain exceptions and adds guidance to reduce complexity in certain areas. For companies that file with the U.S. Securities and Exchange Commission ("SEC"), the standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted but requires simultaneous adoption of all provisions of the new standard. The Company believes that the adoption of this guidance will not have a material impact on its consolidated financial statements.

Management does not believe that any other recently issued, but not yet effected, accounting standards if currently adopted would have a material effect on the Company’s financial statements.

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SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020

3. Fair Value Measurement

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair market value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The following table sets forth by Level, within the fair value hierarchy, the Company’s assets at fair value as of June 30, 2020:

    

Level 1

    

Level 2

    

Level 3

    

Total

Mutual Funds

$

15,961,433

 

 

$

15,961,433

Total Investments

$

15,961,433

 

 

$

15,961,433

Real Estate Owned

$

7,023,382

$

7,023,382

Following is a description of the methodologies used for assets measured at fair value:

Mutual funds: Valued at the daily closing price reported by the fund. Mutual funds held by the Company are open-end mutual funds that are registered with the SEC. These funds are required to publish their daily net asset values and to transact at that price. The mutual funds held by the Company are deemed to be actively traded.
Real estate owned: The Company estimates fair values of real estate owned using market information such as recent sales contracts, appraisals, recent sales offers, assessed values or discounted cash value models.

4.    Mortgages Receivable

Mortgages Receivable

The Company offers secured, non-bank loans to real estate owners and investors (also known as “hard money” loans) to fund their acquisition, renovation, development, rehabilitation or improvement of properties located primarily in Connecticut. The loans are secured by first mortgage liens on one or more properties owned by the borrower or related parties. In addition, each loan is personally guaranteed by the borrower or its principals, which guarantees may be collaterally secured as well. The loans are generally for a term of one to three years. The loans are initially recorded and carried thereafter, in the financial statements, at cost. Most of the loans provide for monthly payments of interest only (in arrears) during the term of the loan and a “balloon” payment of the principal on the maturity date.

For the six-month periods ended June 30, 2020 and 2019, the aggregate amounts of loans funded by the Company were $42,303,747 and $28,516,128, respectively, offset by principal repayments of $25,417,062 and $21,098,466, respectively.

At June 30, 2020, the Company’s portfolio included loans with outstanding principal balances up to approximately $2.2 million, with stated interest rates ranging from 5.0% to 13.0% and a default interest rate for non-payment of 18%.

At June 30, 2020, no single borrower had loans outstanding representing more than 10% of the total balance of the loans outstanding.

During the six months ended June 30, 2020 the Company purchased notes receivable with a principal balance of $5,248,235, not including unfunded construction draws of $722,450, at par. The notes bear interest at rates ranging from 5% to 12% and, with the exception of a $140,000 note that has a maturity date in July 2035, have maturities of three years or less.

The Company will extend the term of a loan if, at the time of the extension, the loan and the borrower satisfy the Company’s underwriting requirements at the time of the extension. The Company treats a loan extension as a new loan.

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SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020

Credit Risk

Credit risk profile based on loan activity as of June 30, 2020 and December 31, 2019:

    

Total Outstanding

Mortgages Receivable

    

Residential

    

Commercial

    

Land

    

Mixed Use

Mortgages

June 30, 2020

$

74,370,820

$

27,123,971

$

6,313,641

$

3,622,068

$

111,430,500

December 31, 2019

$

71,605,920

$

16,122,990

$

5,639,979

$

979,800

$

94,348,689

The following are the maturities of mortgages receivable as of June 30:

2020

    

$

51,304,483

2021

 

49,420,040

2022

 

8,752,266

2023

 

1,953,711

Total

$

111,430,500

At June 30, 2020, of the 477 mortgage loans in the Company’s portfolio, 13 were the subject of foreclosure proceedings. The aggregate outstanding balances due on these loans as of June 30, 2020, including unpaid principal, accrued but unpaid interest and borrower fees, was approximately $3.6 million. In the case of each of these loans, the Company believes the value of the collateral exceeds the total amount due.

5.    Real Estate Owned

Property purchased for rental or acquired through foreclosure are included on the balance sheet as real estate owned.

As of June 30, 2020, and December 31, 2019, real estate owned totaled $7,023,382 and $8,258,082, respectively. As of June 30, 2020, real estate owned included $1,655,580 of real estate held for rental and $5,367,802 of real estate held for sale. On May 15, 2020, the Company sold a property classified as real estate held for sale, receiving approximately $557,000 in gross proceeds. No gain or loss was recognized on this sale as the Company is foreclosing on additional collateral provided by the borrower. In the first six months of 2020, the Company recorded an impairment loss of $495,000 compared to an impairment loss of $-0- in the first six months of 2019.

6.     Notes Payable

In 2019 the Company issued 7.125% unsecured, unsubordinated notes due June 30, 2024 (the “June Notes”) and 6.875% unsecured, unsubordinated notes due December 30, 2024 (the “December Notes”; collectively, the June Notes and December Notes are referred to as the “Notes”), in underwritten public offerings in June 2019 and December 2019, respectively. The Notes were issued in denominations of $25.00 each and are listed on the NYSE American and trade under the symbol “SCCB” and “SACC”, respectively. The June Notes commenced accruing interest on June 25, 2019 and the December Notes commenced accruing interest on November 7, 2019. Accrued interest on the Notes is payable quarterly in cash, in arrears, on March 30, June 30, September 30 and December 30, commencing September 30, 2019 for the June Notes and December 30 for the December Notes. The June Notes and December Notes mature, and all amounts outstanding thereunder including principal, accrued but unpaid interest and any other fees and costs, June 30, 2024 and December 30, 2024, respectively. So long as the Notes are outstanding, the Company is prohibited from making distributions in excess of 90% of its taxable income, incurring any additional indebtedness for borrowed money or purchasing any shares of its capital stock unless it has an “Asset Coverage Ratio” of at least 150% after giving effect to the payment of such dividend, the incurrence of such indebtedness or the application of the net proceeds, as the case may be. The Company may redeem the Notes, in whole or in part, without premium or penalty, at any time after June 25, 2021, in the case of the June Notes, and November 7, 2021, in the case of the December Notes, upon at least 30 days prior written notice to the holders of the Notes. The redemption price will be equal to the outstanding principal amount of

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SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020

the Notes redeemed plus the accrued but unpaid interest thereon up to, but not including, the date of redemption. The Notes are reflected on the Company’s June 30, 2020 and December 31, 2019 balance sheets net of deferred financing costs in the amount of approximately $2.5 million and $2.7 million, respectively.

7.    Other income

For the three-month and six-months periods ended June 30, 2020 and 2019, other income consists of the following:

Three Months

Six Months

ended June 30, 

ended June 30, 

    

2020

    

2019

    

2020

    

2019

Income on borrower charges

$

72,083

$

28,460

$

158,532

$

32,494

Lender, modification and extension fees

 

145,529

 

88,974

 

277,803

 

150,223

In-house legal fees

 

51,200

 

42,550

 

102,350

 

71,700

Other income

 

14,197

 

19,407

 

28,598

 

42,114

Total

$

283,009

$

179,391

$

567,283

$

296,531

8.    Commitments and Contingencies

Origination Fees

Loan origination fees consist of points, generally 2%-5% of the original loan principal. These payments are amortized over the life of the loan for financial statement purposes.

Original maturities of deferred revenue are as follows as of:

June 30, 

    

2020

$

567,102

2021

249,451

2022

 

40,619

2023

 

1,713

Total

$

858,885

In instances in which mortgages are repaid before their maturity date, the balance of any unamortized deferred revenue is recognized in full at the time of repayment.

Unfunded Commitments

At June 30, 2020, the Company is committed to an additional $8,182,827 in construction loans that can be drawn by the borrower when certain conditions are met.

Other

In the normal course of its business, the Company is named as a party-defendant because it is a mortgagee having interests in real properties that are being foreclosed upon, usually because the owner failed to pay property taxes. The Company actively monitors these actions and, in all cases, believes there remains sufficient value in the subject property to assure that no loan impairment exists. At June 30, 2020, there were eight such properties, representing approximately $1.3 million in mortgages receivable.

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SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2020

9.    Related Party Transactions

In the ordinary course of business, the Company may originate, fund, manage and service loans to shareholders. The underwriting process on these loans is consistent with Company policy. The terms of such loans, including the interest rate, income, origination fees and other closing costs are the same as those applicable to loans made to unrelated third parties in the portfolio. As of June 30, 2020, and 2019, loans to known shareholders totaled $6,141,356 and $4,575,902, respectively, and interest income earned on these loans totaled $344,384.99 and $225,024, respectively.

For each of the six-month periods ended June 30, 2020 and 2019, the wife of the Company’s chief executive officer was paid $50,000 for accounting and financial reporting services provided to the Company.

10.  Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and mortgage loans.

The Company maintains its cash and cash equivalents with various financial institutions. Accounts at the financial institutions are insured by the Federal Deposit Insurance Corporation up to $250,000.

The Company makes loans that are secured by first mortgage liens on real property located primarily (approximately 90%) in Connecticut. This concentration of credit risk may be affected by changes in economic or other conditions of the geographic area.

Credit risks associated with the Company’s mortgage loan portfolio and related interest receivable are described in Note 4 - Mortgages Receivable.

11.  Equity Offerings

On November 9, 2018, the Company entered into an At the Market Issuance Sales Agreement with B. Riley FBR, Inc., (the “Sales Agent”) to sell common shares, par value $0.001 per share, of the Company (the “ATM Shares”), having an aggregate offering price of up to $16 million, from time to time, through an “at-the-market” equity offering program (the “ATM Offering”). A total of 3,466,965 ATM Shares were sold in the ATM Offering during the six-month period ended June 30, 2019, providing the Company net proceeds of approximately $15,456,957. No shares were sold under the ATM during the six-month period ended June 30, 2020.

On January 27, 2020, the Company filed a Registration Statement on Form S-3 with the SEC covering the offering and sale of up to $100 million of its securities, including common shares, preferred shares, debt securities, warrants, guaranties and units consisting of two or more classes of the foregoing securities. The registration statement became effective February 5, 2020. During the six-month period ended June 30, 2020, no securities were sold pursuant to the registration statement.

12.  Subsequent Events

On July 21, 2020, the Company declared a dividend of $0.12 per share, or $