3 

FOR THE SIX MONTHS ENDED JUNE 30, 2018

SACHEM CAPITAL CORP.

STATEMENTS OF CASH FLOW (Continued)

(unaudited)

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

SACHEM CAPITAL CORP.

STATEMENTS OF CASH FLOW (Continued)

(unaudited)

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

During the six months ended June 30, 2018, the Company purchased a mortgage receivable from a third party at a discount in the amount of $21,433.

Real estate acquired in connection with the foreclosure of certain mortgages, inclusive of interest and other fees receivable,during the six months ended June 30, 2018 amounted to $1,439,244.

The reversal of previously accrued capitalized costs during the six months ended June 30, 2018, amounted to $6,212.

Real estate acquired in connection with the foreclosure of certain mortgages, inclusive of interest and other fees receivable,during the six monthsperiod ended June 30,March 31, 2019 amounted to $1,962,669.

During the six months ended June 30, 2019, the Company purchased equipment for $13,005 subject to a capital lease.

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

SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2019

MARCH 31, 2020

 6

SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2020

 7

SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2020

 8

SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2020

 9

SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2020

 10

SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2020

 11

SACHEM CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2020

12 

On July 3, 2019, the Company purchased real estate at a tax sale for $125,000.

On July 11, 2019, the Company declared a dividend of $0.12 per common share, which was paid on July 29, 2019 to shareholders of record on July 22, 2019. The total amount of the dividend payment was $2,348,454.

On July 16, 2019, the Company received gross proceeds of $82,035 from the exercise of 16,407 warrants having an exercise price of $5.00 per share.

On July 24, 2019, the Company sold 2,000,000 common shares at $5.00 per share pursuant to an underwritten public offering. The offering was made pursuant to a Prospectus Supplement filed under the S-3 Registration Statement. The gross proceeds to the Company from the offering were $10.0 million. On August 13, 2019, the Company sold an additional 300,000 common shares, at a price of $5.00 per share, upon the exercise of the over-allotment option granted to the underwriters of the offering. The gross proceeds to the Company, from the sale of these additional shares were $1.5 million. The estimated net proceeds from the offering, after payment of underwriting commissions and discounts but before other transaction-related expenses, were approximately $10.9 million. 

SACHEM CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2019

On July 1, 2019, the Company filed a Prospectus Supplement to the S-3 Registration Statement covering the sale of up to $30,000,000 of its common shares in negotiated transactions or other transactions that are deemed to be “at-the-market offerings” as defined in Rule 415 under the Securities Act of 1933. The Company has no obligation to sell any of the ATM Shares under the Sales Agreement and may at any time suspend sales of the ATM Shares. From July 1 through August 12, 2019, the Company sold 648,454 common shares in the ATM Offering and realized gross proceeds of $3,389,905.

On July 26, 2019, the Company repaid the “due to shareholder”. The total payment was $2,231,777, including principal of $2,217,000 and accrued interest of $14,777.

The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this report. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements, within the meaning of section 21E of the Exchange Act, that involve risks and uncertainties. The actual results may differ materially from those anticipated in these forward-looking statements.

Company Overview

Sachem Capital Corp. was formed as HML Capital Corp.We are a Connecticut-based real estate finance company that specializes in January 2016 under the New York Business Corporation Law. Onoriginating, underwriting, funding, servicing and managing a portfolio of short-term (i.e. three years or less) loans secured by first mortgage liens on real property. From our inception, in December 15, 2016, we changed our name to Sachem Capital Corp. Prior to February 8, 2017, our business operated as a Connecticut limited liability company under the name Sachem Capital Partners, LLC (“SCP”). On February 9, 2017, we completed2010, through our initial public offering in February 2017 (the “IPO”) in which, we issued and sold 2.6 million of our common shares, $.001 par value per share (“Common Shares”), at $5.00 per share, which raised $13 million of gross proceeds. The net proceeds from the IPO were approximately $11.1 million.operated as a limited liability company. The primary purpose of the IPO was to raise additional equity capital to fund mortgage loans and expand our mortgage loan portfolio. The IPO was also intendedportfolio and to diversify our ownership so that we could qualify, for federal income tax purposes, as a real estate investment trust, or REIT.

We believe that, uponsince consummation of the IPO, we met all the requirements to qualify as a REIT for federal income tax purposes and elected to be taxed as a REIT beginning with our 2017 tax year. As a REIT, we are entitled to claim deductions for distributions of taxable income to our shareholders thereby eliminating any corporate tax on such taxable income. Any taxable income not distributed to shareholders is subject to tax at the regular corporate tax rates and may also be subject to a 4% exciseexercise tax to the extent it exceeds 10% of our total taxable income. To maintain our qualification as a REIT, we are required to distribute each year at least 90% of our taxable income. As a REIT, we may also be subject to federal excise taxes and state taxes.

Financing Strategy OverviewReview of First Quarter and Outlook for Balance of Year

To continue to grow our business, we must increase the size of our loan portfolio, which requires that we raise additional capital either by selling shares of our capital stock or by incurring additional indebtedness. We do not have a policy limiting the amount of indebtedness that we may incur. Thus, our operating income in the future will depend, in part, on the amount of indebtedness incurred and the spread between our cost of funds and the yield on our loan portfolio. Furthermore, rising interest rates could have an adverse impact on our business if we cannot increase the rates on our loans to offset the increase in our cost of funds and to satisfy investor demand for yield. In addition, rapidly rising interest rates could have an unsettling effect on real estate values, which could compromise some of our collateral.

Historically, we have relied upon both equity capital and debt to grow our business. At December 31, 2018, we hadstarted off 2020 with approximately $52.8$35 million of shareholders’ equityliquid assets and approximately $27.5 million of indebtedness, of which approximately $27.2 million was the outstanding balance on our $35 million credit facility. Since that date, we have restructured our balance sheet by raising additional equity capital and reducing our indebtedness. At June 30, 2019, shareholders’ equity was approximately $69.4 million, and our indebtedness was approximately $22.5 million. In connection with the termination of the Webster Facility (as defined below), we incurred termination costs and expenses of approximately $780,000, including a write-off of unamortized deferred financing costs of approximately $440,000, or approximately $0.04 per share based on the weighted number of common shares outstanding at June 30, 2019. While the costs of this restructuring had an adverse impact on our operational performance in the second quarter of 2019, a majority of the costs were non-cash (i.e., deferred financing costs) and non-recurring. Even though net income in the second quarter of 2019 was adversely impacted by these financing transactions, net cash provided by operations inwithin the first half of 2019 increased approximately 27.6% compared to the first six month of 2018. In addition, we believe, our restructured balance sheet will have a positive impact on our operations over the balanceseven weeks of the year, by reducingwe had used about $15 million of that war chest to fund new mortgages. Then COVID-19 hit and we quickly realized that things were about to change drastically. Once the State of Connecticut went into lockdown mode, we were forced to curtail our operating expensesoperations. As a finance company, we were permitted to remain open but given “social distancing” and providing usother measures designed to protect our employees and curtail the spread of the virus, we are rotating employees between the office and, for those with greater operational flexibility.

Specifically, since January 1, 2019, we:remote log-in capability, work from home. Remote work is not as efficient and our underwriting process is collaborative which may be hindered somewhat. Furthermore, customer contact has been curtailed significantly. In addition, the filing and preparation of loan documents with the various recording offices may be delayed and currently there is no access to the Connecticut court system to process foreclosures and evictions. In summary, the consequences of COVID-19 may include one or more of the following:

Currently, of our 480 mortgages receivable, we have 42 COVID-19 forbearance requests representing $9.2 million of mortgages receivable and a total of approximately $283,000 of deferred interest.

As is the case with most industries and businesses impacted by COVID-19, we are limited in terms of the tools that are available to us to blunt the impact of COVID-19. We will do all that is possible to keep our operations going, maintain contact with all our borrowers and applicants and take whatever action is necessary and appropriate to enforce our rights. However, we cannot assure you that our business, operations and financial condition will not be adversely impacted by COVID-19.

In light of the impact of the COVID-19 epidemic on general economic conditions and the capital markets, we have taken various steps to reduce our risks, including the following changes to our underwriting guidelines as of April 1, 2020 applicable to new loans:

AsOther factors that we believe will impact our business in 2020 include the following:

(i)                 Increased competition. In the past, our primary competitors were other non-bank real estate finance companies (like us) and banks and other financial institutions. Our principal competitive advantages included our size and our ability to address the needs of borrowers in terms of timing and structuring loan transactions. More recently, we are encountering competition from private equity funds, hedge funds and other specialty finance entities funded by investment banks, asset managers, private equity funds and hedge funds. Clearly, the primary driver for these new market participants is the need to generate yield. They are well-funded and aggressive in terms of pricing. Currently, we have seen a decrease in competition as a result of these transactions, weCOVID-19.

(ii)               Borrower expectations. The new competitive landscape is shifting the negotiating leverage in favor of borrowers. As borrowers have reducedmore choices, they are demanding better terms. For 2019, the amountaverage yield on our portfolio was down slightly to 12.42% from 12.85% in 2018. We expect further rate compression in 2020.

(iii)             Declining property values. The rate of increasing property values has slowed and, in some cases, has even reversed. Although our overall indebtedness, eliminateddefault and foreclosure rate has been relative consistent over the fees and expenses relating to the Webster Facility, which were significant, eliminatedlast three years, as property values decline the risk of higher interest ratesforeclosure increases. Our response to this development has been to adhere to our strict loan-to-value ratio, limit the term of our loans to not more than one year and aggressively enforce our rights when loans go into default.

(iv)              We have adjusted our business and growth strategy to address changes in the futuremarketplace and extricated ourselves from the Webster Facility loan covenants, which we felt limited our operational and financing flexibility. We believe these benefits outweigh the higher interest rategrowth to date. Specifically, we are paying on the Notes relativelooking to the rateexpand our geographic footprint beyond Connecticut, we were paying on the Webster Facility.

Because most of the net proceeds from these financing transactions were used to repay existing indebtedness, only a minor portion was available to us for working capital purposes. Accordingly,are looking at funding larger loans than we were not able to significantly increase our mortgage loan portfolio or revenueshave in the second quarter of 2019. Wepast and we are looking to fund developers and builders with longer and stronger operating histories than those we have begun to address this issuefunded in the third quarter of 2019. First, on July 1, 2019, we filed a Prospectus Supplementpast. We continue to look for opportunities in new markets that meet our Form S-3 Registration Statement declared effective by the SEC on November 9, 2018, covering the sale of up to $30,000,000 of our common shares in negotiated transactions or other transactions that are deemed to be “at-the-market offerings” as defined in Rule 415 under the Securities Act of 1933. Since July 1, we have sold 648,454 common shares in the ATM Offeringbasic underwriting and realized gross proceeds of $3,389,905. Second, in July 2019, we sold 2,000,000 common shares at $5.00 per share pursuant to an underwritten public offering (the “July 2019 Offering”).loan criteria. In August 2019, the Company sold an additional 300,000 common shares, at a price of $5.00 per share, upon the exercise of the underwriters’ over-allotment option. The total gross proceeds to the Company from the July 2019 Offering were $11.5 million and the net proceeds, after payment of underwriting discounts and commissions, but before payment of other transaction-related expenses, was approximately $10.9 million. A portion of the net proceeds from the ATM Offering and the July 2019 Offering, approximately $2.2 million, was used to pay off a liability to a shareholder and the balance is being used to fund new mortgage loans.

Finally, given our improved balance sheet, we may obtain a new revolving credit facility in the future ifaddition, we believe the terms are reasonable.migration to higher quality transactions will offset any rate compression and help us maintain a low foreclosure rate.

Operational and Financial Overview

At June 30, 2019, (i) our loan portfolio included 414 mortgageOur loans with individual principal loan amounts ranging from approximately $7,000 to approximately $2.3 million and an aggregate loan amount of approximately $83.5 million, (ii) the average original principal amount of the mortgage loans in the portfolio was $201,590 and the median mortgage loan amount was $137,131 and (iii) approximately 76% of the mortgage loans had a principal amount of $250,000 or less. In comparison, at June 30, 2018, (i) our loan portfolio included 385 loans, with individual principal loan amounts ranging from $15,000 to $2.0 million and an aggregate loan amount of approximately $72.4 million, (ii) the average original principal amount of the loans in the portfolio was $188,000 and the median loan amount was $127,000 and (iii) approximately 82% of the loans had a principal amount of $250,000 or less. At June 30, 2019 and 2018, unfunded commitments for future advances totaled approximately $6.4 million and $6.2 million, respectively.

For the three months ended June 30, 2019, revenues and net income were approximately $3.07 million and $1.1 million, respectively. For the three months ended June 30, 2018, revenues and net income were approximately $3.04 million and $2.2 million, respectively. For the six months ended June 30, 2019, revenues and net income were approximately $6.4 million and $3.2 million, respectively. For the six months ended June 30, 2018, revenues and net income were approximately $5.8 million and $4.2 million, respectively.

Our operating expenses have increased significantly primarily due to the growth in our operations. Interest and debt amortization costs, compensation expense, professional fees, filing fees, printing and mailing costs, exchange listing fees, transfer agent fees and other miscellaneous costs related to our compliance with various laws, rules and regulations applicable to REITs and a publicly-held reporting company have all increased.

The mortgage loans that we originate typically have a maximum initial term of one to three years and bear interest at a fixed rate of 10%5.0% to 13%13.0% per year and a default rate of 18% per year. We usually receive origination fees, or “points,” ranging from 2% to 5% of the original principal amount of the loan as well as other fees relating to underwriting, funding and managing the loan, such as inspection fees. Since we treat an extension or renewal of an existing loan as a new loan, we also receive additional “points” and other loan-related fees in connection with those transactions. Interest is always payable monthly in arrears. AsGenerally, our underwriting criteria mandated a matterloan-to-value ratio of no less than 70% –i.e., the amount of the loan could not exceed 70% of the market value of the property securing the loan. However, due to the increased risk that we face on account of COVID-19, we recently revised that policy that the amount of the loan may not exceed 50% of the market value of the property securing the loan –i.e., a 50% loan-to-value ratio. For now, this change in policy is temporary until we do not make any loans ifcan better assess the loan-to value ratio exceeds 70%. However, inimpact COVID-19 will have on our business. In the case of loans secured by property undergoing construction or renovation and that have future funding obligations,loans, the loan-to-value ratio is based on the estimated post-construction or post-renovation value of the property. Accordingly, during the construction or renovation period the loan amount could exceed the actual value of the property. Generally, weWe rely on readily available market data, including appraisals when available or timely, tax assessment rolls, recent sales transactions brokers and in some cases, third-party appraisalsbrokers to evaluate the strengthvalue of the collateral. Finally, we have adopted a policy that limits the maximum amount of any loan we fund to a single borrower or a group of affiliated borrowers to 10% of the aggregate amount of our loan portfolio, after taking into accountconsideration the loan under consideration.

Our revenue consists primarily of interest earned on our mortgage loan portfolio and our net income is the spread between the interest we earn and our cost of funds. Our capital structure is currently more heavily weighted to equity rather than debt (approximately 75% vs .25%— approximately 58.2% vs. 41.8% of our total capitalization at March 31, 2020. At March 31, 2020, we had outstanding two series of unsecured, unsubordinated five-year notes — $23.7 million due June 30, 2019). At June2024 and bearing interest at the rate of 7.125% per annum and $34.5 million due December 30, 2024 bearing interest 6.875% per annum. For the three months ended March 31, 2020 and 2019, the annual yield on our mortgage loan portfolio was 12.83% per annum. The12.16% and 12.42%, respectively. For this purpose, yield has remained steady over the past few years as older loans come duetakes into account interest payments, origination fees and are either repaid or refinanced at similar rates. The yield reflected above does not include other amountsfees and charges collected from borrowers such as origination fees, defaultrelated to originating, managing or servicing our mortgage loan portfolio. We expect interest rate compression to continue to be a factor in 2020 due to increased competition and borrower demands. On the other hand, since the interest rate on our outstanding indebtedness is fixed, we have reduced the risk on interest rate compression if and when interest rates of interestbegin to increase. That will enable us to continue to focus on growth and late payment fees.building market share rather than short-term profits and cash flow.

In addition, we seek to mitigate some of the risk associated with rising rates by limiting the term of new loans to one year. At March 31, 2020, approximately 42% of the mortgage loans in our portfolio had a term of one year or less. If, at the end of the term, the loan is not in default and meets our other underwriting criteria, we will consider an extension or renewal of the loan at our then prevailing interest rate. However, ifIf interest rates continue to increase,have decreased and we may find it necessary to change our strategy and try to increase the rates on our mortgage loans as well. If we are successful, this may undermine our strategy to increase market share. If we are not successful,renew a loan at a lower rate, the “spread” between our borrowing costs and the yield on our portfolio will be squeezed and would adversely impact our net income. We cannot assure you that we will be able to increase our rates at any time in the future and we cannot assure you that we can continue to increase our market share.

As a real estate finance company, we deal with a variety of default situations, including breaches of covenants, such as the obligation of the borrower to maintain adequate liability and hazard insurance on the mortgaged property, to pay the taxes on the property and to make timely payments to us. As such, we may not be aware that a default occurred. As a result, we are unable to quantify the numberAt March 31, 2020, 13 of loans that may have, at one time or another, been in default. Since inception, through June 30, 2019, we have made over 1,000our mortgage loans having an aggregate original principal amount of approximately $198 million.

At June 30, 2019, of the 414 mortgage loans in our portfolio, eight have been referred to legal counsel for collection and arewere the subject of foreclosureenforcement or collection proceedings. The aggregate outstandingamount due on these loans, including principal balance of these eight mortgage loans and theunpaid accrued but unpaid interest, as of June 30, 2019 was approximately $2.9$3.1 million, representing approximately 3.4%2.8% of our aggregate mortgage loan portfolio including accrued interest. In addition, there are fourteen loans in default because the borrower has failed to make monthly interest payments, pay real estate taxes and insurance or failed to comply with other loan covenants. The aggregate outstanding principal balance of these mortgage loans and the accrued but unpaid interest as of June 30, 2019 was approximately $5.8 million representing approximately 6.8% of our aggregate mortgage loan portfolio including accrued interest.portfolio. In the case of each of these mortgage loans, we have determined the value of the collateral exceeds the outstanding balance on the loan.aggregate amount due.

At June 30, 2019,Financing Strategy Overview

To continue to grow our business, we must increase the size of our loan portfolio, which requires that we raise additional capital either by selling shares of our capital stock or by incurring additional indebtedness. We do not have a policy limiting the amount of indebtedness that we may incur. Thus, our operating income in the future will depend on how much debt we incur and the spread between our cost of funds and the yield on our loan portfolio. Rising interest rates could have an adverse impact on our business if we cannot increase the rates on our loans to offset the increase in our cost of funds and to satisfy investor demand for yield. In addition, rapidly rising interest rates could have an unsettling effect on real estate owned included 15 properties with an aggregatevalues, which could compromise some of our collateral.

We do not have any formal policy limiting the amount of indebtedness we may incur. Depending on various factors we may, in the future, decide to take on additional debt to expand our mortgage loan origination activities to increase the potential returns to our shareholders. Although we have no pre-set guidelines in terms of leverage ratio, the amount of leverage we will deploy will depend on our assessment of a variety of factors, which may include the liquidity of the real estate market in which most of our collateral is located, employment rates, general economic conditions, the cost of funds relative to the yield curve, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, our opinion regarding the creditworthiness of our borrowers, the value of the collateral underlying our portfolio, and our outlook for interest rates and property values. At March 31, 2020, debt proceeds represented approximately $4.9 million. While this is higher than41.8% of our total capital. However, to grow the 11 propertiesbusiness and satisfy the requirement to pay out 90% of net profits, we expect to increase our level of debt to at least 50% of our total capital. We intend to use leverage for the sole purpose of financing our portfolio and not for speculating on changes in interest rates.

Our total indebtedness at March 31, 2020 was approximately $59.0 million, which included a mortgage loan of approximately $800,000 and two series of notes having an aggregate valueoriginal principal amount of approximately $2.9 million owned at December 31, 2018, it is unchanged from the 15 properties$58.2 million. Notes having an aggregate original principal amount of approximately $23.7 million bear interest at the rate of 7.125% per annum and have a maturity date of June 30, 2024 (the “June Notes”). Notes having an aggregate original principal amount of $34.5 million bear interest at the rate of 6.875% per annum and have a maturity date of December 30, 2024 (the “December Notes”).

Both the December Notes and the June Notes are unsecured, unsubordinated obligations and rank equally in right of payment with all our existing and future senior unsecured and unsubordinated indebtedness but are effectively subordinated in right of payment to all our existing and future secured indebtedness (including indebtedness that is initially unsecured but to which we subsequently grant a security interest). Interest on both issues is payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year the Notes are outstanding.

Both the December Notes and June Notes are subject to (i) “Defeasance,” which means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on such Notes when due and satisfying any additional conditions required under the Indenture (defined below), we will be deemed to have been discharged from our obligations under the Notes and (ii) an “Asset Coverage Ratio” requirement pursuant to which we may not pay any dividends or make distributions in excess of 90% of our taxable income, incur any indebtedness or purchase any shares of our capital stock unless we have an “Asset Coverage Ratio” of at least 150% after giving effect to the payment of such dividend, the making of such distribution or the incurrence of such indebtedness. “Asset Coverage Ratio” means the ratio (expressed as a percentage) of the value of $4.9 millionthe Company’s total assets bears to the aggregate amount of its indebtedness.

We may, at March 31, 2019.our option, at any time and from time to time, on or after November 7, 2021, in the case of the December Notes, and June 30, 2021, in the case of the June Notes, redeem such Notes, in whole or in part, at a redemption price equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest to, but excluding, the date fixed for redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes.

The key factors contributing to our growth to date have been our ability to access working capitalDecember Notes are listed on the NYSE American LLC with a trading symbol “SACC” and the strong demand for our products and services,June Notes are listed on the NYSE American with a trading symbol “SCCB.”

We have entered into an Indenture, dated June 21, 2019, with U.S. Bank National Association, as trustee (the “Trustee”), as well as supplements thereto, which was driven principally by a robust Connecticut real estate market. These factors coincided with the overall growth in the U.S. economy. In the fourth quarter of 2018, we curtailed our lending operations due to a shortage of working capital, which adversely impacted our revenues and net incomeprovides for the fourth quarterform and terms of 2018. In addition, beginning in the second half of 2018, we started noticing subtle changes in the business environment. For example, traditional lending institutions, such as banks, appeared to be tightening their credit requirements. Normally, that would be a positive development for our business. However, at the same time, property values in Connecticut were either stagnant or decliningNotes and the lengthissuance of time between initial listingthe Notes. The Indenture also contains events of default and sale was expanding. It is unclear whether these developments are merely temporary phenomena or represent long-term trends. In the meantime, the demand for our products and services continues to be robust. We believe that our best strategy to deal with adverse changes in the marketplace is to adhere to our basic underwriting guidelines.cure provisions.

REIT Qualification

We believe that we have qualified as a REIT since the consummation of the IPO and that it is in the best interests of our shareholders that we operate as a REIT. We made the election to be taxed as a REIT beginning with our 2017 tax year. As a REIT, we are required to distribute at least 90% of our taxable income to our shareholders on an annual basis. We cannot assure you that we will be able to maintain REIT status.

Our qualification as a REIT depends on our 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 (the “Code”), relating to, among other things, the sources of our gross income, the composition and values of our assets, our compliance with the distributions requirements applicable to REITs and the diversity of ownership of our outstanding Common Shares. Given that our senior executive officers, Jeffrey C. Villano and John L. Villano, own a significant portion of our outstanding capital shares, wecommon shares. We cannot assure you that we will be able to maintain that qualification.our qualification as a REIT.

So long as we qualify as a REIT, we, generally, will not be subject to U.S. federal income tax on our taxable income that we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate income tax rates and may be precluded from electing to be treated as a REIT for four taxable years following the year during which we lose our REIT qualification. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income.

Emerging Growth Company Status

We are an “emerging growth company,”company”, as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As an emerging growth company, we can also delay adopting new or revised accounting standards until those standards apply to private companies. We intend to avail ourselves of these options. Once adopted, we must continue to report on that basis until we no longer qualify as an emerging growth company.

We will cease to be an emerging growth company upon the earliest of: (i) the end of the 2022 fiscal year; (ii) the first fiscal year after our annual gross revenue are $1.07 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the end of any fiscal year in which the market value of our common shares held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will find our common shares less attractive if we choose to rely on these exemptions. If, as a result of our decision to reduce future disclosure, investors find our common shares less attractive, there may be a less active trading market for our common shares and the price of our common shares may be more volatile.

As an “emerging growth company,” we intend to avail ourselves of the reduced disclosure requirements and extended transition periods for adopting new or revised accounting standards that would otherwise apply to us as a public reporting company. Once adopted, we must continue to report on that basis until we no longer qualify as an emerging growth company. As a result, our financial statements may not be comparable to those of other public reporting companies that either are not emerging growth companies or that are emerging growth companies but have opted not to avail themselves of these provisions of the JOBS Act and investors may deem our securities a less attractive investment relative to those other companies, which could adversely affect our stock price.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP in the United States of America 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. We base our use of estimates on (a) a preset number of assumptions that consider past experience, (b) future projections and (c) general financial market conditions. Actual amounts could differ from those estimates.

Interest income from commercial loans is recognized, as earned, over the loan period and origination fee revenue on commercial loans is amortized over the term of the respective note.

Results of operationsOperations

Three months ended June 30,March 31, 2020 compared to three months ended March 31, 2019 and 2018

Total revenue

Total revenue for the three months ended June 30, 2019March 31, 2020 was approximately $3.07$4.3 million compared to approximately $3.04$3.3 million for the three months ended June 30, 2018,March 31, 2019, an increase of approximately 1%. Compared to the 2018 period, for the 2019 period, interest income was lower by about $60,000 and other income was lower by approximately $25,000. These reductions were offset by increase of approximately $94,000 in fee income and $13,000 in rental income.

Operating costs and expenses

Total operating costs and expenses for three months ended June 30, 2019 were approximately $1.9 million compared to $832,000 for the three months ended June 30, 2018 period, an increase of approximately 132%. The increase in operating costs and expenses is primarily attributable to $780,000 of expense incurred in connection with the termination of the Webster Facility. In addition to being a non-recurring charge, $439,446 represents the write-off of unamortized deferred financing costs, a non-cash item. The second biggest contributor to the increase in operating costs and expenses was compensation expense (including stock-based compensation), which increased by $170,000. This increase reflects the increase in base salary paid to our co-chief executive officers, which was effective as of July 1, 2018, as well as compensation to our controller, who was hired in August 2018, and our in-house legal counsel, who was hired in November 2018. In addition, in April 2019 we hired a maintenance crew to maintain our real estate assets. Finally, interest and amortization of deferred financing costs increased approximately $70,000 reflecting the increase in our mortgage loan portfolio.

Net Income

Net income for the three months ended June 30, 2019 was approximately $1.1$1 million, or $0.06 per share, compared to $2.2 million, or $0.14 per share for the three months ended June 30, 2018.

Six months ended June 30, 2019 and 2018

Total revenue

Total revenue for the six months ended June 30, 2019 was approximately $6.4 million compared to approximately $5.8 million for the six months ended June 30, 2018, an increase of approximately $650,000, or 11.3%28.8%. The increase in revenue represents an increase in lending operations. For the 20192020 period, interest income was approximately $5.1$2.9 million and net origination fees were approximately $705,000.$511,000. In comparison, for the sixthree months ended June 30, 2018,March 31, 2019, interest income was approximately $4.3$2.8 million and net origination fees were approximately $689,000. Finally, fee income increased by$365,000. The balance of the increase was attributable to interest on investments and the gain from sale of investments of approximately $109,000. These increases were offset,$544,000 in part, by a reduction in other income of $203,000.the aggregate.

Operating costs and expenses

Total operating costs and expenses for sixthree months ended June 30, 2019March 31, 2020 were approximately $3.2$2.1 million compared to $1.6$1.3 million for the sixthree months ended June 30, 2018 period,March 31, 2019, an increase of approximately 104%60.6%. The increase in operating costs and expenses is primarily attributable to $780,000 of expense incurred in connection with the termination of the Credit Facility. In addition to being a non-recurring charge, $439,446 represents a write-off of unamortized deferred financing costs, a non-cash item. The second biggest contributor to the increase in operating costs and expenses wasour lending operations. Compared to the 2019 period, in the 2020 period interest expense and amortization of deferred financing costs which increased approximately $469,000 reflecting$529,000 due to the increase in our mortgage loan portfolio as well as an increase in the interest rate on the Webster Facility. As the Webster Facility has been terminated and the amount of our overall indebtedness has been reduced, relative-- $59.0 million at March 31, 2020 compared to interest income, this item should decrease in future periods. Another contributor$31.2 million at March 31, 2019. Professional fees increased approximately $44,000 due to the overall increase in operatingresignation of Jeffrey Villano and costs and expenses was a $312,000 increase inrelated to expansion plans outside of Connecticut, while compensation expense (including stock-based compensation). This increase reflectsdecreased approximately $40,000, primarily due to the increase in base salary paid toresignation of Jeffrey Villano and Donna Genovese, our co-chief executive officers, which was effective asofficer and director of July 1, 2018, as well as compensation to our controller, who was hired in August 2018, and our in-house legal counsel, who was hiredmarketing, respectively, in November 2018. In addition, in April 2019, we hired a maintenance crew to maintain our real estate assets. Finally,and general and administrative expenses increased $107,000.decreased approximately $25,000 due to cost controls in place during the quarter. In addition, we recorded an impairment loss of $250,000 during the March 2020 quarter on our real estate owned.

Comprehensive loss

Net Income

Net income for the sixthree months ended June 30, 2019March 31, 2020 was approximately $3.2$2.2 million, or $0.19$0.10 per share. In comparison,share, compared to $2.1 million, or $0.13 per share for the three months ended March 31, 2019. The decrease in net income per share was due to the increase in the weighted average number of shares outstanding at quarter end – 22,117,301 shares for the sixthree months ended June 30, 2018 was $4.2 million, or $0.27 per share.March 31, 2020 compared to $15,579,126 for the three months ended March 31, 2019.

Liquidity and Capital Resources

At June 30, 2019, we hadMarch 31, 2020, cash and short-term marketable securities totaled approximately $3.1$17.9 million in cash, none of which is restricted, compared to cash of approximately $158,900 (including restricted cash)$34.8 million at December 31, 2018.2019. This decrease was offset by a corresponding increase in mortgages receivable of $17.4 million. Overall, total assets decreased by approximately $29,000 compared to year end and total liabilities increased approximately $576,000 primarily as a result of increases in advances from borrowers of $385,000 and deferred revenue of approximately $75,000. Shareholders’ equity decreased by approximately $605,000 due to costs associated with our recently filed S-3, approximately $58,000, an increase in our accumulated comprehensive loss of approximately $135,000 and the difference between our net income of approximately $2.2 million and the dividends paid of approximately $2.7 million.

Net cash provided by operating activities for the sixthree months ended June 30, 2019March 31, 2020 was approximately $3.7$1.7 million compared to approximately $2.9$1.2 million for the same 2018 period, an increase of approximately $800,000 or 27.6%.2019 period. For the 20192020 period the total adjustment tonet cash from operations consisted primarily of net income was approximately positive $530,000 reflecting (i) a $440,000 adjustment for non-cash costs associated with the termination of the Webster Facility$2.2 million, an impairment loss of $250,000, depreciation and (ii) a $780,000 decreaseamortization of deferred financing cost of $133,000, decreases in dueother receivables of $25,000 and deposits of $37,000 and increases in deferred revenue of $75,000 and advances from borrowers of $385,000 offset by (iii) a $450,000 increase in interest and fees payable, (ii) a $177,000 increase in depositsthe realized gain on property and (iii) a $177,000 decrease in due to note purchaser. In comparison for 2018 period, the total adjustment to net income was negative $1.25 million, which reflects (i) a $725,000 decrease in the amount due to the note purchaser, (ii) a $280,000 decrease in accrued expenses, (iii) a $105,000 decrease in due from borrowers and (iv) a $570,000 increaseshort-term securities of $446,000, increases in interest and fees receivable offset by (v)of $200,000 and due from borrowers of $778,000. For the 2019 period net cash from operating activities consisted primarily of net income of $2.1 million, depreciation and amortization of deferred financing cost of $55,000 a $181,000 decrease in other receivables of $25,000 and (vi) a $111,000 decreaseincreases in escrowaccrued interest of $20,000 and advances from borrowers of $69,000, offset by increases in interest and fees receivable of $649,000, due from borrowers of $92,000, prepaid expenses of $71,000 and deposits of $38,000 and (vii) a $107,000 increasedecreases in accounts payable and accrued expenses of $188,000 and deferred revenue.revenue of $31,000.

Net cash used for investing activities for the sixthree months ended June 30, 2019March 31, 2020 was approximately $7.7$16.2 million compared to approximately $10.1$4.7 million for same 2019 period. For the comparable 2018 period. This decrease is2020 period, net cash used for investing activities consisted primarily due to (i) a $1.7 million decrease inof principal disbursements for mortgages receivable of approximately $28.7 million, purchase of investments and (ii) a $2.1marketable securities of approximately $17.4 million increase in principal collections on mortgage receivable,and acquisitions and improvements of real estate owned of approximately $377,000 offset by (iii) a $1.2mortgage loan pay-offs of approximately $11.8 million, decrease in proceeds from the sale of investments and marketable securities of $17.4 million and proceeds from sale of real estate owned of approximately $1.1 million. For the 2019 period, net cash used for investing activities consisted primarily of principal disbursements for mortgages receivable of approximately $12.8 million, acquisitions and improvements of real estate owned of approximately $363,000 and purchases of property and equipment of $142,000, offset by mortgage receivable.loan pay-offs of approximately $8.5 million and proceeds from sale of real estate owned of approximately $125,000.

Net cash used by financing activities for the three months ended March 31, 2020 was approximately $2.7 million compared to approximately $4.5 million of cash provided by financing activities for the six months ended June 30,comparable 2019 was approximately $6.9 million compared to approximately $8.5 millionperiod. Net cash used for financing activities for the same 2018 period.2020 period consists of dividends paid of approximately $2.7 million, financing cost incurred of approximately $58,000 and principal payments on our notes and mortgage payable of approximately $9,000. Net cash provided by financing activities for the 2019 period consists primarily of (i) approximately $42.7 million of proceeds from our Creditthe Webster Facility (ii)net of repayments of approximately $15.5$3.2 million, the proceeds of netthe New Bankwell Bank Mortgage Loan (described below) of $795,000, a bank overdraft of $118,000, proceeds from the sale of common shares, (iii)a note of approximately $21.73$1.0 million of net proceeds from the sale of Notes, (iv)and approximately $1.0$2.2 million of proceeds from the saleissuance of mortgage notes and (v) approximately $800,000 of gross proceeds from the new Bankwell mortgage loan,our common stock offset by (vi) repaymentsdividends of approximately $69.9$2.6 million and principal repayments on our credit facilities, (vii) approximately $4.7 million of dividends paid and (viii) approximately $291,000 repayment of the firstOld Bankwell mortgage. For the 2018 period, net cash from financing activities consists primarilyMortgage Loan (as defined below) of approximately $45.7 million of proceeds from our credit facilities offset by (i) repayments of approximately $33.4 million on our credit facilities, (ii) approximately $3.2 million of dividends paid and (iii) approximately $585,000 of financing costs (most of which related to the Webster Facility.)$291,000.

2018 Financing Transactions

Effective May 11, 2018, we entered into a Credit and Security Agreement with Webster Business Credit Corporation (“WBCC”), Bankwell Bank and Berkshire Bank (collectively, the “Lenders”) regarding a new $35 million revolving credit facility (the “Webster Facility”) to replace our existing $25 million credit facility with Bankwell (the “Bankwell Credit Line”.) The Webster Facility was secured by a first priority lien on all our assets. Interest on the outstanding balance accrued at a rate equal to the 30-day LIBOR rate plus 4.00% per annum. All amounts outstanding under the Webster Facility, including principal, accrued interest and other fees and charges, were to be due and payable May 11, 2022. Pursuant to the termsOn April 1, 2019, effective as of the Webster Facility, the maximum amount we could borrow was equal to 75% of the aggregate principal amount of our “Eligible Mortgage Loans,” as defined. The Credit and Security Agreement between with the Lenders also contained provisions regarding defaults and events of default, representations and warranties and affirmative, negative and financial covenants that are typical of transactions of this sort. At closing, we made an initial drawn down on the Webster Facility of $20.2 million, of which $18.6 million was used to repay the balance due to Bankwell, $1.4 million was used for working capital and the balance was used to pay transaction costs and other fees and expenses relating to obtaining and closing the Webster Facility. No fee was paid with respect to the termination of the Bankwell credit line. At the time of the closing of the Webster Facility, the interest rate on the Bankwell credit line was 6.79% and the interest rate on the Webster Facility was 6.09%.

At December 31, 2018, we were not in compliance with the “tangible net worth” covenant required pursuant to the Credit and Security Agreement, and on March 29, 2019, the Lenders waived compliance with that covenant.

On June 25, 2019, the entire outstanding balance on the Webster Facility, including principal, accrued but unpaid interest and other fees, in the aggregate amount of $19.8 million was paid in full and the Webster Facility was terminated. In connection with the termination of the Webster Facility, we incurred non-recurring charges of $779,641, of which $439,446 constituted the write-off of non-cash deferred financing costs.

2019 Financing Transactions

In the first six months of 2019, we consummated the following financing transactions:

Refinancing of Bankwell Mortgage

We refinanced the $310,000 mortgage loan obtained from Bankwell Bank in February 2017 (the “Old Bankwell Mortgage Loan”) with a new 10-year mortgage loan from Bankwell Bank in the principal amount of $795,000 bearing interest at the rate of 5.06% per annum and maturing on March 31, 2029 (the “New Bankwell Mortgage Loan”). Monthly payments ofBeginning on May 1, 2019, principal and interest and principal on the new loan, $4,710.00,New Bankwell Mortgage Loan are payable, in arrears, starting May 1, 2019,in monthly installments of $4,710, calculated based on a 25-year amortization rate. Interest on the Old Bankwell Mortgage Loan accrued at the rate of 4.52% per annum and the monthly installment payments were $1,975.00.$1,975. The entire outstanding principal balance of the New Bankwell Mortgage Loan and all accrued and unpaid interest thereon is due and payable on March 31, 2029. The New Bankwell Mortgage Loan, among other things, is secured by a first mortgage lien on the real property owned by us, which currently serves as our principal place of business, located at 698 Main Street, Branford Connecticut. In connection with the New Bankwell Mortgage Loan, John L. Villano and Jeffrey C. Villano, our Co-Chief Executive Officers, jointly and severally, during the term of the loan, indemnified Bankwell Bank from and against any and all actual claims, demands, liabilities, losses, damages, judgments, penalties, reasonable out-of-pocket costs and expenses arising out of or attributable to the New Bankwell Mortgage Loan.

$16 Million At-the-Market Offering

From mid-March through early May we sold approximately 3,467,000 common shares in an “at-the-market offering” as defined in Rule 415 under the Securities Act of 1933. The gross proceeds from the sale of such shares were $16 million and the net proceeds to us, after payment of commissions to the sales agent, were approximately $15.5 million.

$23,000,000 Note Offering

In June 2019, we consummated an offering of $23,000,000 aggregate principal amount (not including $663,000 aggregate principal amount of Notes sold on July 1, 2019 upon exercise of the underwriters’ over-allotment option) of our 7.125% unsecured, unsubordinated notes due June 30, 2024 (the “Notes”). The Notes were issued in denomination of $25.00 each and are listed on the NYSE American and trade under the symbol “SCCB.” Interest accrues on the Notes commencing on June 25, 2019. Accrued interest is payable quarterly, in cash, in arrears, on each March 30, June 30, September 30 and December 30 that the Notes are outstanding, commencing September 30, 2019. So long as the Notes are outstanding, we are prohibited from making distributions in excess of 90% of our taxable income, incurring any additional indebtedness or purchasing any shares of our capital stock unless we have 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. We may redeem the Notes, in whole or in part, without premium or penalty, at any time after June 25, 2021 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 the Notes redeemed plus the accrued but unpaid interest thereon up to, but not including, the date of redemption. The Notes are reflected on our June 30, 2019 balance sheet net of deferred financing costs in the amount of approximately $1.3 million.

We project anticipated cash requirements for our operating needs as well as cash flows generated from operating activities available to meet these needs. Our short-term cash requirements primarily include funding of loans and payments for usual and customary operating and administrative expenses, such as interest payments on notes payable, employee compensation, rent, sales, marketing expenses and dividends. Based on this analysis, we believe that our current cash balances, and our anticipated cash flows from operations will be sufficient to fund the operations for the next 12 months.

Our long-term cash needs will include principal payments on outstanding indebtedness and funding of new mortgage loans. Funding for long-term cash needs will come from our cash on hand and operating cash flows, and unused capacity of our revolving credit facility or any replacement thereof.flows.

From and after the effective date of our REIT election, we intend to pay regular quarterly distributions to holders of our common shares in an amount not less than 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gains).

Subsequent Events

On April 27, 2020, the Company sold a note in default with a principal balance of $140,000 for $170,000 realizing approximately $18,000 in interest income.

On April 29, 2020, the Company received $247,845 gross loan proceeds from the Paycheck Protection Program.

Subsequent Events

On July 1, 2019, we sold Notes having an aggregate principal amount of $663,000, pursuant to the exercise of the over-allotment option granted to the underwriters of the offering. The net proceeds to us, after payment of underwriting discounts and commissions, but before payment of other transaction-related expenses, was $636,480.

On July 3, 2019, we purchased real estate at a tax sale for $125,000.

On July 11, 2019, we declared a dividend of $0.12 per common share, which was paid on July 29, 2019 to shareholders of record on July 22, 2019. The total amount of the dividend payment was $2,348,454. Our ability to pay dividends, the amount of the dividend and the frequency at which we will pay dividends is subject to numerous factors, including our operating results and the number of shares of our capital stock outstanding. We cannot assure that will be able to continue to pay dividends at our current rate.

On July 16, 2019, we received gross proceeds of $82,035 from the exercise of 16,407 warrants having an exercise price of $5.00 per share.

On July 1, 2019, we filed a Prospectus Supplement covering the sale of up to $30 million of our common shares in negotiated transactions or other transactions that are deemed to be “at-the-market offerings” under applicable SEC rules. Through August 12, 2019, we sold 648,454 common shares in the ATM Offering and realized gross proceeds of $3,389,905.

On July 24, 2019, we sold 2,000,000 common shares at $5.00 per share pursuant to an underwritten public offering. On August 13, 2019, we sold an additional 300,000 common shares, at a price of $5.00 per share, upon the exercise of the over-allotment option granted to the underwriters of the offering. The total gross proceeds to us from the offering were $11.5 million and the aggregate net proceeds, after payment of underwriting discounts and commissions, but before payment of other transaction-related expenses, was approximately $10.9 million.

On July 26, 2019, we repaid an amount owed to a shareholder in connection with the repurchase of certain mortgage loans. The total payment was $2,231,777, including principal of $2,217,000 and accrued interest of $14,777.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of our requirements for capital resources.

Contractual Obligations

As of June 30, 2019,March 31, 2020, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans as well as contractual obligations consisting of operating leases for equipment and software licenses.