What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-16 compared with 2021-05-14 · 151 added, 115 removed, 166 unchanged (62% of the section changed)

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As a REIT, we may also be subject to federal excise taxes and state taxes.

Review of First Quarter and Outlook for Balance of Year

Compared to the first quarter of 2020, revenue increased 32.5%, net income decreased 2.5%, and earnings per share remained unchanged.

The revenue increase was directly related to the growth in our lending activities.

The decrease in net income was generally due to a 70.2% increase in total operating costs and expenses.

Interest and amortization of deferred financing costs accounted for 90% of the increase in total operating costs and expenses, which, in turn reflects a 96.9% increase in notes payable ($114.5 million at March 31, 2021 and $58.2 million at March 31, 2020.

However, cash and cash equivalents and investment securities at March 31, 2021 were $54.7 million compared to $17.9 million at March 31, 2020.

In addition, we had $30.5 million in loan repayments (compared to $55 million for all of 2020) versus $31.7 million of new funding.

Both the loan repayments and new funding amounts were the highest for any quarter since our IPO.

As a result, our mortgage loan portfolio only increased $1 million from December 31, 2020.

In other words, the velocity of loan repayments and reinvesting those proceeds did not allow us to put our working capital to work efficiently.

Our biggest challenge for the remainder of the year is to put our working capital to work and reduce our interest expense.

Our primary business objective remains constant:

to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term principally through dividends.

Market Opportunity

Notwithstanding the spread of the novel corona virus known as COVID-19, which had a severe adverse impact on certain segments of the U.S.

and global economy, its impact on our business was negligible.

Even now, as concerns mount over the impact that the Delta variant of the virus will have on the global economic recovery, we believe that there will continue to be a significant market opportunity for a well-capitalized “hard money” lender to originate attractively priced loans to small-scale real estate developers with strong equity positions ( i.e., good collateral), particularly in Connecticut where, traditionally, real estate values in many neighborhoods have been stable and substandard properties are improved, rehabilitated and renovated.

We further believe that there are many opportunities for us to expand our business into new markets.

We also believe developers will prefer to borrow from us rather than other lending sources because of our flexibility in structuring loans to suit their needs, our lending criteria, which places greater emphasis on the value of the collateral rather than the property cash flow or credit of the borrower, and our ability to close quickly.

Review of First Half of 2021 and Outlook for Balance of Year

Compared to the first half of 2020, revenue increased 44.2%, net income increased 4.6%, and earnings per share was unchanged at $0.10 per share.

The revenue increase was directly related to an increase in interest income of 49.4%, which reflects the growth in our lending activities.

The increase in revenue was offset by an 87.4% increase in total operating costs and expenses.

The increase in operating expenses is mainly attributable to a 116.1% increase in interest and amortization of deferred financing costs related to the increase in notes payable used to finance working capital ($110.1 million at June 30, 2021 compared $55.7 million at June 30, 2020).

In addition, the increase in compensation, fees and taxes represented 18.7% of the total increase in operating costs, reflecting the addition of a Chief Operating Officer in July, 2020 and a Chief Investment Officer in April, 2021, both of whom are part of our long-term growth strategy.

The increase in net income was generally related to the growth in our loan portfolio and significant origination fee income.

Mortgages receivable increased by 55.1% or $61.4 million compared to June 30,2020, while cash and cash equivalents and investment securities increased 417.9% or $86.1 million.

The increase in cash and cash equivalents and investment securities was due primarily to $22.9 million of net proceeds from the sale of common shares, and $40.6 million of net proceeds from the sale of our Series A Preferred Stock.

Our primary business objective remains to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term principally through dividends.

We intend to achieve this objective by accelerating profitable growth and driving operational excellence.

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To drive operational excellence, we have embarked on a broad change management initiative to review, assess, and upgrade – or transform if necessary – our existing operational processes, from workflows and employee roles/responsibilities to decision trees and data collection forms.

We believe that our ability to react quickly to the needs of borrowers, our flexibility in terms of structuring loans to meet the needs of borrowers, our intimate knowledge of the Connecticut real estate market, which is our largest market, our expertise in ‘‘hard money’’ lending and our focus on newly originated first mortgage loans, should enable us to achieve our primary objective.

We believe that our ability to react quickly to the needs of borrowers, our flexibility in terms of structuring loans to meet the needs of borrowers, our knowledge of the primary real estate markets we lend in, our expertise in ‘‘hard money’’ lending and our focus on newly originated first mortgage loans, should enable us to achieve our primary objective.

Nevertheless, we remain flexible to take advantage of other real estate opportunities that may arise from time to time, whether they relate to the mortgage market or to direct or indirect investments in real estate.

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In terms of our outlook for 2021, the biggest challenge remains the unknown impact of COVID-19 and future actions that may be taken to contain the spread of COVID-19.

Keeping our workforce healthy and safe is our number one priority and we are following the updated guidelines and recommendations issued by the State of Connecticut on March 19, 2021.

Keeping our workforce healthy and safe is our number one priority and we are following the updated guidelines and recommendations issued by the State of Connecticut and Centers for Disease Control.

We continue to encourage employees to stay home when sick and encourage working from home when possible.

In the event of a positive COVID-19 case, Sachem employees inform management and follow state testing and contact tracing protocols.

At Sachem, we have not been immune to the virus striking our employees and their family members.

Fortunately, none of these occurrences has been life-threatening in any way.

However, to mitigate the risk of office closure and to ensure business continuity, our employees are equipped so they can seamlessly work remotely, away from the Sachem corporate office.

In the event of a positive COVID-19 test result, Sachem employees inform management and follow state testing and contact tracing protocols.

We have not been immune to the virus striking our employees and their family members.

Fortunately, none of these occurrences has been life-threatening.

However, to mitigate the risk of office closure and to ensure business continuity, our employees are equipped so they can seamlessly work remotely.

This remote work set-up has proven to be effective since, at times during the pandemic, employees had to self-isolate based on their own health condition or that of an immediate family member.

While loan processing and funding may have been marginally delayed, there was no impact to the service levels we provided our borrowers.

In the event we are forced to close our physical office, there would be some impact.

While loan processing and funding may have been marginally delayed, there was no material adverse impact to the service levels we provided our borrowers.

In the event we are forced to close our physical office, we think it likely that there would be some adverse impact.

For example, the underwriting process would continue to function but would take longer to complete without immediate access to background and credit profiles.

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Borrower expectations.

The new competitive landscape is shifting the negotiating leverage in favor of borrowers.

As borrowers have more choices, they are demanding better terms.

For the quarter ended March 31, 2021, the yield on our portfolio was 11.73% compared to 12.16% for the quarter ended March 31, 2020.

The new competitive landscape is shifting the negotiating leverage in favor of borrowers.As borrowers have more choices, they are demanding better terms.

As of June 30, 2021, the yield on our portfolio was 11.72% compared to 12.38% for the same period in 2020.

We expect further rate compression in 2021.

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We remain aware of property value market cycles and utilize a dashboard of indicators to track property value trends.

If we see a decline in property values, our response to this development would be 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.

We intend to be well-capitalized and well-positioned to be opportunistic through negative cycles as we did in the first quarter of 2020.

Our response to this development would be to adhere to our strict loan-to-value ratio and other underwriting guidelines and aggressively enforce our rights when loans go into default.

By judiciously relying on our dashboard of leading indicators and continuing to make decisions in a sound and proper manner, we see no reason to expect any negative outcome regarding our business operations and growth.

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Increased operating expenses.

We expect operating expenses to be higher in 2021 than they were in 2020.

Specifically, we expect an increase in interest expense due to a higher level of indebtedness.

In 2020, we sold approximately $56.1 million of unsecured unsubordinated five-year notes having an interest rate of 7.75%.

The full impact of the interest will be felt for the first time in 2021.

In addition, we expect our compensation expense to increase as we hired new personnel and increased salaries on account of our growth.

Our operating expenses for 2021 are significantly higher than they were in 2020 due to our higher debt load.

In addition, our dividend payments will be higher in 2021 than in 2020 due to an increase in the number of common shares outstanding as well as the issuance of of our Series A Preferred Stock, which carries a 7.75% annual dividend rate.

Finally, our compensation expense has increased as we hired new personnel and increased salaries of existing employees to administer a larger loan portfolio and more complex loan transactions.

Unfunded commitments.

Most of our loans are funded in full at closing.

However, where all or a portion of the loan proceeds are to be used to fund the costs of renovating or constructing improvements on the property, only a portion of the loan may be funded at closing.

At June 30, 2021, our mortgage loan portfolio included 130 loans with future funding obligations, in the aggregate principal amount of $31,845,533.

Advances under these loans are funded against requests supported by all required documentation (including lien waivers) as and when needed to pay contractors and other costs of construction.

In order to deal with these obligations, we are compelled to maintain higher cash balances, which could adversely impact our financial performance.

Despite the challenges we faced in 2020, the changing dynamics of the real estate finance marketplace and the impact of COVID-19, we continue to believe in the viability of our business model.

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Specifically, we believe that the following factors will, in fact, help us deal with the uncertainties expected in 2021:

As of March 31, 2021, we had cash and cash equivalents and investment securities balance of approximately $54.7 million, which we will use to increase our mortgage loan portfolio.

From January through March 31, 2021, we funded $31.7 million of mortgage loans including loan modifications and construction draws.

Our largest expense item is interest and amortization of deferred financing costs, which has increased significantly as we have increased our indebtedness.

At March 31, 2021, our capital structure was 63.0% debt and 37.0% equity.

The weighted average interest rate on our $114.5 million of outstanding unsecured unsubordinated five-year notes is 7.36% per annum.

● As of June 30, 2021, we had cash and cash equivalents and investment securities of approximately $106.7 million, which we plan to use in the second half of 2021 to increase our mortgage loan portfolio.

From January through June 30, 2021, we funded $75.2 million of mortgage loans including loan modifications and construction draws.

● During the second quarter of 2021, we significantly reduced our leverage, thereby mitigating the risks should economic conditions deteriorate.

At June 30, 2021, our capital structure was 50.6% debt and 49.4% equity compared to 63% debt and 37% equity at March 31, 2021.

The change was accomplished by selling equity – common shares and preferred shares – rather than by reducing our indebtedness.

Our total indebtedness at June 30, 2021 was approximately $148.8 million, including deferred financing costs.

Of this amount, approximately $34.3 million is the outstanding balance on our credit facility with Wells Fargo, which is currently accruing interest at the relatively modest rate of 1.5%.

remaining indebtedness, approximately $114.5 million, is the aggregate outstanding principal balance on our unsubordinated unsecured notes, which have a weighted average interest rate of 7.36% per annum.

On the other hand, the notes provide us with operational flexibility.

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Finally, the notes are unsecured.

However, we may obtain a senior credit facility should such a facility be available at terms that are advantageous to our strategy.

● On July 21, 2021, we consummated a $200 million master repurchase financing facility (“Facility”) with Churchill MRA Funding I LLC (“Churchill”), a subsidiary of Churchill Real Estate, a vertically integrated real estate finance company based in New York, New York.

Under the terms of the Facility, we have the right, but not the obligation, to sell mortgage loans to Churchill and Churchill has the right, but not the obligation, to purchase those loans.

The cost of capital under the facility is equal to the sum of (a) the greater of (i) 0.25% and (ii) the 30-dayLIBOR plus (b) 3%-4%, depending on the aggregate principal amount of the mortgage loans held by Churchill at that time.

The Facility matches the term of our loans and gives us the ability to raise capital as needed at a relatively low rate without securitizing our entire loan portfolio.

● We have made the necessary adjustments to our operations to replace our former co-chief executive officer by hiring new employees and re-assigning existing employees to new tasks.

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● We have adjusted and refined our business strategy to address changes in the marketplace and our growth to-date.

Specifically, we continue to strengthen our geographic footprint beyond Connecticut with particular emphasis on Florida and Texas.

Specifically, we continue to strengthen our geographic footprint beyond Connecticut and the rest of New England with particular emphasis on Florida and Texas.

In addition to the aforementioned states, our current mortgage loan portfolio includes loans secured by properties in New York, Arizona, South Carolina and California.

We continue to look for opportunities in new markets that meet our underwriting and loan criteria.

● We are funding larger loans than we have in the past that are secured by what we believe are higher-quality properties that are being developed by borrowers that we deem to be more stable and successful.

In 2020, we funded loans secured by properties in Arizona, Texas, South Carolina, Florida, Colorado and California.

We continue to look for opportunities in new markets that meet our basic underwriting and loan criteria.

In addition, we believe the migration to these types of loans will offset any rate compression and help us maintain a low foreclosure rate.

● To leverage our expertise in real estate finance and our capital resources, on the one hand, and to capitalize on lending opportunities in specific markets, on the other, we plan to partner and invest with local “hard money” real estate lenders creating satellite offices under the “Sachem” influence.

An advantage of this model is that these local lenders subscribe to a “Sachem” model using their own personal assets and those of other investor partners to fund loan opportunities and operations which increases their capital commitment to the opportunity.

Under these arrangements, we would provide loan funding capital as well as our underwriting and servicing expertise and our local partners would provide us with “boots on the ground” lending opportunities.

We have had preliminary discussion with various local lenders in Austin, Texas, Orlando, Florida and Greenwich, Connecticut all of whom seem to be receptive to the notion.

However, we have not yet entered into any definitive agreements and we cannot assure you that we will be able to consummate any such partnerships or joint ventures on terms that will be acceptable to all parties.

● On March 24, 2021, we loaned $25,000 to our wholly-owned subsidiaiary, Sachem Sponsor LLC.

Sachem Sponsor used those funds to purchase 1,437,500 shares of Class B common stock of Sachem Acquisition Corp., a newly organized blank check company formed under the laws of Maryland in February 2021 for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses.

Sachem Acquisition Corp.’s registration statement on Form S-1 is currently under SEC review.

Operational and Financial Overview

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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.

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.

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Our revenue consists primarily of interest earned on our loan portfolio.

As our capital structure has tilted towards more debt over the past 21 months, debt service has become a significant factor in determining our net income.

Our capital structure at March 31, 2021 was approximately 63.0% debt vs.

37.0% equity.

As of March 31, 2021, our capital structure was weighted towards more debt versus equity and debt service has become a significant factor in determining our net income.

As of June 30, 2021 our capital structure shifted and is more balanced -- approximately 50.6% debt and 49.4% equity.

Most of our debt, approximately $114.5 million, is unsecured unsubordinated 5-year notes.

The weighted average interest rate on these notes is 7.36%.

In addition, we had a balance of approximately $28.2 million at March 31, 2021 under our margin loan account with Wells Fargo.

In addition, we had a balance of approximately $34.3 million at June 30, 2021 under our margin loan account with Wells Fargo.

The outstanding balance on this loan bears interest at a rate equal to 1.75% below the prime rate.

The interest rate on this loan as of March 31, 2021 was 1.5%.

In addition, our net income for three months ended March 31, 2021 has been adversely impacted by a reduction in the yield on our mortgage loan portfolio as well as $30.5 million of loan payoffs during the period compared to $55 million for all of 2020.

In the first quarter of 2021, we realized faster payoff of investment “fix and flip” loans with these projects coming to fruition quicker due to a stronger real estate market and, we believe, our sound underwriting and analysis of each project.

According to Realtor.com, nationwide for April 2021, year-over-year, “days on market,” a common real estate market indicator, fell 31%, active listings fell 53% and median list prices increased 17%.

For the Connecticut market over the same period, days on market decreased between 43.1% - 51.5% and median list prices increased 1.7% - 18.3%, depending on the county.

The interest rate on this loan as of June 30, 2021 was 1.5%.

In addition, our net income for the three and six months ended June 30, 2021 has been adversely impacted by a reduction in the yield on our mortgage loan portfolio as well as $58.0 million of loan payoffs during the six month period compared to $55 million for all of 2020.

In the first half of 2021, we realized faster payoff of investment “fix and flip” loans with these projects coming to fruition quicker due to a stronger real estate market and, we believe, our sound underwriting and analysis of each project.

Our strategy continues to be to adhere to our current underwriting guidelines, which we believe will allow us to continue to grow our loan portfolio while protecting and preserving capital in a manner that provides attracted risk-adjusted returns to our shareholders.

For the three months ended March 31, 2021 and 2020, the yield on our mortgage loan portfolio was 11.73% and 12.16%, respectively.

For the six months ended June 30, 2021 and 2020, the yield on our mortgage loan portfolio was 11.72% and 12.38%, respectively.

For this purpose, yield only takes into account the stated interest rate on the mortgage note adjusted to the default rate, if applicable.

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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, 2021, approximately 82.7% of the mortgage loans in our portfolio had a term of one year or less.

At June 30, 2021, approximately 88.5% 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.

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As such, we may not be aware that a default occurred.

At March 31, 2021, five of our mortgage loans were the subject of enforcement or collection proceedings.

At June 30, 2021, seven of our mortgage loans were the subject of enforcement or collection proceedings.

The aggregate amount due on these loans, including principal, unpaid accrued interest and borrower charges, was approximately $895,000, representing approximately 0.5% of our aggregate mortgage loan portfolio.

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In addition, rapidly rising interest rates could have an unsettling effect on real estate values, which could compromise some of our collateral.

In June 2021 and July 2021, we raised aggregate net proceeds of approximately $45.4 million (after deducting underwriting discounts and commissions and offering expenses) from the sale of 1,903,000 shares of our Series A Preferred Stock (defined below) in the Series A Offering (defined below) as described in Liquidity and Capital Resources below and Notes 11 and 15 to the accompanying financial statements.

The Series A Preferred Stock is listed on the NYSE American and began trading under the symbol “SACHPRA” on July 6, 2021.

We do not have any formal policy limiting the amount of indebtedness we may incur.

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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, 2021, debt proceeds represented approximately 63.0% of our total capital.

To grow the business and satisfy the requirement to pay out 90% of net profits, during the last two years we increased our level of debt from 41.7% to 63.0% of our total capital.

At June 30, 2021, debt represented approximately 50.6% of our total capital.

To grow the business and satisfy the requirement to pay out 90% of net profits, during the last two years we increased our level of debt from 41.7% to 63.0% of our total capital before reducing our debt level to 50.6% this quarter.

We intend to maintain a modest amount of leverage for the sole purpose of financing our portfolio and not for speculating on changes in interest rates.

Our total outstanding indebtedness at March 31, 2021 was approximately $142.7 million, which included a credit line loan of approximately $28.2 million and three series of unsecured, unsubordinated five-year notes having an aggregate original principal amount of approximately $114.5 million (collectively, the “Notes”).

Our total outstanding indebtedness at June 30, 2021 was approximately $148.8 million, which included a credit line loan of approximately $34.3 million and three series of unsecured, unsubordinated five-year notes having an aggregate original principal amount of approximately $114.5 million (collectively, the “Notes”), including deferred financing costs.

The Notes include notes having an aggregate principal amount of approximately $23.7 million bearing interest at the rate of 7.125% per annum and have a maturity date of June 30, 2024 (the “June 2024 Notes”);

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Interest on all three series of Notes is payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year the Notes are outstanding.

During the quarter we paid off a $795,000 mortgage loan that was secured by our office building.

Each series of Notes was issued pursuant to the Indenture, dated June 21, 2019, and a supplement thereto, which provides for the form and terms, including default provisions and cures, applicable to each series.

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The June 2024 Notes trade under the symbol “SCCB”, the December 2024 Notes trade under the symbol “SACC” and the 2025 Notes trade under the symbol “SCCC”.

We have a margin loan account with Wells Fargo, which is secured by our portfolio of short-term securities and has a balance of approximately $28.2 million at March 31, 2021.

We have a margin loan account with Wells Fargo, which is secured by our portfolio of short-term securities and has a balance of approximately $34.3 million at June 30, 2021.

The outstanding balance on this loan bears interest at a rate equal to 1.75% below the prime rate.

The interest rate at March 31, 2021 is 1.5%.

The interest rate at June 30, 2021 is 1.5%.

On July 21, 2021, we consummated a $200 million master repurchase financing facility (“Facility”) with Churchill MRA Funding I LLC (“Churchill”), a subsidiary of Churchill Real Estate, a vertically integrated real estate finance company based in New

York, New York.

Under the terms of the Facility, we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans.

The cost of capital under the Facility is equal to the sum of (a) the greater of (i) 0.25% and (ii) the 30-dayLIBOR plus (b) 3%-4%, depending on the aggregate principal amount of the mortgage loans held by Churchill at that time.

Our obligations under the Facility are secured by a lien on the mortgage loans sold to Churchill.

The Facility gives us the ability to raise capital as needed at a relatively low rate.

It also gives us the flexibility to seek other sources of funding.

REIT Qualification

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Results of Operations

Three months ended March 31, 2021 compared to three months ended March 31, 2020

Three months ended June 30, 2021 compared to three months ended June 30, 2020

Total revenue

Total revenue for the three months ended March 31, 2021 was approximately $5.7 million compared to approximately $4.3 million for the three months ended March 31, 2020, an increase of approximately $1.4 million, or 32.5%.

The increase in revenue is primarily attributable to an increase in our lending operations.

Total revenue for the three months ended June 30, 2021 was approximately $6.7 million compared to approximately $4.3 million for the three months ended June 30, 2020, an increase of approximately $2.4 million, or 56.0%.

The increase in revenue is primarily attributable to the growth in our lending operations.

For the 2021 period, interest income was approximately $4.7 million compared to approximately $3.3 million for the 2020 period, representing an increase of approximately $1.4 million or 43.4%.

Origination fees were basically unchanged with approximately $517,000 for the 2021 period compared to approximately $511,000 for the 2020 period.

Investment income and gains and losses on sale of investment securities were approximately $113,000 for the 2021 period compared to approximately $544,000 for the 2020 period, a decrease of approximately $431,000 or 79%.

Origination fees increased to approximately $832,000 for the 2021 period compared to approximately $647,000 for the 2020 period.

Investment income for the 2021 period was $180,000 compared to approximately $33,000 for the 2020 period.

This increase reflects reflects both a larger investment portfolio and more favorable market conditions during 2021.

In the 2021 period we had $85,000 of gains from the sale of investment securities compared to a loss of approximately $8,900 for the 2020 period.

Other income was approximately $543,000 for the 2021 period compared to approximately $283,000 for the 2020 period, an increase of approximately $260,000, or 92.0%.

Finally, in the 2021 period we recognized gain on the extinguishment of debt of $257,845.

Operating costs and expenses

Total operating costs and expenses for three months ended March 31, 2021 were approximately $3.5 million compared to approximately $2.1 million for the three months ended March 31, 2020, an increase of approximately 70.2%.

The increase in operating costs and expenses is primarily attributable to the increase in our unsecured bond debt while growing our lending operations and for the reasons discussed hereinabove.

Total operating costs and expenses for three months ended June 30, 2021 were approximately $4.2 million compared to approximately $2.0 million for the three months ended June 30, 2020, an increase of approximately $2.2 million or 105.1%.

The increase in operating costs and expenses is primarily attributable to the increase in interest expense and amortization of deferred financing costs, which, in turn, is a direct result of an increase in our overall indebtedness, particularly our unsubordinated unsecured notes.

At June 30, 2021, total indebtedness was $148.8 million and the aggregate outstanding principal amount of our notes was $114.5 million (including deferred financing costs).

In comparison, at June 30, 2020, the corresponding amounts were $59.0 million and $58.2 million, respectively.

In the 2021 period, interest and amortization of deferred financing costs was approximately $2.5 million compared to approximately $1.2 million in the same 2020 period, an increase of $1.3 million, or 118.2%.

The balance of the increase in operating expenses was attributable to (i) professional fees, which increased approximately $100,000, (ii) compensation, fees and taxes which increased approximately $248,000, and (iii) general and administrative expenses which increased approximately $19,000, offset in part by a reduction in impairment loss of $225,000.

In November 2019 one of our co-chief executive officers and our director of marketing resigned, which reduced our compensation expense in the first quarter of 2020.

In the second half of 2020, we hired a chief operating officer and junior executives in accounting and administration, which resulted in increased compensation in the first quarter of 2021.

Net income for the three months ended March 31, 2021 was approximately $2.2 million, or $0.10 per share, compared to $2.2 million, or $0.10 per share for the three months ended March 31, 2020.

The balance of the increase in operating expenses was attributable to (i) professional fees, which increased approximately $141,000.

or 128.1%, (ii) compensation, fees and taxes which increased approximately $424,000, or 109.3%, (iii) general and administrative expenses which increased approximately $121,000, or 94.8%, and an increase in impairment loss of $49,000, or 20%.

In November 2019 one of our co-chief executive officers and our director of marketing resigned, which reduced our compensation expense in the three months ended June 30, 2020.

Since July of 2020, we hired a chief operating officer, chief investment officer, and junior executives in accounting and administration, which resulted in increased compensation for the three and six month periods ended June 30, 2021.

Comprehensive income

For the quarter ended June 30, 2021, we reported an unrealized loss on investment securities of approximately $104,000 reflecting the decrease in the market value of such securities since March 31, 2021.

For the quarter ended June 30, 2020, we reported an unrealized gain on investment securities of approximately $221,000 reflecting the increase in the market value of such securities since March 31, 2020.

Net income for the three months ended June 30, 2021 was approximately $2.5 million, or $0.10 per share, compared to $2.3 million, or $0.10 per share for the three months ended June 30, 2020.

Six months ended June 30, 2021 compared to six months ended June 30, 2020

Total revenue

Total revenue for the six months ended June 30, 2021 was approximately $12.4 million compared to approximately $8.6 million for the six months ended June 30, 2020, an increase of approximately $3.8 million, or 44.2%.

The increase in revenue is primarily attributable to the growth in our lending operations.

For the 2021 period, interest income was approximately $9.2 million compared to approximately $6.2 million for the 2020 period, representing an increase of approximately $3.0 million or 49.4%.

Origination fees increased to approximately $1.35 million for the 2021 period compared to approximately $1.2 million for the 2020

Investment income increased to approximately $423,000 for the 2021 period compared to approximately $131,000 for the 2020 period due to our larger investment portfolio and more favorable market conditions during 2021.

Net losses on the sale of investment securities was approximately $44,000 for the 2021 period compared to net gains of approximately $437,000 for the 2020 period.

Other income was approximately $1.0 million for the 2021 period compared to approximately $567,000 for the 2020 period, an increase of approximately $433,00, or 76.3%.

Operating costs and expenses

Total operating costs and expenses for six months ended June 30, 2021 were approximately $7.7 million compared to approximately $4.1 million for the six months ended June 30, 2020, an increase of approximately 87.4%.

The increase in operating costs and expenses is primarily attributable to the increase in our unsecured bond debt while growing our lending operations and for the reasons discussed herein.

In the 2021 period, interest and amortization of deferred financing costs was approximately $5.0 million compared to approximately $2.3 million in the same 2020 period, an increase of $2.7 million, or 116.0%.

The balance of the increase in operating expenses was attributable to (i) professional fees, which increased approximately $241,000, or 99.2%, (ii) compensation, fees and taxes which increased approximately $672,000, or 91.7%, and (iii) general and administrative expenses which increased approximately $140,000, or 52.4%, offset in part by a reduction in impairment loss of $176,000, or 35.6%.

In November 2019 one of our co-chief executive officers and our director of marketing resigned, which reduced our compensation expense in the six months ended June 30, 2020.

Since July of 2020, we hired a chief operating officer, chief investment officer and junior executives in accounting and administration, which resulted in increased compensation for the six month periods ended June 30, 2021.

Comprehensive income

For the six months ended June 30, 2021, we reported an unrealized loss on investment securities of approximately $112,000 reflecting the decrease in the market value of such securities since December 31, 2020.

For the six months ended June 30, 2020, we reported an unrealized gain on investment securities of approximately $86,000 reflecting the increase in the market value of such securities since December 31, 2019.

Net income for the six months ended June 30, 2021 was approximately $4.7 million, or $0.20 per share, compared to $4.5 million, or $0.20 per share for the six months ended June 30, 2020.

Liquidity and Capital Resources

At March 31, 2021, cash and cash equivalents and investment securities totaled approximately $54.7 million compared to $56.7 million at December 31, 2020.

This decrease was reflected by a corresponding increase in mortgages receivable of $1.2 million.

Total assets at March 31, 2021 were approximately $228.4 million compared to approximately $226.7 million at December 31, 2020, an increase of approximately $1.8 million, or less than 1 %.

The increase was due primarily to the increase of our mortgage loan portfolio of approximately $1.2 million, an increase in investment in partnership of approximately $1.8 million, an increase in due from borrowers of approximately $499,000, an increase in other receivables of approximately $346,000, an increase in prepaid expenses and deposits of approximately $200,000 and an increase in interest and fees receivable of approximately $63,000, offset in part by a decrease in cash and cash equivalents and investment securities of approximately $2.1 million, a decrease in real estate owned of approximately $237,000 and a decrease in deferred financing costs of approximately $73,000.

Total liabilities at March 31, 2021 were approximately $143.8 million compared to approximately $145.8 million at December 31, 2020, a decrease of approximately $2.0 million, or approximately 1.3%.

This decrease is principally due to a decrease in dividends payable of $2.7 million and the mortgage payable of $768,000, offset by increases in advances from borrowers of $873,000, increases in accounts payable and accrued expenses of $164,000 and deferred revenue of approximately $85,000.

Total shareholders’ equity at March 31, 2021 was approximately $84.6 million compared to approximately $81.0 million at December 31, 2020, an increase of approximately $3.7 million.

This increase was due primarily to net proceeds of $1.5 million from the sale of stock and our net income of approximately $2.2 million.

Net cash provided by operating activities for the three months ended March 31, 2021 was approximately $2.8 million compared to approximately $1.7 million for same 2020 period.

For the 2021 period net cash provided by operating activities consisted primarily of net income of $2.2 million, amortization of deferred financing costs and original issue of $244,000, a loss on the sale of investment securities of $129,000, and increases in accounts payable and accrued expenses of $164,000, deferred revenue of $85,000 and advances from borrowers of $873,000, offset by an increase in interest and fees receivable of $63,000, other receivables of $346,000, due from borrowers of $499,000 and prepaid expenses of $102,000.

For the 2020 period net cash from operating activities consisted primarily of net income of $2.2 million, an impairment loss of $250,000, depreciation and amortization of deferred financing cost of $133,000, decreases in other 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 the realized gain on investment securities of $446,000, increases in interest and fees receivable of $200,000 and due from borrowers of $778,000.

Net cash used for investing activities for the three months ended March 31, 2021 was approximately $2.1 million compared to approximately $16.2 million for the comparable 2020 period.

For the 2021 period, net cash used for investing activities consisted primarily of principal disbursements for mortgages receivable of approximately $31.7 million, purchase of an interest in investment partnership of $1.8 million, purchase of investment securities of $22.8, acquisitions of and improvements to real estate owned of $160,000, purchase of property and equipment of $36,000 and costs in connections with investment activities of $98,000, offset by principal collections on mortgages receivable of $30.5 million and proceeds from the sale of investment securities of $23.6 million and proceeds from the sale of real estate owned of $371,000.

For the 2020 period, net cash used for investing activities consisted primarily of principal disbursements for mortgages receivable of approximately $28.7 million, purchase of investment securities of approximately $17.4 million and acquisitions and improvements of real estate owned of approximately $377,000, offset by mortgage loan pay-offs of approximately $11.8 million, proceeds from the sale of investments securities of $17.4 million and proceeds from sale of real estate owned of approximately $1.1 million.

Net cash used for financing activities for the three months ended March 31, 2021 was approximately $1.8 million compared to approximately $2.7 million of cash used for the comparable 2020 period.

Net cash used for financing activities for the 2021 period consists principally of dividends paid of $2.7 million and repayment of mortgage payable of $768,000, offset by proceeds from the sale of common shares of $1.5 million and proceeds from our line of credit of $105,000.

Net cash used for financing activities for the 2020 period consists principally of dividends paid of approximately $2.7 million and financing costs incurred of approximately $58,000.

At June 30, 2021, cash and cash equivalents and investment securities totaled approximately $106.7 million compared to $56.7 million at December 31, 2020.

This increase is attributable to $40.6 million of net proceeds from our Series A Preferred Stock offering as well as common stock issuances.

Total assets at June 30, 2021 were approximately $296.3 million compared to approximately $226.7 million at December 31, 2020, an increase of approximately $69.6 million, or 30.7%.

The increase was due primarily to increases in cash and cash equivalents and investment securities of $50.0 million, our mortgage loan portfolio of approximately $17.2 million, investment in partnership of approximately $1.8 million, and a net increase in property and equipment of $736,000, offset by a decrease in real estate owned of approximately $972,000.The increase in property and equipment is due to the purchase of an office building in Branford, Connecticut that will become our new corporate headquarters in 2022.

Total liabilities at June 30, 2021 were approximately $150.0 million compared to approximately $145.8 million at December 31, 2020, an increase of approximately $4.3 million, or approximately 2.9%.

This increase is principally due to increases in our line of credit of approximately $6.2 million, advances from borrowers of $1.2 million, and deferred revenue of approximately $131,000, offset by decreases in dividends payable of approximately $2.7 million, mortgage payable of $770,000, other loans of $258,000, and accounts payable and accrued expenses of $57,000.

Total shareholders’ equity at June 30, 2021 was approximately $146.3 million compared to approximately $80.9 million at December 31, 2020, an increase of approximately $65.4 million.

This increase was due primarily to our closing of the Series A Preferred Stock offering on June 29, 2021 with net proceeds of $40.6 million, net proceeds of $22.9 million from the sale of stock and our net income of approximately $4.7 million.

Net cash provided by operating activities for the six months ended June 30, 2021 was approximately $6.1 million compared to approximately $4.0 million for same 2020 period.

For the 2021 period net cash provided by operating activities consisted primarily of net income of $4.7 million, amortization of deferred financing costs and bond discount of $503,000, an impairment loss of $319,000, increase in deferred revenue of 131,000, and an increase in advances from borrowers of $1.2 million, offset by an increase in interest and fees receivable of $198,000, other receivables of $64,000, due from borrowers of $281,000, prepaid expenses of $82,000, and a gain on extinguishment of debt of $258,000.

For the 2020 period net cash from operations consisted primarily of net income of $4.5 million, an impairment loss of $495,000, depreciation and amortization of deferred financing cost of $267,000, and an increase in advances from borrowers of $164,000, offset by a realized gain on investments of approximately $437,000, increases in interest and fees receivable of $186,000, amounts due from borrowers of $598,000, and prepaid expenses of $48,000, and a decrease in deferred income of $347,000.

Net cash used for investing activities for the six months ended June 30, 2021 was approximately $26.7 million compared to approximately $15.7 million for the comparable 2020 period.

For the 2021 period, net cash used for investing activities consisted primarily of net principal disbursements for mortgages receivable of approximately $17.2 million, purchase of an interest in investment partnership of $1.8 million, net purchases of investment securities of $7.4 million, acquisitions of and improvements to real estate owned of $286,000, purchase of property and equipment of $776,000 and costs in connections with investment activities of $193,000, offset by proceeds from the sale of real estate owned of $919,000.

For the 2020 period, net cash used for investing activities consisted primarily of net principal disbursements for mortgages receivable of approximately $16.9 million, and the acquisition of and improvements to real estate owned of $1.0 million, offset by proceeds from the sale of real estate owned of $1.8 million and net proceeds from the sale of investment securities of approximately $512,000.

Net cash provided by financing activities for the six months ended June 30, 2021 was approximately $63.4 million compared to approximately $2.5 million of cash used for the comparable 2020 period.

Net cash provided by financing activities for the 2021 period consists principally of the net proceeds from issuance of common shares of $22.9 million, net proceeds from the issuance of preferred stock of $40.6 million and proceeds from our line of credit of 6.2 million, which increases were offset by dividends paid of $5.4 million, repayment of mortgage payable of $768,000 and the payment of financing costs of approximately $88,000.

Net cash used for financing activities for the 2020 period consists principally of dividends paid of approximately $2.7 million and financing costs incurred of approximately $58,000, offset by proceeds from other loans of $258,000.

On June 29, 2021, we sold 1,700,000 shares of Series A Preferred Stock for aggregate gross proceeds of $42.5 million and net proceeds, after deducting underwring discounts and commission and other offering expenses, of $40.6 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, 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.

Based on this analysis, we believe that our current cash balances and investment securities, 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.

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Subsequent Events

On April 9, 2021, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with the Ladenburg Thalmann & Co.

and Janney Montgomery Scott LLC, as distribution agents (collectively, the “Agents”), to sell up to $46,636,250 of our common shares from time to time, through an “at-the-market” equity offering program.

The offer and sale of the shares will be made pursuant to a prospectus supplement, dated April 9, 2021 (the “Prospectus Supplement”), to our Registration Statement on Form S-3 (File No.

333-236097) (the “Registration Statement”) declared effective by the Securities and Exchange Commission (the “SEC”) on February 5, 2020.

During the period from April 1, 2021 to May 4, 2021, we sold an aggregate of an additional 2,045,336 of our common shares and realized aggregate net proceeds of approximately $10,535,405, some of which were sold under the Sales Agreement and some which were sold under a similar agreement with the Agents that was signed in October 2019.

In April 2021, our Compensation Committee (the “Committee”) approved the following 2021 compensation packages for our Chief Executive Officer, John L.

Villano, and Chief Operating Officer, Peter J.

With respect to Mr.

● A base salary of $500,000 (compared to $360,000 in 2020);

● A “targeted” annual bonus of $250,000, the exact amount to be determined by the Committee in its sole discretion, and payable on or before March 31, 2022;

● A time-based equity award of $500,000 payable in restricted common shares;

● A one-time cash bonus of $250,000, of which $125,000 is immediately payable and $62,500 is payable on each of July 1 and October 1, 2021, subject to Mr.

Villano’s continued employment by the Company.

With respect to Mr.

● A base salary of $250,000 (same as 2020);

● A cash bonus of $25,000, payable immediately in one lump sum;

● A time-based equity award of $25,000 payable in restricted common shares.

We issued (i) 89,928 restricted common shares to Mr.

Villano based on the closing price of $5.56 per common share on April 8, 2021 (the grant date) and (ii) 4,753 restricted common shares to Mr.

Cuozzo based on the closing price of $5.26 per common share on April 12, 2021 (the grant date).

The shares were issued pursuant to our 2016 Equity Compensation Plan and are subject to restrictions on transfer and forfeiture of any unvested shares in the event of a voluntary resignation as our employee without “Good Reason” or of a termination of employment with us for “Cause,” as such terms are defined in their respective employment agreements.

The restrictions on transfer and the forfeiture provisions will lapse with respect to one-third of the shares on each of January 1, 2022, 2023 and 2024.

Each of Messrs.

Villano and Cuozzo has the right to vote and receive dividends with respect to all the shares granted to him.

On April 30, 2021, we sold a property classified as real estate held for sale at March 31, 2021, receiving $280,449 in net proceeds.

No loss will be recognized on this sale.

On July 1, 2021, the underwriters of the Series A Preferred Stock offering partially exercised their overallotment option to purchase an additional 203,000 shares of Series A Preferred Stock, which was consummated on July 2, 2021.

The gross proceeds from the sale of of the overallotment shares were $5.1 million and the net proceeds were approximately $4.9 million.

The balance of the over-allotment option, 52,000 shares, was never exercised.

York, New York.

Under the terms of our Master Repurchase Agreement with Churchill, we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans.

We intend to use the proceeds from the Facility to finance the continued expansion of our lending business and for general corporate purposes.

From July 1, 2021 through August 9, 2021, we sold 1,582,717 of our common shares in an at-the-market offering (see Note 11) which raised $8,014,203 in net proceeds.

Off-Balance Sheet Arrangements

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Contractual Obligations

As of March 31, 2021, 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.

As of June 30, 2021, 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.

Operating lease obligation

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis