What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-10 · 108 added, 98 removed, 200 unchanged (51% 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 the First Half of 2022 and Outlook for Balance of Year

Compared to the first half of 2021, revenue increased 83.9%, net income attributable to common shareholders increased 64.1%, and earnings per share increased $0.02 per share, or 8.2%.

The revenue increase was directly related to the growth in our lending activities, reflected in our interest income which had an increase of 105.6% and our origination fees that had an increase of 173.0%.

The increase in revenue was partly offset by a 72.1% increase in operating costs and expenses.

Review of the First Nine Months of 2022 and Outlook for Balance of Year

Compared to the nine months of 2021, revenue increased 73.7%, net income attributable to common shareholders increased 46.5%, and earnings per share remained consistent at $0.32 per share.

The revenue increase was directly related to the growth in our lending activities, reflected in our interest income which had an increase of 99.2% and our origination and modification fees that had an increase of 106.6%.

The increase in revenue was partially offset by a 82.6% increase in operating costs and expenses.

The increase in operating expenses is mainly attributable to a 100% increase in interest and amortization of deferred financing costs and an 69.7% increase in compensation and related expenses.

The increase in compensation expense is mainly attributable to the addition of a Chief Investment Officer in April 2021 as well as additional support staff in our operations and finance teams, positions that are part of our long-term growth strategy.

With the hiring of a new Chief Financial Officer in the third quarter of 2022,and additional accounting staff to support him, we expect compensation to continue to increase.

Mortgages receivable increased by 144.5% compared to June 30, 2021, while cash and cash equivalents decreased 53.2%.

The increase in both mortgages receivable and decrease in cash and cash equivalents were primarily due to an increase in lending.

The increase in compensation expense is mainly attributable to the addition of a new Chief Financial Officer in August 2022, along with additional accounting and operational staff.

Such hirings are part of our long-term growth strategy.

Thus, we expect compensation to continue to increase.

Mortgages receivable increased by 103.9% compared to September 30, 2021, along with cash and cash equivalents increased 84.3%.

The increase in mortgages receivable is a result of increases in lending, while the increase in cash is primarily driven by sales of equity and debt securities.

Our primary business objective for 2022 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.

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● operate to qualify as a REIT and for an exemption from registration under the Investment Company Act of 1940, as amended.

We expect the second half of 2022 to be challenging due to the following factors:

We expect the next few quarters to be challenging due to the following factors:

Interest rates and inflation.

Since the beginning of the current year, the Federal Reserve Board has raised interest rates four times:

0.25% in March;

0.75% in June and 0.75% in July.

Since the beginning of the current year through the date of this report, the Federal Reserve Board (the “Fed”) has raised interest rates six times for an aggregate of 3.75%.

These are the first interest increases since December 2018.

As a result, the prime rate has increase from 3.25% to 5.50%.

The Fed’s rate increases are in response to a sharp increase in the annual rate of inflation in the United States, which is currently 9.1%, the highest its been in decades.

As a result, the prime rate has increased from 3.25% to 7.00%.

The Fed’s rate increases are in response to a sharp increase in the annual rate of inflation in the United States, which was reported to be 8.2% for the 12 months ended September 2022, the highest rate in decades, per the Wall Street Journal.

As a result of these increases, the growth of the U.S.

economy has slowed, with a decrease in U.S.

GDP reported in both the first quarter and second quarter of 2022.

If the second quarter decrease is confirmed later this month, the United States would officially be in a recession.

Until now, these economic factors have not had an adverse impact on our business other than to increase our borrowing costs on our variable rate indebtedness ( i.e., the Wells Fargo Loan and the Churchill Facility.) However, any fixed rate indebtedness that we incur in the future is likely to be more expensive than our current fixed rate indebtedness.

In addition, if these trends continue, they could result in decreased demand for our products and a decrease in property valuations, which could have an adverse impact on the ability of our borrowers to repay their loans.

economy has slowed.

Until now, these economic factors have not had an adverse impact on the volume or velocity of our business.

However, they have led to an increase in our borrowing costs.

In addition, the increase in interest rates and inflation and the decrease in the rate of growth of the U.S.

economy has caused a severe decrease in the major stock indices and a general decrease in the valuations of many public companies, including Sachem Capital.

As a consequence, our ability to access the public markets to raise capital has been adversely impacted.

If these trends continue, they could result in decreased demand for our products and a decrease in property valuations, which could have an adverse impact on the ability of our borrowers to repay their loans.

Thus, we cannot assure you that our business, operations and financial condition will not be adversely impacted.

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Increased operating expenses.

Our operating expenses for the three and six months ended June 30, 2022 are significantly higher than they were in the same period in 2021 due to our higher debt load, increased headcount, and increased loan volume.

Our operating expenses for the three and nine months ended September 30, 2022 are significantly higher than they were in the same period in 2021 due to our higher debt load, increased headcount, and increased loan volume.

In addition, 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.

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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, 2022, our mortgage loan portfolio included 191 loans with future funding obligations, in the aggregate principal amount of approximately $119.1 million, compared to 130 loans in the aggregate principal amount of approximately $31,845,533 at June 30, 2021.

At September 30, 2022, our mortgage loan portfolio included 185 loans with future funding obligations, in the aggregate principal amount of approximately $118 million, compared to 157 loans in the aggregate principal amount of approximately $61,707,185 at September 30, 2021.

The increase is due to an increase in construction loan originations, a large portion of which is in the Florida market.

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.

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

Despite these challenges, the changing dynamics of the real estate finance marketplace, the debt and equity markets, supply chain disruptions, and the impact of COVID-19, we continue to believe in the viability of our business model.

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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 June 30, 2022, debt represented approximately 59.3% of our total capital compared to 50.6% at June 30, 2021.

At September 30, 2022, debt represented approximately 59.8% of our total capital compared to 49.3% at September 30, 2021.

To prudently grow the business and satisfy the tax requirement to distribute 90% of our taxable income, we expect to maintain our current level of debt and look to reduce our cost of capital.

We intend to continue to leverage our portfolio for the sole purpose of financing our portfolio and not for speculating on changes in interest rates, particularly while interest rates remain low.

As of June 30, 2022, we had six series of unsecured unsubordinated notes outstanding, having an aggregate outstanding principal balance of $248.2 million (collectively, the “Notes”) all of which rank equally in right of payment with all of our existing and future senior unsecured and unsubordinated indebtedness and are effectively subordinated in right of payment to all existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant a security interest) and structurally subordinated to all existing and future indebtedness of our subsidiaries.

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

As of September 30, 2022, we had seven series of unsecured unsubordinated notes outstanding, having an aggregate outstanding principal balance of $288.4 million (collectively, the “Notes”) all of which rank equally in right of payment with all of our existing and future senior unsecured and unsubordinated indebtedness and are effectively subordinated in right of payment to all existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant a security interest) and structurally subordinated to all existing and future indebtedness of our subsidiaries.

Interest on each series of notes is payable quarterly in arrears on each March 30, June 30, September 30 and December 30 of each year they are outstanding and, except as noted below, each series can be prepaid beginning on the second anniversary of its date of issuance.

The net proceeds, net of the deferred financing cost, is approximately $237.5 million.

The net proceeds, net of the deferred financing cost, was approximately $276.4 million.

● $40,250,000 aggregate original principal amount, issued August 23, 2022, bearing interest at the rate of 8.00% per annum and maturing on September 30, 2027 (the “September 2027 Notes”) and which trade on the NYSE American under the symbol SCCG;

● $30,000,000 aggregate original principal amount, issued May 11, 2022, bearing interest at the rate of 7.125% per annum and maturing on June 30, 2027 (the “June 2027 Notes”) and which trade on the NYSE American under the symbol SCCF;

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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.

All six series of 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, we will be deemed to have been discharged from our obligations under such notes and (ii) an “Asset Coverage Ratio” requirement pursuant to which we may not (x) pay any dividends or make distributions in excess of 90% of our taxable income, (y) incur any indebtedness or (z) 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.

All seven series of 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, we will be deemed to have been discharged from our obligations under such notes and (ii) an “Asset Coverage Ratio” requirement pursuant to which we may not (x) pay any dividends or make distributions in excess of 90% of our taxable income, (y) incur any indebtedness or (z) 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 our total assets relative to the aggregate amount of its indebtedness.

Under the terms of the Indenture, we may, at our option, at any time and from time to time, on or after June 30, 2021, in the case of the June 2024 Notes, November 7, 2021, in the case of the December 2024 Notes, September 4, 2022, in the case of the 2025 Notes, December 20, 2023, in the case of the 2026 Notes, March 9, 2024, in the case of the March 2027 Notes and May 11, 2024, in the case of the June 2027 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.

Under the terms of the Indenture, we may, at our option, at any time and from time to time, on or after June 30, 2021, in the case of the June 2024 Notes, November 7, 2021, in the case of the December 2024 Notes, September 4, 2022, in the case of the 2025 Notes, December 20, 2023, in the case of the 2026 Notes, March 9, 2024, in the case of the March 2027 Notes, May 11, 2024, in the case of the June 2027 Notes and August 23, 2024, in the case of the September 2027 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.

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

At June 30, 2022, the amount outstanding under the Churchill Facility was approximately 39.4 million, which amount was accruing interest of an effective rate of 5.44% per annum.

At September 30, 2022, the amount outstanding under the Churchill Facility was approximately $43.1 million, which amount was accruing interest of an effective rate of 6.99% per annum.

In 2020, we established a margin loan account with Wells Fargo that allows us to borrow against our investment securities portfolio (the “Wells Fargo Loan”).

The Wells Fargo Loan is secured by our portfolio of short-term securities, had a balance of approximately $23.4 million at June 30, 2022.

The Wells Fargo Loan is secured by our portfolio of short-term securities, had a balance of approximately $3.5 million at September 30, 2022.

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

At June 30, 2022, the prime rate was 4.75% and the interest rate on the Wells Fargo Loan was 3.00%.

However, on July 27, 2022, the Federal Reserve Board raised interest rates 0.75%, which will result in an increase in the prime rate and other interest rate benchmarks.

At September 30, 2022, the prime rate was 6.25% and the interest rate on the Wells Fargo Loan was 4.5%.

Other than increasing our borrowing costs under the Wells Fargo Loan, it is too early to tell what impact this latest rate increase will have on our business, operations and/or financial condition.

In 2021, we obtained a new adjustable-rate mortgage loan from New Haven Bank for up to a maximum principal amount of $1.4 million (the “NHB Mortgage”) of which $750,000 was outstanding at June 30, 2022.

The initial proceeds of the NHB Mortgage were used to offset some of the costs we incurred to acquire the property located at 568 East Main Street, Branford, Connecticut, which, once renovated, will become our new corporate headquarters.

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Once the NHB Mortgage is fully funded, the mortgage lien on 698 Main Street will be released.

In addition to the foregoing, in June 2021 and July 2021, we raised aggregate net proceeds of approximately $45.5 million (after deducting underwriting discounts and commissions and offering expenses) from the sale of 1,903,000 shares of our Series A Preferred Stock in a firm commitment underwritten public offering at a public offering price of $25.00 per share, equal to the liquidation preference.

In addition to the foregoing, during the nine-month period ended September 30, 2021, we raised aggregate net proceeds of approximately $45.5 million (after deducting underwriting discounts and commissions and offering expenses) from the sale of 1,903,000 shares of our Series A Preferred Stock in a firm commitment underwritten public offering at a public offering price of $25.00 per share, equal to the liquidation preference.

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

Finally, from time-to-time we raise capital by selling our common shares in various at-the market offerings.

During the six months ended June 30, 2022, we sold an aggregate of 3,867,157 common shares pursuant to an at-the-market offering for which we realized aggregate net proceeds of approximately $21.3 million.

During the nine months ended September 30, 2022, we sold an aggregate of 7,177,043 common shares pursuant to an at-the-market offering for which we realized aggregate net proceeds of approximately $36.7 million.

REIT Qualification

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We will cease to be an emerging growth company on December 31, 2022 and, accordingly, will no longer be exempt from the various reporting requirements.

However, since we will still be a smaller reporting company, we will continue to be exempt from the independent auditor certification requirement under Section 404 of the Sarbanes-Oxley Act.

However, since we will still

be a smaller reporting company, we will continue to be exempt from the independent auditor certification requirement under Section 404 of the Sarbanes-Oxley Act.

Critical Accounting Policies and Use of Estimates

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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.

We base our use of estimates on (a) a preset number of assumptions that consider prior experience, (b) future projections and (c) general financial market conditions.

Actual amounts could materially differ from those estimates.

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Results of Operations

Three months ended June 30, 2022 compared to three months ended June 30, 2021

Three months ended September 30, 2022 compared to three months ended September 30, 2021

Total Revenue

Total revenue for the three months ended June 30, 2022 was approximately $12.5 million compared to approximately $6.7 million for the three months ended June 30, 2021, an increase of approximately $5.8 million, or 86.9%.

Total revenue for the three months ended September 30, 2022 was approximately $13.5 million compared to approximately $8.5 million for the three months ended September 30, 2021, an increase of approximately $5.0 million, or 58.9%.

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

For the 2022 period, interest income was approximately $11.5 million compared to approximately $6.1 million for the 2021 period, representing an increase of approximately $5.4 million or 89.5%.

Origination fees were approximately $2.0 million compared to approximately $832,000 for the 2021 period, representing an increase of approximately $1.2 million or 145.9%.

For the three months ended June 30, 2022, revenue was offset by approximately $1.5 million of unrealized losses on investment securities.

Origination and modification fees were approximately $1.7 million compared to approximately $1.3 million for the 2021 period, representing an increase of approximately $400,000 or 31.6%.

For the three months ended September 30, 2022, revenue was partially offset by approximately $1.1 million of unrealized losses on investment securities.

There was no such offset in the comparable 2021 period.

Operating Costs and Expenses

Total operating costs and expenses for three months ended June 30, 2022 were approximately $7.3 million compared to approximately $4.2 million for the three months ended June 30, 2021, an increase of approximately $3.1 million, or 75.0%.

The increase in operating costs and expenses is primarily attributable to the increase in our unsecured indebtedness, which was the fuel for our revenue growth, and an increase in compensation expense of approximately 46.3%.

Total operating costs and expenses for three months ended September 30, 2022 were approximately $8.5 million compared to approximately $4.2 million for the three months ended September 30, 2021, an increase of approximately $4.3 million, or 101.0%.

The increase in operating costs and expenses is primarily attributable to the increase in our indebtedness, which was the fuel for our revenue growth, and an increase in the cost of funds.

In the 2022 period, interest and amortization of deferred financing costs was approximately $6 million compared to approximately $2.6 million in the same 2021 period, an increase of approximately $3.4 million or 130.7%.

The balance of the increase in operating expenses was primarily attributable to (i) compensation, fees and taxes which increased approximately $376,000, and (ii) general and administrative expenses which increased approximately $169,000, offset by gain on sale of real estate, which decreased approximately $203,000.

The balance of the increase in operating expenses was primarily attributable to (i) compensation, fees and taxes which increased approximately $738,000, a 95.7% increase over the comparable 2021 amount, and (ii) general and administrative expenses, which increased approximately $237,500, a 49.6% increase over the comparable 2021 amount.

Comprehensive Income

For the quarter ended June 30, 2022, we reported an unrealized loss on investment securities of approximately $193,000 reflecting the decrease in the market value of certain securities since March 31, 2022.

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 certain securities since March 31, 2021.

Net income attributable to common shareholders for the three months ended June 30, 2022 was approximately $4.3 million, or $0.12 per share, compared to approximately $2.5 million, or $0.10 per share for the three months ended June 30, 2021.

Six months ended June 30, 2022 compared to six months ended June 30, 2021

For the quarter ended September 30, 2022, we reported an unrealized loss on investment securities of approximately $132,000 reflecting a decrease in the market value of certain securities since June 30, 2022.

For the quarter ended September 30, 2021, we reported an unrealized loss on investment securities of approximately $500,000 reflecting the decrease in the market value of certain securities since June 30, 2021.

Net income attributable to common shareholders for the three months ended September 30, 2022 was approximately $4.1 million, or $0.11 per share, compared to approximately $3.4 million, or $0.12 per share for the three months ended September 30, 2021.

Nine months ended September 30, 2022 compared to nine months ended September 30, 2021

Total Revenue

Total revenue for the six months ended June 30, 2022 was approximately $22.8 million compared to approximately $12.4 million for the six months ended June 30, 2021, an increase of approximately $10.4 million, or 83.9%.

Total revenue for the nine months ended September 30, 2022 was approximately $36.4 million compared to approximately $20.9 million for the nine months ended September 30, 2021, an increase of approximately $15.5 million, or 73.7%.

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

For the 2022 period, interest income was approximately $30.5 million compared to approximately $15.3 million for the 2021 period, representing an increase of approximately $15.2 million or 99.2%.

Origination fees increased to approximately $3.7 million for the 2022 period compared to approximately $1.3 million for the 2021 period, an increase of approximately $2.3 million, or 173.0%.

Income from partnership investments increased to approximately $589,000 for the 2022 period compared to approximately $54,000 for the 2021, an increase of approximately $535,000.

Other income was approximately $1.4 million for the 2022 period compared to approximately $1.3 million for the 2021 period, an increase of approximately $153,000.

For the six months ended June 30, 2022, revenue was offset by approximately $2.5 million of unrealized losses on investment securities.

Origination and modification fees increased to approximately $5.8 million for the 2022 period compared to approximately $2.8 million for the 2021 period, an increase of approximately $3.0 million, or 106.6%.

Income from partnership investments increased to approximately $1.1 million for the 2022 period compared to approximately $90,000 for the 2021, an increase of approximately $1.0 million.

Fee and other income was approximately $2.0 million for the 2022 period compared to approximately $1.9 million for the 2021 period, an increase of approximately $100,000.

For the nine months ended September 30, 2022, revenue was offset by approximately $3.6 million of unrealized losses on investment securities.

There was no such offset in the comparable 2021 period.

Operating Costs and Expenses

Total operating costs and expenses for six months ended June 30, 2022 were approximately $13.3 million compared to approximately $7.7 million for the six months ended June 30, 2021, an increase of approximately $5.6 million, or 72.1%.

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.

Total operating costs and expenses for nine months ended September 30, 2022 were approximately $21.8 million compared to approximately $11.9 million for the nine months ended September 30, 2021, an increase of approximately $9.9 million, or 82.6%.

The increase in operating costs and expenses is primarily attributable to the increase in our overall indebtedness and the increase in our cost of funds.

In the 2022 period, interest and amortization of deferred financing costs was approximately $15.1 million compared to approximately $7.5 million in the same 2021 period, an increase of $7.6 million, or 100.0%.

The balance of the increase in operating expenses was attributable to (i) compensation, fees and taxes which increased approximately $778,000, or 55.4%, (ii) general and administrative expenses which increased approximately $410,000, or 100.5%, (iii) other expenses and taxes which increased approximately $115,000 and (iv) impairment loss which increased approximately $277,000, or 86.7%.

The balance of the increase in operating expenses was attributable to (i) compensation, fees and taxes which increased approximately $1.5 million, or 69.7%, (ii) general and administrative expenses which increased approximately $625,000, or 45.6%, and (iii) impairment loss which increased approximately $322,000, or 68.6%.

Comprehensive Income

For the six months ended June 30, 2022, we reported an unrealized gain on investment securities of approximately $50,000 reflecting the increase in the market value of such securities since December 31, 2021.

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.

Net income attributable to common shareholders for the six months ended June 30, 2022 was approximately $7.7 million, or $0.22 per share, compared to $4.7 million, or $0.20 per share for the six months ended June 30, 2021.

For the nine months ended September 30, 2022, we reported an unrealized loss on investment securities of approximately $81,500 reflecting the decrease in the market value of such securities since December 31, 2021.

For the nine months ended September 30, 2021, we reported an unrealized loss on investment securities of approximately $612,000 reflecting the decrease in the market value of such securities since December 31, 2020.

Net income attributable to common shareholders for the nine months ended September 30, 2022 was approximately $11.9 million, or $0.32 per share, compared to $8.1 million, or $0.32 per share for the nine months ended September 30, 2021.

Non-GAAP Metrics – Adjusted Earnings

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Accordingly, if the value of certain of those securities increases, the increase is reported as revenue, whereas the remaining increase is reported as a change in accumulated other comprehensive income.

On the other hand, if the value decreases, as has been the case in the first two quarters of 2022, the decrease in value of certain of the securities reduces our revenues.

For income tax purposes, we do not report the gain or loss on those securities until they are actually sold.

On the other hand, if the value decreases, as has been the case in the first three quarters of 2022, the decrease in value of certain of the securities reduces our revenues.

For income tax purposes, we do not report the gain or loss on those securities until they are sold.

This creates a discrepancy between our GAAP net income and our taxable income.

To maintain our status as a REIT, we are required to distribute, on an annual basis, at least 90% of our taxable income.

To maintain our status as a REIT, we are required to distribute, on an annual

basis, at least 90% of our taxable income.

Thus, to give our shareholders a better perspective of our taxable income, we use a metric called Adjusted Earnings.

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Adjusted Earnings should be examined in conjunction with net income (loss) as shown in our statements of comprehensive income.

Adjusted Earnings should not be considered as an alternative to net income (loss) (determined in accordance with generally accepted accounting principles in the United States of America (“GAAP)), or to cash flows from operating activities (determined in accordance with GAAP), as a measure of our liquidity, nor is Adjusted Earnings indicative of funds available to fund our cash needs or available for distribution to shareholders.

Adjusted Earnings should not be considered as an alternative to net income (loss) (determined in accordance with GAAP), or to cash flows from operating activities (determined in accordance with GAAP), as a measure of our liquidity, nor is Adjusted Earnings indicative of funds available to fund our cash needs or available for distribution to shareholders.

Rather, Adjusted Earnings is an additional measure we use to analyze our business performance because it excludes the effects of certain non-cash charges that we believe are not necessarily indicative of our operating performance.

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For the Three Month

For the Six Month

Period Ended June 30,

For the Nine Month

Period Ended September 30,

Adjusted Earnings:

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Adjusted earnings attributable to common shareholders

For the three months ended June 30, 2022 adjusted earnings per share was $0.16.

For the six months ended June 30, 2022 adjusted earnings per share was $0.29.

There were no unrealized gains or losses on investment securities reported in net income for the six month period ended June 30, 2021.

For the three months ended September 30, 2022 Adjusted Earnings per share was $0.13.

For the nine months ended September 30, 2022 Adjusted Earnings per share was $0.42.

There were no unrealized gains or losses on investment securities reported in net income for the three- and nine-month periods ended September 30, 2021.

Liquidity and Capital Resources

At June 30, 2022, cash and cash equivalents and investment securities totaled approximately $63.5 million compared to approximately $102.6 million at December 31, 2021.

The decrease in cash and cash equivalents and investment securities is a reflection that we were drawing down those assets to fund new loans.

Some of the cash represented the proceeds from the sale of the June 2027 Notes.

Total assets at June 30, 2022 were approximately $525.4 million compared to approximately $418.0 million at December 31, 2021, an increase of approximately $107.4 million, or 25.7%.

At September 30, 2022, cash and cash equivalents and investment securities totaled approximately $69.8 million compared to approximately $102.6 million at December 31, 2021.

The decrease in cash and cash equivalents and investment securities reflects a draw down of those assets to fund new loans.

Some of the cash represented the proceeds from the sale of the June 2027 Notes and September 2027 Notes.

Total assets at September 30, 2022 were approximately $561.8 million compared to approximately $418.0 million at December 31, 2021, an increase of approximately $143.8 million, or 34.4%.

The increase was due primarily to the increase of our mortgage loan portfolio of approximately $156.2 million, an increase in investments in partnerships of approximately $16.5 million, offset in part by a decrease in cash and cash equivalents and investment securities of approximately $32.8 million.

Total liabilities at June 30, 2022 were approximately $320.4 million compared to approximately $237.9 million at December 31, 2021, an increase of approximately $82.5 million, or 34.7%.

This increase is principally due to increases in the repurchase facility of approximately $20.3 million, or 106.3%, and the notes payable, net of deferred financing costs, of approximately $79.7 million, or 49.6%, offset primarily by decreases in the accrued dividends payable of approximately $3.9 million, line of credit of approximately $9.8 million and advances from borrowers of approximately $3.7 million.

Total shareholders’ equity at June 30, 2022 was approximately $205.0 million compared to approximately $180.1 million at December 31, 2021, an increase of approximately $24.9 million.

This increase was due primarily to net proceeds of $21.2 million from the sale of common shares and our net income attributable to common shareholders of approximately $7.7 million.

Net cash provided by operating activities for the six months ended June 30, 2022 was approximately $7.3 million compared to approximately $6.1 million for same 2021 period.

Total liabilities at September 30, 2022 were approximately $342.5 million compared to approximately $237.9 million at December 31, 2021, an increase of approximately $104.6 million, or 44.0%.

This increase is principally due to increases in the repurchase facility of approximately $24.0 million, or 125.8%, and the notes payable, net of deferred financing costs, of approximately $119.0 million, or 74.1%, offset primarily by decreases in the accounts payable and accrued liabilities, including accrued dividends payable, of approximately $3.5 million, line of credit of approximately $29.6 million and advances from borrowers of approximately $5.1 million.

Total shareholders’ equity at September 30, 2022 was approximately $219.3 million compared to approximately $180.1 million at December 31, 2021, an increase of approximately $39.2 million, or 21.8%.

This increase was due primarily to net proceeds of $36.7 million from the sale of common shares and our net income attributable to common shareholders of approximately $11.9 million, offset by dividends paid on our Series A Preferred Stock and common shares of $2.8 million and $9.6 million, respectively.

Net cash provided by operating activities for the nine months ended September 30, 2022 was approximately $12.4 million compared to approximately $17.4 million for same 2021 period.

For the 2022 period net cash provided by operating activities consisted primarily of net income of approximately $14.6 million, amortization of deferred financing costs and bond discount of $1.7 million and unrealized loss on investment securities of approximately $3.6 million, offset by increases in interest and fees receivable of $2.2 million, due from borrowers of $1.5 million and decreases in advances from borrowers of approximately $5.1 million.

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.

Net cash used for investing activities for the six months ended June 30, 2022 was approximately $120.6 million compared to approximately $26.7 million for the comparable 2021 period.

For the 2022 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $36.1 million, purchases of interests in investment partnerships of approximately $13.6 million and principal disbursements for mortgages receivable of approximately $192.0 million, offset by principal collections on mortgages receivable of approximately $60.9 million, proceeds from the sale of investment securities $59.7 million and proceeds from the sale of real estate owned of $1.4 million.

For the 2021 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $85.5 million, principal disbursements for mortgages receivable of approximately $75.2 million and purchase of interests in investment partnerships of approximately $1.8 million, offset by principal collections on mortgages receivable of approximately $58.0 million, proceeds from the sale of investment securities $78.1 million and proceeds from the sale of real estate owned of $919,000.

Net cash provided by financing activities for the six months ended June 30, 2022 was approximately $100.4 million compared to approximately $63.4 million of cash used for the comparable 2021 period.

Net cash provided by financing activities for the 2022 period consists principally of net proceeds from the issuance of fixed rate notes of $78.8 million, net proceeds from the issuance of common shares of approximately $21.2 million and net proceeds from repurchase facility of approximately $20.3 million, offset primarily by repayment of line of credit of approximately $9.7 million, dividends paid on common shares of approximately $8.3 million and dividends paid on preferred stock of approximately $1.8 million.

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, offset primarily by dividends paid of $5.4 million and repayment of mortgage payable of $768,000.

2021 period net cash provided by operating activities consisted primarily of net income of approximately $9.0 million, amortization of deferred financing costs and bond discount of approximately $839,400, an impairment loss of approximately $469,000, increase in deferred revenue of approximately $1.8 million, and an increase in advances from borrowers of approximately $8.2 million, offset by a gain on sale of marketable securities of approximately $212,400 and a gain on forgiveness of debt of approximately $257,800, and an increase in interest and fees receivable of approximately $885,400, other receivables of approximately $361,000 and due from borrowers of approximately $1.4 million.

Net cash used for investing activities for the nine months ended September 30, 2022 was approximately $151.3 million compared to approximately $84.9 million for the comparable 2021 period.

For the 2022 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $39.7 million, net purchases of interests in investment partnerships of approximately $16.5 million and principal disbursements for mortgages receivable of approximately $252.4 million, offset by proceeds from the sale of investment securities of approximately $62.2 million, proceeds from the sale of real estate owned of approximately $1.6 million, and by principal collections on mortgages receivable of approximately $95.2 million For the 2021 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $160.9 million, net purchases of interests in investment partnerships of approximately $1.8 million, and principal disbursements for mortgages receivable of approximately $154.8 million, offset by proceeds from the sale of investment securities of approximately $141.7 million, proceeds from the sale of real estate owned of approximately $1.8 million, and principal collections on mortgages receivable of approximately $90.5 million.

Net cash provided by financing activities for the nine months ended September 30, 2022 was approximately $132.3 million compared to approximately $67.4 million of cash used for the comparable 2021 period.

Net cash provided by financing activities for the 2022 period consists principally of net proceeds from the issuance of fixed rate notes of approximately $117.6 million, net proceeds from the issuance of common shares of approximately $36.7 million and net proceeds from repurchase facility of approximately $24.0 million, offset primarily by repayment of line of credit of approximately $29.6 million, dividends paid on common shares of approximately $13.5 million and dividends paid on preferred stock of approximately $2.8 million.

Net cash provided by financing activities for the 2021 period consists principally of the net proceeds from issuance of common shares of approximately $30.9 million, net proceeds from the issuance of preferred stock of approximately $45.5 million and proceeds from our line of credit of approximately $2.0 million, offset by dividends paid on common shares of approximately $8.8 million, dividends paid on preferred stock of approximately $932,000, repayment of mortgage payable of approximately $768,000 and financing costs incurred of approximately $451,000.

We project anticipated cash requirements for our operating needs as well as cash flows generated from operating activities available to meet these needs.

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Subsequent Events

From July 1, 2022 through August 8, 2022, we sold an aggregate of 2,265,841 common shares under our at-the-market offering facility realizing gross proceeds of approximately $10.8 million.

On July 8, 2022, the board of directors declared a dividend of $0.14 per common share payable on July 28, 2022 to shareholders of record as of July 21, 2022.

On July 19, 2022, after shareholders approved an amendment to our charter at our 2022 Annual Meeting of Shareholders, we filed a Certificate of Amendment of the Certificate of Incorporation to increase the number of authorized common shares available for issuance from 100,000,000 to 200,000,000.

On July 19, 2022, we issued an aggregate of 15,000 restricted common shares to our three independent directors (i.e., 5,000 shares each), of which 3,750 shares vested immediately upon issuance and 3,750 shares will vest on each of July 19, 2023, 2024 and 2025.

On July 26, 2022, we entered into an agreement with John E.

Warch pursuant to which we will employ Mr.

Warch as our Chief Financial Officer and Executive Vice President.

Warch’s employment term commenced August 1, 2022 and will continue until terminated by either party.

His annual base compensation is $325,000.

In connection with this hire, John L.

Villano resigned as our Chief Financial Officer but will continue to serve as our Chief Executive Office and President.

Management has evaluated subsequent events through August 9, 2022 the date on which the financial statements were available to be issued.

From October 1, 2022 through November 9, 2022, we sold an aggregate of 405,037 common shares under its at-the-market offering facility realizing gross proceeds of approximately $1.6 million.

On October 6, 2022, we acquired substantially all the business assets of Urbane New Haven, LLC (“Urbane”), a real estate firm specializing in all phases of real estate development and construction, including architecture, design, contracting and marketing.

The purchase price for the assets was 300,000 common shares, or approximately $1.1 million based on the closing price of $3.68 per share on October 5, 2022.

The issuance of the shares to Urbane was exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to Sections 4(a)(2) and/or 4(a)(5) thereunder.

A legend restricting resale, transfer, or other disposition of these shares other than in compliance with the Act was placed on such shares.

In connection with the acquisition, Eric O’Brien, one of the owners of Urbane, has been hired as our new Senior Vice President, Asset Management.

O’Brien’s primary responsibilities include construction management oversight and real estate development.

We are currently in the process of determining our potential contingent liability, if any, for the purchase, as well as its allocation of the purchase price amongst the assets purchased, intangible assets, goodwill and liabilities assumed.

Accordingly, these amounts are not included.

Effective on October 7, 2022, our Board of Directors adopted a stock repurchase plan pursuant to which we may repurchase up to an aggregate of $7.5 million of our outstanding common shares in the open market at prevailing market prices or in negotiated transactions off the market, in accordance with all applicable securities laws and regulations, including Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Plan”).

The Plan is expected to continue through September 30, 2023, unless extended or shortened by our Board of Directors.

Ladenburg Thalmann & Co.

will act as our exclusive purchasing agent under the Plan.

On October 24, 2022, all of the remaining outstanding underwriters’ warrants expired without being exercised.

(See Note 15, of the accompanying financial statements.)

On October 26, 2022, we issued 10,000 restricted common shares to an employee, of which 3,334 shares vest immediately upon issuance and 3,333 shares will vest on each of October 26, 2023 and 2024.

The closing price of a common share on October 26, 2022 was $3.83.

On October 27, 2022, our Board of Directors declared a dividend of $0.13 per share payable to shareholders of record as of November 7, 2022.

The dividend will be paid on November 14, 2022.

Management has evaluated subsequent events through November 10, 2022 the date on which the financial statements were available to be issued.

Based on the evaluation, no adjustments were required in the accompanying financial statements.

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Contractual Obligations

As of June 30, 2022, 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, software licenses and investment in partnerships.

As of September 30, 2022, 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, software licenses and investment in partnerships.

Investment in partnerships

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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