Sachem Capital Corp. [SCCC] Filings

Sachem Capital Corp. [SCCC] Filings

Sachem Capital Corp. [SACH] Filings

Sachem Capital Corp. [SCCG] Filings

Sachem Capital Corp. [SCCF] Filings

Sachem Capital Corp. [SCCB] Filings

Sachem Capital Corp. [SCCD] Filings

10-Q 1 sach-20230331x10q.htm 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2023

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

For the transition period from to

Commission File Number: 001-37997

SACHEM CAPITAL CORP.

(Exact name of registrant as specified in its charter)

New York		81-3467779
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

568 East Main Street, Branford, CT 06405

(Address of principal executive offices)

(203) 433-4736

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

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

Title of each class	Ticker symbol(s)	Name of each exchange on which registered
Common Shares, par value $.001 per share	SACH	NYSE American LLC
7.125% Notes due 2024	SCCB	NYSE American LLC
6.875% Notes due 2024	SACC	NYSE American LLC
7.75% Notes due 2025	SCCC	NYSE American LLC
6.00% Notes due 2026	SCCD	NYSE American LLC
6.00% Notes due 2027	SCCE	NYSE American LLC
7.125% Notes due 2027	SCCF	NYSE American LLC
8.00% Notes due 2027	SCCG	NYSE American LLC
7.75% Series A Cumulative Redeemable Preferred Stock, Liquidation Preference $25.00 per share	SACHPRA	NYSE American LLC

As of May 15, 2023, the Issuer had a total of 43,893,050 common shares, $0.001 par value per share, outstanding.

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SACHEM CAPITAL CORP.

TABLE OF CONTENTS

		Page Number
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 (unaudited)	1
	Consolidated Statements of Comprehensive Income for the Three-Month Periods Ended March 31, 2023 and 2022 (unaudited)	2
	Consolidated Statements of Changes in Shareholders’ Equity for the Three-Month Periods Ended March 31, 2023 and 2022 (unaudited)	3
	Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2023 and 2022 (unaudited)	4
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36
Item 4.	Controls and Procedures	36

Part II	OTHER INFORMATION

Item 6.	Exhibits	37
SIGNATURES		40

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to numerous risks, uncertainties and assumptions, some of which are described in our 2022 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

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

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

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

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

SACHEM CAPITAL CORP.

CONSOLIDATED BALANCE SHEETS

(unaudited)


	March 31, 2023		December 31, 2022
Assets
Cash and cash equivalents	$	20,332,516	$	23,713,097
Investment securities		35,837,202		24,576,462
Mortgages receivable, net		476,469,464		460,633,268
Interest and fees receivable, net		6,645,909		6,309,845
Due from borrowers, net		6,037,966		5,276,967
Real estate owned		6,138,912		5,216,149
Investments in partnerships		35,322,234		30,831,180
Property and equipment, net		4,792,472		4,121,721
Other assets		5,420,367		4,983,173
Total assets	$	596,997,042	$	565,661,862

Liabilities and Shareholders’ Equity
Liabilities:
Notes payable (net of deferred financing costs of $7,793,640 and $8,352,597)	$	280,608,110	$	280,049,153
Repurchase facility		54,055,815		42,533,466
Mortgage payable		1,660,000		750,000
Line of credit		13,673,930		3,587,894
Accrued dividends payable		—		5,342,160
Accounts payable and accrued liabilities		2,007,450		1,439,219
Advances from borrowers		11,314,622		9,892,164
Deferred revenue		4,681,060		4,360,452
Total liabilities		368,000,987		347,954,508

Commitments and Contingencies

Shareholders’ Equity:
Preferred shares - $0.001 par value; 5,000,000 shares authorized; 2,903,000 shares designated as Series A Preferred Stock; 1,909,187 and 1,903,000 shares of Series A Preferred Stock issued and outstanding at March 31, 2023 and December 31, 2022, respectively		1,909		1,903
Common shares - $0.001 par value; 200,000,000 shares authorized; 43,756,724 and 41,093,536 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively		43,757		41,094
Paid-in capital		235,709,499		226,220,990
Accumulated other comprehensive loss		(469,853)		(561,490)
Accumulated deficit		(6,289,257)		(7,995,143)
Total shareholders’ equity		228,996,055		217,707,354
Total liabilities and shareholders’ equity	$	596,997,042	$	565,661,862

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

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SACHEM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	Three Months Ended
	March 31,
	2023		2022
Revenue:
Interest income from loans	$	10,983,326	$	8,511,375
Investment gain, net		274,796		117,337
Income from partnership investments		549,723		272,488
Origination and modification fees, net		1,475,920		1,843,841
Fee and other income		707,605		608,564
Unrealized gain (loss) on investment securities		716,389		(1,052,230)
Total revenue		14,707,759		10,301,375

Operating costs and expenses:
Interest and amortization of deferred financing costs		6,872,967		3,898,389
Compensation, fees and taxes		1,779,318		993,962
General and administrative expenses		898,115		631,948
Other expenses		83,722		99,272
(Gain) Loss on sale of real estate		(148,100)		65,838
Allowance for credit losses		101,515		105,000
Impairment loss		—		155,500
Total operating costs and expenses		9,587,537		5,949,909
Net income		5,120,222		4,351,466
Series A Preferred Stock dividend		(924,762)		(921,766)
Net income attributable to common shareholders		4,195,460		3,429,700

Other comprehensive loss
Unrealized gain on investment securities		91,637		242,808
Comprehensive income	$	4,287,097	$	3,672,508
Basic and diluted net income per common share outstanding:
Basic	$	0.10	$	0.10
Diluted	$	0.10	$	0.10
Weighted average number of common shares outstanding:
Basic		42,792,509		34,892,883
Diluted		42,792,509		34,898,666

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

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SACHEM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)


	FOR THE THREE MONTHS ENDED MARCH 31, 2023
											Accumulated
									Additional		Other
	Preferred Stock				Common Stock				Paid in		Comprehensive		Accumulated
	Shares		Amount		Shares		Amount		Capital		Loss		Deficit		Totals
Balance, January 1, 2023		1,903,000	$	1,903		41,093,536	$	41,094	$	226,220,990	$	(561,490)	$	(7,995,143)	$	217,707,354

Cumulative effect of change in accounting principle - Adoption of ASU 2016-13 (Note 2)		—		—		—		—		—		—		(2,489,574)		(2,489,574)

Issuance of Series A Preferred Stock, net of expenses		6,187		6		—		—		136,699		—		—		136,705

Issuance of common shares, net of expenses		—		—		2,479,798		2,480		9,178,678		—		—		9,181,158

Stock based compensation		—		—		183,390		183		173,132		—		—		173,315

Unrealized gain on investments		—		—		—		—		—		91,637		—		91,637

Dividends paid on Series A Preferred Stock		—		—		—		—		—		—		(924,762)		(924,762)

Net income for the period ended March 31, 2023		—		—		—		—		—		—		5,120,222		5,120,222
Balance, March 31, 2023		1,909,187	$	1,909		43,756,724	$	43,757	$	235,709,499	$	(469,853)	$	(6,289,257)	$	228,996,055


	FOR THE THREE MONTHS ENDED MARCH 31, 2022
									Accumulated
							Additional		Other
	Preferred Stock			Common Stock			Paid in		Comprehensive		Accumulated
	Shares	Amount		Shares	Amount		Capital		Loss		Deficit		Totals
Balance, January 1, 2022	1,903,000	$	1,903	32,730,004	$	32,730	$	185,516,394	$	(476,016)	$	(4,992,450)	$	180,082,561

Issuance of common shares, net of expenses	—		—	2,730,725		2,730		15,545,085		—		—		15,547,815

Exercise of warrants	—		—	19,658		20		(20)		—		—		—

Stock based compensation	—		—	33,500		34		106,845		—		—		106,879

Unrealized gain on marketable securities	—		—	—		—		—		242,808		—		242,808

Dividends paid on Series A Preferred Stock	—		—	—		—		—		—		(921,766)		(921,766)

Net income for the period ended March 31, 2022	—		—	—		—		—		—		4,351,466		4,351,466
Balance, March 31, 2022	1,903,000	$	1,903	35,513,887	$	35,514	$	201,168,304	$	(233,208)	$	(1,562,750)	$	199,409,763

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

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SACHEM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOW

(unaudited)


	Three Months Ended
	March 31,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	5,120,222	$	4,351,466
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs and bond discount		600,215		469,251
Depreciation expense		40,132		22,239
Stock based compensation		173,315		106,879
Allowance for credit losses		101,515		105,000
Impairment loss		—		155,500
(Gain) loss on sale of real estate		(148,100)		65,838
Unrealized(gain) loss on investment securities		(716,389)		1,052,230
(Gain) loss on sale of investment securities		(275,879)		154,135
Changes in operating assets and liabilities:
(Increase) decrease in:
Interest and fees receivable		(366,191)		(395,924)
Other assets - miscellaneous		(499,651)		(210,688)
Due from borrowers		(783,302)		(292,302)
Other assets - prepaid expenses		9,955		42,220
(Decrease) increase in:
Accounts payable and accrued liabilities - accrued interest		95,221		121,913
Accounts payable and accrued liabilities - accounts payable and accrued expenses		(84,738)		10,720
Deferred revenue		320,608		232,794
Advances from borrowers		1,422,458		1,563,852
Total adjustments		(110,831)		3,203,657

NET CASH PROVIDED BY OPERATING ACTIVITIES		5,009,391		7,555,123

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities		(13,971,218)		(27,545,183)
Proceeds from the sale of investment securities		3,780,522		51,705,055
Purchase of interests in investment partnerships, net		(4,491,054)		(11,358,017)
Proceeds from sale of real estate owned		515,136		622,737
Acquisitions of and improvements to real estate owned, net		(103,136)		(177,336)
Purchase of property and equipment		(710,883)		(3,658)
Principal disbursements for mortgages receivable		(58,883,818)		(88,735,230)
Principal collections on mortgages receivable		39,884,300		27,106,768
Other assets – pre-offering costs		25,111		(57,768)
NET CASH USED FOR INVESTING ACTIVITIES		(33,955,040)		(48,442,632)

CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (repayment of) line of credit		10,086,036		(9,898,667)
Net proceeds from repurchase facility		11,522,349		7,857,960
Proceeds from mortgage		910,000		—
Accounts payable and accrued liabilities - principal payments on other notes		(4,252)		(6,627)
Dividends paid on Common Stock		(5,342,160)		(3,927,600)
Dividends paid on Series A Preferred Stock		(924,762)		(921,766)
Proceeds from issuance of common shares, net of expenses		9,181,158		15,547,815
Proceeds from issuance of Series A Preferred Stock, net of expenses		136,699		—
Gross proceeds from issuance of fixed rate notes		—		50,000,000
Financings costs incurred in connection with fixed rate notes		—		(1,839,034)
NET CASH PROVIDED BY FINANCING ACTIVITIES		25,565,068		56,812,081

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(3,380,581)		15,924,572

CASH AND CASH EQUIVALENTS- BEGINNING OF YEAR		23,713,097		41,938,897

CASH AND CASH EQUIVALENTS - END OF PERIOD	$	20,332,516	$	57,863,469

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

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SACHEM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOW (Continued)

(unaudited)

Real estate acquired in connection with the foreclosure of certain mortgages, inclusive of interest and other fees receivable, during the three months ended March 31, 2023 amounted to $1,186,663.

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

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SACHEM CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

1. The Company

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

2. Significant Accounting Policies

Unaudited Financial Statements

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2022 and the notes thereto included in the Company’s Annual Report on Form 10-K. Results of operations for the three months ended March 31, 2023, are not necessarily indicative of the operating results to be attained in the entire fiscal year, or for any subsequent period.

Use of Estimates

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

Cash and Cash Equivalents

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

Investment Securities

The Company considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values.

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. If qualitative factors indicate an available for sale debt security may be credit impaired the loss is measured as the excess of carrying value over the present value of expected cash flows, limited to the excess of carrying value over fair value. To determine credit losses, the Company may employ a systematic

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SACHEM CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

methodology that considers available quantitative and qualitative evidence. In addition, the Company considers specific adverse conditions related to the financial health of, and business outlook for, the investee. If the Company has plans to sell the security or it is more likely than not that the Company will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in net income and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, the Company may incur future impairments.

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). The Company performs a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in net income.

Current Expected Credit Losses Allowance

The Company adopted the current expected credit loss (“CECL”) standard effective January 1, 2023 in accordance with ASU No. 2016-13. The initial CECL allowance adjustment of $2,489,574 was recorded effective January 1, 2023 as a cumulative-effect of change in accounting principle through a direct charge to accumulated deficit on the consolidated statements of shareholders’ equity; however, subsequent changes to the CECL allowance will be recognized in the consolidated statements of comprehensive income.

The Company records an allowance for credit losses in accordance with the CECL standard on the Company’s loan portfolio, including unfunded construction commitments, on a collective basis by assets with similar risk characteristics. This methodology replaces the probable incurred loss impairment methodology. In addition, interest and fees receivable and amounts included in due from borrowers, other than reimbursements, which include origination, modification and other fees receivable are also analyzed for credit losses in accordance with the CECL standard, as they represent a financial asset that is subject to credit risk. As allowed under the CECL standard the Company uses, as a practical expedient, the fair value of the collateral at the reporting date when recording the net carrying amount of the loan and determining the allowance for credit losses for loans in pending/pre-foreclosure status, as defined. Fair value of collateral is reduced by estimated cost to sell if the collateral is expected to be sold. The amount of loans in pending/pre-foreclosure as of March 31, 2023 and December 31, 2022 was approximately $40.6 million and $24.0 million, respectively. As of March 31, 2023 and December 31, 2022, there were no such loans in pending/pre-foreclosure that required an allowance for credit loss.

The CECL standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the economic environment. The Company utilizes a loss-rate method for estimating current expected credit losses. The loss rate method involves applying a loss rate to a pool of loans with similar risk characteristics to estimate the expected credit losses on that pool of loans. In determining the CECL allowance, the Company considers various factors including (1) historical loss experience in its portfolio, (2) loan specific losses for loans deemed collateral dependent based on excess amortized cost over the fair value of the underlying collateral, and (3) its current and future view of the macroeconomic environment. The Company utilizes a reasonable and supportable forecast period equal to the contractual term of the loan plus any applicable short-term extensions that are reasonably expected for construction loans.

Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loans based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. The CECL allowance related to the principal outstanding is presented within “Mortgages receivable, net” and for unfunded commitments is within accounts payable and accrued liabilities in the Company’s consolidated balance sheets. The CECL allowance related to the late payment fees are presented in “Interest and fees receivable” and “Due from borrowers” in the Company’s consolidated balance sheets.

As of March 31, 2023 and January 1, 2023, the CECL allowance for mortgages receivable was approximately $2.0 million and approximately $1.9 million, respectively, an increase of approximately $55,000.

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SACHEM CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

As of March 31, 2023 and January 1, 2023, the CECL allowance for interest and fees receivable was approximately $30,100 and approximately $26,100, respectively, an increase of $4,000.

As of March 31, 2023 and January 1, 2023, the CECL allowance for due from borrower was approximately $22,300 and $19,900, respectively, an increase of approximately $2,400.

As of March 31, 2023 and January 1, 2023, the CECL allowance for unfunded commitments was $562,000, and approximately $522,000, respectively, an increase of approximately $40,000.

Fair Value Measurements

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

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

Level 2Inputs to the valuation methodology include:

●

quoted prices for similar assets or liabilities in active markets;

●

quoted prices for identical or similar assets or liabilities in inactive markets;

●

inputs other than quoted prices that are observable for the asset or liability; and

●

inputs that are derived principally from or corroborated by observable market data by correlation to other means.

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

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

Property and Equipment

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

Land and building acquired in 2021 to serve as the Company’s future corporate headquarters is stated at cost. Renovation of the building was completed in the first quarter of 2023 and the Company relocated its operations to the new building in March 2023. The building is being depreciated using the straight-line method over its estimated useful life of 40 years. The new building was placed in service during the three months ended March of 2023.

Real Estate Owned

Real estate owned by the Company is stated at cost and is tested for impairment quarterly.

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SACHEM CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

Consolidations

The consolidated financial statements of the Company include the accounts of all subsidiaries in which the Company has control over significant operating, financial and investing decisions of the entity. All intercompany accounts and transactions have been eliminated.

Impairment of Long-Lived Assets

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

Goodwill

Goodwill is not amortized, but rather tested for impairment annually or more frequently if events or changes in circumstances indicate potential impairment. Goodwill at March 31, 2023 represents the excess of the consideration paid over the fair value of net assets acquired from Urbane New Haven, LLC in October 2022.

In testing goodwill for impairment, the Company follows FASB ASC 350, “Intangibles—Goodwill and Other”, which permits a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill, then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill, or the Company chooses not to perform the qualitative assessment, then the Company compares the fair value of that reporting unit with its carrying value, including goodwill.

Deferred Financing Costs

Costs incurred in connection with the Company’s revolving credit facilities, described in Note 7-Line of Credit, Mortgage Payable, Churchill Facility, and Needham Facility are, amortized over the term of the applicable facility using the straight-line method.

Costs incurred by the Company in connection with the public offering of its unsecured, unsubordinated notes, described in Note 9 - Notes Payable, are being amortized over the term of the respective Notes.

Revenue Recognition

Interest income from the Company’s loan portfolio is earned over the loan period and is calculated using the simple interest method on principal amounts outstanding. Generally, the Company’s loans provide for interest to be paid monthly in arrears. The Company, generally, does not accrue interest income on mortgages receivable that are more than 90 days past due or interest charged at default rates. However, interest income not accrued at March 31, 2023 but collected prior to the issuance of this report is included in income for the period ended March 31, 2023.

Origination and modification fee revenue, generally 1% – 3% of either the original loan principal or the modified loan balance, is collected at loan funding and is recognized ratably over the contractual life of the loan in accordance with ASC 310.

Income Taxes

The Company believes it qualifies as a real estate investment trust (“REIT”) for federal income tax purposes and operates accordingly. It made the election to be taxed as a REIT on its 2017 Federal income tax return. The Company’s qualification as a REIT

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SACHEM CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

depends on its ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code of 1986, as amended (the “Code”), relating to, among other things, the sources of its income, the composition and values of its assets, its compliance with the distribution requirements applicable to REITs and the diversity of ownership of its outstanding capital stock. So long as it qualifies as a REIT, the Company, generally, will not be subject to U.S. federal income tax on its taxable income distributed to its shareholders. However, if it fails to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal income tax at regular corporate rates and may also be subject to various penalties and may be precluded from re-electing REIT status for the four taxable years following the year during in which it lost its REIT qualification.

The Company has elected, and may elect in the future, to treat certain of its existing or newly created corporate subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, a TRS may hold assets that the Company cannot hold directly and generally may engage in any real estate or non-real estate related business. The TRSs generate income, resulting in federal and state income tax liability for these entities. The Company does not expect to incur any corporate federal income tax liability outside of the TRSs, as it believes it has maintained its qualification as a REIT. During the three months ended March 31, 2023 and 2022, the Company’s TRSs recognized no provisions for federal income tax or state, local and franchise taxes on the Company’s consolidated statements of operations. During the three months ended March 31, 2023 and 2022, there were no recognized provisions for federal income tax nor state, local and franchise tax.

The income tax provision for the Company differs from the amount computed from applying the statutory federal income tax rate to income before income taxes due to non-taxable REIT income and other permanent differences including the non-deductibility of acquisition costs of business combinations for federal income tax reporting.

FASB ASC Topic 740-10 “Accounting for Uncertainty in Income Taxes” prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and disclosure required. Under this standard, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in interest expense. The Company has determined that there are no uncertain tax positions requiring accrual or disclosure in the accompanying consolidated financial statements as of March 31, 2023 and 2022.

Earnings Per Share

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

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments”, (ASU 2016-13), which changes accounting requirements for the measurement and recognition of expected credit losses from an incurred or probable methodology to a current expected credit loss methodology. Mortgages receivable, unfunded loan commitments, interest and fees receivable and amounts included in due from borrowers, other than reimbursements, which include origination, modification and other fees receivable are the only items currently held by the Company that are within the scope of ASU 2016-13. The Company adopted this ASU effective January 1, 2023 and applied a modified retrospective approach through a cumulative-effect adjustment to retained earnings upon adoption. At transition on January 1, 2023, the cumulative effect of adopting this ASU resulted in a decrease in retained earnings of $2,489,574 and an increase in the allowance for credit losses. The increase in the allowance is driven by the fact that the allowance under CECL covers expected credit losses over the full expected life of the loan portfolios and also takes into account forecasts of expected future economic conditions.

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SACHEM CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses” (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for troubled debt restructurings (“TDR”) for creditors that have adopted the CECL standard and requires enhanced disclosures for loan modifications made to borrowers experiencing financial difficulty in the form of interest rate reductions, principal forgiveness, other-than-insignificant payment delays, or term extensions. In addition, the new guidance requires presentation in the vintage disclosures of current-period gross write-offs by year of origination. The amendments in this update became effective for fiscal years beginning after December 15, 2022. This update did not have a material effect on the Company’s financial statements.

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 was issued to (1) to clarify the guidance in FASB ASC Topic 820, “Fair Value Measurement”, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with FASB ASC Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company does not anticipate that this update will have a material impact on its consolidated financial statements.

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

Reclassifications

Certain amounts included in the March 31, 2022 and December 31, 2022 consolidated financial statements have been reclassified to conform to the March 31, 2023 presentation.

3. Fair Value Measurement

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

The following table sets forth by Level, within the fair value hierarchy, the Company’s assets at fair value as of March 31, 2023:


	Level 1		Level 2		Level 3		Total
Stocks and ETFs	$	—	$	1,403,680	$	—	$	1,403,680
Mutual funds		15,193,680		—		—		15,193,680
Debt securities		18,109,325		1,130,517		—		19,239,842
Total liquid investments	$	33,303,005	$	2,534,197	$	—	$	35,837,202
Real estate owned	$	—	$	—	$	6,138,912	$	6,138,912

The following table sets forth by Level, within the fair value hierarchy, the Company’s assets at fair value as of December 31, 2022:


	Level 1		Level 2		Level 3		Total
Stocks and ETF’s	$	3,282,659	$	1,446,065		—	$	4,728,724
Mutual funds		14,850,839		—		—		14,850,839
Debt securities		3,880,045		1,116,854		—		4,996,899
Total liquid investments	$	22,013,543	$	2,562,919		—	$	24,576,462
Real estate owned		—		—	$	5,216,149	$	5,216,149

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SACHEM CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

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

Stocks and ETFs (level 1 and 2): Valued at the closing price reported in the active market in which the individual securities are traded.

Mutual funds (level 1 and 2): Valued at the daily closing price reported by the fund. Mutual funds held by the Company are open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. These funds are required to publish their daily net asset values and to transact at that price. The mutual funds held by the Company are deemed to be actively traded.

Debt securities: Valued at the closing price reported in the active market in which the individual securities are traded.

Real estate owned: The Company estimates fair values of real estate owned using market information such as recent sales contracts, appraisals, recent sales, assessed values or discounted cash value models.

See Note 5 for the roll forward of real estate owned – Level 3 assets.

Impact of Fair Value of AFS Securities on OCI

The carrying value of the Company’s financial instruments approximates fair value generally due to the relative short-term nature of such instruments. Other financial assets and financial liabilities have fair value that approximate their carrying value.

Pursuant to ASC 326-30-50-4 and 50-5 the Company is required to disclose investment securities that have been in a continuous unrealized loss position for 12 months or more as of the balance sheet date. As of March 31, 2023 and December 31, 2022, the Company had a continuous unrealized losses over 12 months in Available-For-Sale debt securities of approximately $517,000 and approximately $531,000, respectively. The Company reviewed a number of factors to assess the credit quality of the debt instruments including, but not limited to, current cash position, operating cash flow, and corporate earnings as of the most recently filed financial statements. As such, as of March 31, 2023, the Company has concluded no such allowance for credit losses in regards to Available-For-Sale debt securities was deemed necessary.

The following table presents the impact of the Company’s Available-For-Sale (AFS) securities - debt securities on its Other Comprehensive Income (OCI) for the three months ended March 31, 2023:


	Three months Ended
	March 31,
	2023		2022
OCI from AFS securities:
Unrealized (loss) on AFS-debt securities at beginning of period	$	(561,490)	$	(476,016)
Unrealized gain on securities available-for-sale – debt securities		91,637		242,808
Change in OCI from AFS securities – debt securities		91,637		242,808
Balance at end of period	$	(469,853)	$	(233,208)

4. Mortgages Receivable

The Company offers secured, non-bank loans to real estate owners and investors (also known as “hard money” loans) to fund their acquisition, renovation, development, rehabilitation or improvement of properties located primarily in the Northeastern United States and Florida. The Company’s lending standards typically require that the original principal amount of all mortgage receivable notes be secured by first mortgage liens on one or more properties owned by the borrower or related parties and that the maximum LTV be no greater than 70% of the appraised value of the underlying collateral, as determined by an independent appraiser at the time of the loan origination. The Company considers the maximum LTV as an indicator for the credit quality of a mortgage note receivable. In the case of properties undergoing renovation, the loan-to-value ratio is calculated based on the estimated fair market value of the property after the renovations have been completed. However, the Company makes exceptions to this guideline if the facts and circumstances support the incremental risk. These factors include the additional collateral provided by the borrower, the

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SACHEM CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

credit profile of the borrower, the Company’s previous relationship, if any, with the borrower, the nature of the property, the geographic market in which the property is located and any other information the Company deems appropriate.

The loans are generally for a term of one to three years. The loans are initially recorded and carried thereafter, in the financial statements, at cost. Most of the loans provide for monthly payments of interest only (in arrears) during the term of the loan and a “balloon” payment of the principal on the maturity date.

Allowance for credit losses are charged to income in amounts sufficient to maintain an allowance for credit losses inherent in the loans which are established systematically by management as of the reporting date. Management’s estimate of expected credit losses is based on an evaluation of relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amounts. The Company uses static pool modeling techniques to determine the allowance for loan losses expected over the remaining life of the loans, which is supplemented by management judgment. Expected losses are estimated for groups of accounts aggregated by geographical location.

The Company’s estimate of expected credit losses includes a reasonable and supportable forecast period equal to the contractual term of the loan plus any applicable short-term extensions that are reasonably expected for construction loans. The Company reviews charge-off experience factors, contractual delinquency, historical collection rates, the value of underlying collateral and other information to make the necessary judgments as to credit losses expected in the portfolio as of the reporting date. While management utilizes the best information available to make its evaluations, changes in macroeconomic conditions, interest rate environments, or both, may significantly impact the assumptions and inputs used in determining the allowance for credit losses. The Company’s charge-off policy is based on a loan by loan review of delinquent loans. The Company has an accounting policy to not place loans on nonaccrual status unless they are greater than 90 days delinquent. Accrual of interest income is generally resumed when delinquent contractual principal and interest is paid or when a portion of the delinquent contractualy payments are made and the ongoing required contractual payments have been made for an appropriate period.

As of March 31, 2023 and December 31, 2022, the Company had an outstanding principal balance of $97,106,984 and $55,691,857 of loans on nonaccrual status, respectively. The nonaccrual loans are inclusive of loans pending foreclosure. For the three months ended March 31, 2023, $649,347 of interest income was recorded on nonaccrual loans.

For the three months ended March 31, 2023 and 2022, the aggregate amounts of loans funded by the Company were $58,883,818 and $88,735,230, respectively, offset by principal repayments of $39,884,300 and $27,106,768, respectively.

As of March 31, 2023, the Company’s mortgage loan portfolio includes loans ranging in size up to $29,919,097 with stated interest rates ranging from 5.0% to 14.2%. The default interest rate is generally 18%, but could be more or less depending on state usury laws.

At March 31, 2023, and December 31, 2022, no single borrower or group of related borrowers had loans outstanding representing more than 10% of the total balance of the loans outstanding.

The Company may agree to extend the term of a loan if, at the time of the extension, the loan and the borrower meet all the Company’s then underwriting requirements. The Company treats a loan extension as a new loan. If an interest reserve is established at the time a loan is funded, accrued interest is paid out of the interest reserve and recognized as interest income at the end of each month. If no reserve is established, the borrower is required to pay the interest monthly from its own funds. The deferred origination, loan servicing and amendment fee income represents amounts that will be recognized over the contractual life of the underlying mortgage notes receivable.

Allowance for Credit Loss

In assessing the Allowance for Credit Losses (“CECL Allowance”), the Company considers historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. The Company derived an annual historical loss rate based on its historical loss experience in its portfolio, adjusted to incorporate the risks of construction lending and to reflect the Company’s expectations of the macroeconomic environment.

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SACHEM CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2023

The following table summarizes the activity in the CECL Allowance from adoption on January 1, 2023:


	CECL Allowance						Provision for		CECL
	as of December		Adoption of ASU				CECL		Allowance as of
(dollars in thousands)	31, 2022⁽¹⁾		2016-13 ⁽²⁾		Charge-offs		Allowance		March 31, 2023
Geographical Location
New England	$	105	$	1,302	$	—	$	3	$	1,410
West		—		7		—		—		7
South		—		402		—		56		458
Mid-Atlantic		—		210		—		(3)		207
Total	$	105	$	1,921	$	—	$	56	$	2,082

(1) As of December 31, 2022, amounts represent probable loan loss provisions recorded before the adoption of the ASU 2016-13.

(2) As a component of the adoption of ASU 2016-13, $562,000 of the CECL allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in the Company’s consolidated balance sheet.

Presented below is the Company’s loan portfolio by geographical location:


	March 31, 2023				December 31, 2022
(dollars in thousands)	Carrying Value		% of Portfolio		Carrying Value	% of Portfolio
Geographical Location
New England	$	226,026	47.23	%	$

Sachem Capital Corp. [SCCC] Filings
Sachem Capital Corp. [SACH] Filings
Sachem Capital Corp. [SCCG] Filings
Sachem Capital Corp. [SCCF] Filings
Sachem Capital Corp. [SCCB] Filings
Sachem Capital Corp. [SCCD] Filings
10-Q	[2023-05-15]
10-K	[2023-03-31]
10-Q	[2022-11-10]
10-Q	[2022-08-10]
10-Q	[2022-05-04]
10-K	[2022-03-31]
10-Q	[2021-11-04]
10-Q	[2021-08-16]
10-Q	[2021-05-14]
10-K	[2021-03-31]
10-Q	[2020-11-06]
10-Q	[2020-08-10]
10-Q	[2020-05-08]
10-K	[2020-03-30]
10-Q	[2019-11-14]
10-Q	[2019-08-14]
10-Q	[2019-05-13]
10-K	[2019-03-29]
10-Q	[2018-11-13]
10-Q	[2018-08-14]
10-Q	[2018-05-15]
10-K	[2018-04-02]
10-Q	[2017-11-13]
10-Q	[2017-08-15]
10-Q	[2017-05-22]
10-K	[2017-04-07]

Three Months Ended

March 31,

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION

Interest paid