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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 3/27/24 Korth Direct Mortgage Inc. 10-K 12/31/23 79:5.9M Securex Filings/FA |
Document/Exhibit Description Pages Size
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11: R2 Consolidated Statements of Financial Condition HTML 125K
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14: R5 Consolidated Statement of Changes in Stockholders' HTML 70K
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17: R8 Summary of Significant Accounting Policies HTML 55K
18: R9 Contingent Liability HTML 30K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
i x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended i i December 31, 2023 / .
or
i ¨ 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: i 000-1695962
| i KORTH DIRECT MORTGAGE INC. |
| (Exact name of registrant as specified in its charter) |
| i Florida | i 27-0644172 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| i 135 San Lorenzo Avenue, i Suite 600, i Coral Gables, i FL i 33146 |
| (Address of principal executive offices) |
| i (305) i 668-8485 |
| (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o i No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. i Yes x No o
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. i Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). i Yes x No o The Registrant voluntarily files Exchange Act Reports and has filed all Exchange Act reports for the preceding 12 months.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o |
| i Non-accelerated filer | o | Smaller Reporting company | i x |
| Emerging growth company | i x |
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. i ¨
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Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes o i No x
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. i o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o i No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
There is i no market for the common equity of Korth Direct Mortgage Inc. As of December 31, 2023, there were common shares of KDM outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
i No documents are incorporated in this Form 10-K by reference.
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KORTH DIRECT MORTGAGE, Inc.
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FORWARD-LOOKING STATEMENTS
Some of the information contained in this Report constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include current expectations of future events based on certain assumptions and statements that do not directly relate to any historical or current fact. When used in this Annual Report, in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, on the Company’s website, or in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” “believes,” or similar expressions are intended to identify forward-looking statements. The Company’s forward-looking statements are based on management’s current expectations and assumptions regarding the Company’s business and performance, the economy, and other future conditions and forecasts of future events, circumstances and results. As with any projection statement or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances and underlying assumptions. The Company’s actual results may vary materially from those expressed or implied in its forward-looking statements. Important factors that could cause the Company’s actual results to differ materially from those in its forward-looking statements include, among other things financial performance, results of operations, financial position, and the achievement of our strategic objectives; the status of borrowers; the ability of borrowers to repay CM Loans, as defined below; the plans of borrowers; expected rates of return and interest rates; mortgage default rates; property values; the commercial real estate market; competition from larger better capitalized competitors, the attractiveness of our CM Loans and Notes; our financial performance; the availability of a secondary market for our Notes; our ability to retain and hire competent employees and appropriately staff our operation; government regulation; regional and national economic conditions, substantial changes in levels of market interest rates; and other competitive and regulatory factors.
The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
PART I
Throughout this Report we use the terms “KDM,” “we,” “Company,” and “us” to refer to Korth Direct Mortgage Inc, and its subsidiaries.
Our principal executive offices are located at 135 San Lorenzo Avenue Suite 600, Coral Gables, Florida 33146, and our telephone number is (305) 668-8485. Our website address is korthdirect.com.
Korth Direct Mortgage Inc. began its formal operations in October of 2016 when we engaged our Chief Lending Officer. KDM is a licensed Mortgage Lender Servicer with the State of Florida. Our NMLS License Number is 1579547. KDM converted from a Florida limited liability company to a Florida corporation effective June 6, 2019. On July 31, 2020 KDM’s ownership was reorganized, and its former sole shareholder, J. W. Korth & Company Limited Partnership (“J. W. Korth”), a Michigan limited partnership which is a FINRA and SEC registered broker-dealer founded in 1982, became a wholly owned subsidiary of the Company.
Overview
KDM originates and funds loans secured by commercial real estate (each a “CM Loan” and collectively the “CM Loans”). CM Loans are held by KDM or its wholly owned subsidiary KDM Funding I, LLC as lender. KDM is also the servicer of the CM Loans, though it may use a sub-servicer for some loans. KDM funds its CM Loans directly in the capital markets through issuance of Mortgage Secured Notes (“MSNs” or “Notes”), through direct participations, or other means (see “The KDM Process”). The MSNs are special obligations of KDM, payable to the extent that the underlying mortgage is paid by the borrower. MSNs are secured by KDM’s interest in the underlying CM Loan. CM Loans are secured obligations of the borrowers, which are generally a single-purpose entity formed or existing that owns the underlying property that is financed.
Our loan origination team is comprised of employees and a network of brokers that have joined the KDM Broker Network to submit loans to us via our website and email. We have created software that integrates with our customer relationship management (“CRM”) software to optimize our digital marketing campaigns and streamline our origination program. We also engage in traditional email, internet, trade show, and telephone marketing as well as leveraging our broker network to source new deals.
We have positioned ourselves in the lending market as a source for commercial real estate loans of higher quality borrowers, and borrowers that may not qualify or may not want to go through the process for bank loans, but whose loans have strong property and mortgage-related metrics. We fill the gap between traditional lenders and hard money lenders, what we call Middle-Money.TM. Property metrics depend on the type of CM Loan being offered and are described below.
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KDM is currently focused on the market for loans secured by mortgages on commercial tenanted properties, including multi-family housing, specialty offices, industrial, retail and warehouses, but may fund other types of commercial real estate.
KDM funds its loans in a variety of ways, including by securitizing them in the capital markets as MSNs. J. W. Korth acts as the underwriter of the MSN Notes and distributes them to institutional investors. The cash from the closing of each MSN issuance is used to complete the funding of the CM Loan or CM Loans underlying each MSN or to repurchase the loan from our warehouse line. KDM also sells loan participations, senior and subordinated notes sometimes alongside an MSN, and sometimes separately. KDM also holds loans on in part or in their entirety on its balance with and without financing (“Portfolio Loans”).
In 2022, KDM’s business broadened beyond MSNs, and we diversified our funding channels to include funding that extends beyond just the MSN program. In order to encompass all of the options, throughout this document when referring to KDM’s business as a whole, we will refer to CM Investments and CM Investors. These terms include our MSN program and its Noteholders, loan participations and the participants, senior note sales and their purchasers, funds and their investors, and separately managed accounts and their investors.
The KDM Process
When KDM identifies a property proposed for financing, it is screened by KDM’s origination underwriting team. If the proposed financing passes preliminary underwriting and meets criteria for one of KDM’s lending programs and/or the KDM Rating process, KDM will put out a term sheet to the prospective borrower. Once the term sheet is signed and deposit is received, KDM orders an appraisal and other third-party reports that it has determined are necessary to underwrite the file. Depending on the planned loan disposition, KDM will begin its CM Investor sales process on a parallel path with underwriting. Once underwriting is complete, KDM closes the loan.
KDM may market the loan as an MSN, for participation, or close the loan on a warehouse line, distributing the interests in the loan to investors later.
If the loan is being funded by a simultaneous MSN issuance, the initial purchaser will execute orders and funds will transfer on the settlement date to one of KDM’s segregated accounts. KDM will then fund the CM Loan and issue the MSNs.
KDM receives monthly interest and principal payments from CM Loan borrowers. KDM collects its service fee from the interest portion of the payment and then disburses the remaining interest and principal via wire transfer, ACH, or to DTC for credit to CM Investors’ accounts at their respective DTC member or those brokerage firms corresponding with DTC members, or directly, as the case may be.
We make CM Loans to borrowers throughout the United States. As of the date of this Report, we were not dependent on any single party for a material amount of our revenue.
Borrowers identify their intended use of CM Loan proceeds in their initial CM Loan request. In some cases, we do not verify or monitor a borrower’s actual use of funds following the funding of a CM Loan unless otherwise specified in the offering memorandum for the MSN.
The KDM Ratings System
In order to assist us with pricing and underwriting CM Loans, KDM has created an internal CM Loan rating system which we use for our MSN program.
The scoring matrix consists of seven factors, each weighted according to its relative importance in how we view the loans we choose to make. The seven factors are: loan to value, debt service coverage ratio, property type, property/improvement age, property demand/metropolitan statistical area, building condition, and sponsor experience. For bridge loans, we consider an additional factor: development/lease up schedule.
We grade each CM Loan on these factors when it is presented to us, which results in a numerical figure that we then translate to a traditional AAA-BBB scale with + and – gradation. We publish our KDM Rating along with each note term sheet and offering memorandum and update it annually in our annual reviews in the quarterly or annual report that corresponds with the anniversary of the CM Loan issuance.
The KDM Loan Committee meets annually to review the KDM Ratings System. We review the performance, the factors, and how well those factors are weighted. The KDM Loan Rating Committee met on March 21, 2024 to review the KDM rating methodology. The methodology considers seven key criteria and is then subject to adjustment on a deal-by-deal basis. The seven criteria are: LTV (Loan to Value), DSCR (Debt Service Coverage Ratio), Property Type, Lease terms, Location, Building Condition and Sponsor Experience. We added additional criteria and weightings for multi-family bridge lending that include non-GSE geographic criteria, different occupancy categories, building class, and project type.
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THE CML ISSUANCE PROCESS
Step One: Identify Loan Parameters
KDM, through market research, identifies loan parameters and related investor parameters that it expects will be of value to both borrowers and investors. It then uses its network of mortgage brokers, real estate agents, and lending platforms to identify properties that potentially meet these parameters. The parameters identified will include the loan type, expected interest rate, maturity, pre-payment terms, loan-to-value, minimum debt service coverage ratio, and basic loan structure.
Step Two: Identify and Screen Property
The KDM origination team works to bring in leads on new properties on which KDM can potentially lend. The team has a network of mortgage brokers, real estate agents, lending platforms, as well as lead generation databases that it uses on a daily basis to identify potential loans. Once the team finds a potential property it creates a deal scorecard that identifies critical preliminary underwriting information, including potential loan value-to-cost ratio, debt service coverage of the proposed loan, sponsor experience, real estate comparison prices, last appraised value, and estimated current value, along with information about the property and location, including city, neighborhood, number of units, and use of proceeds.
Step Three: Create a Term Sheet
KDM puts out a term sheet on the deal outlining the prospective terms under which KDM will lend on the property. Once the borrower signs the term sheet and sends in their deposit, KDM orders third party reports including the appraisal, appraisal review, and property condition report and environmental report, as applicable.
Step Four: Complete Underwriting
Once KDM receives back the third party reports and completes all of its property and underwriting diligence, KDM prepares a commitment letter for the borrower. When the borrower executes the commitment letter, it pays KDM an application fee. Simultaneously, KDM prepares any capital raise pitch decks or other offering documents, depending on the planned disposition for the loan. KDM will also have a third party underwrite the loan in certain circumstances.
Step Five: Closing and funding the CML
KDM may close and fund CMLs before securitization either with its own funds, or on its warehouse line, or simultaneously with securitization.
MSN Closing
KDM will schedule closing for the CML on or within a few days after the settlement date of the MSN. However, as with all loan closings, and particularly with multi-state, multi-property loans, at times there may be certain delays in closing. KDM does not expect closing delays to exceed a few business days, but in some instances the delay may be longer than anticipated. On the Settlement Date, funds, net of selling concession, will be wired by the Initial Purchaser or the underwriter, as the case may be, to KDM’s segregated account for loan funding. KDM will wire such funds to the closing agent for the CML as soon as good title to the property is received and KDM authorizes funding of the CML. Barring any delays in closing, this occurs on the Settlement Date, and KDM wires funds to the title company handling the transaction as soon as practicable after receipt.
Once funds are collected, the CML will be finalized with documents filed in the proper jurisdiction showing KDM as mortgagee. Documents will also be filed, pursuant to the Indenture, assuring the Trustee a first perfected interest in the CML. At the same time, KDM will create and execute a physical note for issuance to Cede & Company and delivery to DTC, or its agent. DTC will credit each participating dealer with the appropriate face amount of the note for further credit to each of its participating client accounts.
In the event that a CML was closed by a correspondent lender, such CML will be closed in the name of the correspondent lender and will be assigned to KDM at closing. Any other material aspects of the process remain the same.
Non-MSN Closing
Depending on the plans for the CML post-closing, KDM may close the loan on its warehouse line, with its own capital, with capital from participants, or table-fund via assignment or participation. The warehouse lender provides a percentage of the capital to close the loan, and KDM provides the balance, according to the terms of its warehouse repurchase agreement. KDM may also lend additional funds to CML Borrowers using its own capital. These loans are junior to any CML and KDM may elect to sell or assign the rights to receive payments under these loans to a third party, provided however that these notes shall remain in the name of KDM, and KDM shall continue providing the servicing of such notes until such time that the CMLs for the underlying property have been paid in full.
How KDM operates if KDM Acquires Existing CM Loans and Issues CM Investments
When KDM acquires an existing CM Loan or group of loans and issues corresponding Notes, the Notes sale and CM Loan closing process are the same as for loans that we originate, except that KDM will purchase the CM Loan from a third party. Information about the borrower of an existing loan may be more limited and appraisals may be less current than for a loan originated by KDM. In such instances, an estimate of value from a local expert may be required to supplement an existing appraisal. A history of CM Loan payments will be included in the offering memorandum for the notes to be issued to purchase an existing CM Loan.
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CM Loans may also be acquired by purchasing a participation in CM Loans from another lending institution. In these cases, the pricing of the participation and the net mark-up or down of the CM Loan in the form of the corresponding Note will be fully described to CM Investors as well as a detailed description of the financial institution selling the participation interest(s).
How KDM Prices CM Loans and CM Investments
Note maturities and yields to CM Investors must be competitive with other options they have for secured investments. Notes are not guaranteed by any federal agency, so they must be competitively priced when compared with other types of asset-secured debt, such as lower investment grade corporate bonds or other mortgage loans. Borrowers may have other options for acquiring new mortgage funding. KDM must be competitive with these options in order to acquire new CM Loans. The dynamic between these two marketplaces is a principal factor in the determination of the terms of KDM Notes and other CM Investments.
How our Servicing Fee Applies
KDM services the underlying CM Loans and manages the distribution and payment of interest and principal on the corresponding CM Investments. For these services it charges an annual servicing fee (“Servicing Fee”) targeted at 1.00%. The Servicing Fee could be lower or higher for a given CM Loan based on that CM Loan and the corresponding CM Investment’s terms, as disclosed in the offering material for each CM Investment. For some of its lending programs, KDM has a fixed contractual servicing rate. The Servicing Fee accrues to KDM and is paid by the borrower from the borrower’s CM Loan interest payments. For CM Investments where there is not an explicit servicing agreement, the Servicing Fee is the difference between the rate paid by the borrower and the rate paid to investors on the CM Investment. However, the Servicing Fee may sometimes be shared with other parties, and not accrue directly to KDM. The Servicing Fee is applied to every interest payment received on the underlying CM Loan. Therefore, if we receive 7.00% interest annually from the underlying CM Loan and the Servicing Fee is 1%, the Note payments will be 6.00% annually, barring any other expenses. For the year ended December 31, 2023, the average Servicing Fee collected was 1.16%. KDM may also derive Servicing Fees from loans that it sells to third parties. The rates received for servicing these loans are set by the purchaser and KDM.
CM Loan Servicing
KDM is responsible for servicing and asset management on all the loans it makes. This includes collecting payments from borrowers and delivering payments to investors and on its Notes. KDM also manages the tax and insurance escrow accounts of the borrowers and their annual tax and insurance payments. KDM also handles all loan requests, lease reviews and approvals, draw requests and annual reviews within its asset management department. KDM has multi-disciplinary staff with extensive servicing and asset management experience and uses a suite of servicing software and homegrown reporting software to manage the ongoing servicing of our book of CM Loans. Currently, KDM services 100% of its loans itself; though we may engage a third-party servicer in the future.
KDM makes advances of funds from time-to-time as it believes necessary. KDM may advance payments to CM Investors if it believes a borrower will return to current status promptly. KDM also may advance payments to local tax authorities, ground lessors, and insurance carriers as it believes necessary to protect the CM Loan or underlying collateral.
KDM has custodial responsibility for the CM Loans and pursuant to the Trust Indenture for the Notes. There are no limitations in KDM’s liability as servicer of its loans.
KDM retains a Servicing Fee for each CM Loan. See “How our Servicing Fee Applies,” above. KDM has relationships with other servicers and uses SitusAMC for special servicing, as needed. Should a specific backup or special servicer be named for an offering, it will be specified in the offering documents for that CM Investment.
CM Loan payments are deposited or transmitted via ACH to the KDM In Trust For 2 Segregated Account. This segregated account collects payments from all CM Loans, except where otherwise specified in the offering documents, and is segregated from the KDM operating funds. This account is managed as an omnibus account and funds received are disbursed for their respective payment on the CM Investments. We also debit this account for our Servicing Fee as described above.
CM Loans may also retain an impound or escrow amount for taxes, ground rent, and insurance and a replacement reserve for roof repairs, tenant improvements, leasing commissions, debt service, or other items necessary to the proper functioning of the property. Such escrowed funds are currently in the KDM In Trust For 1 Segregated account. In most cases, KDM reserves the right as servicer to release any impounded amounts or reserved where permitted by the loan documents or when in its reasonable business judgement, such releases are warranted as they do not impair the borrower’s ability to repay the CM Loan.
In the event it becomes necessary to expend funds for the collection or protection of a CM Loan, or for the preservation or protection of a CM Loan property, including the institution of foreclosure proceedings, such expenses will initially be covered by KDM and recouped at disposition of the property or upon repayment by the Borrower should the CM Loan be brought into compliance. Ultimately, all costs and expenses will be funded (or reimbursed to us) from the proceeds of any foreclosure or settlement, including reimbursement to us of any expenses we have disbursed toward collection of a CM Loan. These expenses may reduce interest or principal payments on a Note. See “Risk Factors.”
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On our website www.korthdirect.com, we disclose borrowers’ payment performance on our CM Loans at least annually. We have made arrangements for collection procedures in the event of borrower default. When a CM Loan is past due and payment has not been received, we contact the borrower to request payment. After a grace period as permitted under the applicable CM Loan agreements, we may, in our discretion, assess a late payment fee. This fee may be charged only once per late payment. Amounts equal to any late payment fees we receive are paid to holders of the CM Investment if and only if a payment on the CM Investment is also late. We may waive a late payment fee when a borrower promises to return a delinquent CM Loan to current status and fulfills that promise. Each time a payment request is denied due to insufficient funds in the borrower’s account or for any other reason, we may assess an unsuccessful payment fee to the borrower in an amount of $35.00 per unsuccessful payment, or such lesser amount as may be provided by applicable law. We retain 100% of this unsuccessful payment fee to cover our costs incurred due to the denial of the payment.
If the CM Loan becomes 31 days overdue (see “Certain Definitions,” below), we will identify the CM Loan as “Late (31-120),” and we may refer the CM Loan to a real estate attorney for foreclosure proceedings. However, we may pursue other remedies to bring the loan back to performance before foreclosure. In these cases, the interest rate on the CM Loan is increased to the highest legal rate in the state in which the property is located. The costs from a foreclosure and resale of a defaulted CM Loan and mortgaged property are applied against the proceeds payable to CM Investors. If funds remain after a property is resold and all expenses are paid, they will be distributed to CM Investors on a pro-rata basis.
Asset Management
KDM has an internal Asset Management department that handles delinquent and defaulted loans. In 2023, seven loans entered delinquent or defaulted status. Two of those loans were sold at or above par. One loan on two properties was part of an assignment for the benefit of creditors and is in receivership. Four other loans ended the year at various stages of work-out negotiations. As of the date of this report, KDM owns one additional property as a result of a completed foreclosure, has negotiated a deed in lieu for another, and is in the process of foreclosure on three others, two of which went delinquent since the beginning of the year, and one is now under LOI to be sold. To handle these issues, KDM uses a combination of inside and outside counsel, asset management, third parties, and servicing staff. The loans that have gone into default are primarily offices that either failed to lease up or lost major tenants.
KDM works in the best interest of investors to maximize recovery value on all properties in asset management. Recovery timelines can vary from as short as 4 months to as long as several years. Properties may not have current cash flow that exceeds expenses and CM Investors may not receive cash flow for an extended period for loans that are in Asset Management.
Certain Definitions
We define delinquent accounts as accounts that are more than 31 days overdue with no immediate plan to repair the delinquency. Charge-offs are defined as the unpaid principal balance of a specific CM Loan minus the expected recovery based on current market conditions for the foreclosed property. Uncollectable accounts are defined as those CM Loans where no recovery is expected to be made. These definitions are regardless of any grace period, re-aging, restructure, or partial payments received. A CM Loan that is categorized as a delinquent account could be re-categorized as current if the borrower brought all payments up to date. Charge-offs would be adjusted for properties in foreclosure based on an annual review of the current market conditions for the geography of the property. Uncollectible accounts will be reviewed quarterly and could be reclassified as collectible if market conditions change for the property subject to the mortgage and foreclosure. As of the date of this Report on Form 10-K, we have no CM Loans that are payment delinquent. See “Status of our CM Loans”.
Intellectual Property
We have intellectual property that is our brand, our process, our ratings system, our KDM Broker Network, our correspondent network, and our internal applications and systems. We have a trademark for the term “Middle-Money” . We also have internal applications that we have developed that assist in managing our business.
Employees
As of the date of this Report, we employ twenty-one full-time people, and four contract people.
Facilities
We maintain offices at 135 San Lorenzo Avenue, Suite 600, Coral Gables, Florida 33146, and J.W. Korth & Company has an office in Lansing, Michigan.
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As of the date of this report, KDM has several subsidiaries, many of which are special purpose entities.
J. W. Korth, a FINRA and SEC registered broker-dealer founded in 1982 by James W. Korth, our CEO. J. W. Korth was previously the parent company of KDM. The companies were reorganized as of July 31, 2020, when KDM, directly and indirectly, acquired all of the equity of J. W. Korth.
KDM Funding I, LLC is a wholly owned subsidiary of KDM formed for the purpose of issuing MSNs on CM Loans that are originated and serviced by KDM.
KDM owns a controlling interest in KDM Stafford LLC, which is a special purpose entity that owns a building we acquired in Virginia.
KDM owns Citrus Servicing LLC, which is an entity that is a servicer for our small balance loan program.
KDM also owns KDM MFB LLC, a Delaware limited liability company, a newly formed and wholly owned subsidiary of Korth Direct Mortgage Inc.
There are also a variety of entities created to own real estate received through foreclosure or deed in lieu of foreclosure, the fund manager, the manager of the real estate assets, and other various special purposes. If and when these become material they will be reported on as necessary.
All of these entities are consolidated into our financial statements.
The following discussion of risk factors contains “forward-looking statements,” as discussed in the forward-looking statements Section of this Form 10-K Report. These risk factors may be important to understanding any statement in this Annual Report on Form 10-K or elsewhere. The following information should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations section and the Financial Statements and related notes of this Report on Form 10-K. Any of these factors, or others, many of which are beyond the Company’s control, could negatively affect the Company’s revenues, profitability or cash flow in the future. The risks and uncertainties described below are not the only ones we face but do represent those risks and uncertainties that we believe are material to our business, operating results, prospects and financial condition. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.
Difficult conditions in the mortgage, residential and commercial real estate markets, or in the financial markets and the economy generally, including market volatility, and geopolitical tensions, may cause us to experience market losses related to our holdings, and there is no assurance that these conditions will improve in the near future.
Our results of operations are materially affected by conditions in the mortgage market, the residential and commercial real estate markets, the financial markets and the economy generally. Difficult market conditions, as well as inflation, energy costs, geopolitical issues, health epidemics, unemployment and the availability and cost of credit, can contribute to increased volatility and diminished expectations for the economy and markets. The U.S. mortgage market has been severely affected by changes in the lending landscape and has experienced defaults, credit losses and significant liquidity concerns, and there is no assurance that these conditions have fully stabilized or that existing conditions will not worsen. Disruptions in mortgage markets negatively impact new demand for real estate. Further, disruptions in the broader financial markets, including the occurrence of unforeseen or catastrophic events such as the effects of COVID-19 or other widespread health emergencies, geopolitical tensions or terrorist attacks, could adversely affect our business and operations. Any such disruption could adversely impact our ability to raise capital, cause increases in borrower defaults and decreases in the value of our assets, cause continued interest rate volatility and movements that could make obtaining financing or refinancing our debt obligations more challenging or more expensive, and could lead to operational difficulties that could impair our ability to manage our business.
Inflation in the U.S. is expected to continue at an elevated level in the near- to medium-term, which may have an adverse impact on the valuation of our loans and affect our borrowers’ ability to refinance.
Heightened competition for workers, supply chain issues, the relocation of foreign production and manufacturing businesses to the U.S., and rising energy and commodity prices have contributed to increasing wages and other economic inputs. Inflation can negatively impact the profitability of real estate assets with long-term leases that do not provide for short-term rent increases or that provide for rent increases with a lower annual percentage increase than inflation. Continued inflation, particularly at higher levels, may have an adverse impact on the valuation of the properties underlying the CM Loans as well as the sponsors’ ability to refinance.
CM Investors may lose some or all of their CM Investment.
The regular payment of a CM Investment depends entirely on payments to KDM of a borrower’s CM Loan. The Notes are special, limited obligations of KDM payable only from KDM’s receipts of CM Loan proceeds, net of KDM’s Servicing Fee and cost of collection. If a borrower defaults on the CM Loan, CM Investors will be dependent on proceeds from the Assignment of Rents held by KDM and on the proceeds, if any, from foreclosure of the CM Loan mortgage for payments on the Notes. The failure of the borrower to repay the CM Loan is not an event of default by KDM. Notes are suitable purchases only for investors of adequate financial means who, in the event of a default on the underlying CM Loan, may have to wait for a foreclosure and subsequent sale to recover some or all of the principal invested in their Note.
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We rely on third-party appraisals to value the property securing the CM Loan, and information from the borrower on cash flow and profitability of the income property.
While we make every effort to engage responsible licensed third-party appraisers, we cannot be certain that the information and presentations they make are reliable. Appraisals are subject to mistakes that could affect the value of a property. Further, appraisers may make judgments of value based on cash flow presented by borrowers. If a borrower were to falsify its cash flow, it could affect the value shown in the appraisal. To verify cash flows, we receive bank statements from borrowers. KDM is not responsible for mistakes or fraudulent activities of borrowers or appraisers.
If we believe it is in the best interest of the CM Investors, we have the right to adjust the terms of a CM Loan.
It is possible that due to natural disasters, local disruption of services, political unrest, changes in local laws, market competition or disruptions and other unforeseen events that affect the property pledged under a CM Loan or affect the borrower’s ability to make its CM Loan payments, it might be in the best interest of the CM Investors to provide a borrower with an accommodation regarding loan terms rather than be forced to foreclose on a loan. If we adjust a CM Loan, it may reduce interest payments, suspend interest payments, lengthen the time when principal may be received or change other terms of the CM Loan which could reduce the expected benefits of the CM Loan to the CM Investors.
KDM may also choose to extend a performing CM Loan for an additional term due to market conditions, or may modify a loan for a good borrower to extend their period while adjusting their rate to current market level, if we believe such modification will not be detrimental to Noteholders.
There may be a default on a CM Loan.
CM Loan default rates may be significantly affected by general economic conditions beyond our control and beyond the control of the individual borrower. Default on a CM Loan is subject to many factors, such as prevailing interest rates, the rate of unemployment, the level of consumer confidence, residential or commercial real estate values, the value of the U.S. dollar, energy prices, changes in consumer spending, the number of personal bankruptcies, disruptions in the credit markets, and other factors, none of which can be predicted with certainty.
Any costs or delays involved in the completion of a foreclosure or liquidation of the underlying property may further reduce proceeds from the property and may increase the loss.
It is possible that we may find it necessary or desirable to foreclose on certain CM Loans we acquire or originate, and the foreclosure process may be lengthy and expensive. Borrowers may resist mortgage foreclosure actions by asserting numerous claims, counterclaims and defenses against us including, without limitation, numerous lender liability claims and defenses, even when such assertions may have no basis in fact, in an effort to prolong the foreclosure action and force us into a modification of the loan or a favorable buy-out of the borrower’s position. In some states, foreclosure actions can sometimes take several years or more to litigate. At any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the foreclosure process. Foreclosure may create a negative public perception of the related mortgaged property, resulting in a decrease in its value. Even if we are successful in foreclosing on the loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the CM Loan, resulting in a loss to CM Investors. Furthermore, any costs or delays involved in the completion of a foreclosure of the CM Loan or a liquidation of the underlying property will further reduce the proceeds and thus increase the loss. Any such reductions could materially and adversely affect the return to the CM Investor.
Real estate properties acquired through foreclosure subject us to additional risks associated with owning real estate.
When a CM Loan defaults, KDM may, on behalf of CM Investors, acquire the property through foreclosure or a deed in lieu of foreclosure. Depending on the market environment at the time, we may need to own the properties for an extended period of time before sale. We have acquired real estate properties through foreclosure, which exposes us to additional risks, including, but not limited to, the following:
● facing difficulties in integrating these properties with our existing business operations;
● incurring costs to carry, and in some cases make repairs or improvements, which results in additional expenses and requires additional liquidity that could exceed our original estimates and impact our operating results;
● being unable to realize sufficient amounts from sales of the properties to avoid losses;
● being unable to sell properties, which are not liquid assets, in a timely manner, or at all, when we need to increase liquidity;
● maintaining occupancy of the properties;
● controlling operating expenses;
● coping with general and local market conditions;
● complying with changes in laws and regulations pertaining to taxes, use, zoning and environmental protection;
● possible liability for injury to persons and property;
● possible uninsured losses related to environmental events such as earthquakes, floods or mudslides; and
● possible liability for environmental remediation.
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Information supplied by the borrower could be inaccurate or intentionally false.
While we perform due diligence on each borrower, including verifying property ownership, rent collections, property values, coverage ratios and other appropriate due diligence materials, a borrower could present us with false information which we may not discover during our due diligence process.
In many cases, we do not monitor our borrowers’ use of funds.
Unless specified otherwise, KDM does not monitor borrowers’ use of funds. It is possible the borrower may not use the funds for the purposes it has asserted, for example, to improve the property. Additionally, the borrower could potentially misuse the proceeds it receives from the loan in a way that negatively impacts their ability to make timely payments on the CM Loan, their credit, or the value of the underlying property.
CM Loan Guarantees May Not Be Collectable
Some CM Loans may have a personal guarantee. We may ask for guarantees from the owners, or the owners of the owner, if the owner is not an individual. Because we primarily focus our underwriting on the value of the mortgaged property, the loan to value ratio, and the debt service coverage ratio, we generally do not investigate the net worth of the borrowers, and therefore, the ultimate value of the guarantee on a CM Loan, if any. In the event a CM Loan goes into foreclosure and the money realized in the foreclosure does not pay off the entire principal owed on the CM Loan, investors should not count on the guarantee being collectible. Should such a situation arise, investors may not see repayment of the entire principal amount of their Notes.
If payments on a CM Loan are not paid when due, CM Investors may not receive the full principal and interest payments that they expect to receive on Notes.
Payment to holders of Notes is completely dependent on payments received from corresponding CM Loans. If the borrower fails to make a required payment on a CM Loan within 30 days of a due date, we will pursue collection. If we refer a CM Loan to an attorney, we will monitor that CM Loan until either the CM Loan is paid or the property is foreclosed and resold and investors are paid. We may also pursue collection of a delinquent CM Loan directly. In the case of collection efforts, the cost of attorney’s fees will be charged against the CM Loan and will reduce the net payments on a Note.
The CM Loans underlying the Notes are typically payable on an interest-only basis until maturity, at which time the entire principal balance is due. Therefore, borrowers may have to refinance to pay off a balloon payment on the CM Loan.
If a borrower must refinance to pay off a CM Loan, such refinancing could be impossible due to market conditions or other factors. In such a case, the CM Loan would default. Such a default could reduce or eliminate principal payment of the Notes.
The borrower may prepay some or all of the principal amount of a CM Loan. A borrower may decide to prepay all, or a portion of, the remaining principal at any time subject to any prepayment penalties (if any) listed in the CM Loan. The amount of any prepayment penalty will depend on the type of loan product and the borrower. CM Investors will receive such prepayment net of our servicing fee. Interest will not accrue after the date on which the CM Loan is paid in full. If the borrower prepays a portion of the remaining unpaid principal balance on the CM Loan, we will reduce the outstanding principal amount and interest will cease to accrue on the prepaid portion. On an amortizing loan, we will require the borrower to pay the same amount on the CM Loan as the borrower paid prior to any partial repayment of principal. As a result of the combination of the reduced principal amount and the unchanged monthly payment, the effective term of the CM Loan will decrease. On an interest only CM Loan, the monthly payment CM Investors receive will be reduced proportionally by the amount of principal repaid. If the borrower prepays the CM Loan in full or in part, CM Investors will in all probability not receive all the interest payments that they expected to receive on their Notes.
The current interest rate environment may make it difficult for a CM Loan to refinance.
Sharp increases in prevailing interest rates may make it difficult or in some cases, not possible, for some CM Loan borrowers to refinance out of the CM Loan. Sharp increases in prevailing interest rates and or inflationary pressures may negatively impact the profitability of the collateral secured by the CM Loans, causing some assets to lose their ability to be cash flow positive or maintain the debt service covenants of lenders at the time they need to refinance. Accordingly such changes may make it difficult, or in some cases, not possible for some CM Loan Borrowers to refinance a CM Loan at maturity, affecting the CM Loan Investors’ ability to realize a return of their principal and or interest payments.
Prevailing interest rates may change during the term of the CM Loan on which a Note is dependent.
If a CM Loan is prepaid, CM Investors may be unable to invest prepaid Note proceeds at a rate comparable to the interest payable on the Notes. Further, for our MSNs, if interest rates rise and there is a market for the Notes, and a Noteholder decides to sell a Note prior to maturity, the Noteholder may receive a discounted return on the Note.
Investor funds in a KDM segregated account do not earn interest.
Proceeds of the sale of the Notes are held in a non-interest bearing segregated account pending completion of the Note Offering. Further, we place borrower loan payments in a segregated account under our control and pay all loan payments collected from the prior payment date at least four business days prior to the payment date on the twenty-fifth day of each month, with an extension to the next business day if required. Funds held in segregated accounts do not earn interest. These segregated accounts are held at BankUnited, RBC, or Chase and are managed by KDM. There is no escrow agreement with the bank.
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We may have to limit our business to avoid being deemed an investment company under the Investment Company Act.
In general, a company that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities may be deemed to be an investment company under the Investment Company Act of 1940, as amended (“Investment Company Act”). The Investment Company Act contains substantive legal requirements that regulate the manner in which “investment companies” are permitted to conduct their business activities. We believe we are excluded from registration by Section 3(c)(5)(c) of the Investment Company Act and have conducted, and we intend to continue to conduct, our business in a manner that does not result in our Company being characterized as an investment company. This section of the Investment Company Act contains an exemption for companies that make mortgages and do not issue redeemable shares. To avoid being deemed an investment company, we may not be able to broaden our offerings, which could require us to forego attractive opportunities. If we are ever deemed to be an investment company under the Investment Company Act, we may be required to institute burdensome compliance requirements and our activities may be restricted, which could materially adversely affect our business, financial condition, and results of operations.
Funds Received for all CM Loans are held on an omnibus basis in a Segregated Account.
We hold all funds received from CM Loans in a segregated account titled In-Trust For 2 at BankUnited bank. We then use our internal accounting system to determine which funds are applied to which Note investors. While our internal accounting system is backed up into separate record keeping systems managed by service providers, should our systems fail and the back-up systems fail for any reason, we may have difficulty determining which payments are to be applied to which Noteholder and your payments could be delayed until such a determination is made.
In the event of a KDM bankruptcy, general creditors of KDM may assert a claim that funds on deposit in the segregated account maintained by KDM for the benefit of CM Investors, and the separate segregated account maintained by KDM for real estate tax and insurance payments, are subject to the claims of general creditors. Principal and interest payments on CM Loans are deposited in a segregated bank account, and payments of real estate taxes and insurance on mortgaged properties are deposited in another segregated account, when and as received by KDM. Receipts deposited in those accounts are disbursed to CM Investors monthly and annually to property insurers and taxing authorities. KDM performs all accounting for these accounts, including sub-accounts for each CM Investment and property, and maintains all accounting records at its principal office. Under the Trust Indenture for the MSNs, the Trustee will have a first lien on the principal and interest account for the benefit of Noteholders. If the bankruptcy court were to determine that the funds in the account were subject to claims of creditors other than Noteholders or the Trustee acting on their behalf, the amount that Noteholders would receive from the account could be adversely affected. Further, amounts on deposit to pay real estate taxes and insurance could be reduced or entirely eliminated if paid to general creditors of KDM in the bankruptcy proceeding. The bankruptcy court could temporarily stay disbursements to CM Investors, taxing authorities and insurers even if the court were ultimately to determine that the funds in the account should be distributed to the CM Investors, the Trustee acting on their behalf, and, also, as appropriate, to taxing authorities and property insurers, resulting in delays to CM Investors in the receipt of payments on their Notes and penalties imposed by insurers and taxing authorities.
We rely on third-party banks to disburse CM Loan proceeds and process CM Loan payments, and we rely on third-party computer hardware and software. If we are unable to continue utilizing these services, our business and ability to service the CM Loans may be adversely affected.
We rely on a third-party bank to disburse CM Loan amounts. Additionally, because we are not a bank, we cannot belong to and directly access the ACH payment network, and we must rely on an FDIC-insured depository institution to process our transactions, including CM Loan payments and remittances to CM Investors. We also rely on computer hardware purchased and software licensed from third parties. This purchased or licensed hardware and software may not continue to be available on commercially reasonable terms, or at all. If we cannot continue to obtain such services from this institution or elsewhere, or if we cannot transition to another processor quickly, our ability to process payments will suffer and the ability to receive principal and interest payments on the Notes will be delayed or impaired.
Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees that we need to support our business.
Competition for highly skilled technical and financial personnel is intense. We may not be able to hire and retain personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.
In addition, we invest significant time and expense in training our employees, which increases their value to competitors that may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements and the quality of our services and our ability to service the CM Loans could diminish, resulting in a material adverse effect on our business and our ability to service the Notes.
If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
Our future depends, in part, on our ability to attract and retain key personnel. Our future also depends on the continued contributions of our executive officers and other key technical personnel, each of whom would be difficult to replace. The loss of the services of any of the executive officers or key personnel, and the process to replace any key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.
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Purchasers of CM Investments will have no control over KDM and will not be able to influence KDM corporate matters.
Our CM Investments grant no equity interest in KDM to the purchaser nor grant the purchaser the ability to vote on or influence our management decisions, including forbearance or foreclosure.
Unforeseeable Adverse Events.
Events beyond our control may damage our ability to maintain adequate records, or perform our servicing obligations. If such events result in a system failure, CM Investors’ ability to receive principal and interest payments on CM Investments could be substantially harmed.
If a catastrophic event resulted in an outage and physical data loss, our ability to perform our servicing obligations would be materially and adversely affected. Such events include, but are not limited to, fires, earthquakes, hurricanes, terrorist attacks, natural disasters, computer viruses and telecommunications failures. We store back-up records via cloud storage services via several different companies. If our electronic data storage and backup storage system are affected by such events, we cannot guarantee that CM Investors would be able to recoup their investment.
Federal and State regulatory bodies may create new rules and regulations that could adversely affect our business.
In the wake of the last financial crisis, banking and finance regulation continues to evolve, and increasing regulation by federal and state governments may become more likely. Our business could be negatively affected by the application of existing laws and regulations or the enactment of new laws applicable to lending, mortgages, mortgage servicing, or securities distribution. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to our investors in the form of increased fees.
If we discover a material weakness in our internal control over financial reporting which we are unable to remedy, or otherwise fail to maintain effective internal control over financial reporting, our ability to report our financial results on a timely and accurate basis may be adversely affected.
Should we or our auditors discover a material weakness in our internal controls, our ability to report our financial results on a timely and accurate basis may be adversely affected.
New Government Regulation may limit our ability to make CM Loans
We do not believe that we are subject to Risk Retention under RR (17 CFR 246), as our entity type is not within scope of the rule according to 12 CFR 244.1(c). However, if we become subject to risk retention rules, we could be required to raise significant capital in order to continue doing business.
Our Proprietary Ratings System is untested and is based on broad assumptions for which we have little statistical basis
We created the KDM Ratings System internally and based it on very broad assumptions. It should be noted that our staff members have no experience in creating a ratings system. We are not affiliated with any commercial rating agency, nor do we have experience in creating ratings of debt or mortgage securities. The Rating System has a short track record and has not been tested against any known data set. The Rating System is still evolving as we add items and add property types. It is not intended to be and should not be relied upon as a predictable measure of performance of the underlying CM Loan at this time. We also have conflicts of interest with respect to our Ratings System. See “Conflicts of Interest Regarding Our Proprietary Ratings System.”
Risks Related to the Banking System and Financial Markets
KDM depends on the functioning of the U.S. banking system and bond markets to raise the capital needed to fund CM Loans which are the core of its business. Should the banking system or bond markets enter into a prolonged downturn or suffer a crisis of confidence, KDM’s ability to raise money to originate new CM Loans may be adversely impacted, causing it to reduce the number of loans it originates.
Item 1B. Unresolved Staff Comments
Not applicable.
In November 2022, we acquired a majority interest in a property in Stafford, Virginia. The property is tenanted by third parties. We lease office space in Coral Gables, Florida, and through our subsidiary, J. W. Korth, in Lansing, Michigan.
On March 5, 2024, on behalf of investors, we acquired a property in Acton, Massachusetts via foreclosure auction.
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The Company is not subject to any material legal proceedings. The company may at times be involved in legal proceedings, claims, and litigation arising in the ordinary course of business not specifically discussed herein. In the opinion of management, the final disposition of such matters will not have a material adverse effect on our consolidated financial position, cash flows or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
There is no market for the Company’s common equity.
Holders
As of December 31, 2023, the Company had issued and outstanding (i) 5,000,000 shares of its common stock, all which were issued to J.W. Korth, (ii) 460,000 shares of its Series A 6% Cumulative Perpetual Convertible Preferred Stock (the “Series A Preferred”), all of which were issued to Cede & Company, and (iii) 19,000 shares of its Series B 6.50% Cumulative Non-Voting Redeemable Secured Preferred Stock (“Series B Preferred”) issued to Cede & Company. The number of holders was determined from the records of our transfer agent and does not include beneficial owners of common or preferred stock whose shares are held in the names of Cede & Company, broker-dealers, or registered clearing agencies. The transfer agent of our common stock and preferred stock is Continental Transfer and Trust Company, One State Street, New York, New York 10004.
Dividends
The Company has not paid, and has no plans to pay, dividends on its common stock. Holders of the Series A Preferred are entitled to receive, when, as, and if declared by the Board of Directors, cash dividends at a rate of 6.00% per annum based on the Series A Preferred liquidation preference of $25.00 per share. Holders of the Company’s 460,000 issued shares of Series A Preferred were paid a dividend totaling $1.50 per share over four quarterly payments for the year ended December 31, 2023.
Holders of the Series B Preferred are entitled to receive, when, as, and if declared by the Board of Directors, cash dividends at a rate of 6.50% per annum based on the Series B liquidation preference of $1,000.00 per share. These holders received dividends of $65.00 per share for the year ended December 31, 2023.
Securities Authorized for Issuance Under Equity Compensation Plans.
For information regarding securities authorized for issuance under our 2019 Stock Plan, please refer to the disclosure included below under the caption “Item 11. Executive Compensation—Equity Compensation Plan Information.”
Sales of Unregistered Securities
On June 29, 2021, KDM issued and sold 19,000 shares of its Series B Preferred to “qualified institutional buyers,” as defined in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), under exemptions from registration provided by Section 4(a)(2) of the Securities Act and Securities Act Rule 144A,
On September 15, 2021, June 28, 2022, and March 23,2023, KDM issued and sold 100,000, 480,000, and 160,000 shares, respectively of its Series A Preferred to qualified institutional buyers under exemptions from registration provided by Section 4(a)(2) of the Securities Act and Securities Act Rule 144A,
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our audited historical financial statements, which are included elsewhere in this Form 10-K. Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions, which are subject to risk, uncertainties and other factors, including, but not limited to, those described in the subsection titled “Risk Factors,” located in Part I, Item 1A, of this Form 10-K.
Overview
KDM was organized as a Florida limited liability company on July 24, 2009, under the name HCMK Consulting, LLC. We changed our name to J. W. Korth & Company, LLC, in November 2010, and then to Korth Direct Mortgage, LLC, on August 24, 2016. KDM converted into a Florida corporation, Korth Direct Mortgage Inc., on June 6, 2019. Our principal executive offices are located at 135 San Lorenzo Avenue Suite 600, Coral Gables, Florida 33146, and our telephone number is (305) 668-8485. Our website address is www.korthdirect.com. We also operate under the trade name KDM Financial, as well as via our subsidiary, J. W. Korth & Company Limited Partnership, a Michigan limited partnership.
Korth Direct Mortgage began its formal operations in October of 2016 when we engaged our Chief Lending Officer. KDM is a licensed Mortgage Lender Servicer with the State of Florida. Our NMLS License Number is 1579547.
We were wholly owned by J. W. Korth until July 31, 2020, when we acquired all of the equity of J.W. Korth, making it a subsidiary.
We originate, fund and service loans which are made to commercial borrowers. The loans are held by KDM as the lender. We fund our loans in a variety of ways, including selling loan participations, via a warehouse line, and directly in the capital markets through issuance of Mortgage Secured Notes (“MSNs” or “Notes”), which are sold through J.W. Korth as initial purchaser through exemptions from registration available under Rule 144A, Regulation D, and other exemptions from registration. We also buy and sell small balance residential rental loans. We may also issue second lien loans using KDM’s own assets, in which case these loans will be junior to the CM Loans where they are secured by the same property, or issue first mortgages with our own funds, which may or may not use additional financing.
Results of Operations for Year Ended December 31, 2023
The Company generated revenues of $9,840,590 for the year ended December 31, 2023, a decrease of $21,443 compared with revenues of $9,862,033 for the year ended December 31, 2022, due to new originations declining to $81,633,575 from $159,310,000 in 2022. As of December 31, 2023, the Company owned mortgages of $484,484,408 compared with mortgages of $447,407,141 as of December 31, 2022, an increase of 8%.
Gross profits decreased by $203,065 (3%) to $6,586,869 during the year ended December 31, 2023, compared with gross profits of $6,789,934 during the year ended December 31, 2022. The decrease in gross profits is due primarily to a year over year decline in new loan origination and lost servicing revenue due to delinquencies.
Operating expenses were $6,943,777 during the year ended December 31, 2023, an increase of $895,592 compared with operating expenses of $6,048,185 during the year ended December 31, 2022. The increase in operating expenses was primarily the result of an increase of $547,847 in depreciation related to acquiring the Stafford, Virginia building.
On an operating basis, after adding back depreciation, KDM netted $308,643, or approximately 4.6% of gross profit. Given that new originations were down by 50% in 2023, this speaks to the overall strength of the business and its durability through challenging markets.
Other income decreased by $9,482,361 to ($5,350,589) during the year ended December 31, 2023, compared with other income of $4,131,772 during the year ended December 31, 2022. The decrease in other income in the current year there was an unrealized loss on mortgages of $3,984,012 as compared to in the prior year there was an unrealized gain of $3,627,472.
The Unrealized (Loss)/Gain on Mortgage caption is the net present value of our mortgage servicing rights. The balance sheet caption Mortgage Servicing Rights takes our expected future servicing revenues from our entire book of loans and discounts it to present value. The Unrealized (Loss)/Gain number is the change in that value from year to year. When we close a new loan, we add several years of future servicing income stream to this number. Each month as we collect a servicing fee from that loan, we realize part of this value. If loans are delinquent or in foreclosure, as we saw in 2023, we lose some of those fees we expected to realize. For 2023, because new lending was down by 50%, we did not add as many new loan servicing fees to this number. We also removed $3,055,907 of future value due to loan delinquencies, and rising interest rates also resulted in mark to market change in value along with realized revenue. Below is a breakdown of how our Mortgage Servicing Rights changed from 2022 to 2023:
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| Change in Mortgage Servicing Rights, at Fair Value | ||||
| December 31, 2022 | $ | 13,229,889 | ||
| New Loans | 2,278,894 | |||
| Loans Removed | (3,055,907 | ) | ||
| Loans Paid off | (414,828 | ) | ||
| Realized Revenue & Mark to Market | (2,792,171 | ) | ||
| (3,984,012 | ) | |||
| December 31, 2023 | $ | 9,245,877 | ||
For the year ended December 31, 2023, the Company recorded a provision for income tax benefit of $1,324,842 compared with $1,287,040 of deferred income tax expense for the year ended December 31, 2022, due to the impact of net loss for 2023.
Net income declined sharply to a net loss of $6,200,165 for the year ended December 31, 2023, compared with net income of $1,607,939 during the year ended December 31, 2022. The decrease in 2023 was primarily attributed to the decrease in Other Income discussed above, most of which is non-cash.
The commercial real estate landscape was especially challenging in 2023 with continued interest rate rises making new lending difficult, and delinquencies resulting from changes in workplace practices and office space utilization making current loans challenging. Nevertheless, the vast majority of our loan book continues to perform, we continue to innovate with respect to new loan product and niches and expect to continue to grow and diversify in the future.
Financial Condition for the year ended December 31, 2023
As of December 31, 2023, we had $4,844,873 in cash, $7,759,198 in portfolio loans and securities, as well as $484,484,408 of loans securitized or participated out to investors. Total KDM originations stood at $596,180,000 for the year ended December 31, 2023, with $111,695,592 paid off or otherwise disposed and $484,484,408 total remaining. As of December 31, 2023, we also hold $6,074,927 loans for sale, and our property and equipment net of depreciation is valued at $17,674,959.
The fair value of our Mortgage Servicing Rights has fallen by 30% to $9,245,877 year over year, which is the net present value of the future servicing income we receive from loans made to date. This value is highly subjective and includes such variables as constant prepayment rate (CPR), discount rate, and market pricing data. Please see a reconciliation of this change in value above in “Results of Operations”. The current value was provided by a third-party consulting firm and uses 15.0% for the discount rate and includes a 7.64% CPR, along with other assumptions customary to the industry.
Total assets grew by 8.23% to $549,337,262 at December 31, 2023 as we continue to grow our asset base during fiscal 2023 although at a slower pace when compared to previous periods.
Capital and Liquidity Needs
On March 31, 2022, The Company entered into a Master Repurchase Agreement and Securities Contract (the “Agreement”) with Signature Bank (“Signature”), for the provision of an uncommitted warehouse facility up to $100,000,000 (the “Line”). The Agreement provides for approximately a three-year term and may be terminated in accordance therein.
On March 11, 2023, KDM’s warehouse lender Signature was placed into receivership by the FDIC. KDM has been advised that the warehouse line was acquired by New York Community Bancorp’s Flagstar Bank. By mutual agreement of the parties, the line has been closed subsequent to the date of the financial statements, on February 22, 2024.
On October 13, 2023, KDM MFB LLC, a Delaware limited liability company (the “KDM MFB”), a newly formed and wholly owned subsidiary of Korth Direct Mortgage Inc. (the “Company”) entered into a $100,000,000 Master Repurchase and Securities Contract credit facility with Churchill MRA Funding I LLC (the “Agreement”). The Company vis a vis KDM MFB, will use the credit facility provided by the Agreement (the “Line”) to finance the Company’s expansion of its lending operations in multi-family and multifamily bridge financing. See Form 8-k filed October 19, 2023 for more information.
KDM is actively raising capital for a new debt fund, KDM Capital Partners, LP. We may access the capital markets or private credit markets as we deem necessary for our business in forms that will comply with covenants of our trust indentures, and allow us the flexibility to continue to grow our business.
| 16 |
Status of our CM Loans
From 2017 through mid-2023, our CM Investors had never missed receiving a payment. For the three loans that went into default in 2021 and 2022, KDM, even though it had no obligation to do so, advanced payments to CM Investors and caused the CM Loans to be paid off either by refinance by the borrower, or we sold the notes at or above par to defaulted note investors. However, the commercial real estate landscape has encountered severe headwinds in 2023 and changes in the office market, in particular, have affected the performance of several of our underlying loans.
As of the date of these financial statements, KDM had 4 loans in default and outstanding, for a total of $64,635,000, for which all of the risk has been sold to investors. KDM’s risk is limited to a $2,000,000 second lien note on one of the properties as well as the servicing revenue it would have earned from the loans. Under the terms of its agreements with CM Investors, KDM, as servicer will work out defaulted loans for the benefit of the CM Investors. In doing so, KDM may incur expenses related to foreclosure and asset management that may not be recoverable.
CM Loans may from time to time be in a state of technical default. Such defaults arise out of a breach of one or more covenants or obligations of the loan, other than those for the repayment of principal or interest. KDM as the Servicer may elect to trigger default conditions where it feels that the underlying loan agreements provide for such default and that the triggering of default remedies is in the best interest of protecting the value of the underlying collateral and the repayment of the loan. Where KDM believes that a technical default would create a material risk to the CM Investors, KDM will provide notice to the CM Investors of the same.
Real Estate
In November 2022, KDM acquired a majority interest in a specialty office building in Stafford, Virginia after the borrower defaulted on its second lien mortgage. The first lien mortgage is in KDM2021-N011 and the property continues to cash flow the first lien. KDM is planning a specialty buildout of the third floor for a new tenant and may continue to operate the property or sell it to investors.
Map of Current Loans
| 17 |
Loan Information as of March 27, 2024
| Number | # of Buildings |
Ticker | Property | Property Type |
EJ Rating | Issue Date | Maturity Date |
Status | Original Balance | Original Appraisal | Original LTV | Appraisal Date |
Current Balance | ||||||||||||||||||||||
| 1 | 2 | KDM2017-N001 | Pinellas Park, FL | Multi-family | A+ | 4/20/2017 | 5/1/2027 | Paid-in-Full | $ | 1,059,000 | $ | 1,920,000 | 55.16 | % | 3/2017 | $ | - | ||||||||||||||||||
| 2 | 3 | KDM2017-N002 | Miami, FL | Multi-family | A | 12/21/2017 | 12/21/2020 | Paid-in-Full | $ | 950,000 | $ | 1,605,000 | 59.19 | % | 3/2018 | $ | - | ||||||||||||||||||
| 3 | 1 | KDM2018-N001 | Miami, FL | Warehouse | A- | 10/11/2018 | 3/13/2023 | Paid-in-Full | $ | 1,850,000 | $ | 2,775,000 | 66.7 | % | 2/2018 | $ | - | ||||||||||||||||||
| 4 | 1 | KDM2018-N002 | St Petersburg, FL | Multi-family | NR | 2/14/2018 | 2/14/2021 | Paid-in-Full | $ | 341,250 | $ | 570,000 | 59.9 | % | 12/2017 | $ | - | ||||||||||||||||||
| 5 | 1 | KDM2018-N003 | Perrysburg, OH | Warehouse | A+ | 4/27/2018 | 5/25/2023 | Paid-in-Full | $ | 6,300,000 | $ | 10,500,000 | 60.0 | % | 1/18/2018 | $ | - | ||||||||||||||||||
| 6 | 1 | KDM2018-N005 | Northwood, Ohio | Warehouse | A+ | 9/25/2018 | 9/25/2023 | Paid-in-Full | $ | 2,700,000 | $ | 4,155,000 | 64.98 | % | 6/2018 | $ | - | ||||||||||||||||||
| 7 | 1 | KDM2018-N007 | Vicksburg, MS | Multi-family | A | 1/15/2019 | 1/15/2024 | Paid-in-Full | $ | 4,850,000 | $ | 8,100,000 | 59.9 | % | 12/2018 | $ | - | ||||||||||||||||||
| 8 | 3 | KDM2019-N001 | Hammonton, NJ | Office | A- | 3/22/2019 | 3/22/2022 | Paid-in-Full | $ | 9,690,000 | $ | 14,250,000 | 68.00 | % | 2/2019 | $ | - | ||||||||||||||||||
| 9 | 2 | KDM2019-N002 | Birmingham & Center Point, AL | Multi-family | A- | 5/3/2019 | 5/3/2024 | Paid-in-Full | $ | 4,400,000 | $ | 6,875,000 | 64.0 | % | 4/2019 | $ | - | ||||||||||||||||||
| 10 | 2 | KDM2019-N003 | Springs Global SC and PA | Industrial | BBB+ | 7/31/2019 | 8/25/2024 | Paid-in-Full | $ | 9,700,000 | $ | 14,220,000 | 68.2 | % | 6/2019 | $ | - | ||||||||||||||||||
| 11 | 3 | KDM2019-N004 | Masco Springs - OH, OK, GA | Industrial | A- | 10/10/2019 | 11/25/2024 | Performing | $ | 37,000,000 | $ | 56,960,000 | 65.0 | % | 9/2019 | $ | 32,394,144 | ||||||||||||||||||
| 12 | 2 | KDM2019-N005 | Capitol Heights, MD | Industrial | A- | 9/30/2019 | 10/25/2024 | Performing | $ | 4,200,000 | $ | 9,360,000 | 44.87 | % | 9/2019 | $ | 4,200,000 | ||||||||||||||||||
| 13 | 2 | KDM2019-N008 | Cleveland, Ohio | Retail | A- | 12/18/2019 | 12/18/2024 | Performing | $ | 3,300,000 | $ | 9,850,000 | 33.5 | % | 11/2019 | $ | 3,300,000 | ||||||||||||||||||
| 14 | 1 | KDM2020-N001 | Woodbridge, VA | Industrial | A- | 2/27/2020 | 3/25/2025 | Performing | $ | 5,000,000 | $ | 9,240,000 | 54.11 | % | 11/2019 | $ | 5,000,000 | ||||||||||||||||||
| 15 | 8 | KDM2020-N002 | Cleveland, OH | Office | A- | 3/31/2020 | 5/25/2025 | Paid-in-Full | $ | 8,500,000 | $ | 23,000,000 | 37.0 | % | 10/2019 | $ | - | ||||||||||||||||||
| 16 | 1 | KDM2020-N003 | Carrollton, GA | Data Center | A- | 4/23/2020 | 4/23/2025 | Performing | $ | 4,000,000 | $ | 7,100,000 | 56.34 | % | 3/2020 | $ | 4,000,000 | ||||||||||||||||||
| 17 | 1 | KDM2020-N007 | Stuart, FL | Office | A- | 7/27/2020 | 8/25/2025 | Performing | $ | 1,650,000 | $ | 2,600,000 | 63.5 | % | 3/2020 | $ | 1,650,000 | ||||||||||||||||||
| 18 | 1 | KDM2020-N006 | Water's Edge, Trenton, NJ | Skilled Nursing Facility | A+ | 7/31/2020 | 8/25/2025 | Performing | $ | 9,500,000 | $ | 19,500,000 | 48.72 | % | 5/2020 | $ | 9,500,000 | ||||||||||||||||||
| 19 | 1 | KDM2020-N009 | La Grange, IL | Industrial | A- | 9/17/2020 | 10/25/2025 | Performing | $ | 2,308,000 | $ | 3,550,000 | 65.0 | % | 7/2020 | $ | 2,308,000 | ||||||||||||||||||
| 20 | 1 | KDM2020-N008 | Loves Park, IL | Industrial | A- | 9/25/2020 | 10/25/2023 | Paid-in-Full | $ | 7,765,000 | $ | 13,170,000 | 58.96 | % | 9/2020 | $ | - | ||||||||||||||||||
| 21 | 3 | KDM2020-N010 | Multifamily in AL, NY, FL | Multi-family | A- | 9/30/2020 | 10/25/2025 | Performing | $ | 8,684,000 | $ | 13,660,000 | 63.6 | % | 8/2020 | $ | 1,176,500 | ||||||||||||||||||
| 22 | 1 | KDM2020-N012 | Hampton, VA | Office | A | 10/30/2020 | 11/25/2025 | Performing | $ | 44,000,000 | $ | 74,900,000 | 58.74 | % | 10/2020 | $ | 44,000,000 | ||||||||||||||||||
| 23 | 2 | KDM2020-N011 | Stamford, CT | Office | A- | 1/8/2021 | 2/25/2026 | Performing | $ | 12,000,000 | $ | 19,100,000 | 62.8 | % | 8/2020 | $ | 12,000,000 | ||||||||||||||||||
| 24 | 3 | KDM2021-N001 | NJ, CA, TX | Mixed-use | A- | 2/12/2021 | 3/25/2026 | Performing | $ | 9,062,000 | $ | 14,910,000 | 60.78 | % | 11/20,12/20, and 1/21 |
$ | 9,062,000 | ||||||||||||||||||
| 25 | 1 | KDM2021-N002 | Bellingham, WA | Office | BBB+ | 3/18/2021 | 4/25/2026 | Performing | $ | 7,240,000 | $ | 12,090,000 | 59.9 | % | 01/2021 | $ | 7,240,000 | ||||||||||||||||||
| 26 | 1 | KDM2021-N004 | Ronkonkoma, NY | Warehouse | BBB/BBB+ | 3/31/2021 | 4/25/2026 | Performing | $ | 2,179,000 | $ | 3,800,000 | 57.3 | % | 01/2021 | $ | 2,179,000 | ||||||||||||||||||
| 27 | 1 | KDM2021-N005 | Los Angeles, CA | Industrial | A-/ WD | 4/23/2021 | 5/25/2024 | Default | $ | 35,100,000 | $ | 61,200,000 | 57.4 | % | 03/2021 | $ | 35,100,000 | ||||||||||||||||||
| 28 | 1 | KDM2021-N006 | FL and SC | Office | A-/A | 4/30/2021 | 5/25/2026 | Performing | $ | 4,380,000 | $ | 8,080,000 | 54.2 | % | 03/2021 | $ | 1,980,000 | ||||||||||||||||||
| 29 | 1 | KDM2021-N007 | Cheyenne, WY | Industrial | A- | 5/21/2021 | 6/25/2026 | Performing | $ | 7,100,000 | $ | 12,200,000 | 58.2 | % | 04/2021 | $ | 6,550,000 | ||||||||||||||||||
| 30 | 2 | KDM2021-N008 | Covina, CA & Las Cruces, NM | Retail | A-/A | 6/25/2021 | 6/25/2024 | Performing | $ | 10,400,000 | $ | 16,000,000 | 65.0 | % | 04/2021 | $ | 7,605,000 | ||||||||||||||||||
| 31 | 1 | KDM2021-N011 | Stafford, VA | Office | A-/A | 5/28/2021 | 6/25/2026 | Performing | $ | 9,500,000 | $ | 15,000,000 | 63.3 | % | 04/2021 | $ | 9,500,000 | ||||||||||||||||||
| 32 | 1 | KDM2021-N013 | East Orange, NJ | Education Center | A- | 7/22/2021 | 8/25/2026 | Performing | $ | 5,253,000 | $ | 9,550,000 | 55.0 | % | 04/2021 | $ | 5,253,000 | ||||||||||||||||||
| 33 | 2 | KDM2021-N014 | Mount Prospect, IL | Retail | A | 7/23/2021 | 8/25/2024 | Performing | $ | 5,850,000 | $ | 9,306,765 | 62.9 | % | 04/2021 | $ | 5,850,000 | ||||||||||||||||||
| 34 | 3 | KDM2021-N015 | Acton, MA | Office | A-/ WD | 8/25/2021 | 9/25/2026 | REO | $ | 9,660,000 | $ | 18,700,000 | 51.7 | % | 06/2021 | $ | - | ||||||||||||||||||
| 35 | 3 | KDM2021-N018 | Columbus, Toledo, Alliance & Mansfield, OH | Skilled Nursing Facility | A | 10/29/2021 | 11/25/2026 | Performing | $ | 23,000,000 | $ | 35,400,000 | 65.0 | % | 09/2021 | $ | 23,000,000 | ||||||||||||||||||
| 36 | 4 | KDM2021-N020 | Washington, PA & Goreville & Marion, IL | Funeral Homes & Office | A- | 11/10/2021 | 12/25/2026 | Partial Default | $ | 4,750,000 | $ | 8,791,000 | 54.0 | % | 09/2021 | $ | 4,125,000 | ||||||||||||||||||
| 37 | 1 | KDM2021-N021 | Kentucky | Office | A- | 11/19/2021 | 12/25/2026 | Performing | $ | 8,500,000 | $ | 17,300,000 | 49.1 | % | 10/2021 | $ | 8,500,000 | ||||||||||||||||||
| 38 | 1 | KDM2021-N022 | St. Louis, Missouri | Office | BBB+ | 12/8/2021 | 1/25/2027 | Default | $ | 18,000,000 | $ | 24,450,000 | 73.6 | % | 11/2021 | $ | 18,000,000 | ||||||||||||||||||
| 39 | 1 | KDM2022-N001 | Allentown, PA | Office | A- | 1/31/2022 | 2/25/2025 | Performing | $ | 24,000,000 | $ | 34,600,000 | 69.4 | % | 12/2021 | $ | 24,000,000 | ||||||||||||||||||
| 40 | 2 | KDM2022-N002 | North Carolina & Virginia | Retail | A- | 2/3/2022 | 2/25/2025 | Performing | $ | 5,500,000 | $ | 9,160,000 | 60.0 | % | 11/2021 | $ | 5,500,000 | ||||||||||||||||||
| 41 | 4 | KDM2022-N003 | Ohio | Skilled Nursing Facility | A- | 2/14/2022 | 3/25/2027 | Performing | $ | 16,500,000 | $ | 33,100,000 | 49.8 | % | 12/2021 | $ | 13,000,000 | ||||||||||||||||||
| 42 | 1 | KDM2022-N006 | Honolulu, HI | Special Use | A- | 4/8/2022 | 5/25/2027 | Performing | $ | 33,000,000 | $ | 52,000,000 | 63.5 | % | 01/2022 | $ | 33,000,000 | ||||||||||||||||||
| 43 | 4 | KDM2022-N007 | California and Texas | Retail | A- | 6/22/2022 | 7/25/2027 | Performing | $ | 11,720,000 | $ | 18,610,000 | 63.0 | % | 12/2021 | $ | 7,916,700 | ||||||||||||||||||
| 44 | 1 | KDM2022-N009 | Benton, Washington | Office | A+ | 8/12/2022 | 8/25/2027 | Performing | $ | 44,880,000 | $ | 78,300,000 | 57.3 | % | 07/2022 | $ | 42,417,177 | ||||||||||||||||||
| 45 | 1 | KDM2022-N010 | Washington D.C. | Office | BBB+ | 8/18/2022 | 9/25/2027 | Performing | $ | 3,850,000 | $ | 8,200,000 | 47.0 | % | 04/2022 | $ | 3,850,000 | ||||||||||||||||||
| 46 | 1 | KDM2022-N011 | Selma, Texas | Warehouse | A-/WD | 6/28/2022 | 6/28/2027 | Default | $ | 6,200,000 | $ | 10,000,000 | 62.0 | % | 05/2022 | $ | 6,200,000 | ||||||||||||||||||
| 47 | 1 | KDM2022-N014 | Coral Gables, Florida | Office | A- | 12/9/2022 | 12/9/2027 | Paid-in-Full | $ | 11,500,000 | $ | 18,500,000 | 62.2 | % | 11/2022 | $ | - | ||||||||||||||||||
| 48 | 1 | KDM2023-N001 | Long Beach, CA | Retail | A/A-/BBB | 3/23/2023 | 4/25/2028 | Performing | $ | 55,000,000 | $ | 86,900,000 | 63.3 | % | 01/2023 | $ | 55,000,000 | ||||||||||||||||||
| 49 | 2 | KDM2023-N003 | Murray, Kentucky & Kingsport, Tennesseee | Multisecuritization | A- | 7/28/2023 | 8/25/2028 | Performing | $ | 5,400,000 | $ | 10,700,000 | 50.5 | % | 05/2023 | $ | 5,400,000 | ||||||||||||||||||
| 50 | 1 | KDM2023-N005 | Worcester, MA | Retail | BBB+ | 11/29/2023 | 12/25/2028 | Performing | $ | 4,500,000 | $ | 8,750,000 | 51.4 | % | 7/2023 | $ | 4,500,000 | ||||||||||||||||||
| 51 | 1 | KDM2023-N006 | Ft Myers, FL | SFR | NR | 12/20/2023 | 12/20/2025 | Performing | $ | 750,000 | $ | 1,140,000 | 65.8 | % | 11/2023 | $ | 750,000 | ||||||||||||||||||
| 52 | 1 | KDM2023-L005 | Homewood, AL | Office | A- | 7/11/2023 | 7/11/2028 | Performing | $ | 11,500,000 | $ | 19,600,000 | 58.7 | % | 5/2023 | $ | 11,500,000 | ||||||||||||||||||
| 53 | 2 | KDM2024-L001 | Pembroke Pines, FL | Medical Office | NR | 3/5/2024 | 3/5/2034 | Performing | $ | 1,333,368 | $ | 1,400,000 | 95.2 | % | 11/2023 | $ | 1,333,368 | ||||||||||||||||||
| 54 | 1 | KDM2024-L002 | Miami, FL | Industrial | NR | 3/7/2024 | 3/7/2034 | Performing | $ | 3,550,000 | $ | 6,500,000 | 54.6 | % | 11/2023 | $ | 3,550,000 | ||||||||||||||||||
| * Ratings are the original and current ratings received from Egan-Jones Ratings Agency | $ | 588,904,618 | $ | 991,197,765 | 60.3 | % | $ | 481,389,889 | |||||||||||||||||||||||||||
| ** NR means the loan has not been rated and was either sold as a participation or an unrated bond. | |||||||||||||||||||||||||||||||||||
| *** Non-sequential loan numbers are due to some loans having been issued a file number, but the transaction was not closed, or is waiting to be closed | |||||||||||||||||||||||||||||||||||
| 18 |
Sales, Marketing and Customer Service
Our marketing efforts are designed to attract borrowers to contact us and to enroll them as clients, and to close transactions with them. Our origination team primarily does this through the substantial network of commercial mortgage brokers we have assembled, as well as through correspondent and wholesale relationships. We employ primarily email correspondence to mortgage brokers, banks, real estate agents, and commercial property owners to encourage them to present CM Loans to us for possible funding through the issuance of corresponding Notes. We attend trade shows, subscribe to lead generation databases, and loan and property platforms to find loans. We contact other financial institutions, directly and through brokers, that may own commercial mortgages, and may attempt to purchase mortgages for KDM.
Fraud detection
We consider fraud detection to be of utmost importance to the successful operation of our business. We employ a combination of proprietary technologies and commercially available licensed technologies and solutions to prevent and detect fraud. We use services from third-party vendors for user identification and OFAC compliance.
Notwithstanding KDM’s due diligence examination of the information provided to KDM by a borrower, there can be no assurance that the information provided to us, and on which we rely, is true, accurate, and complete.
Competition
The market for mortgage lending is competitive and rapidly evolving. We believe the following are the principal competitive factors in the lending market:
| · | pricing and fees; |
| · | experience, including borrower full funding rates and investor returns; |
| · | branding; and |
| · | ease of use. |
We face competition from major banking institutions, non-bank lenders, local banks, other private credit groups, as well as smaller private lenders.
Our success depends on further developing our network of transaction referral sources and broadening our distribution of our CM Investments.
We may also face future competition from new companies entering our market. If one or more of our competitors were to merge or partner with another of our competitors or a new market entrant, the change in competitive landscape could adversely affect our ability to compete effectively.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 8. Consolidated Financial Statements
The following is an index to the Consolidated Financial Statements of the Company being filed here-with commencing at page F-1 below:
| 19 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
We have had no changes in nor disagreements with our independent accountants on accounting and financial disclosure during the years ended December 2023 and 2022, nor in any subsequent interim period.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2023.
Management’s Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined by Securities Exchange Act Rule 13a-15(f). Our internal controls are designed to provide reasonable assurance as to the reliability of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our Chief Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting as of December 31, 2023, as required by Securities Exchange Act Rule 13a-15(c). In making our assessment, we have utilized the criteria set forth by the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We concluded that based on our evaluation, our internal control over financial reporting was effective as of December 31, 2023.
Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting that occurred during the fourth quarter ended December 31, 2023, or subsequent to the date the Company completed its evaluation, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None
| 20 |
PART III
Item 10. Directors, Executive Officers and Corporate Governance
As of the date of this Report, the Executive Officers and Directors of the Company were:
| Name | Age | Office |
| James W. Korth | 73 | Chairman of the Board |
| Holly C. MacDonald-Korth | 48 | Chief Executive Officer, President, Chief Financial Officer and Director |
| Pamela J. Hipp | 55 | Director of Securities Marketing and Director |
| Daniel Llorente | 44 | Chief Lending Officer and Director |
|
Jonathan L. Shepard |
80 |
Secretary and Director |
| Keith E. Henrich | 45 | General Counsel |
James W. Korth is the Chairman of the Board of Directors and was the Chief Executive Officer of KDM from 2016 until June 2023. He is also the Managing Partner of J W Korth & Company, LP, which he started in 1982. Mr. Korth has spent his business career as an investment banker in all manner of debt securities, including brokered CDs, and Certificates of Accrual on Treasury Securities (“CATS”), and has advised the US Treasury Department in the creation of the STRIPS program, and corporate General Term Notes, a Medium Term Note program emulated across the industry. Mr. Korth also manages several securities portfolios for clients of J W Korth & Company and holds his Series 4, 7, 24, 53, 66, and 79 licenses. He received his Master of Science from Michigan State University. Mr. Korth was made Chairman of the Board in June 2019.
Holly MacDonald-Korth is the Chief Executive Officer of KDM since June 2023, has been the President since 2019, and the Chief Financial Officer of KDM since 2016. Since 2006, she has been the Managing Director and Chief Financial Officer of J W Korth & Company, where she oversees all operations, finance, and business development for the firm. Prior to joining J W Korth, Ms. MacDonald-Korth was Senior Vice President at Overstock.com and a financial systems analyst at the Board of Governors of the Federal Reserve. Ms. MacDonald-Korth is the daughter of James W. Korth. She received a Bachelor of Business Administration with Honors in Finance from University of Miami. She holds her Series 7, 24, 27, and 66 licenses.
Daniel Llorente is the Chief Lending Officer of KDM since 2016. Mr. Llorente has over fourteen years of commercial and residential real estate financing experience at a variety of mortgage banks. Prior to joining KDM, Mr. Llorente was a Mortgage Loan Originator at Lakeview Loan Servicing. In 2013 and 2014 he served as an Associate Portfolio Manager at Bayview Loan Servicing. From 2012 -2013 he served as Assistant Vice President and Portfolio Manager at Intercredit Bank. From 2009 to 2012 he was Senior Loan Analyst at LNR Property LLC. Prior to that time he held positions at Regions Bank, Silver Hill Financial, and Lincoln Road Funding. All positions were in Miami, Florida and related to real estate financing. He is an ABA Certified Credit Analyst. Mr. Llorente graduated from Florida State University with a degree in finance and received an MBA from Nova Southeastern University.
Pamela J. Hipp is Managing Director of Fixed Income and Investor Relations and a Director. Ms. Hipp works for J. W. Korth & Company as Managing Director of Trading. She joined J. W. Korth in 2007 after its purchase of Cambridge Group Investments as regional trader and was promoted to Managing Director of Trading in 2010. Ms. Hipp has been in the securities industry for 23 years, first working at Citistreet Equities serving major corporations retirement account management; she then moved on to Cambridge Group in 2000. A Registered Representative and General Principal, Pam holds FINRA Series 7, 24, 63, 66, and 79 registrations and received her Bachelor of Science degree from Michigan State University. Pam is also a Partner of J. W. Korth and member of its Investment Committee, which guides recommendations and proprietary investment decisions.
Keith Henrich serves as KDM’s General Counsel, joining in January 2022. Mr. Henrich has large public company experience serving as the Assistant General Counsel for The Hackett Group, Inc. (NASDAQ: HCKT),from 2014-2021, a multi-national publicly traded company, and has focused his practice handling mergers and acquisitions, private placements, debt financing, public company reporting obligations, commercial lending and general corporate law as an associate at Bryn & Associates, from 2010 through 2014, in Miami, Florida, and Hogan Lovells in Washington D.C. from 2008-2009. Mr. Henrich holds an LL.M. from Georgetown University in Securities and Financial Regulation and a J.D. from Nova Southeastern University.
Jonathan Shepard has been KDM’s Secretary and a Director since 2016. Mr. Shepard also served as outside general counsel to KDM from 2016 to 2021 and continues to act as outside counsel to the Company. He has practiced in New York City, Philadelphia, and Boca Raton, Florida, in law firms, corporations, and the United States Environmental Protection Agency. He was a partner in Siegel, Lipman, and Shepard, LLP, in Boca Raton from 1994 until December 2017, and in October 2017 formed Shepard PLLC, where he now practices in Boca Raton. He is a graduate of Princeton University and Yale Law School.
Board Committees
We do not have any Board committees. We anticipate that as we grow our business, we may establish formal committees, which may include an audit committee, a compensation committee, and a governance and nominating Committee.
| 21 |
Code of Ethics
We adopted a Code of Conduct and Ethics that applies to all officers, directors, and employees of our Company on February 27, 2019. Any person may, without charge, request a copy of our Code of Ethics by writing info@korthdirect.com. Our code of ethics is also available on our website at http://www.korthdirect.com.
Item 11. Executive Compensation
Summary Compensation Table
The following table provides summary information regarding compensation earned by the named executive officer during the fiscal years ended December 31, 2023 and 2022.
| Option | All Other | |||||||||||||||||||||||
| Name | Salary | Bonus | Awards | Compensation | Total | |||||||||||||||||||
| and Principal Position | Year | ($) | ($) | (1) | ($) | ($) | ||||||||||||||||||
|
Holly MacDonald Korth, Chief Executive Officer, President and Chief Financial Officer |
2023 | $ | 628,400 | $ | 25,000 | 0 | 0 | $ | 653,400 | |||||||||||||||
| 2022 | $ | 470,000 | $ | 123,000 | 50,000 | 490 | $ | 593,490 | ||||||||||||||||
|
James W Korth, Chairman |
2023 | $ | 175,000 | $ | 0 | 0 | 0 | $ | 175,000 | |||||||||||||||
| 2022 | $ | 410,000 | $ | 0 | 50,000 | 0 | $ | 410,000 | ||||||||||||||||
For the years ended December 31, 2023 and 2022, our Chief Lending Officer, Daniel Llorente, received compensation of $270,250 and $275,000, respectively.
The Company does not have a compensation or other committee of its directors.
Equity Compensation Plan Information
The Korth Direct Mortgage Inc. 2019 Stock Option Plan (the “Stock Plan”) provides for the grant of both incentive and non-statutory stock options to key employees, directors or other persons having a service relationship with the Company. Effective December 8th, 2022 for the purchase of up to an aggregate of 3,000,000 shares of the Company’s common stock, $0.001 par value. The Stock Plan is administered by the Board of Directors or a committee appointed by the Board.
The purpose of the Stock Plan is to attract, retain and motivate employees, officers, directors, consultants, agents, advisors and independent contractors of the Company by providing them the opportunity to acquire a proprietary interest in the Company and to link their interests and efforts to the long-term interests of the Company’s shareholders.
The following table presents details of the Company’s equity compensation plan as of December 31, 2023:
| Number of
securities to be issued upon exercise of outstanding options |
Weighted-average
exercise price of outstanding options |
Number of
securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
||||||||||
| (a) | (b) | (c) | ||||||||||
|
Equity compensation plans approved by security holders (1) |
1,097,500 | $ | 1.15 | 1,902,500 | ||||||||
|
Equity compensation plans not approved by security holders |
– | – | – | |||||||||
| Total | 1,097,500 | $ | 1.15 | 1,902,500 | ||||||||
(1) Consists of the Company’s Stock Plan.
| 22 |
Description of the Stock Plan
The Stock Plan is administered by the Board of Directors of the Company. The maximum number of shares of common stock available for issuance under the Stock Plan is 3,000,000.
The Stock Plan permits awards of incentive stock options, nonqualified stock options, and restricted stock. The Stock Plan provides that the exercise price of any option will not be less than the fair market value of the common stock on the date of grant or, for a 10% shareholder, 110% of fair market value.
Eligibility
An award under the Stock Plan can be made to any employee, consultant, or director of the Company, as selected by the Board of Directors.
Shares Covered by the Stock Plan
The Stock Plan permits the granting of awards covering an aggregate of 1,097,500 shares of Company common stock. The shares of Company common stock may be either authorized but unissued shares or treasury shares.
Any shares that are reserved for options or performance shares that lapse, expire, terminate or are cancelled, or if shares of Company common stock are issued under the plan and are thereafter reacquired by the Company, the shares subject to such awards and the reacquired shares may be available for subsequent awards under the Stock Plan.
Stock Options and Rights
Options granted under the Stock Plan may be either non-qualified stock options or incentive stock options qualifying for special tax treatment under Section 422 of the Internal Revenue Code. The exercise price of any stock option may not be less than the fair market value of the shares of common stock on the date of grant and 110% of fair market value for 10% shareholders. The exercise price is payable in cash, shares of common stock previously owned by the optionee or a combination of cash and shares of common stock previously owned by the optionee, or by a recourse or non-recourse note executed by the nominee (subject to Sarbanes-Oxley prohibitions on officer loans). Both non-qualified stock options and incentive stock options will generally expire on the tenth anniversary of the date of the grant, unless otherwise specified.
Restricted Stock Plan
Under the Stock Plan, the Board of Directors may grant shares of restricted stock on terms and conditions, including performance criteria, repurchase and forfeiture, as determined by the Board. Upon satisfaction of the terms and conditions of the award, shares of restricted stock become transferable.
Amendment and Termination of the Stock Plan
The Board may, at any time, amend the Stock Plan or any portion of the plan, provided that to the extent required by law or a stock exchange rule, shareholder approval is required for any amendment to the plan. By its terms, the Stock Plan terminates ten years after its effective date.
Recent Grants
There were 15,000 option shares granted during the year ended December 31, 2023.
Grants of Plan-Based Awards
Our named executive officers received the following grants of plan-based stock option awards in 2023 pursuant to our 2019 Stock Plan.
| Keith Henrich | 15,000 | ||
Director Compensation
No directors receive compensation for their work as a director. However, directors received common stock options for their services as employees or consultants to the Company. See Item 12 “Security Ownership of Certain Beneficial Ownership and Management and Related Stockholder Matters”.
| 23 |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth security ownership information pertaining to persons who are officers, directors, or known by us to beneficially own more than 5% of the common stock, which is the sole class of voting stock in the Company, and of all of the directors and executive officers of the Company as a group, as of December 31, 2023.
Except as otherwise indicated, each person and each group shown in the table has sole voting and investment power with respect to the shares of common stock indicated. For purposes of the table below, in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, a person is deemed to be the beneficial owner, of any shares of our common stock over which he or she has or shares, directly or indirectly, voting or investment power or of which he or she has the right to acquire beneficial ownership at any time within 60 days. As used in this prospectus, “voting power” is the power to vote or direct the voting of shares and “investment power” includes the power to dispose or direct the disposition of shares. Common stock beneficially owned and percentage ownership was based on 5,000,000 shares outstanding on December 31, 2023, plus 417,500 shares deemed outstanding pursuant to Rule 13d-3, for a total of 5,417,500 shares outstanding. Unless otherwise indicated, the address of each beneficial owner is c/o Korth Direct Mortgage Inc., 135 San Lorenzo Ave, Coral Gables, FL 33146.
| Name and Address | Number of Shares |
Percent | |
| 5% Beneficial Owners | |||
| Directors and Executive Officers | |||
| James W. Korth | 2,004,287 | 37.0% | |
| Chairman of the Board | |||
| Director | |||
| Holly MacDonald-Korth | 2,313,233 | 42.7% | |
| Chief Executive Officer, President, Chief Financial Officer, | |||
| Director | |||
| Pamela Hipp, Director (1) | 487,500 | 9.0% | |
| Daniel Llorente, Director(1) | 312,500 | 5.8% | |
| Jonathan Shepard, Secretary and Director(1) | 52,500 | 1.0% | |
| All directors and executive officers as | 5,170,020 | 95.5% | |
| a group (5 persons) (1) |
| (1) | Includes pursuant to Rule 13d-3 common stock options exercisable within 60 days of the date of this Report, as follows: Mr. Korth, 25,000 shares; Ms MacDonald-Korth, 25,000 shares; Ms Hipp, 137,500 shares; Mr. Llorente, 312,500 shares; Mr. Shepard, 52,500 shares. See Item 11, “Executive Compensation-Equity Compensation Plan Information.” |
The Company does not have a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934
| 24 |
Item 13. Certain Relationships and Related Transactions, and Director Independence
The principal shareholders of the Company are Holly MacDonald-Korth (43%) and James Korth (37%). Mr. Korth is Chairman and a Director of the Company, and together with his daughter, Holly MacDonald-Korth, the CEO, President, Chief Financial Officer, and a Director of the Company, they both control 80% of the Company voting stock. In June 2023, Ms. MacDonald-Korth purchased 1,100,000 shares of Company stock from her father, making her the largest shareholder.
KDM earns money by making and servicing loans, J. W. Korth, a wholly owned subsidiary of KDM, is a broker-dealer that makes money by selling securities, including securities issued by KDM.
Some members of the KDM loan origination team are also registered brokers with J.W. Korth. Such employees may be paid for both origination and sales of a loan and a Note, respectively. We mitigate these conflicts of interest with compliance oversight and review of such transactions and compensation.
We believe we may have certain conflicts arising from our rating system. The same people doing our ratings may also benefit from the sales of Notes and making new CM Loans. Further, J.W. Korth is owned by KDM, and distributes our Notes and may make a market in them. Ratings will be reviewed periodically and changed as necessary for each CM Loan and the corresponding Notes. If a secondary market were to develop, secondary market prices for our Notes may move up or down if the rating is changed. However, no such market currently exists.
We may change any of our procedures regarding managing our conflicts of interest at any time. We also may amend our rating procedure at any time.
Indemnification Agreement
Our Bylaws provide that we will indemnify our members, managers and officers to the fullest extent permitted by Florida law.
Item 14. Principal Accountant Fees and Services
Berkowitz Pollack and Brant was engaged as the Company’s independent registered public accounting firm for the years ended December 2023, 2022, and 2021. Richey May & Co., LLP served as the Company’s independent registered public accounting firm for the fiscal years ended December 31, 2020, 2019, 2018, and 2017.
Auditor Fees
The following table sets forth fees billed, or expected to be billed, to the Company by the Company’s independent auditors for the years ended December 31, 2023 and 2022 for (i) services rendered for the audit of the Company’s annual financial statements and the review of the Company’s quarterly financial statements; (ii) services rendered that are reasonably related to the performance of the audit or review of the Company’s financial statements that are not reported as Audit Fees; (iii) services rendered in connection with tax preparation, compliance, advice and assistance; and (iv) all other services:
| 2023 | 2022 | |||||||
| Audit fees | $ | 181,825 | $ | 177,575 | ||||
| Audit related fees | - | - | ||||||
| Total Fees | $ | 181,825 | $ | 177.575 | ||||
For 2023, the audit fees listed include J. W. Korth’s audit expense of $24,125 as well as KDM’s audit expense of $157,700.
| 25 |
PART IV.
Item 15. Exhibits and Financial Statement Schedules
The following exhibits designated with a footnote reference are incorporated herein by reference to a prior registration statement or a periodic report filed by the Registrant pursuant to Section 13 or 15(d) of the Exchange Act:
| 26 |
| 10.1 | Korth Direct Mortgage Inc. 2019 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K filed June 29, 2019) | |
| 10.2 | Purchase Agreement dated July 31, 2020, among Korth Direct Mortgage Inc., a Florida corporation; J.W. Korth & Company Limited Partnership, a Michigan limited partnership; and JW Korth LLC, a Florida limited liability company (incorporated by reference to Current Report on Form 8-K filed August 6, 2020) | |
| 10.3 | First Amendment to Purchase Agreement (incorporated by reference to Registrant’s Report on Form 10-Q filed August 16, 2021) | |
| 23.1 | Consent of Berkowitz Pollack and Brant* | |
| 31.1 | Section 302 Certificate of Chief Executive Officer and Chief Financial Officer * | |
| 31.2 | Section 906 Certificate of Chief Executive Officer and Chief Financial Officer* | |
| 101 | Interactive Data File | |
| 104 |
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)* |
| 27 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| KORTH DIRECT MORTGAGE, INC. | |||
| By: | /s/ Holly MacDonald-Korth | ||
| Holly MacDonald-Korth | |||
| Chief Executive Officer and Chief Financial Officer | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below.
| Signature | Title | Date |
| /s/ Holly MacDonald-Korth | Chief Executive Officer and Chief Financial Officer | March 29, 2024 |
| Holly MacDonald-Korth |
| 28 |
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Korth Direct Mortgage, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Korth Direct Mortgage, Inc. (the “Company”) as of December 31, 2023 and 2022, and the related statements of income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ i Berkowitz Pollack Brant, Advisors + CPAs
We have served as the Company’s auditor since 2021.
| F-2 |
KORTH DIRECT MORTGAGE INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
| F-3 |
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| December 31, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Cash and Cash Equivalents | $ | i 4,844,873 | $ | i 7,776,789 | ||||
| Restricted Cash | i 16,856,935 | i 10,583,641 | ||||||
| Restricted Investment | - | i 3,986,207 | ||||||
| Mortgages Owned | i 484,484,408 | i 447,407,141 | ||||||
| Mortgage Servicing Rights, at Fair Value | i 9,245,877 | i 13,229,889 | ||||||
| Portfolio Loans | i 7,674,198 | i 3,318,832 | ||||||
| Loans Held for Sale | i 6,074,927 | - | ||||||
| Securities | i 85,000 | i 567,826 | ||||||
| ROU Leased Asset | i 501,715 | i 723,179 | ||||||
| Goodwill | i 110,000 | i 110,000 | ||||||
| Property and equipment, net of depreciation | i 17,674,959 | i 18,172,304 | ||||||
| Other Assets | i 1,784,370 | i 1,673,353 | ||||||
| TOTAL ASSETS | $ | i 549,337,262 | $ | i 507,549,161 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| LIABILITIES | ||||||||
| Escrows Payable | $ | i 14,884,214 | $ | i 12,421,553 | ||||
| Lease Liability | i 540,266 | i 768,984 | ||||||
| Deferred Revenue, net | i 1,725,803 | i 1,593,869 | ||||||
| Deferred Tax Liability, net | i 2,012,419 | i 3,337,261 | ||||||
| Contingent Liability, net | i 164,644 | i 327,298 | ||||||
| Securities Sold Short | i 2,565,082 | - | ||||||
| Mortgage Secured Notes Payable | i 485,154,510 | i 454,883,011 | ||||||
| Warehouse Line of Credit, net | i 10,191,104 | i 326,736 | ||||||
| Other Liabilities and Payables | i 2,030,662 | i 1,526,488 | ||||||
| Total Liabilities | i 519,268,704 | i 475,185,200 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Accumulated Earnings | i 293,220 | i 6,493,385 | ||||||
| Additional Paid-in Capital | i 29,578,706 | i 25,626,614 | ||||||
| Common Stock, $ par value, shares authorized shares issued and outstanding at December 31, 2023 and December 31, 2022 | i 5,000 | i 5,000 | ||||||
| Series A Preferred Stock, $ par value, shares authorized, and shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively | i 460 | i 300 | ||||||
| Series B Preferred Stock, $ par value, shares authorized, issued and outstanding at December 31, 2023 and December 31, 2022 | i 19 | i 19 | ||||||
| Non-Controlling Interest | i 191,153 | i 238,643 | ||||||
| Total Stockholders' Equity | i 30,068,558 | i 32,363,961 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | i 549,337,262 | $ | i 507,549,161 | ||||
See accompanying notes to the audited consolidated financial statements.
| F-4 |
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| For Year Ended | For Year Ended | |||||||
| December 31, 2023 | December 31, 2022 | |||||||
| REVENUES | ||||||||
| Origination Revenue, Net | $ | i 1,709,783 | $ | i 1,439,675 | ||||
| Servicing Revenue | i 5,809,594 | i 5,865,969 | ||||||
| Underwriting Income | i 278,550 | i 876,475 | ||||||
| Leasing Revenue | i 1,076,320 | - | ||||||
| Other Revenue | i 966,343 | i 1,679,914 | ||||||
| Total Revenues | i 9,840,590 | i 9,862,033 | ||||||
| COST OF REVENUES | ||||||||
| Broker Underwriting Expense | i 1,826,143 | i 2,119,892 | ||||||
| Administrative Expenses | i 1,427,578 | i 952,207 | ||||||
| Total Cost of Revenues | i 3,253,721 | i 3,072,099 | ||||||
| GROSS PROFIT | i 6,586,869 | i 6,789,934 | ||||||
| OPERATING EXPENSES | ||||||||
| Office | i 840,395 | i 501,923 | ||||||
| Compensation and Related Benefits | i 4,306,667 | i 4,237,661 | ||||||
| Professional & Legal | i 858,949 | i 775,760 | ||||||
| Advertising | i 272,215 | i 415,137 | ||||||
| Depreciation | i 665,551 | i 117,704 | ||||||
| Total Expenses | i 6,943,777 | i 6,048,185 | ||||||
| (Loss)/Income From Operations | ( i 356,908 | ) | i 741,749 | |||||
| Other (Expenses)/Income | ||||||||
| Unrealized (Loss)/Gain on Mortgages | ( i 3,984,012 | ) | i 3,627,472 | |||||
| Interest Expense | ( i 1,324,770 | ) | ( i 1,344,907 | ) | ||||
| Unrealized Loss on Mortgage Secured Notes | ( i 10,565 | ) | - | |||||
| Unrealized Loss on Securities | ( i 129,009 | ) | - | |||||
| Realized Gain/(Loss) on Mortgage Secured Notes | i 97,767 | ( i 564,300 | ) | |||||
| Realized Gain on Foreclosure | - | i 2,413,507 | ||||||
| Total Other (Expenses)/Income | ( i 5,350,589 | ) | i 4,131,772 | |||||
| (Loss)/Income before provision for income taxes | ( i 5,707,497 | ) | i 4,873,521 | |||||
| (Income tax benefit)/Provision for income taxes | ( i 1,324,842 | ) | i 1,287,040 | |||||
| Net (Loss)/Income before non-controlling interest | ( i 4,382,655 | ) | i 3,586,481 | |||||
| Less: Net (Loss)/Income attributable to non-controlling interest | ( i 47,490 | ) | i 238,643 | |||||
| Net (Loss)/Income | ( i 4,335,165 | ) | i 3,347,838 | |||||
| Series A Preferred Dividends | i 630,000 | i 450,000 | ||||||
| Series B Preferred Dividends | i 1,235,000 | i 1,289,899 | ||||||
| Net (loss)/income attributable to common stockholders | $ | ( i 6,200,165 | ) | $ | i 1,607,939 | |||
See accompanying notes to the audited consolidated financial statements.
| F-5 |
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| Series A Preferred Stock | Series B Preferred Stock | Common Stock | Additional Paid | Accumulated | Non-Controlling | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | in Capital | Earnings | Interest | Totals | |||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | i 300,000 | $ | i 300 | i 19,000 | $ | i 19 | i 5,000,000 | $ | i 5,000 | $ | i 25,719,332 | $ | i 4,885,445 | $ | - | $ | i 30,610,096 | |||||||||||||||||||||||
| Share-based compensation | - | - | - | - | - | - | i 171,282 | - | - | i 171,282 | ||||||||||||||||||||||||||||||
| Issuance of Series A preferred stock | i 480,000 | i 480 | - | - | - | - | i 11,856,000 | - | - | i 11,856,480 | ||||||||||||||||||||||||||||||
| Repurchase of Series A Preferred Stock | ( i 480,000 | ) | ( i 480 | ) | - | - | - | - | ( i 12,120,000 | ) | - | - | ( i 12,120,480 | ) | ||||||||||||||||||||||||||
| Series A & Series B preferred stock dividends declared | - | - | - | - | - | - | - | ( i 1,739,898 | ) | - | ( i 1,739,898 | ) | ||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | i 3,347,838 | i 238,643 | i 3,586,481 | ||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | i 300,000 | $ | i 300 | i 19,000 | i 19 | i 5,000,000 | $ | i 5,000 | $ | i 25,626,614 | $ | i 6,493,385 | $ | i 238,643 | $ | i 32,363,961 | ||||||||||||||||||||||||
| Share-based compensation | - | - | - | - | - | - | i 56,252 | - | - | i 56,252 | ||||||||||||||||||||||||||||||
| Issuance of Series A preferred stock | i 160,000 | i 160 | - | - | - | - | i 3,895,840 | - | - | i 3,896,000 | ||||||||||||||||||||||||||||||
| Series A & Series B preferred stock dividends declared | - | - | - | - | - | - | - | ( i 1,865,000 | ) | - | ( i 1,865,000 | ) | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( i 4,335,165 | ) | ( i 47,490 | ) | ( i 4,382,655 | ) | |||||||||||||||||||||||||||
| Balance at December 31, 2023 | i 460,000 | $ | i 460 | i 19,000 | $ | i 19 | i 5,000,000 | $ | i 5,000 | $ | i 29,578,706 | $ | i 293,220 | $ | i 191,153 | $ | i 30,068,558 | |||||||||||||||||||||||
See accompanying notes to the audited consolidated financial statements.
| F-6 |
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Year Ended | For the Year Ended | |||||||
| December 31, 2023 | December 31, 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (Loss)/Income | $ | ( i 4,382,655 | ) | $ | i 3,586,481 | |||
| Adjustments to Reconcile Net (Loss)/Income to | ||||||||
| Net Cash Provided by Operating Activities: | ||||||||
| Unrealized Gain on Mortgages Owned | i 3,984,012 | ( i 3,613,532 | ) | |||||
| Unrealized Loss on Mortgage Secured Notes | i 10,565 | ( i 13,940 | ) | |||||
| Realized Loss on Mortgage Secured Notes | - | i 564,300 | ||||||
| Realized Gain on Foreclosure | - | ( i 2,413,507 | ) | |||||
| Stock Compensation Expense | i 56,252 | i 171,282 | ||||||
| Depreciation | i 665,551 | i 117,704 | ||||||
| Amortization of loan costs | i 589,955 | i 356,519 | ||||||
| Deferred rent expense from operating lease | ( i 7,254 | ) | ( i 290 | ) | ||||
| Deferred income taxes | ( i 1,324,842 | ) | i 1,287,040 | |||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Mortgage Secured Notes Issued | i 30,271,499 | i 128,670,647 | ||||||
| Mortgage Secured Notes Purchased | i 472,261 | ( i 893,180 | ) | |||||
| Restricted Investment | i 3,986,207 | ( i 3,986,207 | ) | |||||
| Warehouse LOC | i 9,274,413 | ( i 29,783 | ) | |||||
| Portfolio Loans | ( i 4,355,366 | ) | i 3,931,030 | |||||
| Loans Held For Sale | ( i 6,074,927 | ) | - | |||||
| Other Assets | ( i 254,279 | ) | i 140,290 | |||||
| Deferred Revenue, net | i 131,934 | i 436,197 | ||||||
| Escrow Payable | i 2,462,661 | i 2,807,918 | ||||||
| Contingent Liability | ( i 162,654 | ) | ( i 162,654 | ) | ||||
| Securities Sold Short | i 2,565,082 | - | ||||||
| Other Liabilities and Payables | i 504,174 | i 540,489 | ||||||
| New Mortgage Lending | ( i 37,077,267 | ) | ( i 130,594,796 | ) | ||||
| Total Adjustments | i 5,717,978 | ( i 2,684,473 | ) | |||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | i 1,335,323 | i 902,008 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | ( i 24,945 | ) | ( i 73,921 | ) | ||||
| NET CASH (USED IN) INVESTING ACTIVITIES | ( i 24,945 | ) | ( i 73,921 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payment of Series A/B preferred stock dividends | ( i 1,865,000 | ) | ( i 1,685,000 | ) | ||||
| Repurchase of Series A preferred stock | - | ( i 12,120,480 | ) | |||||
| Net proceeds from the sale of Series A preferred stock | i 3,896,000 | i 11,856,480 | ||||||
| NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES | i 2,031,000 | ( i 1,949,000 | ) | |||||
| NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | i 3,341,378 | ( i 1,120,913 | ) | |||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH – Beginning of Year | i 18,360,430 | i 19,481,343 | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH – End of Year | $ | i 21,701,808 | $ | i 18,360,430 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION | ||||||||
| Cash paid during the year for interest | $ | i 734,813 | $ | i 1,353,881.00 | ||||
| Cash paid for income taxes | $ | - | $ | i 91,708.00 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Assets acquired through settlement in lieu of foreclosure | $ | - | $ | i 19,353,508.00 | ||||
See accompanying notes to the audited consolidated financial statements.
| F-7 |
AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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Korth Direct Mortgage, Inc. (the “Company” or “KDM”) is incorporated in the State of Florida. The Company was created to originate mortgages and fund those mortgages with Notes secured by mortgage loans. J.W. Korth & Company Limited Partnership (“J.W. Korth”) is a wholly owned subsidiary of KDM.
J.W. Korth is a securities broker dealer registered with the Securities Exchange Commission and the states of Michigan, Florida, and various other states and an SEC registered investment adviser under the Investment Advisers Act of 1940. J.W. Korth is a licensed member of the Financial Industry Regulatory Authority (FINRA), the Securities Investor Protection Corporation, as well as a Municipal Securities Rulemaking Board (MSRB) registrant.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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The accompanying consolidated financial statements include the accounts of the Company and the accounts of J.W. Korth, KDM MFB LLC, and KDM Funding I LLC, the Company's wholly-owned subsidiaries, and KDM Stafford LLC, that KDM owns a controlling interest. Beginning July 2023, the consolidated financial statements also include the accounts of Citrus Servicing LLC, an entity controlled by the Company. Intercompany balances and transactions have been eliminated in consolidation.
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The accompanying consolidated financial statements have been prepared on the accrual basis of accounting, in accordance with Generally Accepted Accounting Principles (“GAAP”).
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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 disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
The following table provides a reconciliation of cash and cash equivalents, and restricted cash to amounts shown in the consolidated statement of cash flows as of December 31, 2023 and 2022:
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| Schedule of cash and cash equivalents | ||||||||
| 2023 | 2022 | |||||||
| Cash and Cash Equivalents | $ | i 4,844,873 | $ | i 7,776,789 | ||||
| Restricted Cash | i 16,856,935 | i 10,583,641 | ||||||
| $ | i 21,701,808 | $ | i 18,360,430 | |||||
The Company maintains cash and restricted cash balances at financial institutions in excess of federally insured limits. The Company has not experienced any losses related to these balances. The Federal Deposit Insurance Corporation insures eligible accounts up to $ i 250,000 per depositor at each financial institution. The Company holds cash and restricted cash at well-known banks and does not believe that it is exposed to any significant credit risk on cash and cash equivalents.
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Mortgages that are current are carried at the principal value owed by the borrower, as of the date of the financial statements, according to the amortization schedule for the loans, which management believes to be the best estimate of fair value. All mortgages owned as of the date of these consolidated financial statements are current. The net present value of the servicing revenue is recorded as mortgage servicing rights, at fair value on the Audited Statements of Financial Condition and is recognized on the Audited Statements of Operations as an unrealized gain on mortgages.
| F-8 |
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The Company has funded the majority of the mortgage loans that it has made by issuing Mortgage Secured Notes (“MSNs”), which are secured by those same mortgages. As of December 31, 2023 and 2022, the Company has funded loans totaling $ i 484,484,408 and $ i 447,407,141, respectively, and it issued MSNs secured by those loans, also in the amount of $ i 485,154,510 and $ i 454,883,011, respectively. The deals have been funded in multiple ways, including private placements, SEC registered deals, and 144A offerings. The Company also funds loans via participation, or a combination of MSN and participation; it also funds a portion of some loans with its own capital.
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The Company recognizes loans made with its own capital, or those not securitized, under the caption “Portfolio Loans” on the balance sheet. As of December 31, 2023 and 2022, the Company had issued Portfolio Loans in the amount of $ i 7,674,198 and $ i 3,318,832, respectively. These loans were funded by the Company, as well as its affiliates.
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The Company purchases small balance commercial loans classified as held for sale which are carried at the lower of amortized cost basis or market value. We determine the fair value of mortgage loans held for sale by using a discounted cash flow model.
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Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Section 350 requires an annual assessment of the recoverability of goodwill using a two-step process. The first step of the impairment test involves a comparison of the fair value of the reporting unit to its carrying value. If the carrying value is higher than the fair value or there is an indication that impairment may exist, a second step must be performed to compute the amount of the impairment. Management conducted its annual assessment of goodwill impairment and determined that there were no indicators of goodwill impairment and therefore did not record an impairment loss for the year ending December 31, 2023.
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The Company’s primary sources of revenue are generated from origination fees, servicing fees, underwriting income, and leasing revenue.
Origination Fees
Loan origination fees represent revenue earned from originating mortgage loans; net of any credits given to the borrower. Loan origination fees generally represent flat, per-loan fee amounts and are deferred and recognized as revenue over the life of the loan. The associated loan origination costs are also deferred and recognized as expense over the life of the loan. The deferred portion of the loan origination fees is netted against the deferred portion of the loan origination costs, which include mortgage broker expenses, and reported as a net deferred revenue liability on the Company’s Statements of Financial Condition .
Servicing Fees
Loan servicing fees represent revenue earned for servicing loans for various investors. Loan servicing fees are a percentage of the outstanding unpaid principal balance and represent the difference between the Corresponding Mortgage Loan (“CM Loan”) interest received and the MSN interest payable. Servicing Fees are recognized as revenue as the related mortgage payments are received; similarly, loan servicing expenses are charged to operations as incurred.
Underwriting Income
Underwriting income represents revenue earned by J.W. Korth for underwriting and distribution of the Company’s securities. Revenues from underwriting income are recognized on settlement date of the trades.
Leasing Revenue
Leasing revenue represents revenues generated through KDM Stafford for rental income earned from operating leases at rental properties majority-owned and controlled by KDM. Leasing revenue generated from operating leases are recognized over the lease term on a straight-line basis. We recorded rental revenue of $ i 1,076,320 for the year ending December 31, 2023.
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In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).” The standard requires organizations to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet and disclose key information about leases that were historically classified as operating leases under previous GAAP. As part of the adoption of this standard, the Company recognizes lease liabilities with a corresponding ROU leased asset of approximately the same amount based on the present value of the remaining lease payments pursuant to current leasing standards for existing operating leases.
| F-9 |
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The Company estimates the fair value of share-based payments on the date of grant using a Black-Scholes option pricing model. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize forfeitures as they occur.
The Black-Scholes option pricing model requires assumptions for the expected volatility of the share price of our common stock, the expected dividend yield, and a risk-free interest rate over the expected term of the stock-based award.
Since the Company’s common stock is not publicly traded, we do not have sufficient Company specific information regarding the volatility of our share price on which to base an estimate of expected volatility. As a result, we use the historical volatilities of similar entities within our industry as the expected volatility of our share price.
The expected dividend yield is 0% as the Company has not paid any dividends on its common stock and does not anticipate it will pay any dividends in the foreseeable future on its common stock.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant date with a remaining term equal to the expected term of the stock-based award.
Since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term, the Company utilizes the simplified method to calculate the expected term of stock-based awards based on the average of the vesting term and contractual term of the award.
The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
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The net present value of the servicing income is recognized at the time the mortgage is initiated. The changes to the net present value which is determined by the determination of the fair value of the assets are recognized through an adjustment to the unrealized gain/loss in each reporting period This value uses several inputs that are highly subjective including: discount rate, prepayment rate, the current interest rate environment, and default rate assumptions. We use a third-party to calculate this value.
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J.W. Korth operates as an SEC and FINRA registered securities broker dealer. The securities transactions are traded through broker clearinghouses and, upon settlement, funds are transferred in and out of the Company’s bank accounts. Unsettled transactions create short-term payables and receivables due to and from the broker clearinghouses. As of December 31, 2023, the Company had a net amount due to the clearinghouse brokers of $ i 13,700.
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Depreciation is provided on a straight-line basis using estimated useful lives of i three to i thirty-nine years.
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Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense. The Company’s tax returns for the years ended December 31, 2020, and after remain subject to examination by federal and state jurisdictions.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13 Financial Instruments, Measurement of Credit Losses on Financial Instruments. This ASU updates the existing incurred loss model to a current expected credit loss (“CECL”) model for financial assets and net investments in leases that are not accounted for at fair value through earnings. The amendments affect cash and cash equivalents, reverse repurchase agreements , certain loans, held-to-maturity debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures and any other financial assets not excluded from the scope. There are also limited amendments to the impairment model for available-for-sale debt securities. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2022 for public smaller reporting companies, including interim reporting periods within those fiscal years. Early adoption is permitted, but not before annual reporting periods beginning after December 15, 2018. The Company adopted CECL on January 1, 2023 and did not have a material impact on the Company’s consolidated financial statements.
| F-10 |
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As part of the acquisition of J. W. Korth in 2020, the Company agreed to pay (i) the Preferred Capital Interest partners of J.W. Korth accrued and unpaid i 6% dividends through i July 31, 2020; (ii) the JW Korth Preferred Capital Interest Partners quarterly dividends concurrently with its payment of the Company’s Series A Preferred Stock dividends at least annually; and (iii) in such years as it pays Series A Preferred dividends, redeem i 25% annually of the JW Korth Preferred Capital Interest partners through a capital contribution to JW Korth.
The following table summarizes the unpaid Contingent Liability outstanding as of December 31, 2023 and 2022:
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NOTE 4 – MORTGAGE SECURED NOTES PAYABLE
As stated above in Note 2, the Company funds the majority of mortgage loans that it makes by issuing Mortgage Secured Notes (“MSNs”), which are secured by those same mortgages. As of December 31, 2023 and 2022, the Company has funded loans with current values totaling $ i 484,484,408 and $ i 447,407,141, respectively, and it issued MSNs secured by those loans in the amount of $ i 485,154,510 and $ i 454,883,011, respectively. The deals have been funded in multiple ways, including private placements, SEC registered deals, and 144A offerings.
The MSNs are typically five-year interest-only notes with the principal balance due at maturity, but terms can vary. Interest rates on the MSNs range from i 4.25% to i 10.35% and mature at various dates from January 2024 to June 2037. The MSNs are payable to the extent that the Company receives payment from the borrower of the mortgage loans. Payments are received from the borrowers and passed through to the MSN noteholders. KDM has custodial responsibility for the MSNs pursuant to the Trust Indenture for the Notes. There are no limitations in KDM’s liability as servicer of its MSNs.
The following table is a schedule of future maturities of the MSNs for each of the five years after December 31, 2023 :
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NOTE 5 - RESTRICTED CASH AND INVESTMENTS
The Company maintains multiple segregated accounts in trust for borrowers and investors. The value of these accounts is carried under the asset accounts, “Restricted Cash” and “Restricted Investment,” with respective offsets to the liability accounts, “Escrows Payable” and “Other Liabilities and Payables.”
| F-11 |
The “In Trust for 1” account holds the monthly tax and insurance payments collected from borrowers and distributes payments annually, on behalf of borrowers, to the appropriate tax authority and insurance companies. This account has a balance of $ i 151,376 and $ i 626,414 as of December 31, 2023 and 2022, respectively. This account is included as part of the Escrow Payable liability account.
The “In Trust for 2” account receives payments from borrowers and distributes payments to investors and pays the servicing fee to the Company. This account has a balance of $ i 638,032 and $ i 752,156 as of December 31, 2023 and 2022, respectively, which consists of borrower early payments and commitment fees. This account is included as part of the Other Liabilities and Payables liability account.
The Company also maintains multiple lockbox accounts that collect rental payments directly from tenants on the borrowers’ behalf. These accounts typically net out funds monthly. The lockbox account balances were $ i 0 and $ i 100,359 as of December 31, 2023 and 2022, respectively. This account is included as part of the Escrow Payable liability account.
The Company maintains an account for payment of quarterly Preferred Series B dividends that has a balance of $ i i 308,750 / as of December 31, 2023 and 2022.
The Company maintains an account restricted per the warehouse line agreement that has a balance of $ i 1,000,000 as of December 31, 2023. See “Note 15 – Warehouse Line of Credit.”
The Company maintains a cash management account that holds a portion of the restricted cash, which is swept on a regular basis. The account had a balance of $ i 4,550,000 and $ i 8,000,000 as of December 31, 2023 and December 31, 2022, respectively. This account is included as part of the Escrow Payable liability account.
The Company invests a portion of the restricted cash collected from borrowers in U.S. Treasury Bills with maturities of six to twelve months. The Restricted Investment account had a balance of $ i 0 and $ i 3,986,207 as of December 31, 2023 and 2022, respectively. This account is included as part of the Escrow Payable liability account.
The Company invests a portion of restricted cash from borrowers in a savings account with a balance of $ i i 250,000 / as of December 31, 2023 and 2022.
The Company has opened two cash management accounts at J.W. Korth & Company that will hold a portion of restricted cash. The balances as of December 31, 2023, were $ i 6,299,514 and $ i 3,556,615, respectively.
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In November 2022, through a Settlement in Lieu of Foreclosure Agreement, the Company obtained majority ownership and the controlling interest in rental property located in Stafford, Virginia. As part of the agreement, a $9.5 million mortgage held by the Company was assigned to a newly created special-purpose entity, KDM Stafford LLC, which is majority-owned and controlled by the Company. The original borrower maintained a minority interest in the special-purpose entity. For the years ended December 31, 2023 and December 31, 2022, the Company recorded net (loss)/income attributable to the non-controlling interest of $( i 47,490) and $ i 238,643, respectively. In addition, a portfolio loan held by the Company in the amount of $7.5 million was classified as an investment in the special-purpose entity which is eliminated in consolidation.
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The Company maintains office space in Coral Gables, Florida. The Company entered into a lease in November 2020 for a term of sixty-two months with the right to extend the term of the lease for two additional, successive periods of two years upon the same terms and conditions of the initial term.
In December 2020, the Company entered into a Sublease Agreement to sublet a portion of the office space described above. The subtenant has agreed to cover the proportionate amount of the lease costs associated with the office space based on essentially the same terms as the lease described above, including the rights to extend for two successive two-year periods. For the years ended December 31, 2023 and 2022, the Company recognized $60,158 and $58,555, respectively, of sublease rental revenue, which is recorded as an offset to the Company’s rental expense discussed below.
The J. W. Korth Michigan office has a lease which began in May 2021 for a term of sixty months.
The net present value of future lease payments pursuant to the operating lease agreements are included in the ROU Leased Asset and the Lease Liability accounts on the Consolidated Statements of Financial Condition. The ROU Leased Asset represents the right to use an underlying asset for the remaining lease term. The Lease Liability represents the obligation to make lease payments pursuant to the terms of the lease agreements.
| F-12 |
Net rental expense for the year ended December 31, 2023 was $ i 258,373 compared to $ i 263,523 for the year ended December 31, 2022, which includes additional expenses for common area, direct operating expense, utilities, parking, and taxes.
As of December 31, 2023, the net present value of the future lease liabilities, using the weighted-average discount rate of i 4.24%, which is commensurate with the Company’s secured borrowing rate, over the weighted-average remaining life of i 2.1 years was $ i 540,266 compared to $ i 768,984 for the year ended December 31, 2022.
The following is a schedule of the maturities of future lease payments, net of future sublease revenue, over the remaining life of the operating leases, reconciled to the net present value of as of December 31, 2023:
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The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the consolidated financial statements for these indemnifications.
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The Company has i forty-four and i thirty-nine customers as of December 31, 2023 and 2022, respectively. The Company defines customers as borrowers that have an active loan with the Company, or are in the midst of the underwriting process and have a commitment fee on deposit with the Company.
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NOTE 10 – RELATED PARTY TRANSACTIONS
From time to time, the Company purchases MSNs and holds them in its brokerage account. These MSNs are included on the Consolidated Statements of Financial Condition as Securities. As of December 31, 2023, the balance was $ i 275,241, which is eliminated in consolidation. From time to time, second lien or balance sheet loans may be all or partially funded by entities controlled by KDM directors or employees; such loans are serviced by KDM. In some circumstances where MSNs are in default, in the event a foreclosure becomes necessary, KDM may acquire properties as a deed in lieu of foreclosure. KDM may create special purpose entities to take title to such properties, liquidate them to satisfy any debts due under an MSN, or keep such properties and repay the MSN from its own funds. The Company has created one such special purpose entity to date, KDM Stafford. KDM Stafford owns one building located in Virginia, which the Company acquired through a deed in lieu of foreclosure.
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NOTE 11 – DEFERRED REVENUE, NET
Loan origination fees are deferred and recognized as revenue over the life of the respective loan. The associated loan origination costs are also deferred and recognized as expense over the life of the loan. The deferred portion of the loan origination fees is netted against the deferred portion of the loan origination costs and reported as a net deferred revenue liability on the Company’s Consolidated Statements of Financial Condition.
| F-13 |
The following is a summary of the loan originating fees and costs deferred and amortized for the years ended December 31, 2023 and 2022:
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| Schedule of loan originating fees and costs deferred and amortized | |||||||||||||
| Deferred Origination Fees | Deferred Origination Costs | Deferred Revenue, Net |
|||||||||||
| Deferred Revenue at December 31, 2022 | $ | i 5,428,823 | $ | ( i 3,834,954 | ) | $ | i 1,593,869 | ||||||
| New loan deferrals | i 1,261,450 | ( i 562,529 | ) | i 698,921 | |||||||||
| Amortization of deferrals | ( i 1,709,783 | ) | i 1,142,796 | ( i 566,987 | ) | ||||||||
| Deferred Revenue at December 31, 2023 | $ | i 4,980,490 | $ | ( i 3,254,687 | ) | $ | i 1,725,803 | ||||||
| Deferred Origination Fees | Deferred Origination Costs | Deferred Revenue, Net |
|||||||||||
| Deferred Revenue at December 31, 2021 | $ | i 4,226,325 | $ | ( i 3,068,653 | ) | $ | i 1,157,672 | ||||||
| New loan deferrals | i 2,636,924 | ( i 1,807,399 | ) | i 829,525 | |||||||||
| Amortization of deferrals | ( i 1,434,426 | ) | i 1,041,098 | ( i 393,328 | ) | ||||||||
| Deferred Revenue at December 31, 2022 | $ | i 5,428,823 | $ | ( i 3,834,954 | ) | $ | i 1,593,869 | ||||||
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On June 28, 2019, the Company’s Board of Directors adopted the 2019 Stock Option Plan (the “Incentive Plan”). The Incentive Plan provides for the grant of both incentive and non-statutory stock options to key employees, directors or other persons having a service relationship with the Company. Effective December 8, 2022, the Incentive Plan was amended to authorize the purchase of up to an aggregate of shares of the Company’s unissued, or reacquired, common stock, $ par value. The Plan will be administered by the Board of Directors or a committee appointed by the Board.
During the year ended December 31, 2023, the Company issued options to purchase shares of the Company’s common stock at an exercise price or $ per share. The weighted-average grant date fair values of options granted during the fiscal year 2023 was $ per share. The fair values of the stock-based awards granted were calculated with the following weighted-average assumptions:
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| Schedule of estimated fair value of stock options weighted-average assumptions | |||
| Risk-free interest rate: | |||
| Expected term: | years | ||
| Expected dividend yield: | |||
| Expected volatility: |
For the years ended December 31, 2023 and 2022, the Company recorded $ and $ of stock-based compensation expense, respectively. As of December 31, 2023 and 2022, there was $ and $, respectively in total unrecognized compensation expense related to non-vested employee stock options granted under the Incentive Plan, which is expected to be recognized over years and years, respectively.
| F-14 |
Stock option activity for the years ended December 31, 2023 and 2022, is summarized as follows:
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| Schedule of stock option activity | ||||||||||||
| 2019 Stock Option Plan: | Shares | Weighted Average Exercise Price | Weighted Remaining Contractual Life (Years) | |||||||||
| Options outstanding at January 1, 2022 | i 835,000 | $ | i 3.00 | |||||||||
| Granted | i 255,000 | $ | i 3.00 | |||||||||
| Exercised | - | - | - | |||||||||
| Expired or forfeited | - | - | - | |||||||||
| Options outstanding at December 31, 2022 | i 1,090,000 | $ | i 1.47 | |||||||||
| Granted | i 15,000 | i 3.00 | ||||||||||
| Exercised | - | - | - | |||||||||
| Expired or forfeited | ( i 10,000 | ) | i 3.00 | i 8.00 | ||||||||
| Options outstanding at December 31, 2023 | i 1,095,000 | $ | i 1.47 | |||||||||
| Options exercisable at December 31, 2023 | i 960,000 | $ | i 1.12 | |||||||||
| Options expected to vest at December 31, 2023 | i 135,000 | $ | i 3.00 | |||||||||
/ i
On September 27, 2019, the Company issued shares of its Series A 6% Cumulative Perpetual Convertible Preferred Stock for net proceeds of $ i 4,750,000. The Company paid $ i 250,000 in expenses related to the preferred stock issuance to J.W. Korth as underwriter and distributor. Each share was sold for $ i 25 and is i convertible into common stock at a ratio of 5 shares of common stock for each share of Series A Preferred Stock. On September 15, 2021, June 28, 2022, and March 23, 2023 the Company sold an additional 100,000, 480,000, and 160,000 shares, respectively of its Series A 6% Cumulative Perpetual Convertible Preferred Stock for net proceeds of $2,375,000, $11,856,480, and $3,896,000.
On August 12, 2022, the Company repurchased and retired shares of its Series A 6% Cumulative Perpetual Convertible Preferred Stock at a price of $ per share, for a total of $ i 12,120,480. The Company paid $ i 640,000 in interest expense.
On June 29, 2021, the Company issued shares of its Series B 6.50% Cumulative Non-Voting Redeemable Secured Preferred Stock (the “Series B preferred stock”), with a liquidation preference of $1,000 per share, for net proceeds of $ i 18,302,500. The Company paid $ i 697,500 in expenses related to the preferred stock issuance to its financial advisor and placement agent.
The Series B preferred stock is non-convertible and will pay cumulative dividends, if and when declared by the Company’s board of directors, at a rate of i 6.50% per annum. Dividends declared will be payable quarterly in arrears on the 15th day of January, April, July and October of each year. The Series B preferred stock ranks senior to KDM’s outstanding Series A 6% Cumulative Perpetual Convertible Preferred Stock, par value $ per share, or Series A preferred stock, and all of KDM’s common stock, and will rank pari passu with, or senior to, all future issuances of preferred stock of KDM.
The Company is required to use commercially reasonable efforts to maintain a nationally-recognized statistical ratings organization, or NRSRO, rating for so long as any shares of Series B preferred stock remain outstanding. If the Company fails to maintain an NRSRO rating for the Series B preferred stock of at least BBB (or the equivalent thereof), the dividend rate applicable to the Series B preferred stock will be increased by 25 basis points, and in the event the Company fails to maintain an NRSRO rating of at least BBB- (or the equivalent thereof), the dividend rate applicable to the Series B preferred stock will be increased by an additional 25 basis points.
The Series B preferred stock is redeemable at the Company’s option, in whole or in part, on or after June 29, 2026, at a redemption price per share equal to $ per share, plus accrued and unpaid dividends, if any. Subject to applicable law, the Company is required to redeem the Series B preferred stock, in each case at a redemption price equal to $1,000.00 per share, plus accrued and unpaid dividends, as follows:
| · | 10% of the originally-issued shares of Series B preferred stock on June 29, 2027; |
| · | 10% of the originally-issued shares of Series B preferred stock on June 29, 2028; |
| · | 10% of the originally-issued shares of Series B preferred stock on June 29, 2029; |
| · | 20% of the originally-issued shares of Series B preferred stock on June 29, 2030; and |
| · | 50% of the originally-issued shares of Series B preferred stock on June 29, 2031. |
The Company’s obligations to redeem the Series B preferred stock will be secured by a security interest on servicing fees, as specified in each mortgage secured note issued by the Company, which is the difference between the interest payable pursuant to the mortgage secured note and the interest receivable pursuant to the related commercial real estate mortgage loan. The requisite holders of Series B preferred stock will be entitled to exercise rights and remedies pursuant to such security interest in the event that the Company does not pay the relevant mandatory redemption price (inclusive of any accrued and unpaid dividends) within thirty (30) days of the applicable redemption date, except with respect to the final redemption date, which is not subject to a thirty (30)-day grace period.
| F-15 |
The Company declared and paid dividends for the years ended December 31, 2023 and 2022, as follows:
i
| Schedule of dividend paid | ||||||||||||
| Series A | Series B | Total Preferred Stock Dividends | ||||||||||
| Accrued Preferred Dividends, January 1, 2022 | $ | i 12,500 | $ | i 205,833 | $ | i 218,333 | ||||||
| Declared Dividends | i 450,000 | i 1,289,899 | i 1,739,899 | |||||||||
| Paid Dividends | ( i 450,000 | ) | ( i 1,235,000 | ) | ( i 1,685,000 | ) | ||||||
| Accrued Preferred Dividends, December 31, 2022 | i 12,500 | i 260,732 | i 273,232 | |||||||||
| Declared Dividends | i 630,000 | i 1,235,000 | i 1,865,000 | |||||||||
| Paid Dividends | ( i 630,000 | ) | ( i 1,235,000 | ) | ( i 1,865,000 | ) | ||||||
| Accrued Preferred Dividends, December 31, 2023 | $ | i 12,500 | $ | i 260,732 | $ | i 273,232 | ||||||
/ i
FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not assumptions specific to the entity.
ASC 820 establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial assets and liabilities at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:
Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Valuation Process
Cash and cash equivalents:
The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
Mortgages Owned and Mortgage Secured Notes Payable:
Mortgage loans for which the Company has the intention and ability to hold for the foreseeable future, or until maturity or payoff, are
reported at their outstanding principal balances, net of any unearned income, premiums or discounts which management believes to be the
best estimate of fair value for the asset. If a decline in fair value below the carrying balance is other-than-temporary, an impairment
loss is recorded and the loan is recorded at the lower fair value at each reporting period. To-date, the Company has not recorded any
impairment losses related to the mortgage loans.
Due to the fact that the Company issues notes secured directly by underlying loans, our assets and liabilities in this category have identical values and assets have offsetting balances, net of any MSNs held by the Company.
| F-16 |
Mortgage Servicing
The net present value of the servicing income is recognized at the time the mortgage is initiated as an unrealized gain, which is being recognized through net income at each reporting period This value uses several inputs that are highly subjective including: discount rate, constant prepayment rate, the current interest rate environment, and default rate assumptions. Since the Company has limited operating history and a small amount of loans outstanding, we have a limited basis to predict prepayment rates and default rates, but have engaged a third party, MIAC Analytics, to assist us in our valuation of this asset. The amount is included on the Consolidated Statements of Financial Condition as “Mortgage Servicing Rights, at Fair Value.”
Securities
J. W. Korth owns , $ i 1 par of defaulted Banco Cruzeiro del Sur bonds. As of December 31, 2023, the value of these bonds was $ i 85,000, which management believes to be the fair value expected to be received from the receiver handling the liquidation of the company in Brazil. Local counsel has informed us that the bank has sufficient cash to pay off the fair value of our bonds.
KDM also holds a small amount of its own MSNs in an account which it may buy from time to time. These bonds are carried at the published statement values.
Fair Value Disclosure
The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis:
i
| Schedule of fair value, assets and liabilities measured on recurring basis | ||||||||||||||||
| December 31, 2023 | ||||||||||||||||
| Total | Level I | Level II | Level III | |||||||||||||
| Financial Assets | ||||||||||||||||
| Mortgages Owned | $ | i 484,484,408 | $ | - | $ | i 484,484,408 | $ | - | ||||||||
| Mortgage Servicing | i 9,245,877 | - | - | i 9,245,877 | ||||||||||||
| Portfolio Loans | i 7,674,198 | - | i 7,674,198 | - | ||||||||||||
| Non-MSN Securities | i 85,000 | - | - | i 85,000 | ||||||||||||
| Total Financial Assets | $ | i 501,489,483 | $ | - | $ | i 492,158,606 | $ | i 9,330,877 | ||||||||
| Financial Liabilities | ||||||||||||||||
| Mortgage Secured Notes Payable | $ | i 485,154,510 | $ | - | $ | i 485,154,510 | $ | - | ||||||||
| Securities Sold Short | i 2,565,082 | - | i 2,565,082 | - | ||||||||||||
| Warehouse Line of Credit | i 11,264,436 | - | i 11,264,436 | - | ||||||||||||
| Total Financial Liabilities | $ | i 498,984,028 | $ | - | $ | i 498,984,028 | $ | - | ||||||||
| December 31, 2022 | ||||||||||||||||
| Financial Assets | ||||||||||||||||
| Mortgages Owned | $ | i 447,407,141 | $ | - | $ | i 447,407,141 | $ | - | ||||||||
| Mortgage Servicing | i 13,229,889 | - | - | i 13,229,889 | ||||||||||||
| Portfolio Loans | i 3,318,832 | - | i 3,318,832 | - | ||||||||||||
| Non-MSN Securities | i 567,826 | - | - | i 567,826 | ||||||||||||
| Total Financial Assets | $ | i 464,523,688 | $ | - | $ | i 450,725,973 | $ | i 13,797,715 | ||||||||
| Financial Liabilities | ||||||||||||||||
| Mortgage Secured Notes Payable | $ | i 454,883,011 | $ | - | $ | i 454,883,011 | $ | - | ||||||||
| Warehouse Line of Credit | i 1,560,000 | - | i 1,560,000 | - | ||||||||||||
| Total Financial Liabilities | $ | i 456,443,011 | $ | - | $ | i 456,443,011 | $ | - | ||||||||
| F-17 |
Fair Value Measurements
Changes in Fair Value Measurements for the year ended December 31, 2023
The Company has engaged MIAC Analytics to assist in the valuation of the mortgage servicing component of its business. The underlying assumptions in the valuation model may change year over year, which will be reflected in the determined fair value and the difference year over year will be reflected in the unrealized gain/loss adjustment.
The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the Audited Consolidated Statements of Financial Condition for the year ended December 31, 2023 and 2022:
i
| Schedule of statements of financial condition | ||||||||||||
| Changes in assets: | ||||||||||||
| Year ended December 31, 2023 | Mortgage Servicing Value | Non-MSN Securities | Total Value | |||||||||
| Beginning balance at January 1, 2023 | $ | i 13,229,889 | $ | i 225,000 | $ | i 13,454,889 | ||||||
| Sales | - | - | - | |||||||||
| Unrealized Gain from newly issued mortgages | i 2,278,894 | - | i 2,278,894 | |||||||||
| Fair Value adjustment | ( i 6,262,906 | ) | ( i 140,000 | ) | ( i 6,402,906 | ) | ||||||
| Ending balance at December 31, 2023 | $ | i 9,245,877 | $ | i 85,000 | $ | i 9,330,877 | ||||||
| Changes in assets: | ||||||||||||
| Year ended December 31, 2022 | Mortgage Servicing Value | Non-MSN Securities | Total Value | |||||||||
| Beginning balance at January 1, 2022 | $ | i 9,616,357 | $ | i 225,006 | $ | i 9,841,363 | ||||||
| Sales | - | ( i 6 | ) | ( i 6 | ) | |||||||
| Unrealized Gain from newly issued mortgages | i 4,187,817 | - | i 4,187,817 | |||||||||
| Fair Value adjustment | ( i 574,285 | ) | - | ( i 574,285 | ) | |||||||
| Ending balance at December 31, 2022 | $ | i 13,229,889 | $ | i 225,000 | $ | i 13,454,889 | ||||||
The Company’s policy for recording transfers between levels of the fair value hierarchy is to recognize as of the financial statement date. For the years ended December 31, 2023 and December 31, 2022, there were no transfers between levels.
The Company has established valuation processes and policies for its Level 3 investments to ensure that the methods used are fair and consistent in accordance with ASC 820 – Fair Value Measurements and Disclosures. The Company’s valuation committee performs reviews of the Level 3 investments’ valuations, which include reviewing any significant price changes reported from the prior period. When a Level 3 investment has a significant price change, the valuation committee reviews relevant market data to substantiate the price change.
| F-18 |
The following table presents quantitative information regarding the significant unobservable inputs the Company uses to determine the fair value of Level 3 investments held as of December 31, 2023 and December 31, 2022:
i
/
/ i
NOTE 15 – WAREHOUSE LINE OF CREDIT
On March 31, 2022, The Company entered into a Master Repurchase Agreement and Securities Contract with Signature Bank (now Flagstar Bank) for the provision of an uncommitted warehouse facility up to $100,000,000 (the “Line”). The Agreement provides for approximately a three-year term and may be terminated in accordance therein.
The Line is floating rate and both the haircut percentage and SOFR-linked interest rate spread vary according to property type and time on the line. The Line offers up to 75% leverage on investment grade loans and is designed for 30 to 90 day hold periods but can accommodate up to a 12-month holding period, with decreasing leverage as time passes.
In connection with entering into the Line, the Company incurred loan fees of approximately $ i 1,589,783 which is netted against the amount drawn on the line and is included in the warehouse line of credit, net in the accompanying audited Consolidated Statements of Financial Condition. Loan fees associated with the Line will be amortized on a straight-line basis over the term of the Line.
On March 20, 2023, Signature Bank announced that much of its assets, including our warehouse line would now operate under the New York Community Bancorp’s Flagstar Bank, N.A.
As of December 31, 2023, the Company had a balance of $ i 10,164,436 on the warehouse line net of the costs associated with the final Agreement which is shown on the audited Consolidated Statements of Financial Condition as Warehouse line of credit, net. Total amortization expense of capitalized loan fees was $ i 570,857 for the year ended December 31, 2023 and recorded in interest expense. Subsequent to year-end, the Company has terminated the Flagstar line.
On October 13, 2023, KDM MFB LLC, a Delaware limited liability company (the “KDM MFB”), a newly formed and wholly owned subsidiary of Korth Direct Mortgage Inc. (the “Company”) entered into a $100,000,000 Master Repurchase and Securities Contract credit facility with Churchill MRA Funding I LLC (the “Agreement”). The Company vis a vis KDM MFB, will use the credit facility provided by the Agreement (the “MFB Line ”) to finance the Company’s expansion of its lending operations in multi-family and multifamily bridge financing. See Form 8-k filed October 19, 2023 for more information. As of December 31, 2023, the Company had a balance of $ i 600,000 on the MFB Line. Total amortization expense of capitalized loan fees was $ i 19,100 for the year ended December 31, 2023 and recorded in interest expense.
| F-19 |
/ i
Income tax expense/(benefit) is detailed as follows:
i /
Income tax expense differs from the amounts that would result from applying the federal statutory rate of 21% to the Company’s income before taxes for the years ended December 31, 2023 and 2022, are as follows:
i /
Temporary differences that give rise to the components of deferred tax assets and liabilities as of December 31, 2023 and 2022, are as follows:
i /
As of December 31, 2023, the Company had net operating loss carry-forwards of $ i 1,091,648 for federal and state income tax purposes.
As of December 31, 2023, management determined that there should be no valuation allowance against the net deferred tax assets of ($ i 851,072). In assessing the ability to realize a portion of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making the assessment.
| F-20 |
The Company has not recognized any tax benefits from uncertain tax positions for any of the reporting periods presented. Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next twelve months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, the Company does not anticipate any significant changes to unrecognized tax benefits over the next 12 months. During the year ended December 31, 2022, no interest or penalties were required to be recognized relating to unrecognized tax benefits.
The Company files U.S. federal and state tax returns, of which the open tax period subject to examination by taxing authorities include the years ended December 31, 2020, 2021 and 2022. The Company is not currently subject to any examinations by any state or federal taxation authority.
/ i
NOTE 17 – PROPERTY AND EQUIPMENT
Property and Equipment are summarized as follows:
i
| 2022 | ||||
| Land & Building | $ | i 17,900,000 | ||
| Equipment | i 276,358 | |||
| Furniture and fixtures | i 183,760 | |||
| i 18,360,118 | ||||
| Accumulated depreciation | ( i 187,814 | ) | ||
| Net Property Equipment | $ | i 18,172,304 | ||
Depreciation expense for the period ending December 31, 2023 and December 31, 2022 was $ i 665,551 and $ i 117,704, respectively.
/ i
The Company has evaluated all events or transactions that occurred after December 31, 2023 through the date that the financial statements were available to be issued. During this period, there were no material subsequent events requiring disclosure, other than those noted below.
| a. | The Company approved a $ i 172,500 cash payment of the quarterly Series A preferred stock dividend for the period of 12/15/2023 – 3/14/2024 paid on 3/15/2024. |
| b. | The Company approved a $ i 308,750 cash payment of the quarterly Series B preferred stock dividend for the period of 1/15/2024 – 4/14/2024 to be paid on 4/15/2024. |
| c. | In February 2024, by mutual agreement between the parties, KDM closed its warehouse line that was acquired by Flagstar. |
| d. | On March 5, 2024 the Company acquired, on behalf of its MSN Noteholders, an office property in Acton, Massachusetts via foreclosure auction. |
| e. | The Company closed $ i 21,674,073 of participations across 4 loans, and sold 12 small balance loans to investors. |
| f. | The Company currently has 4 loans in various stages of delinquency and foreclosure, one of which is under contract to be sold. |
F-21
| This ‘10-K’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 6/29/31 | ||||
| 6/29/30 | ||||
| 6/29/29 | ||||
| 6/29/28 | ||||
| 6/29/27 | ||||
| 6/29/26 | ||||
| 3/29/24 | ||||
| Filed on: | 3/27/24 | |||
| 3/21/24 | ||||
| 3/5/24 | ||||
| 2/22/24 | ||||
| For Period end: | 12/31/23 | |||
| 10/19/23 | 8-K | |||
| 10/13/23 | ||||
| 3/23/23 | ||||
| 3/20/23 | ||||
| 3/11/23 | ||||
| 1/1/23 | ||||
| 12/31/22 | 10-K | |||
| 12/15/22 | ||||
| 12/8/22 | ||||
| 8/12/22 | ||||
| 8/4/22 | 8-K | |||
| 6/28/22 | ||||
| 3/31/22 | 10-K, 10-Q, 8-K | |||
| 1/1/22 | ||||
| 12/31/21 | 10-K | |||
| 9/15/21 | ||||
| 8/16/21 | 10-Q | |||
| 7/1/21 | 8-K | |||
| 6/29/21 | ||||
| 12/31/20 | 10-K | |||
| 10/6/20 | 8-K | |||
| 8/6/20 | 8-K | |||
| 7/31/20 | 8-K | |||
| 12/31/19 | 10-K | |||
| 9/27/19 | 8-K | |||
| 6/28/19 | 8-K | |||
| 6/6/19 | ||||
| 2/27/19 | ||||
| 12/31/18 | 10-K | |||
| 12/15/18 | ||||
| 12/31/17 | 10-K | |||
| 8/24/16 | ||||
| 7/24/09 | ||||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/05/22 Korth Direct Mortgage Inc. 8-K:1,9 7/28/22 13:817K Securex Filings/FA 8/16/21 Korth Direct Mortgage Inc. 10-Q 6/30/21 68:3.9M Securex Filings/FA 7/01/21 Korth Direct Mortgage Inc. 8-K:3,5,7,9 6/30/21 6:268K Securex Filings/FA 10/07/20 Korth Direct Mortgage Inc. 8-K:1,9 9/30/20 2:327K Securex Filings/FA 8/06/20 Korth Direct Mortgage Inc. 8-K:1,2,3,9 7/31/20 2:49K Securex Filings/FA 6/28/19 Korth Direct Mortgage Inc. 8-K:5,9 6/28/19 2:112K Securex Filings/FA 6/12/19 Korth Direct Mortgage Inc. 8-K:3,5,9 6/07/19 5:322K Securex Filings/FA 11/13/18 Korth Direct Mortgage Inc. 10-Q 9/30/18 37:1.4M Securex Filings/FA 11/20/17 Korth Direct Mortgage Inc. S-1/A¶ 11/17/17 7:2.2M Securex Filings/FA |