SEC Info℠ | Home | Search | My Interests | Help | Sign In | Please Sign In | ||||||||||||||||||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/15/22 Korth Direct Mortgage Inc. 10-Q 6/30/22 69:3.7M Securex Filings/FA |
Document/Exhibit Description Pages Size 1: 10-Q Quarterly Report HTML 575K 2: EX-31.1 Certification -- §302 - SOA'02 HTML 23K 3: EX-31.2 Certification -- §302 - SOA'02 HTML 23K 4: EX-32.1 Certification -- §906 - SOA'02 HTML 20K 5: EX-32.2 Certification -- §906 - SOA'02 HTML 20K 11: R1 Cover HTML 71K 12: R2 Unaudited Consolidated Statements of Financial HTML 101K Condition 13: R3 Unaudited Consolidated Statements of Financial HTML 42K Condition (Parenthetical) 14: R4 Unaudited Consolidated Statements of Income HTML 110K 15: R5 Unaudited Consolidated Statement of Changes in HTML 54K Stockholders' Equity 16: R6 Unaudited Consolidated Statements of Cash Flows HTML 102K 17: R7 Nature of Business HTML 24K 18: R8 Summary of Significant Accounting Policies HTML 53K 19: R9 Contingent Liability HTML 28K 20: R10 Mortgage Secured Notes Payable HTML 33K 21: R11 Restricted Cash HTML 27K 22: R12 Commitments HTML 31K 23: R13 Indemnifications HTML 22K 24: R14 Related Party Transactions HTML 24K 25: R15 Deferred Revenue, Net HTML 35K 26: R16 Employee and Director Stock Options HTML 44K 27: R17 Preferred Equity HTML 39K 28: R18 Fair Value HTML 81K 29: R19 Income Taxes HTML 28K 30: R20 Property and Equipment HTML 32K 31: R21 Warehouse Line of Credit HTML 26K 32: R22 Subsequent Events HTML 25K 33: R23 Summary of Significant Accounting Policies HTML 90K (Policies) 34: R24 Summary of Significant Accounting Policies HTML 25K (Tables) 35: R25 Contingent Liability (Tables) HTML 26K 36: R26 Mortgage Secured Notes Payable (Tables) HTML 26K 37: R27 Commitments (Tables) HTML 27K 38: R28 Deferred Revenue, Net (Tables) HTML 31K 39: R29 Employee and Director Stock Options (Tables) HTML 41K 40: R30 Fair Value (Tables) HTML 77K 41: R31 Property and Equipment (Tables) HTML 30K 42: R32 The following table provides a reconciliation of HTML 27K cash, cash equivalents, and restricted cash to amounts shown in the consolidated statements of cash flows as of June 30, 2022 and 2021 (Details) 43: R33 Summary of Significant Accounting Policies HTML 27K (Details Narrative) 44: R34 The following table summarizes the unpaid HTML 27K Contingent Liability outstanding as of June 30, 2022 (Details) 45: R35 Contingent Liability (Details Narrative) HTML 27K 46: R36 The following table presents the future scheduled HTML 41K principal payments on the Company?s MSNs (Details) 47: R37 Mortgage Secured Notes Payable (Details Narrative) HTML 32K 48: R38 Restricted Cash (Details Narrative) HTML 37K 49: R39 The following is a schedule of the maturities of HTML 39K future lease payments over the remaining life of the operating leases, reconciled to the net present value of as of June 30, 2022 (Details) 50: R40 Commitments (Details Narrative) HTML 28K 51: R41 The following is a summary of the loan origination HTML 34K fees and costs deferred and amortized for the six months ended June 30, 2022 (Details) 52: R42 Schedule of estimated fair value of stockoptions HTML 30K weighted-average assumptions (Details) 53: R43 Stock option activity for the six months ended HTML 53K June 30, 2022, is summarized as follows (Details) 54: R44 Employee and Director Stock Options (Details HTML 37K Narrative) 55: R45 Preferred Equity (Details Narrative) HTML 51K 56: R46 The following tables display the Company?s assets HTML 49K and liabilities measured at fair value on a recurring basis (Details) 57: R47 The following table presents a reconciliation of HTML 56K changes in Level 3 assets and liabilities reported in the Consolidated Statements of Financial Condition for June 30, 2022 (Details) 58: R48 The following table presents quantitative HTML 36K information regarding the significant unobservable inputs the Company uses to determine the fair value of Level 3 investments held as of June 30, 2022 (Details) 59: R49 Fair Value (Details Narrative) HTML 25K 60: R50 Income Taxes (Details Narrative) HTML 34K 61: R51 Schedule of property and equipment (Details) HTML 32K 62: R52 Property and Equipment (Details Narrative) HTML 22K 63: R53 Warehouse Line of Credit (Details Narrative) HTML 27K 64: R54 Subsequent Events (Details Narrative) HTML 31K 67: XML IDEA XML File -- Filing Summary XML 124K 65: XML XBRL Instance -- k81022010q_htm XML 721K 66: EXCEL IDEA Workbook of Financial Reports XLSX 103K 7: EX-101.CAL XBRL Calculations -- cik0001695963-20220630_cal XML 145K 8: EX-101.DEF XBRL Definitions -- cik0001695963-20220630_def XML 383K 9: EX-101.LAB XBRL Labels -- cik0001695963-20220630_lab XML 730K 10: EX-101.PRE XBRL Presentations -- cik0001695963-20220630_pre XML 606K 6: EX-101.SCH XBRL Schema -- cik0001695963-20220630 XSD 138K 68: JSON XBRL Instance as JSON Data -- MetaLinks 305± 446K 69: ZIP XBRL Zipped Folder -- 0001214659-22-010126-xbrl Zip 168K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended i June 30, 2022
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
(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) |
i _________________________________ ___________________________________
(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ i Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ i Yes ¨ No
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 | ¨ | Accelerated filer | ¨ |
i Non-accelerated filer | ¨ | Smaller Reporting company | þ |
Emerging growth company | þ |
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 ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ i No þ
C:
C: 1 |
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Securities registered pursuant to Section 12(b) of the Act: None.
As of June 30, 2022 there were shares of Common Stock of Korth Direct Mortgage Inc. outstanding.
2 |
PART I – FINANCIAL INFORMATION | ||
Item 1. | Consolidated Financial Statements | |
Unaudited Consolidated Statements of Financial Condition | 4 | |
Unaudited Consolidated Statements of Income | 5 | |
Unaudited Consolidated Statement of Changes in Stockholders’ Equity | 6 | |
Unaudited Consolidated Statements of Cash Flows | 7 | |
Notes to Unaudited Consolidated Financial Statements | 8 | |
Item 2. | Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Consolidated Operations | 18 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 20 |
Item 4. | Controls and Procedures | 20 |
PART II – OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 20 |
Item 1A. | Risk Factors | 20 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 20 |
Item 3. | Defaults Upon Senior Securities | 20 |
Item 4. | Mine Safety Disclosures | 20 |
Item 5. | Other Information | 20 |
Item 6. | Exhibits | 21 |
SIGNATURES | 22 |
C:
3 |
PART I—FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2022 | December 31, 2021 | |||||||
ASSETS | ||||||||
Cash and Cash Equivalents | $ | i 4,436,479 | $ | i 9,137,672 | ||||
Restricted Cash | i 24,862,805 | i 10,343,671 | ||||||
Mortgages Owned | i 417,102,419 | i 326,312,345 | ||||||
Mortgage Servicing Rights, at Fair Value | i 13,193,466 | i 9,616,357 | ||||||
Portfolio Loans | i 23,897,064 | i 14,749,862 | ||||||
Securities | i 325,000 | i 225,006 | ||||||
ROU Leased Asset | i 830,325 | i 935,323 | ||||||
Goodwill | i 110,000 | i 110,000 | ||||||
Property and equipment, net of depreciation | i 292,255 | i 304,203 | ||||||
Other Assets | i 573,205 | i 312,019 | ||||||
TOTAL ASSETS | $ | i 485,623,018 | $ | i 372,046,458 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES | ||||||||
Escrows Payable | $ | i 11,557,350 | $ | i 9,613,634 | ||||
Lease Liability | i 876,661 | i 981,418 | ||||||
Deferred Revenue, net | i 2,241,138 | i 1,157,672 | ||||||
Deferred Tax Liability | i 2,701,243 | i 2,050,220 | ||||||
Contingent Liability, net | i 492,439 | i 489,952 | ||||||
Mortgage Secured Notes Payable | i 386,335,219 | i 326,212,364 | ||||||
Warehouse Line of Credit, net | i 34,643,551 | - | ||||||
Other Liabilities and Payables | i 2,083,902 | i 931,102 | ||||||
Total Liabilities | i 440,931,503 | i 341,436,362 | ||||||
STOCKHOLDERS' EQUITY | ||||||||
Accumulated Earnings | i 7,097,958 | i 4,885,445 | ||||||
Additional Paid-in Capital | i 37,587,758 | i 25,719,332 | ||||||
Common Stock, $
par value,
shares authorized shares issued and outstanding at June 30, 2022 and December 31, 2021 | i 5,000 | i 5,000 | ||||||
Series A Preferred Stock, $
par value, shares
authorized, shares issued and outstanding at June 30, 2022, and shares authorized and issued and outstanding as of December 31, 2021 | i 780 | i 300 | ||||||
Series B Preferred Stock, $
par value,
shares authorized, issued and outstanding at June 30, 2022 and December 31, 2021 | i 19 | i 19 | ||||||
Total Stockholders' Equity | i 44,691,515 | i 30,610,096 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | i 485,623,018 | $ | i 372,046,458 |
See accompanying notes to the unaudited consolidated financial statements.
C:
4 |
KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1 THROUGH JUNE 30
For the Six Months Ended | For the Six Months Ended | |||||||
June 30, 2022 | June 30, 2021 | |||||||
REVENUES | ||||||||
Origination Revenue, Net | $ | i 730,012 | $ | i 347,487 | ||||
Servicing Revenue | i 3,022,146 | i 1,167,238 | ||||||
Underwriting Income | i 427,400 | i 520,147 | ||||||
Other Revenue | i 892,626 | i 1,270,824 | ||||||
Total Revenues | i 5,072,184 | i 3,305,696 | ||||||
COST OF REVENUES | ||||||||
Broker Underwriting Expense | i 976,636 | i 152,267 | ||||||
Administrative Expenses | i 490,060 | i 592,959 | ||||||
Total Cost of Revenues | i 1,466,696 | i 745,226 | ||||||
GROSS PROFIT | i 3,605,488 | i 2,560,470 | ||||||
OPERATING EXPENSES | ||||||||
Office | i 235,073 | i 246,134 | ||||||
Compensation and Related Benefits | i 2,111,392 | i 1,849,571 | ||||||
Professional & Legal | i 420,311 | i 484,541 | ||||||
Advertising | i 173,475 | i 58,044 | ||||||
Depreciation | i 34,407 | i 16,193 | ||||||
Total Expenses | i 2,974,658 | i 2,654,483 | ||||||
Net Income/(Loss) From Operations | i 630,830 | ( i 94,013 | ) | |||||
Other Income / (Expenses) | ||||||||
Unrealized Gain on Mortgages | i 3,577,109 | i 3,093,810 | ||||||
Unrealized Gain on Mortgage Security Notes | i 76,004 | i 1,832 | ||||||
Interest Expense | ( i 106,914 | ) | ( i 21,994 | ) | ||||
Gain from Forgiveness of PPP Loan | - | i 161,600 | ||||||
Total Other Income | i 3,546,199 | i 3,235,248 | ||||||
Net income before provision for income taxes | i 4,177,029 | i 3,141,235 | ||||||
Provision for income taxes | i 1,067,117 | i 807,762 | ||||||
Net Income | i 3,109,912 | i 2,333,473 | ||||||
Series A Preferred Dividends | i 225,000 | i 150,000 | ||||||
Series B Preferred Dividends | i 672,399 | - | ||||||
Net income attributable to common stockholders | $ | i 2,212,513 | $ | i 2,183,473 |
See accompanying notes to the unaudited consolidated financial statements.
C:
5 |
KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR SIX MONTHS ENDED JUNE 30, 2022 AND 2021
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Additional Paid | Accumulated | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | in Capital | Earnings | Totals | ||||||||||||||||||||||||||||
Balance at January 1, 2021 | i 200,000 | $ | i 200 | - | $ | - | i 5,000,000 | $ | i 5,000 | $ | i 5,016,139 | $ | i 1,365,653 | $ | i 6,386,992 | |||||||||||||||||||||
Share-based compensation | - | - | - | - | - | - | i 12,906 | - | i 12,906 | |||||||||||||||||||||||||||
Series A & Series B preferred stock dividends declared | - | - | i 19,000 | i 19 | - | - | - | ( i 150,000 | ) | ( i 150,000 | ) | |||||||||||||||||||||||||
Sale of Series B preferred stock | - | - | - | - | - | - | i 18,302,481 | - | i 18,302,500 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | i 2,333,473 | i 2,333,473 | |||||||||||||||||||||||||||
Balance at June 30, 2021 | i 200,000 | $ | i 200 | i 19,000 | $ | i 19 | i 5,000,000 | $ | i 5,000 | $ | i 23,331,526 | $ | i 3,549,126 | $ | i 26,885,871 | |||||||||||||||||||||
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 12,906 | - | i 12,906 | |||||||||||||||||||||||||||
Series A & Series B preferred stock dividends declared | - | - | - | - | - | - | - | ( i 897,399 | ) | ( i 897,399 | ) | |||||||||||||||||||||||||
Sale of Series A preferred stock | i 480,000 | i 480 | - | - | - | - | i 11,855,520 | - | i 11,856,000 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | i 3,109,912 | i 3,109,912 | |||||||||||||||||||||||||||
Balance at June 30, 2022 | i 780,000 | $ | i 780 | i 19,000 | $ | i 19 | i 5,000,000 | $ | i 5,000 | $ | i 37,587,758 | $ | i 7,097,958 | $ | i 44,691,515 |
See accompanying notes to the unaudited consolidated financial statements.
C:
6 |
KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended | For the Six Months Ended | |||||||
June 30, 2022 | June 30, 2021 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net Income | $ | i 3,109,912 | $ | i 2,333,473 | ||||
Adjustments to Reconcile Net Income to Net Cash (Used In)/Provided by Operating Activities: | ||||||||
Unrealized Gain on Mortgages Owned | ( i 3,577,109 | ) | ( i 3,093,810 | ) | ||||
Unrealized Gain on Mortgage Security Notes | ( i 76,004 | ) | ( i 1,832 | ) | ||||
Stock Compensation | i 12,906 | i 12,906 | ||||||
Gain from forgiveness of PPP loan | - | ( i 161,600 | ) | |||||
Depreciation | i 34,407 | i 16,193 | ||||||
Amortization of loan costs | i 94,556 | - | ||||||
Deferred rent expense from operating lease | i 241 | i 36,826 | ||||||
Deferred income taxes | i 651,023 | i 784,010 | ||||||
Changes in Operating Assets and Liabilities: | ||||||||
Mortgage Secured Notes Issued | i 60,122,855 | i 88,344,206 | ||||||
Mortgage Secured Notes Purchased | ( i 23,990 | ) | ( i 76,180 | ) | ||||
Warehouse Line of Credit, net | i 34,548,995 | - | ||||||
Portfolio Loans | ( i 9,147,202 | ) | ( i 13,852 | ) | ||||
Other Assets | ( i 261,187 | ) | ( i 14,364,118 | ) | ||||
Deferred Revenue, net | i 1,083,466 | i 339,447 | ||||||
Escrows Payable | i 1,943,715 | i 4,742,718 | ||||||
Other Liabilities and Payables | i 1,100,390 | ( i 107,042 | ) | |||||
New Mortgage Lending | ( i 90,790,074 | ) | ( i 78,939,206 | ) | ||||
Total Adjustments | ( i 4,283,012 | ) | ( i 2,481,334 | ) | ||||
NET CASH (USED IN) OPERATING ACTIVITIES | ( i 1,173,100 | ) | ( i 147,861 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of property and equipment | ( i 22,459 | ) | ( i 152,152 | ) | ||||
NET CASH (USED IN) INVESTING ACTIVITIES | ( i 22,459 | ) | ( i 152,152 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payment of Series A preferred stock dividends | ( i 225,000 | ) | ( i 150,000 | ) | ||||
Payment of Series B preferred stock dividends | ( i 617,500 | ) | - | |||||
Net proceeds from the sale of Series A preferred stock | i 11,856,000 | - | ||||||
Net proceeds from the sale of Series B preferred stock | - | i 18,302,500 | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | i 11,013,500 | i 18,152,500 | ||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | i 9,817,941 | i 17,852,487 | ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH – Beginning of Period | i 19,481,343 | i 2,037,177 | ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH – End of Period | $ | i 29,299,284 | $ | i 19,889,664 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION | ||||||||
Cash paid during the period for interest | $ | i 12,358 | $ | i 21,994 | ||||
Cash paid during the period for income taxes | $ | i 77,798 | $ | - |
See accompanying notes to the unaudited consolidated financial statements.
C:
7 |
KORTH DIRECT MORTGAGE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
i
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.
i
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
The accompanying consolidated financial statements include the accounts of the Company and J.W. Korth, its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated upon consolidation.
i
The accompanying financial statements have been prepared on the accrual basis of accounting, in accordance with Generally Accepted Accounting Principles (“GAAP”). The accompanying financial statements have also been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
i
Beginning in the first quarter of 2022, we have condensed certain categories of information in our consolidated financial statements to enhance the readability and understanding of those statements by making them more succinct. As a result, certain footnote disclosures we normally include in our annual consolidated financial statements have been omitted, but remain prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our unaudited consolidated statements of financial condition, income, changes in stockholders’ equity, and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on March 31, 2022.
i
The preparation of consolidated 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 periods. Actual results could differ from those estimates.
i
For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
i
The following table provides a reconciliation of cash, cash equivalents, and restricted cash to amounts shown in the consolidated statements of cash flows as of June 30, 2022 and 2021:
6/30/2022 | 6/30/2021 | |||||||
Cash and Cash Equivalents | $ | i 4,436,479 | $ | i 9,137,672 | ||||
Restricted Cash | i 24,862,805 | i 10,751,992 | ||||||
$ | i 29,299,284 | $ | i 19,889,664 |
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
/C:
8 |
i
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 loan. Mortgages owned as of the date of these financial statements are current. The net present value of the servicing revenue is recorded as mortgage servicing rights, at fair value on the consolidated Statements of Financial Condition, and is recognized on the consolidated Statements of Income as an unrealized gain on mortgages.
i
The Company primarily funds the mortgage loans (”CM Loans”) that it makes by issuing Mortgage Secured Notes (“MSNs”) in series, each of which MSN series is secured by the mortgage or mortgages funded from proceeds of the MSN series. Our MSNs have been funded in multiple ways, including private placements, SEC registered offerings, loan participations, and Rule 144A offerings. As of June 30, 2022, the Company has funded loans totaling $454,012,345 since inception and it issued MSNs secured by those loans in the amount of $402,712,364 since inception.
i
The Company recognizes loans made with its own capital, or those not securitized, under the caption “Portfolio Loans” on the statement of financial condition. As of June 30, 2022, the Company had issued Portfolio Loans in the amount of $26,670,623 and currently holds $23,897,064. Of this amount, $15,050,000 is a portion of the MSNs not funded by the warehouse line, and the balance are loans that were funded by the Company as well as affiliates.
i
From time to time, the Company sells all or part of its loans as loan participations to banks or other lending Institutions that prefer to hold their mortgage investment in that manner. As of June 30, 2022, the Company had issued Loan Participations in the amount of $6,500,000, all of which are still outstanding. These participations are included in the Mortgages Owned number and Mortgage Secured Notes Payable.
i
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 period ending June 30, 2022.
i
The Company’s primary sources of revenue are origination fees, servicing fees, processing fees, underwriting income, trading profits, and interest income.
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 interest received from our CM Loans 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.
Processing Fees
Processing fees are collected from the borrower at the time the commitment letter is signed and cover a variety of expenses during the underwriting process. If the Company cancels the transaction, then unused fees are refunded. If the transaction is unable to proceed for any reason not the fault of the Company, then the Company keeps the full processing fee. Revenues from processing fees are recognized at closing or at the time a transaction is canceled.
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 the settlement date of the trades.
C:
9 |
Trading Profits
Trading profits represent revenue generated through the trading of securities either for its own account or on behalf of J.W. Korth’s clients. Revenue from trading profits is recognized upon settlement of the securities transactions.
Interest Income
Interest Income is primarily derived from interest earned on Portfolio Loans and includes interest earned on cash and securities.
i
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 statement of financial condition 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.
i
The Company estimates the fair values 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. 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.
i
Unrealized Gain on Mortgages OWNED
The net present value of the servicing income is recognized at the time the mortgage is initiated. This value uses several inputs that are highly subjective including: discount rate, prepayment rate, the current interest rate environment, and default rate assumptions. Since the Company has a short operating history and a small number of loans outstanding, we have a limited basis to predict prepayment rates and default rates.
i
Depreciation is provided on a straight-line basis using estimated useful lives of three to seven years.
i
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated 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 consolidated 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.
i
Debt issuance costs are amortized over the term of the respective obligation, using the straight-line method. Amortization expense of debt issuance costs is recorded in interest expense in the consolidated statements of financial income.
i
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. Management is currently evaluating the impact that the adoption of ASU 2016-13 will have on the Company’s consolidated financial statements.
/
C:
10 |
i
As part of the acquisition of J. W. Korth, the Company agreed to pay (i) the Preferred Capital Interest partners of J.W. Korth accrued and unpaid dividends of 6% per annum 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 J. W. Korth.
i
The following table summarizes the unpaid Contingent Liability outstanding as of June 30, 2022:
Contingent liability to redeem J.W. Korth Preferred Capital Interest Partners | i 696,253 | |||
Contingent liability payment | ( i 215,502 | ) | ||
Accrued quarterly dividends recorded as interest expense through June 30, 2022 | i 11,688 | |||
Contingent Liability, net | $ | i 492,439 |
i
NOTE 4 – MORTGAGE SECURED NOTES PAYABLE
As stated above in Note 2, the Company funds mortgage loans that it makes by issuing Mortgage Secured Notes (“MSNs”), which are secured by those same mortgages. As of June 30, 2022 and December 31, 2021, the Company has outstanding loans securing MSNs totaling $417,102,419 and $ i 326,312,345, respectively, and it issued MSNs secured by those loans in the amount of $386,335,219 and $326,212,364, respectively. The deals have been funded in multiple ways, including private placements, loan participations, 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 6.50% and mature at various dates from September 2023 to June 2037. The MSNs are non-recourse to KDM and 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.
i
The following table presents the future scheduled principal payments on the Company’s MSNs:
Future Maturities of Debt | ||||
Last 6 months of 2022 | $ | i 239,795 | ||
2023 | i 10,968,184 | |||
2024 | i 105,932,917 | |||
2025 | i 90,939,523 | |||
2026 | i 118,372,000 | |||
Thereafter | i 59,882,800 | |||
Total | $ | i 386,335,219 |
/
i
The Company maintains multiple segregated accounts in trust for borrowers and investors. The value of these accounts is carried under the asset “Restricted Cash.”
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 corresponds to the Escrow Payable liability. As of June 30, 2022, and December 31, 2021, this account has a balance of $ i 11,480,984 and $ i 9,519,859, respectively.
C:
11 |
The “In Trust for 2” account receives payments from borrowers, distributes payments to investors, and pays the servicing fee to the Company. This account corresponds to the Due to Investors liability, which is included in other liabilities and payables. As of June 30, 2022 and December 31, 2021, this account had a balance of $ i 393,905 and $ i 421,286, respectively.
As of June 30, 2022 the company had restricted cash of $ i 11,602,800 pending closing of one loan.
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 as of June 30, 2022 and December 31, 2021 were $ i 76,367 and $ i 93,775, 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 June 30, 2022, and December 31, 2021, respectively.
The Company maintains an account restricted per the warehouse line agreement that has a balance of $ i 1,000,000 as of June 30, 2022.
/i
In November 2020, the Company signed a lease for office space in Miami, Florida, 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 as 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.
The Company also maintains an office in Lansing, Michigan for J.W. Korth.
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.
Rental expense for the quarter ended June 30, 2022 was $ i 125,521 compared to $ i 148,977 for the year ended June 30, 2021, which includes additional expenses for common area, direct operating expense, utilities, parking, and taxes.
As of June 31, 2022, 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 3.6 years was $ i 876,661.
i
The following is a schedule of the maturities of future lease payments over the remaining life of the operating leases, reconciled to the net present value of as of June 30, 2022:
/ /
i
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.
C:
12 |
i
NOTE 8 – 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 mortgages owned. Also, 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, in the event a foreclosure becomes necessary, KDM may acquire properties where MSNs are in default as a deed in lieu of foreclosure, KDM may create single purpose entities to take title to such properties and liquidate them to satisfy any debts due under an MSN.
i
NOTE 9 – 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.
i
The following is a summary of the loan origination fees and costs deferred and amortized for the six months ended June 30, 2022:
Deferred | Deferred | |||||||||||
Origination | Origination | Deferred | ||||||||||
Fees | Costs | Revenue, net | ||||||||||
Deferred Revenue at January 1, 2022 | $ | i 4,226,325 | ($ | i 3,068,653 | ) | $ | i 1,157,672 | |||||
New loan deferrals | i 2,336,000 | ( i 1,070,211 | ) | i 1,265,789 | ||||||||
Amortization of deferrals | ( i 730,012 | ) | i 547,689 | ( i 182,323 | ) | |||||||
Deferred Revenue at June 30, 2022 | $ | i 5,832,313 | ($ | i 3,591,175 | ) | $ | i 2,241,138 |
i
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 for 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.
In June 2019, the Company issued options to purchase shares of the Company’s common stock at an exercise price of $ per share. The weighted-average grant date fair values of options granted was $ per share. The fair values of the stock-based awards granted were calculated with the following weighted-average assumptions:
i
Risk-free interest rate: | % | |
Expected term: | 5.75 years | |
Expected dividend yield: | % | |
Expected volatility: | .01% |
For the six months ended June 30, 2022, and June 30, 2021, the Company recorded $ of stock-based compensation expense. Stock options vest 50% at issuance and then ratably over the remaining three years vesting period until they are fully vested. As of June 30, 2022, there was $ in total unrecognized compensation expense related to non-vested employee stock options granted under the Incentive Plan.
i
2019 Stock Option Plan: | Shares | Weighted Average Exercise Price | Weighted Remaining Contractual Life (Years) | |||||||||
Options outstanding at January 1, 2022 | i 835,000 | $ | i 1.00 | 7.50 | ||||||||
Granted | - | |||||||||||
Exercised | - | |||||||||||
Expired or forfeited | - | |||||||||||
Options outstanding at June 30, 2022 | i 835,000 | $ | i 1.00 | 7.00 | ||||||||
Options exercisable at June 30, 2022 | i 417,500 | $ | i 1.00 | 7.00 | ||||||||
Options expected to vest at June 30, 2022 | i 417,500 | $ | i 1.00 | 7.00 |
/
C:
13 |
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 and June 28, 2022, the Company sold an additional 100,000 and 480,000 shares, respectively of its Series A 6% Cumulative Perpetual Convertible Preferred Stock for net proceeds of $2,375,000 and $11,856,000.
On June 29, 2021, the Company issued shares of its Series B 6.50% Cumulative Non-Voting Redeemable Secured 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 $ 1 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, i 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 $ 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 are 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.
/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.
C:
14 |
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. If a decline in fair value below the carrying balance is other-than-temporary, an unrealized 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.
Mortgage Servicing:
The net present value of the servicing income is recognized at the time the mortgage is initiated as an unrealized gain. 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 holds $ i 225,000 of defaulted Banco Cruzeiro del Sur bonds which it reasonably believes it will receive par value for from the receiver handling the liquidation in Brazil. Local counsel has informed us that the bank has sufficient cash to pay off our bonds. We therefore carry them at par value.
KDM also holds a small amount of its own MSNs in an account which it may buy from time to time to provide liquidity to clients of J.W. Korth. These bonds are carried at the published statement values.
C:
15 |
Fair Value Disclosure
i
The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis:
June 30, 2022 | ||||||||||||||||
Total | Level I | Level II | Level III | |||||||||||||
Financial Assets | ||||||||||||||||
Mortgages Owned | $ | i 417,102,419 | $ | - | $ | i 417,102,419 | $ | - | ||||||||
Mortgage Servicing | i 13,193,466 | - | - | i 13,193,466 | ||||||||||||
Portfolio Loans | i 23,897,064 | - | i 23,897,064 | - | ||||||||||||
Non-MSN Securities | i 325,000 | - | - | i 325,000 | ||||||||||||
Total Financial Assets | $ | i 454,517,949 | $ | - | $ | i 440,999,483 | $ | i 13,518,466 | ||||||||
Financial Liabilities | ||||||||||||||||
Mortgage Secured Notes Payable | $ | i 386,335,219 | $ | - | $ | i 386,335,219 | $ | - | ||||||||
Warehouse Line of Credit | i 36,150,000 | - | i 36,150,000 | - | ||||||||||||
Total Financial Liabilities | $ | i 422,485,219 | $ | - | $ | i 422,485,219 | $ | - |
December 31, 2021 | ||||||||||||||||
Financial Assets | ||||||||||||||||
Mortgages Owned | $ | i 326,312,345 | $ | - | $ | i 326,312,345 | $ | - | ||||||||
Mortgage Servicing | i 9,616,357 | - | - | i 9,616,357 | ||||||||||||
Portfolio Loans | i 14,749,862 | - | i 14,749,862 | - | ||||||||||||
Non- MSN Securities | i 225,006 | - | - | i 225,006 | ||||||||||||
Total Financial Assets | $ | i 350,903,570 | $ | - | $ | i 341,062,207 | $ | i 9,841,363 | ||||||||
Financial Liabilities | ||||||||||||||||
Mortgage Secured Notes Payable | $ | i 326,212,364 | $ | - | $ | i 326,212,364 | $ | - |
Fair Value Measurements
Changes in Fair Value Measurements for the six months ended June 31, 2022
i
The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the Consolidated Statements of Financial Condition for June 30, 2022:
Changes in assets: | ||||||||||||
Period ended June 30, 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 | ||||||
Purchases | - | i 100,000 | i 100,000 | |||||||||
Trades | - | - | - | |||||||||
Sales | - | ( i 6 | ) | ( i 6 | ) | |||||||
Issues | - | - | - | |||||||||
Settlements | - | - | - | |||||||||
Net realized gain/loss or Interest income | - | - | - | |||||||||
Unrealized Gain from newly issued mortgages | i 4,041,144 | - | i 4,041,144 | |||||||||
Fair Value adjustment | ( i 464,035 | ) | - | ( i 464,035 | ) | |||||||
Transfers into Level 3 | - | - | - | |||||||||
Transfers out of Level 3 | - | - | - | |||||||||
Ending balance at June 30, 2022 | $ | i 13,193,466 | $ | i 325,000 | $ | i 13,518,466 |
C:
16 |
The Company’s policy for recording transfers between levels of the fair value hierarchy is to recognize such transfers as of the financial statement date. For the six months ended June 30, 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.
i
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 June 30, 2022:
/ /
i
The provision for income taxes was $ i 1,067,117 for the six months ended June 30, 2022. The effective tax rate was i 26% of the income before income taxes of $ i 4,177,029, which differs from the federal statutory rate of i 21% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.
The provision for income taxes was $ i 807,762 for the six months ended June 30, 2021. The effective tax rate was i 25.7% of the income before income taxes of $ i 3,141,235, which differs from the federal statutory rate of i 21% due to state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.
/i
NOTE 14 – PROPERTY AND EQUIPMENT
i
Property and Equipment are summarized as follows:
Schedule of property and equipment
June 30, 2022 | ||||
Equipment | $ | i 229,177 | ||
Furniture and fixtures | i 182,907 | |||
i 412,084 | ||||
Accumulated depreciation | ( i 119,829 | ) | ||
Net Property Equipment | $ | i 292,255 |
December 31, 2021 | ||||
Equipment | $ | i 210,953 | ||
Furniture and fixtures | i 178,672 | |||
i 389,625 | ||||
Accumulated depreciation | ( i 85,422 | ) | ||
Net Property Equipment | $ | i 304,203 |
Depreciation expense for the periods ending June 30, 2022 and June 30, 2021 was $ i 34,407 and $ i 16,193, respectively.
/C:
17 |
i
NOTE 15 – WAREHOUSE LINE OF CREDIT
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 $ i 100,000,000 (the “Line”). The Agreement provides for approximately a three-year term and may be terminated in accordance therein.
The Agreement provides that from time to time the Company may receive proceeds under the Line to originate first priority lien mortgages on real property. Signature will purchase the first lien commercial real estate mortgage loans (the “Loans”) pursuant to the Agreement. Each of the Loans will be originated in accordance with the underwriting and ratings criteria of the Company as further described in the Agreement. The Company will repurchase the Loans from Signature coincident with securitization or other disposition or pooling of the Loans under the terms and timeframes set forth in more detail in the Agreement.
The Line has a back-up security interest grant secured by collateral specified in the Agreement in the event the Agreement is recharacterized as a secured loan. The Agreement contains financial covenants of the Company, including limitations on the Company’s incurrence of certain debt and requirements that the Company maintain certain financial ratios and minimum net worth.
The Company is in compliance with these covenants as of and for the quarter ended June 30, 2022.
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 loans 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 consolidated balance sheets. Loans fees associated with the Line will be amortized on a straight-line basis over the term of the Line.
As of June 30, 2022, the Company had a balance of $ i 36,150,000 on the warehouse line net the costs associated with the final Agreement which is shown on the balance sheet as Warehouse line of credit, net. Total amortization expense for six months ended June 30, 2022 and recorded as interest expense is $ i 94,556.
/i
The Company has evaluated all events or transactions that occurred after June 30, 2022, through the date of these financial statements, which is the date that the consolidated financial statements were available to be issued. During this period, there were no material subsequent events requiring disclosure, other than those noted below.
On July 28, 2022 KDM entered into a material agreement with its new wholly owned subsidiary, KDM Funding I LLC (“KDMF”), and Delaware Trust Company for an additional trust indenture under which KDMF will issue MSNs. The Company will service the loans as well as be the paying agent and authenticating agent for KDMF. The Company also signed a revised Master Purchase Agreement with J. W. Korth & Company to be the initial purchaser of its MSNs. Please see the current report Form 8-K filed with the Commission on August 5, 2022 for more information.
KDM and its subsidiaries have issued $86,880,000 MSNs between June 30, 2022 and the date of this filing. However, $22,000,000 were redeemed during the same period under the special redemption clause of the notes. Coincident with issuance, the warehouse line balance has been reduced by approximately $33,000,000.
On August 12, 2022 the Company bought in shares of its Series A preferred for $ per share for a total of $ i 12,120,000.
See “Status of KDM Loans” for updates on our loans.
/
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q; (ii) our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021; and (iii) our management’s discussion and analysis of financial condition and results of operations included in our 2020 Form 10-K. This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed in “Forward-Looking Statements” herein and “Part I – Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021.
Overview
Korth Direct Mortgage Inc. (“KDM,” the “Company,” “we,” or “us”) began operations in October of 2016. We were founded by J. W. Korth & Company, LP, a FINRA and SEC registered broker-dealer, which is now a wholly owned subsidiary.
C:
18 |
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, and our principal subsidiary is J W Korth & Company, Limited Partnership (“J. W. Korth”).
We are licensed in Florida as a Mortgage Lender Servicer. Our NMLS License Number is 1579547.
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 directly in the capital markets through issuance of Mortgage Secured Notes (“MSNs” or “Notes”), which are sold through J.W. Korth as underwriter or placement agent through exemptions from registration available under Rule 144A, Regulation D, and other exemptions from registration.
Results of Operations for the six Months ended June 30, 2022
The Company generated revenues of $5,072,184 for the six months ended June 30, 2022, an increase of $1,766,488 compared with revenues of $3,305,696 for the six months ended June 30, 2021, a 53% increase. As of June 30, 2022, the Company owned mortgages of $417,102,419 compared with mortgages of $326,312,345 as of December 31, 2021 and $254,310,056 as of June 30, 2021, a 28% and 64% increase, respectively.
Gross profit increased by $1,045,018 (41%) to $3,605,488 during the six months ended June 30, 2022, compared with gross profit of $2,560,470 during the six months ended June 30, 2021. The increase in gross profits was primarily attributed to the increase in the amount of mortgages serviced during the six months ended June 30, 2022.
Operating expenses were $2,974,658 during the six months ended June 30, 2022, which was an increase of $320,175 (12%) compared with operating expenses of $2,654,483 during the six months ended June 30, 2021. The increase in operating expenses was driven primarily by the increase of $261,821 in compensation and related benefits and $115,431 in advertising expenses. The additional compensation expenses are largely due to conversion to employees from contractors for some of our top originators.
Other income increased by $310,951 (10%) to $3,546,199 during the six months ended June 30, 2022, compared with other income of $3,235,248 during the six months ended June 30, 2021. The increase in other income was due primarily to the unrealized gain on Mortgages of $3,577,109 during the six months ended June 30, 2022 compared to $3,093,810 during six months ended June 30, 2021.
During the six months ended June 30, 2022, the Company recorded $1,067,117 in deferred income tax expense compared with $807,762 of deferred income tax expense from June 30, 2021.
Net income increased $776,439 (33%) to $3,109,912 for the six months ended June 30, 2022, compared with net income of $2,333,473 during the six months ended June 30, 2021. The increase in 2022 was primarily attributed to the dramatic increase in servicing revenue of $1,854,908, a 159% increase.
Financial Condition for the six Months Ended June 30, 2022
As of June 30, 2022, we had $4,436,479 in cash, loans totaling $440,999.483, consisting of $417,102,419 in mortgages and participations, and $23,897,064 in portfolio loans, and Mortgage Servicing Rights with a fair value of $13,193,466 on our balance sheet. We have had Mortgage Secured Note Payables partially or completely pay off in the amount of $27,127,500 for the six months ended June 30, 2022.
Liquidity and Capital Resources
The Company closed on a $100,000,000 financing repurchase facility on March 31, 2022. From time to time, we may need additional haircut capital to use the repurchase facility, which we may fund in a variety of ways, on either a short or long term basis. Haircut capital is the cash on hand necessary to fund the portion of the loan not funded by the Line.
Status of KDM Loans
All CM Loans are currently paying as agreed.
Except as set forth below, all of our CM Loans as of the date of this filing are performing. One of our CM Loans that we reported was in technical default last quarter has refinanced out in Q2 2022. Another of our loans that had a second mortgage that went into maturity default is paying the first mortgage as agreed under the lockbox and is working to refinance. The borrower executed a deed in lieu of foreclosure, which KDM is holding in escrow pending a successful refinance. KDM does not believe that there would be a deficiency on a sale of the property under either the first or second mortgage, but anticipates that in the event that it acquires the property, it may invest an additional $1,500,000 to complete a secure information facility build out in progress, which would maximize the value of the building on sale. KDM expects that during such time, debt service from collected rents would continue to be adequate to service the first mortgage, and other than the initial costs associated with the build out described above, expects to recover all principal, interest and build out costs subsequent to a proposed sale.
C:
19 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We have no instruments subject to market risk.
Item 4. Controls and Procedures.
We are responsible for establishing and maintaining adequate internal control over financial reporting as such item 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 Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting as of September 30, 2021, 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 June 30, 2022.
PART II—OTHER INFORMATION
The Company is not currently subject to any material legal proceedings other than in the course of ordinary business which upon the disposition thereof, in the opinion of management are likely to have a material adverse effect on our consolidated financial condition, cash flows, or results of operations.
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
None.
C:
20 |
C:
21 |
Pursuant to the requirements 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. | |||
Dated: August 15, 2022 | By: | /s/ James W. Korth | |
James W. Korth, Chief Executive Officer |
22
This ‘10-Q’ Filing | Date | Other Filings | ||
---|---|---|---|---|
6/29/31 | ||||
6/29/30 | ||||
6/29/29 | ||||
6/29/28 | ||||
6/29/27 | ||||
6/29/26 | ||||
12/15/22 | ||||
Filed on: | 8/15/22 | |||
8/12/22 | ||||
8/5/22 | 8-K | |||
7/28/22 | 8-K | |||
For Period end: | 6/30/22 | |||
6/28/22 | ||||
3/31/22 | 10-K, 10-Q, 8-K | |||
1/1/22 | ||||
12/31/21 | 10-K | |||
9/30/21 | 10-Q | |||
9/15/21 | ||||
7/1/21 | 8-K | |||
6/30/21 | 10-Q, 10-Q/A, 8-K | |||
6/29/21 | ||||
3/30/21 | 10-K | |||
1/1/21 | ||||
7/31/20 | 8-K | |||
9/27/19 | 8-K | |||
6/28/19 | 8-K | |||
6/12/19 | 8-K | |||
5/31/19 | ||||
12/15/18 | ||||
List all Filings |
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 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 |