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Korth Direct Mortgage Inc. – ‘10-Q’ for 6/30/22

On:  Monday, 8/15/22, at 3:20pm ET   ·   For:  6/30/22   ·   Accession #:  1214659-22-10126   ·   File #:  333-215782

Previous ‘10-Q’:  ‘10-Q’ on 5/13/22 for 3/31/22   ·   Next:  ‘10-Q’ on 11/14/22 for 9/30/22   ·   Latest:  ‘10-Q’ on 11/14/23 for 9/30/23   ·   8 References:   

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  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

Quarterly Report   —   Form 10-Q

Filing Table of Contents

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 


‘10-Q’   —   Quarterly Report

Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Table of Contents
"Consolidated Financial Statements
"Unaudited Consolidated Statements of Financial Condition
"Unaudited Consolidated Statements of Income
"Unaudited Consolidated Statement of Changes in Stockholders' Equity
"Unaudited Consolidated Statements of Cash Flows
"Notes to Unaudited Consolidated Financial Statements
"Management's Discussion and Analysis of Consolidated Financial Condition and Results of Consolidated Operations
"Quantitative and Qualitative Disclosures about Market Risk
"Controls and Procedures
"Legal Proceedings
"Risk Factors
"Unregistered Sales of Equity Securities and Use of Proceeds
"Defaults Upon Senior Securities
"Mine Safety Disclosures
"Other Information
"Exhibits
"Signatures

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM  i 10-Q

 

(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

 

 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)

 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  i 5,000,000 shares of Common Stock of Korth Direct Mortgage Inc. outstanding.

 

 

 C: 
2
 

 

TABLE OF CONTENTS

 

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 
 Table of Contents

 

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, $ i  i 0.001 /  par value,  i  i 60,000,000 /  shares authorized
 i  i  i  i 5,000,000 /  /  /  shares issued and outstanding at June 30, 2022 and December 31, 2021
    i 5,000     i 5,000 
Series A Preferred Stock, $ i  i 0.001 /  par value,  i 880,000 shares authorized,
 i  i 780,000 /  shares issued and outstanding at June 30, 2022, and  i 400,000
shares authorized and  i  i 300,000 /  issued and outstanding as of December 31, 2021
    i 780     i 300 
Series B Preferred Stock, $ i  i 0.001 /  par value,  i  i 20,000 /  shares authorized,  i  i  i  i 19,000 /  /  / 
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 
 Table of Contents


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.

 

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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.

 

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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.

 

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KORTH DIRECT MORTGAGE INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 i 

NOTE 1 - NATURE OF BUSINESS

 

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 

PRINCIPLES OF CONSOLIDATION

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 

BASIS OF ACCOUNTING

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 

BASIS OF PRESENTATION

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 

USE OF ESTIMATES

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 

CASH AND CASH EQUIVALENTS

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

 / 

 

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MORTGAGE VALUATION

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.

 

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MORTGAGE SECURED NOTES

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.

 

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PORTFOLIO LOANS

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 

PARTICIPATIONS

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 

GOODWILL

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.

 

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REVENUE RECOGNITION

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.

 

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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 

LEASES

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 

STOCK-BASED COMPENSATION

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

Depreciation is provided on a straight-line basis using estimated useful lives of three to seven years.

 

 i 

INCOME TAXES

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

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.

 

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NOTE 3 – CONTINGENT LIABILITY

 

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 

NOTE 5 - RESTRICTED CASH

 

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.

 

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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 

NOTE 6 - COMMITMENTS

 

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:

 

   Future Lease
Payments
 
2022  $ i 125,364 
2023    i 256,920 
2024    i 264,087 
2025    i 271,470 
2026    i 30,504 
Total Lease Payments    i 948,345 
Less: Imputed Interest   ( i 71,684)
Present Value of Lease Liabilities  $ i 876,661 
 / 

 / 

 

 i 

NOTE 7 - INDEMNIFICATIONS

 

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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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 
 / 

 / 

 

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NOTE 10 – EMPLOYEE AND DIRECTOR STOCK OPTIONS

 

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  i 1,000,000 shares of the Company’s unissued, or reacquired, common stock, $ i 0.001 par value. The Plan will be administered by the Board of Directors.

 

In June 2019, the Company issued options to purchase  i 835,000 shares of the Company’s common stock at an exercise price of $ i 1.00 per share. The weighted-average grant date fair values of options granted was $ i 0.1855 per share. The fair values of the stock-based awards granted were calculated with the following weighted-average assumptions:

 

 i 

Schedule of estimated fair value of stockoptions weighted-average assumptions

Risk-free interest rate:   i 1.76%
Expected term:  5.75 years
Expected dividend yield:   i 0%
Expected volatility:   i 35.01%
 / 

 

For the six months ended June 30, 2022, and June 30, 2021, the Company recorded $ i 12,906 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 $ i 0 in total unrecognized compensation expense related to non-vested employee stock options granted under the Incentive Plan.

 

 i 

Stock option activity for the six months ended June 30, 2022, is summarized as follows:

 

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 
 / 

 

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NOTE 11 – PREFERRED EQUITY

 

On September 27, 2019, the Company issued  i 200,000 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  i 19,000 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 $ i 0.001 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 $ i 1,000 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 $ i 1,000 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.

 / 

 

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NOTE 12 – FAIR VALUE

 

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.

 

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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.

 

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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 
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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:

 

Investment type  Fair Value   Valuation technique  Unobservable inputs  Values 
 Mortgage servicing  $ i 13,193,466    i Net Present Value   i Prepayment Discount    i 9.58%
            i Discount rate    i 15.00%
Non-MSN Securities  $ i 325,000    i Net Par Value        
 / 

 / 

 

 

 i 

NOTE 13 – INCOME TAXES

 

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.

 / 

 

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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 

NOTE 16 – SUBSEQUENT EVENTS

 

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  i 480,000 shares of its Series A preferred for $ i 25.25 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.

 

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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.

 

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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

 

Item 1. Legal Proceedings.

 

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.

 

Item 1A. Risk Factors.

 

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.

 

Item 5. Other Information.

 

None.

 

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Item 6. Exhibits.

 

Exhibit  
Number Description
   
3.1 Articles of Conversion from Korth Direct Mortgage LLC to Korth Direct Mortgage Inc. dated May 31, 2019 (incorporated by reference to our Current Report on Form 8-K filed June 12, 2019
   
3.2 Articles of Incorporation of Korth Direct Mortgage Inc. dated May 31, 2019 (incorporated by reference to Current Report on Form 8-K filed June 12, 2019)
   
3.3 Amendment to Articles of Incorporation of Korth Direct Mortgage Inc. and Certificate of Designation of Series A 6% Cumulative Perpetual Convertible Preferred Stock, as filed with the Florida Secretary of State on September 20, 2019 (incorporated by reference to Current Report on Form 8-K filed July 1, 2021)
   
3.4 Amendment to Articles of Incorporation of Korth Direct Mortgage Inc. and Amended Certificate of Designation of Series A 6% Cumulative Perpetual Convertible Preferred Stock, as filed with the Florida Secretary of State on March 20, 2020 (incorporated by reference to Current Report on Form 8-K filed July 1, 2021)
   
3.5 Amendment to Articles of Incorporation of Korth Direct Mortgage Inc. and Amendment to Amended Certificate of Designation of Series A 6% Cumulative Perpetual Convertible Preferred Stock, as filed with the Florida Secretary of State on June 25, 2021 (incorporated by reference to Current Report on Form 8-K filed July 1, 2021)
   
3.6 Articles of Amendment to Articles of Incorporation of Korth Direct Mortgage Inc. and Certificate of Designation of Series B 6.50% Cumulative Non-Voting Redeemable Secured Preferred Stock, as filed with the Florida Secretary of State on June 25, 2021 (incorporated by reference to Current Report on Form 8-K filed July 1, 2021)
   
3.7 Bylaws of Korth Direct Mortgage Inc. dated May 31, 2019 (incorporated by reference to Current Report on Form 8-K filed June 12, 2019)
   
4.1 Trust Indenture and Security Agreement between Korth Direct Mortgage LLC, and Delaware Trust Company dated November 17, 2017 (incorporated by reference to our Registration Statement on Form S-1 filed on February 22, 2018)
   
4.2 Trust Indenture and Security Agreement (Rule 144A Offerings) between Korth Direct Mortgage LLC, and Delaware Trust Company dated September 20, 2018 (incorporated by reference to Quarterly Report on Form 10-Q filed November 13, 2018)
   
4.3 Trust Indenture and Security Agreement (Private Placements) between Korth Direct Mortgage Inc. and Delaware Trust Company dated September 30, 2020 (incorporated by reference to Current Report of Form 8-K filed October 7, 2020)
   
10.1 2019 Stock Option Plan (incorporated by reference to Current Report on Form 8-k filed June 28, 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
   
31.1 Section 302 Certificate of Chief Executive Officer*
31.2 Section 302 Certificate of Chief Financial Officer *
32.1 Section 906 Certificate of Chief Executive Officer*
32.2 Section 906 Certificate of Chief Financial Officer*
   
101 Interactive Data File*
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)*

 

*Filed herewith.

 

 C: 
 21 
 Table of Contents

 

SIGNATURES

 

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

 

 

 

 


Dates Referenced Herein   and   Documents Incorporated by Reference

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
8/5/228-K
7/28/228-K
For Period end:6/30/22
6/28/22
3/31/2210-K,  10-Q,  8-K
1/1/22
12/31/2110-K
9/30/2110-Q
9/15/21
7/1/218-K
6/30/2110-Q,  10-Q/A,  8-K
6/29/21
3/30/2110-K
1/1/21
7/31/208-K
9/27/198-K
6/28/198-K
6/12/198-K
5/31/19
12/15/18
 List all Filings 


8 Previous Filings that this Filing References

  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/A11/17/17    7:2.2M                                   Securex Filings/FA
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