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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/14/23 Korth Direct Mortgage Inc. 10-Q 9/30/23 68:4.1M Securex Filings/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 633K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 21K
3: EX-32.1 Certification -- §906 - SOA'02 HTML 18K
9: R1 Cover HTML 68K
10: R2 Unaudited Consolidated Statements of Financial HTML 121K
Condition
11: R3 Unaudited Consolidated Statements of Financial HTML 41K
Condition (Parenthetical)
12: R4 Unaudited Consolidated Statements of Operations HTML 117K
13: R5 Unaudited Consolidated Statement of Changes in HTML 68K
Stockholders' Equity
14: R6 Unaudited Consolidated Statements of Cash Flows HTML 94K
15: R7 Nature of Business HTML 24K
16: R8 Summary of Significant Accounting Policies HTML 55K
17: R9 Contingent Liability HTML 26K
18: R10 Mortgage Secured Notes Payable HTML 33K
19: R11 Restricted Cash HTML 29K
20: R12 Acquisition of Rental Property HTML 22K
21: R13 Commitments HTML 30K
22: R14 Indemnifications HTML 21K
23: R15 Related Party Transactions HTML 25K
24: R16 Deferred Revenue, Net HTML 32K
25: R17 Employee and Director Stock Options HTML 48K
26: R18 Preferred Equity HTML 39K
27: R19 Fair Value HTML 108K
28: R20 Income Taxes HTML 26K
29: R21 Property and Equipment HTML 32K
30: R22 Warehouse Line of Credit HTML 25K
31: R23 Subsequent Events HTML 24K
32: R24 Summary of Significant Accounting Policies HTML 97K
(Policies)
33: R25 Summary of Significant Accounting Policies HTML 24K
(Tables)
34: R26 Contingent Liability (Tables) HTML 24K
35: R27 Mortgage Secured Notes Payable (Tables) HTML 25K
36: R28 Commitments (Tables) HTML 25K
37: R29 Deferred Revenue, Net (Tables) HTML 30K
38: R30 Employee and Director Stock Options (Tables) HTML 43K
39: R31 Fair Value (Tables) HTML 98K
40: R32 Property and Equipment (Tables) HTML 25K
41: R33 Summary of Significant Accounting Policies HTML 27K
(Details)
42: R34 Summary of Significant Accounting Policies HTML 38K
(Details Narrative)
43: R35 Contingent Liability (Details) HTML 25K
44: R36 Contingent Liability (Details Narrative) HTML 28K
45: R37 Mortgage Secured Notes Payable (Details) HTML 38K
46: R38 Mortgage Secured Notes Payable (Details Narrative) HTML 35K
47: R39 Restricted Cash (Details Narrative) HTML 45K
48: R40 Acquisition of Rental Property (Details Narrative) HTML 26K
49: R41 Commitments (Details) HTML 33K
50: R42 Commitments (Details Narrative) HTML 26K
51: R43 Deferred Revenue, Net (Details) HTML 28K
52: R44 Employee and Director Stock Options (Details) HTML 28K
53: R45 Employee and Director Stock Options (Details 1) HTML 56K
54: R46 Employee and Director Stock Options (Details HTML 44K
Narrative)
55: R47 Preferred Equity (Details Narrative) HTML 69K
56: R48 Fair Value (Details) HTML 56K
57: R49 Fair Value (Details 1) HTML 51K
58: R50 Fair Value (Details 2) HTML 32K
59: R51 Fair Value (Details Narrative) HTML 29K
60: R52 Income Taxes (Details Narrative) HTML 26K
61: R53 Property and Equipment (Details) HTML 33K
62: R54 Property and Equipment (Details Narrative) HTML 20K
63: R55 Warehouse Line of Credit (Details Narrative) HTML 23K
66: XML IDEA XML File -- Filing Summary XML 121K
64: XML XBRL Instance -- kdm11823010q_htm XML 817K
65: EXCEL IDEA Workbook of Financial Report Info XLSX 107K
5: EX-101.CAL XBRL Calculations -- cik0001695963-20230930_cal XML 165K
6: EX-101.DEF XBRL Definitions -- cik0001695963-20230930_def XML 377K
7: EX-101.LAB XBRL Labels -- cik0001695963-20230930_lab XML 779K
8: EX-101.PRE XBRL Presentations -- cik0001695963-20230930_pre XML 603K
4: EX-101.SCH XBRL Schema -- cik0001695963-20230930 XSD 145K
67: JSON XBRL Instance as JSON Data -- MetaLinks 391± 556K
68: ZIP XBRL Zipped Folder -- 0001214659-23-014973-xbrl Zip 170K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
i x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended i September 30, 2023
or
i ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________________________________________to________________________________________________
Commission File Number: i 000-1695962
(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) |
_________________________________ ___________________________________
(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. x 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 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). x 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 | i x |
| Emerging growth company | i x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. i ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ i No x
| 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.
As of September 30, 2023, there were shares of common stock of Korth Direct Mortgage Inc. outstanding.
| 2 |
PART I – FINANCIAL INFORMATION
| Item 1. | Consolidated Financial Statements | 4 |
| Unaudited Consolidated Statements of Financial Condition | 4 | |
| Unaudited Consolidated Statements of Operations | 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 | 20 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 21 |
| Item 4. | Controls and Procedures | 21 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 22 |
| Item 1A. | Risk Factors | 22 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 22 |
| Item 3. | Defaults Upon Senior Securities | 22 |
| Item 4. | Mine Safety Disclosures | 22 |
| Item 5. | Other Information | 22 |
| Item 6. | Exhibits | 23 |
| SIGNATURES | 25 | |
| 3 |
PART I—FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Cash and Cash Equivalents | $ | i 2,458,853 | $ | i 7,776,789 | ||||
| Restricted Cash | i 20,107,712 | i 10,583,641 | ||||||
| Restricted Investment | - | i 3,986,207 | ||||||
| Mortgages Owned | i 495,069,406 | i 447,407,141 | ||||||
| Mortgage Servicing Rights, at Fair Value | i 13,301,811 | i 13,229,889 | ||||||
| Portfolio Loans | i 7,674,873 | i 3,318,832 | ||||||
| Loans Held for Sale | i 5,758,143 | - | ||||||
| Securities | i 225,000 | i 567,826 | ||||||
| ROU Leased Asset | i 558,009 | i 723,179 | ||||||
| Goodwill | i 110,000 | i 110,000 | ||||||
| Property and equipment, net of depreciation | i 17,804,306 | i 18,172,304 | ||||||
| Other Assets | i 2,080,850 | i 1,673,353 | ||||||
| TOTAL ASSETS | $ | i 565,148,963 | $ | i 507,549,161 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| LIABILITIES | ||||||||
| Escrows Payable | $ | i 17,588,089 | $ | i 12,421,553 | ||||
| Lease Liability | i 598,573 | i 768,984 | ||||||
| Deferred Revenue, net | i 1,884,197 | i 1,593,869 | ||||||
| Deferred Tax Liability, net | i 3,175,095 | i 3,337,261 | ||||||
| Contingent Liability, net | i 164,644 | i 327,298 | ||||||
| Mortgage Secured Notes Payable | i 496,488,218 | i 454,883,011 | ||||||
| Warehouse Line of Credit, net | i 9,282,162 | i 326,736 | ||||||
| Other Liabilities and Payables | i 2,160,541 | i 1,526,488 | ||||||
| Total Liabilities | i 531,341,519 | i 475,185,200 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Accumulated Earnings | i 4,024,946 | i 6,493,385 | ||||||
| Additional Paid-in Capital | i 29,565,317 | i 25,626,614 | ||||||
| Common Stock, $ par value, shares authorized shares issued and outstanding at September 30, 2023 and December 31, 2022 | i 5,000 | i 5,000 | ||||||
| Series A Preferred Stock, $ par value, shares authorized, shares issued and outstanding at September 30, 2023 and at December 31, 2022 | i 460 | i 300 | ||||||
| Series B Preferred Stock, $ par value, shares authorized, issued and outstanding at September 30, 2023 and December 31, 2022 | i 19 | i 19 | ||||||
| Non-Controlling Interest | i 211,702 | i 238,643 | ||||||
| Total Stockholders' Equity | i 33,807,444 | i 32,363,961 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | i 565,148,963 | $ | i 507,549,161 | ||||
See accompanying notes to the unaudited consolidated financial statements.
| 4 |
KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1 THROUGH SEPTEMBER 30
| For the Nine Months Ended | For the Nine Months Ended | |||||||
| September 30, 2023 | September 30, 2022 | |||||||
| REVENUES | ||||||||
| Origination Revenue, Net | $ | i 1,129,425 | $ | i 1,097,374 | ||||
| Servicing Revenue | i 4,327,857 | i 4,480,069 | ||||||
| Underwriting Income | i 239,800 | i 763,825 | ||||||
| Leasing Revenue | i 830,782 | - | ||||||
| Other Revenue | i 746,291 | i 1,315,766 | ||||||
| Total Revenues | i 7,274,155 | i 7,657,034 | ||||||
| COST OF REVENUES | ||||||||
| Broker Underwriting Expense | i 1,326,764 | i 1,676,162 | ||||||
| Administrative Expenses | i 1,138,353 | i 781,082 | ||||||
| Total Cost of Revenues | i 2,465,117 | i 2,457,244 | ||||||
| GROSS PROFIT | i 4,809,038 | i 5,199,790 | ||||||
| OPERATING EXPENSES | ||||||||
| Office | i 577,393 | i 354,343 | ||||||
| Compensation and Related Benefits | i 3,230,650 | i 3,118,561 | ||||||
| Professional & Legal | i 518,016 | i 591,297 | ||||||
| Advertising | i 236,443 | i 309,057 | ||||||
| Depreciation & Amortization | i 499,911 | i 52,500 | ||||||
| Total Expenses | i 5,062,413 | i 4,425,758 | ||||||
| (Loss)/Income From Operations | ( i 253,375 | ) | i 774,032 | |||||
| Other (Expenses)/Income | ||||||||
| Unrealized Gain on Mortgages | i 71,922 | i 4,265,739 | ||||||
| Unrealized (Loss)/Gain on Mortgage Secured Notes | ( i 34,575 | ) | i 76,004 | |||||
| Interest Expense | ( i 1,171,445 | ) | ( i 924,503 | ) | ||||
| Realized Gain on Mortgage Secured Notes | i 113,677 | - | ||||||
| Total Other (Expense)/Income | ( i 1,020,421 | ) | i 3,417,240 | |||||
| (Loss)/Income before provision for income taxes | ( i 1,273,796 | ) | i 4,191,272 | |||||
| (Income Tax Benefit)/Provision for income taxes | ( i 162,166 | ) | i 1,006,274 | |||||
| Net (Loss)/Income before non-controlling interest | ( i 1,111,630 | ) | i 3,184,998 | |||||
| Net Loss attributable to non-controlling interest | ( i 26,941 | ) | - | |||||
| Net (Loss)/ Income | ( i 1,084,689 | ) | i 3,184,998 | |||||
| Series A Preferred Dividends | i 457,500 | i 337,500 | ||||||
| Series B Preferred Dividends | i 926,250 | i 981,150 | ||||||
| Net (Loss)/Income attributable to common stockholders | $ | ( i 2,468,439 | ) | $ | i 1,866,348 | |||
See accompanying notes to the unaudited consolidated financial statements.
| 5 |
KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
| Series A Preferred Stock | Series B Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Non-Controlling | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Earnings | Interest | Totals | |||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | i 300,000 | $ | i 300 | i 19,000 | $ | i 19 | i 5,000,000 | $ | i 5,000 | $ | i 25,719,332 | $ | i 4,885,445 | $ | - | $ | i 30,610,096 | |||||||||||||||||||||||
| Share-based compensation | - | - | - | - | - | - | i 12,906 | - | - | i 12,906 | ||||||||||||||||||||||||||||||
| Series A & Series B preferred stock dividends declared | - | - | - | - | - | - | - | ( i 1,318,650 | ) | - | ( i 1,318,650 | ) | ||||||||||||||||||||||||||||
| Issuance of Series A preferred stock | i 480,000 | i 480 | - | - | - | - | i 11,856,000 | - | - | i 11,856,480 | ||||||||||||||||||||||||||||||
| Repurchase of Series A preferred stock | ( i 480,000 | ) | ( i 480 | ) | - | - | - | - | ( i 12,120,000 | ) | - | - | ( i 12,120,480 | ) | ||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | i 3,184,998 | - | i 3,184,998 | ||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | i 300,000 | $ | i 300 | i 19,000 | $ | i 19 | i 5,000,000 | $ | i 5,000 | $ | i 25,468,238 | $ | i 6,751,793 | $ | - | $ | i 32,225,350 | |||||||||||||||||||||||
| Balance at January 1, 2023 | i 300,000 | $ | i 300 | i 19,000 | $ | i 19 | i 5,000,000 | $ | i 5,000 | $ | i 25,626,614 | $ | i 6,493,385 | $ | i 238,643 | $ | i 32,363,961 | |||||||||||||||||||||||
| Share-based compensation | - | - | - | - | - | - | i 42,863 | - | - | i 42,863 | ||||||||||||||||||||||||||||||
| Issuance of Series A preferred stock | i 160,000 | i 160 | - | - | - | - | i 3,895,840 | - | - | i 3,896,000 | ||||||||||||||||||||||||||||||
| Series A & Series B preferred stock dividends declared | - | - | - | - | - | - | - | ( i 1,383,750 | ) | - | ( i 1,383,750 | ) | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( i 1,084,689 | ) | ( i 26,941 | ) | ( i 1,111,630 | ) | |||||||||||||||||||||||||||
| Balance at September 30, 2023 | i 460,000 | $ | i 460 | i 19,000 | $ | i 19 | i 5,000,000 | $ | i 5,000 | $ | i 29,565,317 | $ | i 4,024,946 | $ | i 211,702 | $ | i 33,807,444 | |||||||||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
| 6 |
KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Nine Months Ended | For the Nine Months Ended | |||||||
| September 30, 2023 | September 30, 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (Loss)/Income | $ | ( i 1,111,630 | ) | $ | i 3,184,998 | |||
| Adjustments to Reconcile Net
(Loss)/Income to Net Cash Provided by Operating Activities: | ||||||||
| Unrealized Gain on Mortgages Owned | ( i 71,922 | ) | ( i 4,265,739 | ) | ||||
| Unrealized Loss/(Gain) on Mortgage Secured Notes | i 34,575 | ( i 76,004 | ) | |||||
| Stock Compensation Expense | i 42,863 | i 12,906 | ||||||
| Depreciation and amortization | i 499,911 | i 52,500 | ||||||
| Amortization of loan costs | i 438,374 | i 264,964 | ||||||
| Deferred rent expense from operating lease | ( i 5,241 | ) | ( i 25 | ) | ||||
| Deferred income taxes | ( i 162,166 | ) | i 968,859 | |||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Mortgage Secured Notes Issued | i 41,605,207 | i 105,704,594 | ||||||
| Mortgage Secured Notes Purchased | i 308,251 | ( i 23,990 | ) | |||||
| Restricted Investment | i 3,986,207 | - | ||||||
| Warehouse LOC | i 8,517,052 | i 2,709,289 | ||||||
| Portfolio Loans | ( i 4,356,041 | ) | i 3,463,756 | |||||
| Loans Held For Sale | ( i 5,758,143 | ) | - | |||||
| Other Assets | ( i 514,464 | ) | ( i 168,212 | ) | ||||
| Deferred Revenue, net | i 290,328 | i 517,990 | ||||||
| Escrow Payable | i 5,166,536 | i 4,793,399 | ||||||
| Contingent Liability | ( i 162,654 | ) | - | |||||
| Other Liabilities and Payables | i 634,053 | i 933,092 | ||||||
| New Mortgage Lending | ( i 47,662,265 | ) | ( i 116,164,613 | ) | ||||
| Total Adjustments | i 2,830,461 | ( i 1,277,234 | ) | |||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | i 1,718,831 | i 1,907,764 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | ( i 24,946 | ) | ( i 29,497 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | ( i 24,946 | ) | ( i 29,497 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payment of Series A/B preferred stock dividends | ( i 1,383,750 | ) | ( i 1,263,750 | ) | ||||
| Payment for repurchase of Series A preferred stock | - | ( i 12,120,480 | ) | |||||
| Net proceeds from the sale of Series A preferred stock | i 3,896,000 | i 11,856,480 | ||||||
| NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES | i 2,512,250 | ( i 1,527,750 | ) | |||||
| NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | i 4,206,135 | i 350,517 | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH – Beginning of Period | i 18,360,430 | i 19,481,343 | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH – End of Period | $ | i 22,566,565 | $ | i 19,831,860 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION | ||||||||
| Cash paid during the year for interest | $ | i 733,071 | $ | i 659,539 | ||||
| Cash paid for income taxes | $ | - | $ | i 470,387 | ||||
See accompanying notes to the unaudited consolidated financial statements.
| 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 (the “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.
On July 28, 2022, KDM created a new wholly owned subsidiary, KDM Funding I LLC (“KDMF”), which is an additional issuer of Mortgage Secured Notes (“MSNs”). KDM is the servicer of KDMF’s loans, and all revenue and expenses are passed through to the Company and consolidated within these financial statements. Although KDMF’s deal history is broken out by KDM and KDMF as issuers in KDM’s annual reports on Form 10-K as well as its securities memoranda there are no stand-alone financial statements prepared for KDMF. See the current report Form 8-K filed with the Commission on August 5, 2022, for more information concerning the business of KDMF.
KDM owns a controlling interest in KDM Stafford LLC, which is a special purpose entity that owns a building KDM acquired in Virginia in November 2022. KDM also owns Citrus Servicing LLC, which is an entity that is a servicer for our small balance loan program.
The Company may create and operate other special purpose and pass-through entities typically organized as limited liability companies in order to own real estate and issue additional securities. These entities will be consolidated into these financial statements and Notes.
i
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
The accompanying unaudited consolidated financial statements include the accounts of the Company and the accounts of the Company’s wholly owned subsidiaries J.W. Korth, KDM Stafford LLC, Citrus Servicing LLC and KDM Funding I LLC. All intercompany balances and transactions have been eliminated in consolidation.
i
The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”). The accompanying unaudited consolidated 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 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, operations, 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 unaudited 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, 2022, as filed with the SEC on March 31, 2023.
i
The preparation of unaudited 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.
| 8 |
The following table provides a reconciliation of cash, cash equivalents, and restricted cash to amounts shown in the unaudited consolidated statements of cash flows as of September 30, 2023, and 2022:
i
| Schedule of cash and cash equivalents | ||||||||
| 2023 | 2022 | |||||||
| Cash and Cash Equivalents | $ | i 2,458,853 | $ | i 2,709,719 | ||||
| Restricted Cash | i 20,107,712 | i 17,122,141 | ||||||
| $ | i 22,566,565 | $ | i 19,831,860 | |||||
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.
/ i
Mortgages that are current are carried at the principal value owed by the borrower as of the date of the unaudited consolidated financial statements, according to the amortization schedule for the loan. Mortgages owned as of the date of these unaudited consolidated financial statements are current. The net present value of the servicing revenue is recorded as mortgage servicing rights at fair value on the Unaudited Consolidated Statements of Financial Condition and the change in the fair value is recognized on the Unaudited Consolidated Statements of Operations as an unrealized gain on mortgages.
i
The Company primarily funds the mortgage loans (”CM Loans”) that it makes by issuing 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 September 30, 2023, the Company has issued MSNs secured by these loans in the amount of $ i 591,180,000 since inception and has redeemed $ i 96,110,594 of its MSNs since inception.
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The Company recognizes loans made with its own capital, or those not securitized or sold via participation, under the caption “Portfolio Loans” on the unaudited consolidated statements of financial condition. This number also includes the cash we have invested in loans on our warehouse line as “haircut capital.” As of September 30, 2023, the Company had issued Portfolio Loans in the amount of $ i 44,234,104 and currently holds $ i 7,674,873 of Portfolio Loans.
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The Company purchases small balance commercial loans classified as held for sale which are carried at the lower of amortized cost basis or market value. We determine the fair value of mortgage loans held for sale by using a discounted cash flow model.
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From time to time the Company sells all or part of its mortgage loans as loan participations to banks or other lending institutions that prefer to hold their mortgage investments in that manner. As of September 30, 2023, the Company had issued loan participations in the amount of $ i 21,500,000, all of which are still outstanding. These participations are included in the Mortgages Owned number and Mortgage Secured Notes Payable.
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Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 ended September 30, 2023.
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The Company’s primary sources of revenue are origination fees, servicing fees, processing fees, underwriting income, trading profits, and interest income.
On November 22, 2022, we obtained control of an income producing property and started collecting leasing revenue. We recorded rental income of $ i 830,782 for the period ending September 30, 2023, which is reported as leasing revenue on the unaudited consolidated statement of operations.
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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 unaudited consolidated 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 unused fees are refunded. If the transaction is unable to proceed for any reason, which is not the fault of the Company, 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.
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.
Leasing Revenue
Leasing revenue represents revenues generated through KDM Stafford for rental income earned from operating leases at rental properties majority-owned and controlled by KDM. Leasing revenue generated from operating leases are recognized over the lease term on a straight-line basis.
Interest Income
Interest Income is primarily derived from interest earned on Portfolio Loans and includes interest earned on cash and securities.
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In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).” The standard requires organizations to recognize right-of-use (“ROU”) assets and lease liabilities on the unaudited consolidated statements 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.
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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.
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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.
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Depreciation is provided on a straight-line basis using estimated useful lives of i three to i thirty-nine years.
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Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the unaudited 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 unaudited consolidated financial statements from such position are measured by 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.
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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 unaudited consolidated statement of operations.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13 Financial Instruments, Measurement of Credit Losses on Financial Instruments. This ASU updates the existing incurred loss model to a current expected credit loss (“CECL”) model for financial assets and net investments in leases that are not accounted for at fair value through earnings. The amendments affect cash and cash equivalents, reverse repurchase agreements, certain loans, held-to-maturity debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures and any other financial assets not excluded from the scope. There are also limited amendments to the impairment model for available-for-sale debt securities. The Company adopted CECL in 2023 and did not have a material impact on the Company’s unaudited consolidated financial statements.
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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 i 6% per annum through i July 31, 2020; (ii) the J.W. 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 Stock dividends, redeem i 25% annually of the J.W. Korth Preferred Capital Interest partners through a capital contribution to J. W. Korth.
The following table summarizes the unpaid Contingent Liability outstanding as of September 30, 2023:
i
| Schedule of unpaid contingent liability outstanding | ||||
| Contingent liability to redeem J.W. Korth Preferred Capital Interest Partners | $ | i 320,500 | ||
| Contingent liability payment | ( i 160,250 | ) | ||
| Accrued quarterly dividends recorded as interest expense through September 30, 2023 | i 4,394 | |||
| Contingent Liability, net | $ | i 164,644 |
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NOTE 4 – MORTGAGE SECURED NOTES PAYABLE
As stated in Note 2 the Company funds the majority of the mortgage loans that it makes by issuing MSNs, which are secured by those same mortgages. As of September 30, 2023 and December 31, 2022, the Company had outstanding loans securing MSNs totaling $ i 495,069,406 and $ i 447,407,141, respectively, and issued MSNs secured by those loans in the amount of $ i 496,488,218 and $ i 454,883,011, respectively. The MSNs have been funded in multiple ways, including private placements, loan participations, and 144A offerings exempt from registration, and through SEC registered 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 senior MSNs have ranged from i 4.25% to i 9.00% and mature at various dates from January 2024 to July 2038. The MSNs are non-recourse to KDM and are payable to the extent that the Company receives payment from the borrower of the borrower’s mortgage loans. Payments made to KDM by borrowers are distributed by KDM to MSN noteholders in accordance with the terms of their MSN Notes.
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The following table presents the future scheduled principal payments on the Company’s MSNs:
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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 authorities and insurance companies. This account corresponds to the Escrow Payable liability. As of September 30, 2023, and December 31, 2022, this account had balances of $ i 559,190 and $ i 626,414, respectively.
The “In Trust for 2” account receives payments from borrowers, distributes payments to investors, and pays the servicing fees to the Company. This account corresponds to the Due to Investors liability, which is included in other liabilities and payables. As of September 30, 2023, and December 31, 2022, this account had balances of $ i 1,181,192 and $ i 752,156, respectively.
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 September 30, 2023 and December 31, 2022, were $ i 97,018 and $ i 100,359, 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 balances of $ i i 308,750 / as of September 30, 2023, and December 31, 2022, respectively.
The Company maintains an account restricted per the warehouse line agreement that has a balance of $ i i 1,000,000 / as of September 30, 2023, and December 31, 2022, respectively.
The Company maintains a cash management account that holds a portion of the restricted cash, which is swept on a regular basis. The account had balances of $ i 5,500,000 and $ i 8,000,000 as of September 30, 2023, and December 31, 2022, respectively. This account is included as part of the Escrow Payable liability account.
The Company invests a portion of the restricted cash collected from borrowers in U.S. Treasury Bills with maturities of six to twelve months. The Restricted Investment account had a balance of $ i 0 and $ i 3,986,207 as of September 30, 2023, and December 31, 2022, respectively. This account is included as part of the Escrow Payable liability account.
The Company invests a portion of restricted cash from borrowers in a savings account. with a balance of $ i 250,000 as of September 30, 2023
The Company has opened two cash management accounts at J.W. Korth & Company that will hold a portion of restricted cash. The balances as of September 30, 2023, were $ i 7,139,766 and $ i 3,946,530, respectively.
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NOTE 6 – ACQUISITION OF RENTAL PROPERTY
In November 2022, through a Settlement in Lieu of Foreclosure Agreement, the Company obtained majority ownership and the controlling interest in rental property located in Stafford, Virginia. As part of the agreement, a $9.5 million mortgage held by the Company was assigned to a newly created special-purpose entity, KDM Stafford LLC, which is majority owned and controlled by the Company. The original borrower maintains a minority interest in the special-purpose entity. For the quarter ended September 30, 2023, the Company recorded a net loss attributable to the non-controlling interest of $ i 26,941. In addition, a portfolio loan held by the Company in the amount of $7.5 million was classified as an investment in the special-purpose entity.
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The Company maintains office space in Coral Gables, Florida. 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 terms 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 terms.
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 unaudited 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 September 30, 2023, was $ i 195,238 compared to $ i 191,137 for the quarter ended September 30, 2022, this includes additional expenses for common area, direct operating expense, utilities, parking, and taxes.
As of September 30, 2023, the net present value of the future lease liabilities, using the weighted-average discount rate of i 4.24%, which is commensurate with the Company’s secured borrowing rate, over the weighted average remaining life of i 2.3 years was $ i 598,573.
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 as of September 30, 2023:
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The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely the Company will have to make material payments under these indemnification arrangements, and it has not recorded any contingent liability in the unaudited consolidated financial statements for these indemnifications.
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NOTE 9 – RELATED PARTY TRANSACTIONS
From time to time the Company purchases MSNs and holds them in its brokerage account. These MSNs are included on the unaudited 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 and are serviced by KDM. In some circumstances where MSNs are in default, in the event a foreclosure becomes necessary, KDM may acquire properties as a deed in lieu of foreclosure. KDM may create special purpose entities to take title to such properties, liquidate them to satisfy any debts due under an MSN, or keep such properties and repay the MSN from its own funds. The Company has created one such special purpose entity to date, KDM Stafford. KDM Stafford owns one building located in Virginia, which the Company acquired through a deed in lieu of foreclosure.
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NOTE 10 – 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 unaudited consolidated statements of financial condition.
The following is a summary of the loan origination fees and costs deferred and amortized for the nine months ended September 30, 2023:
i| Schedule of loan originating fees and costs deferred and amortized | |||||||||||||
Deferred Origination Fees | Deferred Costs | Deferred Revenue, Net | |||||||||||
| Deferred Revenue at December 31, 2022 | $ | i 5,428,823 | $ | ( i 3,834,954 | ) | $ | i 1,593,869 | ||||||
New loan deferrals | i 1,190,200 | ( i 514,594 | ) | i 675,606 | |||||||||
Amortization of deferrals | ( i 1,129,425 | ) | i 744,147 | ( i 385,278 | ) | ||||||||
| Deferred Revenue at September 30, 2023 | $ | i 5,489,598 | $ | ( i 3,605,401 | ) | $ | i 1,884,197 |
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On June 28, 2019, the Company’s Board of Directors adopted the 2019 Stock Option Plan (the “Incentive Plan”). The Incentive Plan provides for the grant of both incentive and non-statutory stock options to key employees, directors or other persons having a service relationship with the Company. Effective December 8, 2022, the Incentive Plan was amended to increase the number of authorized option shares to shares of the Company’s unissued, or reacquired, common stock, $ par value. The Plan is administered by the Board of Directors.
During the year ended December 31, 2022, the Company issued options to purchase shares of the Company’s common stock at an exercise price of $ per share. During the quarter ended June 30, 2023, 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 during the fiscal year 2022 and the quarter ended September 30, 2023 were $ per share and $ per share, respectively. The fair values of the stock-based awards granted were calculated with the following weighted-average assumptions:
i| Schedule of estimated fair value of stock options weighted-average assumptions | |||||
| YE 2022 | September 2023 | ||||
| Risk-free interest rate: | |||||
| Expected term: | years | years | |||
| Expected dividend yield: | |||||
| Expected volatility: |
For the nine months ended September 30, 2023, and September 30, 2022, the Company recorded $ and $, respectively 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 September 30, 2023, there were shares of the company’s common stock available to be issued pursuant to the Incentive Plan.
Stock option activity for the nine months ended September 30, 2023, is summarized as follows:
i| Schedule of stock option activity | ||||||||||||
| 2019 Stock Option Plan: | Shares | Weighted Average Exercise Price | Weighted Remaining Contractual Life (Years) | |||||||||
| Options outstanding at January 1, 2023 | i 1,090,000 | $ | i 1.47 | |||||||||
| Granted | i 15,000 | i 3.00 | ||||||||||
| Exercised | ||||||||||||
| Expired or forfeited | i 7,500 | i 3.00 | ||||||||||
| Options outstanding at September 30, 2023 | i 1,097,500 | $ | i 1.48 | i 8.15 | ||||||||
| Options exercisable at September 30, 2023 | i 962,500 | $ | i 1.12 | |||||||||
| Options expected to vest at September 30, 2023 | i 135,000 | $ | i 3.00 | i 9.0 | ||||||||
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On September 27, 2019, the Company issued shares of its Series A 6% Cumulative Perpetual Convertible Preferred Stock, par value $ per share, for net proceeds of $ i 4,750,000. The Company paid $ i 250,000 in expenses related to the preferred stock issuance to J. W. Korth as underwriter and distributor. Each share was sold for $ i 25 and is i convertible into common stock at a ratio of 5 shares of common stock for each share of Series A Preferred Stock. On September 15, 2021, June 28, 2022, and March 23, 2023, the Company sold an additional 100,000, 480,000, and 160,000 shares, respectively, of its Series A 6% Cumulative Perpetual Convertible Preferred Stock for net proceeds of $2,375,000, $11,856,480, and $3,896,000.
On August 12, 2022, the Company repurchased and retired shares of its Series A 6% Cumulative Perpetual Convertible Preferred Stock at a price of $ per share, for a total of $ i 12,120,480. The Company paid $ i 640,000 in interest expense.
On June 29, 2021, the Company issued shares of its Series B 6.50% Cumulative Non-Voting Redeemable Secured Preferred Stock, with a liquidation preference of $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 pays 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 common stock and Series A 6% Cumulative Preferred Stock in dividend rights and upon liquidation, winding up or dissolution, 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 Company’s current corporate rating is BBB+.
The Series B preferred stock is redeemable at the Company’s option, in whole or in part, on or after June 29, 2026, at a redemption price per share equal to $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 $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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FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not assumptions specific to the entity.
ASC 820 establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial assets and liabilities at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:
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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
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, it has 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 unaudited 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, for which it reasonably believes it will receive par value from the receiver handling the liquidation in Brazil. Local counsel has informed J.W.Korth that the bank has sufficient cash to pay off J.W. Korth’s bonds.
KDM also holds a small amount of its own MSNs in an account in which it will hold MSNs 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
The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis:
i| Schedule of fair value, assets and liabilities measured on recurring basis | ||||||||||||||||
| September 30, 2023 | ||||||||||||||||
| Total | Level I | Level II | Level III | |||||||||||||
| Financial Assets | ||||||||||||||||
| Mortgages Owned | $ | i 495,069,406 | $ | - | $ | i 495,069,406 | $ | - | ||||||||
| Mortgage Servicing | i 13,301,811 | - | - | i 13,301,811 | ||||||||||||
| Portfolio Loans | i 7,674,873 | - | i 7,674,873 | - | ||||||||||||
| Loans Held for Sale | i 5,758,143 | - | - | i 5,758,143 | ||||||||||||
| Non-MSN Securities | i 225,000 | - | - | i 225,000 | ||||||||||||
| Total Financial Assets | $ | i 522,029,233 | $ | - | $ | i 502,744,279 | $ | i 19,284,954 | ||||||||
| Financial Liabilities | ||||||||||||||||
| Mortgage Secured Notes Payable | $ | i 496,488,218 | $ | - | $ | i 496,488,218 | $ | - | ||||||||
| Warehouse Line of Credit | i 9,282,162 | - | i 9,282,162 | - | ||||||||||||
| Total Financial Liabilities | $ | i 505,770,380 | $ | - | $ | i 505,770,380 | $ | - | ||||||||
| December 31, 2022 | ||||||||||||||||
| Financial Assets | ||||||||||||||||
| Mortgages Owned | $ | i 447,407,141 | $ | - | $ | i 447,407,141 | $ | - | ||||||||
| Mortgage Servicing | i 13,229,889 | - | - | i 13,229,889 | ||||||||||||
| Portfolio Loans | i 3,318,832 | - | i 3,318,832 | - | ||||||||||||
| Securities | i 342,826 | - | i 342,826 | - | ||||||||||||
| Non-MSN Securities | i 225,000 | - | - | i 225,000 | ||||||||||||
| Total Financial Assets | $ | i 464,523,688 | $ | - | $ | i 451,068,799 | $ | i 13,454,889 | ||||||||
| Financial Liabilities | ||||||||||||||||
| Mortgage Secured Notes Payable | $ | i 454,883,011 | $ | - | $ | i 454,883,011 | $ | - | ||||||||
| Warehouse Line of Credit | i 1,560,000 | - | i 1,560,000 | - | ||||||||||||
| Total Financial Liabilities | $ | i 456,443,011 | $ | - | $ | i 456,443,011 | $ | - | ||||||||
Fair Value Measurements
Changes in Fair Value Measurements for the nine months ended September 30, 2023
The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the unaudited consolidated statements of financial condition for September 30, 2023:
i| Schedule of statements of financial condition | ||||||||||||
| Changes in assets: | ||||||||||||
| Period ended September 30, 2023 | Mortgage Servicing Value | Non-MSN Securities | Total Value | |||||||||
| Beginning balance at January 1, 2023 | $ | i 13,229,889 | $ | i 225,000 | $ | i 13,454,889 | ||||||
| Unrealized Gain from newly issued mortgages | i 2,439,129 | - | i 2,439,129 | |||||||||
| Fair Value adjustment | ( i 2,367,207 | ) | - | ( i 2,367,207 | ) | |||||||
| Ending balance at September 30, 2023 | $ | i 13,301,811 | $ | i 225,000 | $ | i 13,526,811 | ||||||
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 nine months ended September 30, 2023, there were no transfers between levels.
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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.
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 September 30, 2023:
i /
/ i
The income tax benefit was $ i 162,166 for the nine months ended September 30, 2023. The effective tax rate was i 22.4% of the loss before income taxes of $ i 1,273,796, 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.
The provision for income taxes was $ i 1,006,274 for the nine months ended September 30, 2022. The effective tax rate was i 26.7% of the income before income taxes of $ i 4,191,272, 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 15 – PROPERTY AND EQUIPMENT
Property and Equipment are summarized as follows:
i| Schedule of property and equipment | ||||
| September 30, 2023 | ||||
| Land & Building | $ | i 17,900,000 | ||
| Equipment | i 300,473 | |||
| Furniture and fixtures | i 184,590 | |||
| i 18,385,063 | ||||
| Accumulated depreciation | ( i 580,757 | ) | ||
| Net Property Equipment | $ | i 17,804,306 | ||
| December 31, 2022 | ||||
| Land & Building | $ | i 17,900,000 | ||
| Equipment | i 276,358 | |||
| Furniture and fixtures | i 183,760 | |||
| i 18,360,118 | ||||
| Accumulated depreciation | ( i 187,814 | ) | ||
| Net Property Equipment | $ | i 18,172,304 | ||
Depreciation expenses for the periods ending September 30, 2023 and September 30, 2022, was $ i 499,911 and $ i 52,500, respectively.
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/ i
NOTE 16 – 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 of up to $100,000,000 (the “Line”). The Agreement provides for approximately a three-year term and may be terminated in accordance with the Agreement.
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 was in compliance with these covenants as of and for the quarter ended September 30, 2023.
The Line is floating rate and both the haircut percentage and SOFR-linked interest rate spread vary according to property type and time on the line. The Line offers up to 75% leverage on investment grade loans and is designed for 30 to 90 day hold periods but can accommodate up to a 12-month holding period, with decreasing leverage as time passes.
In connection with entering into the Line, the Company incurred loan fees of approximately $ i 1,589,783 which is netted against the amount drawn on the line and is included in the warehouse line of credit, net in the accompanying unaudited consolidated statements of financial condition. Loans fees associated with the Line will be amortized on a straight-line basis over the term of the Line.
As of September 30, 2023, the Company had a balance of $ i 10,164,436 on the warehouse line. The total amortization expense for the nine months ended September 30, 2023, and recorded as interest expense is $ i 438,374.
On March 20, 2023, Signature Bank announced that much of its assets, including our warehouse line would now operate under the New York Community Bancorp’s Flagstar Bank, N.A.
/ i
The Company has evaluated all events or transactions for potential recognition or disclosure in the unaudited consolidated financial statements through November 14, 2023, which is the date that the unaudited consolidated financial statements were available to be issued. During this period, there following events requiring disclosure.
| - | On October 13, 2023, KDM MFB LLC, a Delaware limited liability company (the “KDM MFB”), a newly formed and wholly owned subsidiary of Korth Direct Mortgage Inc. (the “Company”) entered into a $100,000,000 Master Repurchase and Securities Contract credit facility with Churchill MRA Funding I LLC (the “Agreement”). The Company vis a vis KDM MFB, will use the credit facility provided by the Agreement (the “Line”) to finance the Company’s expansion of its lending operations in multi-family and multifamily bridge financing. See Form 8-k filed October 19, 2023 for more information |
| - | Subsequent to the date of the financial statements, three of KDM’s mortgage loan borrowers have had their loans go into payment default. The three loans in question are all commercial office spaces in various states. KDM is pursuing remedies to each situation individually. These loans are also the source of payments to the holders of KDM’s mortgage secured notes (“MSN(s)”). KDM’s MSNs are special obligations of KDM secured by individual mortgage loans. Pursuant to the terms of the MSNs, KDM must remit payments received in connection with the underlying mortgage loan in accordance with the terms of the MSN and to the extent that they are received from the mortgage borrower. While it is not an event of default for KDM under the MSNs if a mortgage loan borrower goes into payment default and fails to make a loan payment, to the extent the mortgage borrower does not pay as agreed, KDM’s service revenue for such loan will be impacted. MSN holders will receive updates on any defaulted mortgage loans affecting their notes via the investor portal at www.korthdirect.com. |
| - | In late October, we were notified that the value of the Banco Cruzeiro bonds that we hold in face value of approximately $250,000 will only be worth approximately $85,000 when J W Korth is finally repaid. The fair value will be updated for the next quarterly report. |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is a discussion of our historical unaudited 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, 2022, filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2023; and (iii) our management’s discussion and analysis of financial condition and results of operations included in our 2021 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 “Part I – Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022.
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.
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. We also fund loans via loan participations and direct investments as well as on our warehouse line.
In July of 2022, we created an additional subsidiary to issue our MSNs, KDM Funding I LLC (“KDMF”). KDMF solely issues the Notes and does not have any other operations and there are no stand-alone financial statements prepared for KDMF. KDM is the servicer of the loans. The revenue and expenses associated with the Note issuance and the underlying loans are consolidated into the Company’s consolidated results of operations. However, when reporting on deal level information, we will break out the deals by issuer.
KDM also has a wholly owned subsidiary named Citrus Servicing LLC which services the loans in our small balance multifamily program.
Results of Operations for the Nine Months ended September 30, 2023
The Company generated revenues of $7,274,155 for the nine months ended September 30, 2023, a decrease of $382,879 compared with revenues of $7,657,034 for the nine months ended September 30, 2022, a 5% decline. As of September 30, 2023, the Company owned mortgages of $495,069,406 compared with mortgages of $447,407,141 as of December 31, 2022, and $442,476,958 as of September 30, 2022, an 11% and 12% increase, respectively.
Gross profit decreased by $390,752 (-8%) to $4,809,038 during the nine months ended September 30, 2023, compared with gross profit of $5,199,790 during the nine months ended September 30, 2022. The decrease in gross profit was due to decline in servicing fees and underwriting income from lack of new lending.
Operating expenses were $5,062,143 during the nine months ended September 30, 2023, which was an increase of $636,655 (14%) compared with operating expenses of $4,425,758 during the nine months ended September 30, 2022. The increase in operating expenses was driven primarily by the increase of $477,411 in depreciation and amortization and $212,075 in office expenses. Office expenses and depreciation expenses increased due to now owning the Stafford, VA property.
Other (expense)/income decreased by $4,437,661 to ($1,020,421) during the nine months ended September 30, 2023, compared with other (expense)/income of $3,417,240 during the nine months ended September 30, 2022. The decrease in other (expense)/income was due primarily to the unrealized gain on mortgages of $71,922 during the nine months ended September 30, 2023, compared to unrealized gain of $4,265,739 during nine months ended September 30, 2022. The decline in unrealized gain, as well as the current loss, is due to a drop-off in originations due to current interest rate environment combined with mark to market value of our servicing book.
During the nine months ended September 30, 2023, the Company recorded $162,166 in deferred income tax benefit compared with $1,006,274 of deferred income tax expense during the nine months ended September 30, 2022.
Net loss is $1,273,796 for the nine months ended September 30, 2023, compared with net income of $4,191,272 during the nine months ended September 30, 2022. The decrease in 2023 was primarily attributed to the decrease in unrealized gain on mortgages due to slowed originations.
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Financial Condition for the nine Months Ended September 30, 2023
As of September 30, 2023, we had $2,458,853 in cash, $20,107,712 in restricted cash, loans totaling $521,804,233, consisting of $495,069,406 in mortgages and participations, $7,674,873 in portfolio loans and $5,758,143 in loans held for sale, and Mortgage Servicing Rights with a fair value of $13,301,811 on our unaudited consolidated statement of financial condition. The increase in restricted cash, mortgages owned, and mortgage servicing rights from December 31, 2022, is primarily due to the issuance of a new $55,000,000 MSN in the nine months ended September 30, 2023.
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. The Company generates servicing revenues on its Mortgages owned with maturity dates ranging from January 2024 to July 2038 as well as income from its investments and portfolio loans with maturity dates ranging from April 2024 to July 2028.
We anticipate raising additional capital to fund our lending and development in the coming months.
Status of KDM Loans
As of September 30, 2023, there were two CM Loans in payment default. On June 26, 2023, the parent company of one of our CM Loan borrowers filed an Assignment for the Benefit of Creditors in FL. KDM has filed a proof of claim in this proceeding and expects that upon liquidation of the assets, it shall be made whole on the loan.
A CM Loan went into 30 day default after missing its July payment. KDM suspended payments to its bondholders and entered into an agreement to sell the note. KDM closed on the note sale transaction in October and paid off the bondholders at par plus one month of accrued interest.
We currently have 3 office loans that have gone into default since the date of these financial statements. KDM is pursuing a variety of remedies for these loans including a proposal of deed in lieu of foreclosure, foreclosure, and forbearance.
Please see the investor portal at korthdirect.com for information on individual loans and securities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk .
We have no material positions 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 consolidated 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 consolidated 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, 2023, as required by Securities Exchange Act Rule 13a- 15(c). In making our assessment, we have utilized the criteria set forth by the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We concluded that based on our evaluation our internal control over financial reporting was effective as of September 30, 2023.
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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, 2022. 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.
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| 23 |
| 10.3 | First Amendment to Purchase Agreement (incorporated by reference to Registrant’s Report on Form 10-Q filed August 16, 2021) |
|
31.1 |
Section 302 Certificate of Chief Executive Officer and Chief Financial Officer* |
| 32.1 | Section 906 Certificate of Chief Executive Officer and Chief Financial Officer* |
| 101 | Interactive Data File |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) * |
| 24 |
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: November 14, 2023 | By: | /s/ Holly MacDonald-Korth | |
| Holly MacDonald-Korth, Chief Executive Officer and Chief Financial Officer | |||
25
| 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 | ||||
| Filed on: | 11/14/23 | |||
| 10/19/23 | 8-K | |||
| 10/13/23 | ||||
| For Period end: | 9/30/23 | |||
| 6/30/23 | 10-Q | |||
| 6/26/23 | ||||
| 3/31/23 | 10-K, 10-Q | |||
| 3/23/23 | ||||
| 3/20/23 | ||||
| 1/1/23 | ||||
| 12/31/22 | 10-K | |||
| 12/8/22 | ||||
| 11/22/22 | ||||
| 9/30/22 | 10-Q | |||
| 8/12/22 | ||||
| 8/5/22 | 8-K | |||
| 8/4/22 | 8-K | |||
| 7/28/22 | 8-K | |||
| 6/28/22 | ||||
| 3/31/22 | 10-K, 10-Q, 8-K | |||
| 1/1/22 | ||||
| 9/15/21 | ||||
| 8/16/21 | 10-Q | |||
| 7/1/21 | 8-K | |||
| 6/29/21 | ||||
| 10/6/20 | 8-K | |||
| 8/6/20 | 8-K | |||
| 7/31/20 | 8-K | |||
| 9/27/19 | 8-K | |||
| 6/28/19 | 8-K | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/05/22 Korth Direct Mortgage Inc. 8-K:1,9 7/28/22 13:817K Securex Filings/FA 8/16/21 Korth Direct Mortgage Inc. 10-Q 6/30/21 68:3.9M Securex Filings/FA 7/01/21 Korth Direct Mortgage Inc. 8-K:3,5,7,9 6/30/21 6:268K Securex Filings/FA 10/07/20 Korth Direct Mortgage Inc. 8-K:1,9 9/30/20 2:327K Securex Filings/FA 8/06/20 Korth Direct Mortgage Inc. 8-K:1,2,3,9 7/31/20 2:49K Securex Filings/FA 6/28/19 Korth Direct Mortgage Inc. 8-K:5,9 6/28/19 2:112K Securex Filings/FA 6/12/19 Korth Direct Mortgage Inc. 8-K:3,5,9 6/07/19 5:322K Securex Filings/FA 11/13/18 Korth Direct Mortgage Inc. 10-Q 9/30/18 37:1.4M Securex Filings/FA 11/20/17 Korth Direct Mortgage Inc. S-1/A¶ 11/17/17 7:2.2M Securex Filings/FA |