UNITED STATES
SECURITIES AND EXCHANGE Washington, D.C. 20549 FORM 10-Q (Mark One) xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 or ¨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: KORTH DIRECT MORTGAGE (Exact name of registrant as specified in its charter)
COMMISSION☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended March 31, 2018or☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from __________________ to __________________000-1695962LLC
| Florida | 27-0644172 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
135 San Lorenzo Avenue, Suite |
| (Address of principal executive offices) |
( |
| (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. ☒ xYes ☐¨ 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ xYes ☐ ¨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 | ||
| Non-accelerated filer | Smaller Reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐¨No☑x
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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 theJune 30, 2023, there were shares of common equity of which is held by affiliates. There is no market for the membership sharesstock of Korth Direct Mortgage LLC. As of March 29, 2018, there were 1,000,000 shares of Korth Direct Mortgage, LLC,Inc. outstanding.
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PART I – FINANCIAL INFORMATION
| Item 1. | 4 | |||
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| 5 | ||||
| 6 | ||||
| 7 | ||||
| Item | ||||
| Item | ||||
| Controls and Procedures | 21 | |||
| Item | ||||
| Item 1A. | Risk Factors | 21 | ||
| Item 2. | ||||
| Item 3. | ||||
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Item 5. | Other Information | 21 | ||
| Item 6. | Exhibits | 22 | ||
| SIGNATURES | ||||
| 3 |
PART I—FINANCIAL INFORMATION
KORTH DIRECT MORTGAGE LLC
March 31, 2018 (Unaudited) | December 31, 2017 | |||||||
| ASSETS | ||||||||
| Cash and Cash Equivalents | $ | 30,741 | $ | 19,844 | ||||
| Restricted Cash | 99,774 | 55,487 | ||||||
| Mortgages Owned, at fair value | 4,317,904 | 1,999,132 | ||||||
| Prepaid Expenses | 10,584 | 11,332 | ||||||
| TOTAL ASSETS | $ | 4,459,003 | $ | 2,085,795 | ||||
| LIABILITIES AND MEMBERS’ DEFICIT | ||||||||
| LIABILITIES | ||||||||
| Due to Parent | $ | 382,627 | $ | 334,324 | ||||
| Escrow Payable | 74,697 | 46,579 | ||||||
| Due to Investors | 25,076 | 8,908 | ||||||
| Accrued Expenses | 15,000 | 15,000 | ||||||
| Mortgage Secured Notes Payable | 4,187,861 | 1,999,132 | ||||||
| Total Liabilities | 4,685,261 | 2,403,943 | ||||||
| MEMBERS’ DEFICIT | ||||||||
| Accumulated Deficit | (229,780 | ) | (321,670 | ) | ||||
| Capital | 3,522 | 3,522 | ||||||
| Total Members’ Deficit | (226,258 | ) | (318,148 | ) | ||||
| TOTAL LIABILITIES AND MEMBERS’ DEFICIT | $ | 4,459,003 | $ | 2,085,795 | ||||
| June 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Cash and Cash Equivalents | $ | 8,273,944 | $ | 7,776,789 | ||||
| Restricted Cash | 19,770,822 | 10,583,641 | ||||||
| Restricted Investment | 2,500,000 | 3,986,207 | ||||||
| Mortgages Owned | 485,500,864 | 447,407,141 | ||||||
| Mortgage Servicing Rights, at Fair Value | 13,320,179 | 13,229,889 | ||||||
| Portfolio Loans | 5,613,038 | 3,318,832 | ||||||
| Securities | 225,000 | 567,826 | ||||||
| ROU Leased Asset | 613,620 | 723,179 | ||||||
| Goodwill | 110,000 | 110,000 | ||||||
| Property and equipment, net of depreciation | 17,936,403 | 18,172,304 | ||||||
| Other Assets | 2,884,232 | 1,673,353 | ||||||
| TOTAL ASSETS | $ | 556,748,102 | $ | 507,549,161 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| LIABILITIES | ||||||||
| Escrows Payable | $ | 20,145,664 | $ | 12,421,553 | ||||
| Lease Liability | 656,196 | 768,984 | ||||||
| Deferred Revenue, net | 1,840,864 | 1,593,869 | ||||||
| Deferred Tax Liability, net | 3,165,348 | 3,337,261 | ||||||
| Contingent Liability, net | 327,298 | 327,298 | ||||||
| Mortgage Secured Notes Payable | 494,124,386 | 454,883,011 | ||||||
| Warehouse Line of Credit, net | - | 326,736 | ||||||
| Other Liabilities and Payables | 1,670,371 | 1,526,488 | ||||||
| Total Liabilities | 521,930,127 | 475,185,200 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Accumulated Earnings | 5,039,800 | 6,493,385 | ||||||
| Additional Paid-in Capital | 29,551,928 | 25,626,614 | ||||||
Common Stock, $ par value, shares authorized shares issued and outstanding at June 30, 2023 and December 31, 2022 | 5,000 | 5,000 | ||||||
Series A Preferred Stock, $ par value, shares authorized, shares issued and outstanding at June 30, 2023 and at December 31, 2022 | 460 | 300 | ||||||
Series B Preferred Stock, $ par value, shares authorized, issued and outstanding at June 30, 2023 and December 31, 2022 | 19 | 19 | ||||||
| Non-Controlling Interest | 220,768 | 238,643 | ||||||
| Total Stockholders' Equity | 34,817,975 | 32,363,961 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 556,748,102 | $ | 507,549,161 | ||||
See accompanying notes to the unaudited consolidated financial statements.
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KORTH DIRECT MORTGAGE LLC
FOR THE PERIOD FROM JANUARY 1 THROUGH MARCH 31
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| (Unaudited) | ||||||||
| REVENUES | ||||||||
| Origination Revenue | $ | 26,825 | $ | - | ||||
| Servicing Revenue | 6,025 | - | ||||||
| Processing Revenue | - | 1,500 | ||||||
| Total Revenues | 32,850 | 1,500 | ||||||
| COST OF REVENUES | ||||||||
| Bank Fees | 545 | 165 | ||||||
| Appraisal Costs | (7,000 | ) | 950 | |||||
| Marketing | 3,539 | 401 | ||||||
| License and Registration | 5,002 | 2,320 | ||||||
| Ratings | - | - | ||||||
| Technology Fees | 157 | - | ||||||
| Total Cost of Revenues | 2,243 | 3,836 | ||||||
| GROSS PROFIT (LOSS) | 30,607 | (2,336 | ) | |||||
| OPERATING EXPENSES | ||||||||
| Office Supplies | 1,171 | 187 | ||||||
| Salaries | 28,382 | 23,129 | ||||||
| Payroll Taxes | 4,203 | 6,367 | ||||||
| Professional & Legal | 34,050 | 5,150 | ||||||
| SEC Filing Expense | 748 | - | ||||||
| Travel & Entertainment | 204 | 439 | ||||||
| Total Expenses | 68,758 | 35,272 | ||||||
| Other Income | ||||||||
| Unrealized gain on Mortgages | 130,043 | - | ||||||
| Net Income (Loss) From Operations | 91,892 | (37,608 | ) | |||||
| NET INCOME (LOSS) | $ | 91,892 | $ | (37,608 | ) | |||
| For the Six Months Ended | For the Six Months Ended | |||||||
| June 30, 2023 | June 30, 2022 | |||||||
| REVENUES | ||||||||
| Origination Revenue, Net | $ | 729,507 | $ | 730,012 | ||||
| Servicing Revenue | 2,807,076 | 3,022,146 | ||||||
| Underwriting Income | 229,000 | 427,400 | ||||||
| Leasing Revenue | 596,782 | - | ||||||
| Other Revenue | 499,931 | 892,626 | ||||||
| Total Revenues | 4,862,296 | 5,072,184 | ||||||
| COST OF REVENUES | ||||||||
| Broker Underwriting Expense | 924,880 | 976,636 | ||||||
| Administrative Expenses | 723,630 | 490,060 | ||||||
| Total Cost of Revenues | 1,648,510 | 1,466,696 | ||||||
| GROSS PROFIT | 3,213,786 | 3,605,488 | ||||||
| OPERATING EXPENSES | ||||||||
| Office | 422,163 | 235,073 | ||||||
| Compensation and Related Benefits | 2,120,429 | 2,111,392 | ||||||
| Professional & Legal | 263,460 | 420,311 | ||||||
| Advertising | 179,901 | 173,475 | ||||||
| Depreciation & Amortization | 332,159 | 34,407 | ||||||
| Total Expenses | 3,318,112 | 2,974,658 | ||||||
| (Loss)/Gain From Operations | (104,326 | ) | 630,830 | |||||
| Other (Expenses)/Income | ||||||||
| Unrealized Gain on Mortgages | 90,290 | 3,577,109 | ||||||
| Unrealized Gain on Mortgage Secured Notes | 66,470 | 76,004 | ||||||
| Interest Expense | (793,307 | ) | (106,914 | ) | ||||
| Total Other (Expense)/Income | (636,547 | ) | 3,546,199 | |||||
| (Loss)/Income before provision for income taxes | (740,873 | ) | 4,177,029 | |||||
| Provision for income taxes | (171,913 | ) | 1,067,117 | |||||
| Net (Loss)/Income before non-controlling interest | (568,960 | ) | 3,109,912 | |||||
| Net Loss attributable to non-controlling interest | (17,875 | ) | - | |||||
| Net (Loss)/ Income | (551,085 | ) | 3,109,912 | |||||
| Series A Preferred Dividends | 285,000 | 225,000 | ||||||
| Series B Preferred Dividends | 617,500 | 672,399 | ||||||
| Net (Loss)/Income attributable to common stockholders | $ | (1,453,585 | ) | $ | 2,212,513 | |||
See accompanying notes to the unaudited consolidated financial statements.
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KORTH DIRECT MORTGAGE LLC
| For the Three Months Ended | For the Three Months Ended | |||||||
| March 31, 2018 | March 31, 2017 | |||||||
| (Unaudited) | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Income/(Loss) | $ | 91,892 | $ | (37,609 | ) | |||
| Adjustments to Reconcile Net Income/(Loss) to | ||||||||
| Net Cash Provided by/ (Used in) Operating Activities: | ||||||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Mortgages owned, at fair value | (2,318,772 | ) | - | |||||
| Restricted Cash | (44,287 | ) | - | |||||
| Mortgage Secured Notes Issued | 2,188,729 | - | ||||||
| Prepaid Expenses | 748 | - | ||||||
| Due to Parent | 48,301 | 40,622 | ||||||
| Taxes Payable | - | (8,213 | ) | |||||
| Escrow Payable | 28,118 | - | ||||||
| Due to Investors | 16,168 | - | ||||||
| Accrued Expenses | - | - | ||||||
| Total Adjustments | (80,995 | ) | 32,409 | |||||
| NET CASH PROVIDED BY/ (USED IN) OPERATING ACTIVITIES | 10,898 | (5,200 | ) | |||||
| NET CASH USED IN INVESTING ACTIVITIES | - | - | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | - | - | ||||||
| NET INCREASE/ (DECREASE) IN CASH AND CASH EQUIVALENTS | 10,898 | (5,200 | ) | |||||
| CASH AND CASH EQUIVALENTS – Beginning of Period | 19,844 | 7,290 | ||||||
| CASH AND CASH EQUIVALENTS – End of Period | $ | 30,741 | $ | 2,090 | ||||
FOR SIX MONTHS ENDED JUNE 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 | 300,000 | $ | 300 | 19,000 | $ | 19 | 5,000,000 | $ | 5,000 | $ | 25,719,332 | $ | 4,885,445 | $ | - | $ | 30,610,096 | |||||||||||||||||||||||
| Share-based compensation | - | - | - | - | - | - | 12,906 | - | - | 12,906 | ||||||||||||||||||||||||||||||
| Series A & Series B preferred stock dividends declared | - | - | - | - | - | - | - | (897,399 | ) | - | (897,399 | ) | ||||||||||||||||||||||||||||
| Sale of Series A preferred stock | 480,000 | 480 | - | - | - | - | 11,855,520 | - | - | 11,856,000 | ||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 3,109,912 | - | 3,109,912 | ||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 780,000 | $ | 780 | 19,000 | $ | 19 | 5,000,000 | $ | 5,000 | $ | 37,587,758 | $ | 7,097,958 | $ | - | $ | 44,691,515 | |||||||||||||||||||||||
| Balance at January 1, 2023 | 300,000 | $ | 300 | 19,000 | $ | 19 | 5,000,000 | $ | 5,000 | $ | 25,626,614 | $ | 6,493,385 | $ | 238,643 | $ | 32,363,961 | |||||||||||||||||||||||
| Share-based compensation | - | - | - | - | - | - | 29,474 | - | - | 29,474 | ||||||||||||||||||||||||||||||
| Issuance of Series A preferred stock | 160,000 | 160 | - | - | - | - | 3,895,840 | - | - | 3,896,000 | ||||||||||||||||||||||||||||||
| Series A & Series B preferred stock dividends declared | - | - | - | - | - | - | - | (902,500 | ) | - | (902,500 | ) | ||||||||||||||||||||||||||||
| Net (loss)/income | - | - | - | - | - | - | - | (551,085 | ) | (17,875 | ) | (568,960 | ) | |||||||||||||||||||||||||||
| Balance at June 30, 2023 | 460,000 | $ | 460 | 19,000 | $ | 19 | 5,000,000 | $ | 5,000 | $ | 29,551,928 | $ | 5,039,800 | # | $ | 220,768 | $ | 34,817,975 | ||||||||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
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KORTH DIRECT MORTGAGE LLCINC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Six Months Ended | For the Six Months Ended | |||||||
| June 30, 2023 | June 30, 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (Loss)/Income | $ | (568,960 | ) | $ | 3,109,912 | |||
Adjustments to Reconcile Net (Loss)/Income to Net Cash Provided by/(Used In) Operating Activities: | ||||||||
| Unrealized Gain on Mortgages Owned | (90,290 | ) | (3,577,109 | ) | ||||
| Unrealized Gain on Mortgage Secured Notes | (66,470 | ) | (76,004 | ) | ||||
| Stock Compensation Expense | 29,474 | 12,906 | ||||||
| Depreciation and amortization | 332,159 | 34,407 | ||||||
| Amortization of loan costs | 264,966 | 94,556 | ||||||
| Deferred rent expense from operating lease | (3,229 | ) | 241 | |||||
| Deferred income taxes | (171,913 | ) | 651,023 | |||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Mortgage Secured Notes Issued | 39,241,375 | 60,122,855 | ||||||
| Mortgage Secured Notes Purchased | 409,296 | (23,990 | ) | |||||
| Restricted Investment | 1,486,207 | - | ||||||
| Warehouse LOC | (591,702 | ) | 34,548,995 | |||||
| Portfolio Loans | (2,294,206 | ) | (9,147,202 | ) | ||||
| Other Assets | (1,282,190 | ) | (261,187 | ) | ||||
| Deferred Revenue, net | 246,995 | 1,083,466 | ||||||
| Escrow Payable | 7,724,111 | 1,943,715 | ||||||
| Other Liabilities and Payables | 143,883 | 1,100,390 | ||||||
| New Mortgage Lending | (38,093,723 | ) | (90,790,074 | ) | ||||
| Total Adjustments | 7,284,743 | (4,283,012 | ) | |||||
| NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES | 6,715,783 | (1,173,100 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | (24,946 | ) | (22,459 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | (24,946 | ) | (22,459 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payment of Series A/B preferred stock dividends | (902,500 | ) | (842,500 | ) | ||||
| Net proceeds from the sale of Series A preferred stock | 3,896,000 | 11,856,000 | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 2,993,500 | 11,013,500 | ||||||
| NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 9,684,336 | 9,817,941 | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH – Beginning of Period | 18,360,430 | 19,481,343 | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH – End of Period | $ | 28,044,766 | $ | 29,299,284 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION | ||||||||
| Cash paid during the year for interest | $ | 528,341 | $ | 12,358 | ||||
| Cash paid for income taxes | $ | - | $ | 77,798 | ||||
See accompanying notes to the unaudited consolidated financial statements.
| 7 |
KORTH DIRECT MORTGAGE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Korth Direct Mortgage LLC (“the Company”Inc. (the “Company” or “KDM”) is a limited liability company formedincorporated 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 J. W.KDM.
J.W. Korth & Company, L.P.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 FINRA registered broker dealer. Theall revenue and expenses are passed through to the Company was created to sell Notes securedand consolidated within these financial statements. Although KDMF’s deal history is broken out by mortgage loans. 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 not incur any debtcreate and operate other than support provided by its owner J. W. Korth & Company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements are solely forinclude the Company. The financial statementsaccounts of the parent company, J. W.Company and the accounts of the Company’s wholly owned subsidiaries J.W. Korth, & Company,KDM Stafford LLC and KDM Funding I LLC. All intercompany balances and transactions have these accounts consolidated within them.
BASIS OF ACCOUNTING
The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally acceptedwith. 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”).
BASIS OF PRESENTATION
Beginning in the United Statesfirst quarter of America.
USE OF ESTIMATES
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.
CASH AND CASH EQUIVALENTS
For purposes of the statementstatements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
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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 June 30, 2023, and 2022:
| Schedule of cash and cash equivalents | ||||||||
| 2023 | 2022 | |||||||
| Cash and Cash Equivalents | $ | 8,273,944 | $ | 4,436,479 | ||||
| Restricted Cash | 19,770,822 | 24,862,805 | ||||||
| $ | 28,044,766 | $ | 29,299,284 | |||||
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 $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.
MORTGAGE VALUATION
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. All mortgagesMortgages 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.
MORTGAGE SECURED NOTES
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 June 30, 2023, the Company has issued MSNs secured by these loans in the amount of $585,780,000 since inception and has redeemed $91,655,614 of its MSNs since inception.
PORTFOLIO LOANS
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 June 30, 2023, the Company had issued Portfolio Loans in the amount of $39,409,104 and currently holds $5,613,038 of Portfolio Loans.
PARTICIPATIONS
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 June 30, 2023, the Company had issued loan participations in the amount of $21,500,000, all of which are still outstanding. These participations are included in the Mortgages Owned number and Mortgage Secured Notes Payable.
GOODWILL
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 mortgages owned, andreporting unit to its carrying value. If the carrying value is recognized onhigher than the Statement of Operations asfair value or there is an unrealized gain.
REVENUE RECOGNITION
The Company has threeCompany’s primary sources of revenue:revenue are origination fees, servicing fees, processing fees, underwriting income, trading profits, and processing fees.interest income.
On November 22, 2022, we obtained control of an income producing property and started collecting leasing revenue. We recorded rental income of $596,782 for the period ending June 30, 2023, which is reported as leasing revenue on the unaudited consolidated statements of operations.
| 9 |
Origination Fees
Loan origination fees represent revenue earned from originating mortgage loans.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 atover the timelife of the loansloan. The associated loan origination costs are funded.
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 CM Loan interest received from our CM Loans and the MSN interest payable. Servicing Feesfees are recognized intoas revenue as the related mortgage payments are received,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, which is 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.
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.
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 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.
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.
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 limiteda short operating history and a small amountnumber of loans outstanding, we have a limited basis to predict prepayment rates and default rates.
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DEPRECIATION
Depreciation is provided on a straight-line basis using estimated useful lives of three to thirty-nine years.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reportedstatement carrying amounts of existing assets and liabilities and disclosures of contingenttheir respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities atare measured using enacted tax rates expected to apply to taxable income in the dateyears 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.
DEBT ISSUANCE COSTS
Debt issuance costs are amortized over the reported amountsterm of revenuesthe 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.
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 expenses duringnet 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 reporting period. Actual results could differ from those estimates.
NOTE 3 – CONTINGENT LIABILITY
As part of the acquisition of J. W. Korth, &the Company L.P. pursuantagreed to pay (i) the Preferred Capital Interest partners of J.W. Korth accrued and unpaid dividends of 6% per annum through 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 dividends, redeem 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 June 30, 2023:
| Schedule of unpaid contingent liability outstanding | ||||
| Contingent liability to redeem J.W. Korth Preferred Capital Interest Partners | $ | 320,500 | ||
| Accrued quarterly dividends recorded as interest expense through June 30, 2023 | 6,798 | |||
| Contingent Liability, net | $ | 327,298 |
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 June 30, 2023 and December 31, 2022, the Company had outstanding loans securing MSNs totaling $485,500,864 and $447,407,141, respectively, and issued MSNs secured by those loans in the amount of $494,124,386 and $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 4.25% to 8.82% and mature at various dates from September 2023 to April 2038. The MSNs are non-recourse to KDM and are payable to the support agreement. The date such payments are due has not yet been determined since revenue generating operations are minimal at the current time. A repayment plan for operating expenses will be created onceextent that the Company is an independently going concern.
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The following table presents the future scheduled principal payments on the Company’s tax returns. In order for a benefit to be recognized, a tax position must be more-likely-than-not to be sustained when challenged or examined by the applicable taxing authority. For the three months ended March 31, 2018, the Company has no material uncertain tax positions to be accounted for in the financial statements.
| Schedule of future maturities | ||||
| Years ending December 31 | Future Maturities of Debt | |||
| Last 6 months of 2023 | $ | 3,752,597 | ||
| 2024 | 102,896,351 | |||
| 2025 | 93,436,469 | |||
| 2026 | 116,831,015 | |||
| 2027 | 87,201,066 | |||
| Thereafter | 90,006,888 | |||
| Total | $ | 494,124,386 | ||
NOTE 5 - RESTRICTED CASH
The Company maintains twomultiple 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 authorityauthorities and insurance companies. This account corresponds to the Escrow Payable liability. As of MarchJune 30, 2023, and December 31, 2018,2022, this account has a liabilityhad balances of $74,697.
The “In Trust for 2” account receives payments from borrowers, and distributes payments to investors, and pays the servicing feefees to the Company. This account corresponds to the Due to Investors liability.liability, which is included in other liabilities and payables. As of MarchJune 30, 2023, and December 31, 2018,2022, this account had balances of $816,407 and $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 June 30, 2023 and December 31, 2022, were $72,990 and $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 $308,750 as of June 30, 2023, and December 31, 2022, respectively.
The Company maintains an account restricted per the warehouse line agreement that has a balance of $25,076.
The Company relies entirelymaintains a cash management account that holds a portion of the restricted cash, which is swept on its parent, J. W.a regular basis. The account had balances of $3,852,329 and $8,000,000 as of June 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 $2,500,000 and $3,986,207 as of June 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 a Certificate of Deposit and a savings account. These accounts have a balance of $3,250,000 and $250,000, respectively as of June 30, 2023
The Company has opened a cash management account at J.W. Korth & Company L.P.that will hold a portion of restricted cash. The balances as of June 30, 2023, were $7,768,512 and $3,500,000, respectively.
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 providea 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 June 30, 2023, the Company recorded a net loss attributable to the non-controlling interest of $17,875. 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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NOTE 7 - COMMITMENTS
The Company maintains office space internet connectivity, phone service,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 incidentalsconditions 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 foreseeable future.
Rental expense for the quarter ended June 30, 2023, was $131,128 compared to $125,521 for the quarter ended June 30, 2022, this includes additional expenses for common area, direct operating expense, utilities, parking, and taxes.
As of June 30, 2023, the net present value of the future lease liabilities, using the weighted-average discount rate of 4.24%, which is commensurate with the Company’s secured borrowing rate, over the weighted average remaining life of 2.6 years was $656,196.
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 June 30, 2023:
| Schedule of future minimum rental payments for operating leases | |||||
Future Lease Payments | |||||
| 2023 | $ | 128,858 | |||
| 2024 | 264,087 | ||||
| 2025 | 271,470 | ||||
| 2026 | 30,504 | ||||
| Total Lease Payments | 694,919 | ||||
| Less: Imputed Interest | (38,723) | ||||
| Present Value of Lease Liabilities | $ | 656,196 |
NOTE 8 - 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 itthe 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.
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. 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 six months ended June 30, 2023:
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 0 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 $3.00 per share. During the quarter ended June 30, 2023, the Company issued options to purchase 15,000 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 June 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:
For the six months ended June 30, 2023, and June 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 June 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 six months ended June 30, 2023, is summarized as follows:
NOTE 12 – PREFERRED EQUITY 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 $4,750,000. The Company paid $250,000 in expenses related to the preferred stock issuance to J. W. Korth as underwriter and distributor. Each share was sold for $25 and is 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 $12,120,480. The Company paid $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 $18,302,500. The Company paid $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 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 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
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, NOTE 13 – 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
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 Mortgages Owned and Mortgage Secured Notes Payable: Mortgage loans 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 Securities J. W. Korth holds $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. We therefore carry them at par value. 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.
Fair Value Disclosure The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis:
Fair Value Measurements Changes in Fair Value Measurements for the six months ended June 30, 2023 The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the
June 30, 2023:
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
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 The following table presents quantitative information regarding the significant unobservable inputs the
NOTE 14 – INCOME TAXES The provision for income taxes was ($171,913) for the six months ended June 30, 2023. The effective tax rate was 23% of the loss before income taxes of $740,873, which differs from the federal statutory rate of 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 $1,067,117 for the six months ended June 30, 2022. The effective tax rate was 26% of the income before income taxes of $4,177,029, which differs from the federal statutory rate of 21% due to state income taxes and certain of the Company’s expenses that are not deductible for tax purposes. NOTE 15 – PROPERTY AND EQUIPMENT Property and Equipment are summarized as follows:
Depreciation expense for the periods ending June 30, 2023 and June 30, 2022, was $332,159 and $34,407, respectively.
NOTE 16 – WAREHOUSE LINE OF CREDIT On March 31,
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 June 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 $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 June 30, 2023, the Company had a balance of $0 on the warehouse line. The total amortization expense for the six months ended June 30, 2023, and recorded as interest expense is $265,964. 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. NOTE 17 – SUBSEQUENT EVENTS The Company has evaluated all events or transactions for potential recognition or disclosure in the unaudited consolidated financial statements through August 11, 2023, which is the date that the unaudited consolidated financial statements were available to be issued. During this period, there were no material subsequent events requiring disclosure. 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. Overview Korth Direct Mortgage Our principal executive offices are located at www.korthdirect.com. We also operate under the trade name KDM Financial, and our principal subsidiary is J.W. Korth We are licensed in We originate, fund and service loans which are
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 issuer. Results of Operations for the The Company generated revenues of $4,862,296 for the six months ended June 30, 2023, a decrease of $209,888 compared with revenues of $5,072,184 for the six months ended June 30, 2022, a 4% decline. As of June 30, 2023, the Company owned mortgages of $485,500,864 compared with mortgages of $447,407,141 as of December 31, Gross profit decreased by $391,702 (-11%) to $3,213,786 during the six months ended June 30, 2023, compared with gross profit of $3,605,488 during the six months ended June 30, 2022. The decrease in Operating expenses were $3,318,112 during the six months ended June 30, 2023, which was Other (expense)/income decreased by $4,182,746 to During the Net loss is $551,085 for the mortgages. Financial Condition for the As of June 30, 2023, we had $8,273,944 in cash, $19,770,822 in restricted cash, $2,500,000 in restricted investment, loans totaling $504,434,081, consisting of $485,500,864 in mortgages and participations, and $5,613,038 in portfolio loans, and Mortgage Servicing Rights with a fair value of $13,320,179 on our unaudited consolidated statements 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 six months ended June 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 September 2023 to April 2038 as well as income from its investments and portfolio loans with maturity dates ranging from April 2024 to March 2028. We anticipate raising additional capital to fund our lending and development in the second half of 2023. Status of KDM Loans As of A CM Loan is currently in a
Subsequent to the filing of this report, KDM has had two additional Loan enter into a 30-day payment default. One of the loans is in these loans is expected to be brought current in the immediate future and no further collection action is expected. The Risk. We have no instruments subject to market risk. Procedures. We are responsible for establishing and maintaining adequate internal control over financial reporting as such 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 June 30, 2023. PART II—OTHER INFORMATION The Company is not currently subject to any material legal 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, None. None. Not Applicable. Item 5. Other Information .None.
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.
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