UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from _______________________________________to _______________________________________
Commission File Number:
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_________________________________ ___________________________________
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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
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).
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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 | ¨ |
| ¨ | Smaller Reporting company | ||
| Emerging growth company |
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an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
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| 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 June 30, 2024, there were shares of common stock of Korth Direct Mortgage Inc. outstanding.
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TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Consolidated Financial Statements | |
| Unaudited Consolidated Statements of Financial Condition | 4 | |
| Unaudited Consolidated Statements of Operations | 5 | |
| Unaudited Consolidated Statements 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
| June 30, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Restricted Cash | ||||||||
| Restricted Investment | ||||||||
| Mortgages Owned | ||||||||
| Mortgage Servicing Rights, at Fair Value | ||||||||
| Portfolio Loans | ||||||||
| Loans Held for Sale | ||||||||
| Securities | ||||||||
| ROU Leased Asset | ||||||||
| Goodwill | ||||||||
| Property and equipment, net of depreciation | ||||||||
| Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| LIABILITIES | ||||||||
| Escrows Payable | $ | $ | ||||||
| Lease Liability | ||||||||
| Deferred Revenue, net | ||||||||
| Deferred Tax Liability, net | ||||||||
| Contingent Liability, net | ||||||||
| Securities Sold Short | ||||||||
| Mortgage Secured Notes Payable | ||||||||
| Warehouse Line of Credit, net | ||||||||
| Other Liabilities and Payables | ||||||||
| Total Liabilities | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Accumulated (Deficit)/Earnings | ( | ) | ||||||
| Additional Paid-in Capital | ||||||||
Common Stock, $ par value, shares authorized shares issued and outstanding at June 30, 2024 and December 31, 2023 | ||||||||
Series A Preferred Stock, $ par value, shares authorized, shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively | ||||||||
Series B Preferred Stock, $ par value, shares authorized, issued and outstanding at June 30, 2024 and December 31, 2023 | ||||||||
| Non-Controlling Interest | ||||||||
| Total Stockholders' Equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
See accompanying notes to the unaudited consolidated financial statements.
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KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1 THROUGH JUNE 30
| For the Six Months Ended | For the Six Months Ended | |||||||
| June 30, 2024 | June 30, 2023 | |||||||
| REVENUES | ||||||||
| Origination Revenue, Net | $ | $ | ||||||
| Servicing Revenue | ||||||||
| Underwriting Income | ||||||||
| Leasing Revenue | ||||||||
| Other Revenue | ||||||||
| Total Revenues | ||||||||
| COST OF REVENUES | ||||||||
| Broker Underwriting Expense | ||||||||
| Administrative Expenses | ||||||||
| Total Cost of Revenues | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES | ||||||||
| Office | ||||||||
| Compensation and Related Benefits | ||||||||
| Professional & Legal | ||||||||
| Advertising | ||||||||
| Depreciation | ||||||||
| Total Expenses | ||||||||
| Loss From Operations | ( | ) | ( | ) | ||||
| Other (Expenses)/Income | ||||||||
| Unrealized (Loss)/Gain on Mortgages | ( | ) | ||||||
| Unrealized (Loss)/Gain on Mortgage Secured Notes | ( | ) | ||||||
| Interest Expense | ( | ) | ( | ) | ||||
| Realized Gain on Foreclosure | ||||||||
| Realized Loss on Mortgage Secured Notes | ( | ) | ||||||
| Realized Loss on Loans Held for Sale | ( | ) | ||||||
| Change in Fair Value of Mortgage Secured Notes | ||||||||
| Loss on Foreclosures | ( | ) | ||||||
| Total Other (Expenses)/Income | ( | ) | ( | ) | ||||
| Loss before provision for income taxes | ( | ) | ( | ) | ||||
| Income tax benefit | ( | ) | ( | ) | ||||
| Net Loss before non-controlling interest | ( | ) | ( | ) | ||||
| Less: Net Loss attributable to non-controlling interest | ( | ) | ( | ) | ||||
| Net Loss | ( | ) | ( | ) | ||||
| Series A Preferred Dividends | ||||||||
| Series B Preferred Dividends | ||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
See accompanying notes to the unaudited consolidated financial statements.
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KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR SIX MONTHS ENDED JUNE 30, 2024 AND 2023
| Series A Preferred Stock | Series B Preferred Stock | Common Stock | Additional Paid | Accumulated | Non-Controlling | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | in Capital | Earnings/(Deficit) | Interest | Totals | |||||||||||||||||||||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Issuance of Series A preferred stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Series A & Series B preferred stock dividends declared | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Balance at January 1, 2024 | $ | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Series A & Series B preferred stock dividends declared | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
| 6 |
KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Six Months Ended | For the Six Months Ended | |||||||
| June 30, 2024 | June 30, 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to Reconcile Net Loss to: | ||||||||
| Net Cash Provided by Operating Activities: | ||||||||
| Unrealized Loss/(Gain) on Mortgages Owned | ( | ) | ||||||
| Unrealized Loss/(Gain) on Mortgage Secured Notes | ( | ) | ||||||
| Unrealized Gain on Securities | ||||||||
| Realized Gain on Foreclosure | ( | ) | ||||||
| Realized Loss on LHS | ||||||||
| Change in Fair Value of Mortgage Secured Notes | ( | ) | ||||||
| Loss on Foreclosures | ||||||||
| Stock Compensation Expense | ||||||||
| Depreciation | ||||||||
| Amortization of loan costs | ||||||||
| Deferred rent expense from operating lease | ( | ) | ( | ) | ||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Mortgage Secured Notes Issued | ( | ) | ||||||
| Mortgage Secured Notes Purchased | ||||||||
| Restricted Investment | ( | ) | ||||||
| Warehouse LOC | ( | ) | ( | ) | ||||
| Portfolio Loans | ( | ) | ||||||
| Loans Held For Sale, at Fair Value | ||||||||
| Other Assets | ( | ) | ( | ) | ||||
| Deferred Revenue, net | ( | ) | ||||||
| Escrow Payable | ( | ) | ||||||
| Securities Sold Short | ( | ) | ||||||
| Other Liabilities and Payables | ||||||||
| New Mortgage Lending | ( | ) | ||||||
| Total Adjustments | ( | ) | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payment of Series A/B preferred stock dividends | ( | ) | ( | ) | ||||
| Net proceeds from the sale of Series A preferred stock | ||||||||
| NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES | ( | ) | ||||||
| NET (DECREASE)/INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH – Beginning of Period | ||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH – End of Period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION | ||||||||
| Cash paid during the year for interest | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Assets acquired through foreclosure | $ | |||||||
See accompanying notes to the unaudited consolidated financial statements.
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KORTH DIRECT MORTGAGE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Korth Direct Mortgage Inc. (the “Company” or “KDM”) is incorporated in the State of Florida. The Company was created to originate mortgages and fund those mortgages with Notes secured by mortgage loans. J.W. Korth & Company Limited Partnership (“J.W. Korth”) is a wholly owned subsidiary of KDM.
J.W. Korth is a securities broker dealer registered with the Securities Exchange Commission (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, KDM Nagog Park LLC, and KDM Cupples REO LLC, which are special purpose entities that own multiple buildings in Stafford, VA, Acton, MA, and St. Louis, MS. KDM also owns Citrus Servicing LLC, which is an entity that is a servicer for our small balance multifamily loan program.
KDM Capital Partners LP (“the Fund”) is a fund that invests in mortgages and other real estate related investments. The Fund primarily invests in mortgages that are originated and serviced by KDM. The Fund launched in June 2024 and is actively raising capital.
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 unaudited consolidated financial statements and Notes, if and when created.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
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 MFB LLC, KDM Funding I LLC, KDM Nagog Park LLC, KDM Cupples REO LLC, KDM Capital Management LLC, KDM Capital Partners LP, and KDM Stafford LLC, in which KDM owns a controlling interest.
BASIS OF ACCOUNTING
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”).
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 unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
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 June 30, 2024, and 2023:
| 2024 | 2023 | |||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Restricted Cash | ||||||||
| $ | $ | |||||||
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 $
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 loans, which management believes to be the best estimate of fair value. 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.
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, 2024, the Company has issued MSNs secured by these loans in the amount of
$
PORTFOLIO LOANS
The Company recognizes loans made
with its own capital, or pieces of 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, 2024, the Company had issued Portfolio Loans in the amount of $
LOANS HELD FOR SALE
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, where gains and losses
are recognized upon sale as realized loss on loans held for sale on the Statements of Operations which is $
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, 2024, the Company had issued loan participations in the amount of $
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 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 June 30, 2024.
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REVENUE RECOGNITION
The Company’s primary sources of revenue are origination fees, servicing fees, underwriting income, and leasing revenue.
Origination Fees
Loan origination fees represent revenue earned from originating mortgage loans; net of any credits given to the borrower. Loan origination fees generally represent flat, per-loan fee amounts and are deferred and recognized as revenue over the life of the loan. The associated loan origination costs are also deferred and recognized as expense over the life of the loan. The deferred portion of the loan origination fees is netted against the deferred portion of the loan origination costs, which include mortgage broker expenses, and reported as a net deferred revenue liability on the Company’s 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.
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.
Leasing Revenue
Leasing revenue represents
revenues generated through KDM Stafford, KDM Nagog Park, and KDM Cupples REO for rental income earned from operating leases at rental properties majority-owned and
controlled by KDM. Leasing revenue generated from operating leases are recognized over the lease term on a straight-line basis. We
recorded rental revenue of $
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 value of share-based payments on the date of grant using a Black-Scholes option pricing model. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize forfeitures as they occur.
The Black-Scholes option pricing model requires assumptions for the expected volatility of the share price of our common stock, the expected dividend yield, and a risk-free interest rate over the expected term of the stock-based award. 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
The net present value of the servicing income is recognized at the time the mortgage is initiated. The changes to the net present value which is determined by the determination of the fair value of the assets are recognized through an adjustment to the unrealized gain/loss in each reporting period This value uses several inputs that are highly subjective including: discount rate, prepayment rate, the current interest rate environment, and default rate assumptions. We use a third-party to calculate this value.
DUE TO CLEARINGHOUSE BROKERS
J.W. Korth operates as an SEC and FINRA
registered securities broker dealer. The securities transactions are traded through broker clearinghouses and, upon settlement, funds
are transferred in and out of the Company’s bank accounts. Unsettled transactions create short-term payables and receivables due
to and from the broker clearinghouses. As of June 30, 2024, the Company had a net amount due to the clearinghouse brokers of $
DEPRECIATION
Depreciation is provided on a straight-line
basis using estimated useful lives of
| 10 |
INCOME TAXES
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.
DEBT ISSUANCE COSTS
Debt issuance costs are amortized over the term of the respective obligation, using the straight-line method. Amortization expense of debt issuance costs is recorded in interest expense in the unaudited consolidated statements of operations.
NOTE 3 – CONTINGENT LIABILITY
As
part of the acquisition of J. W. Korth, the Company agreed to pay (i) the Preferred Capital Interest partners of J.W. Korth accrued
and unpaid dividends of
The following table summarizes the unpaid Contingent Liability outstanding as of June 30, 2024:
| Contingent liability to redeem J.W. Korth Preferred Capital Interest Partners | $ | |||
| Contingent liability payment | ( | ) | ||
| Accrued quarterly dividends recorded as interest expense through June 30, 2024 | ||||
| Contingent Liability, net | $ |
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, 2024, and
December 31, 2023, the Company had outstanding loans securing MSNs totaling $
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
| 11 |
The following table presents the future scheduled principal payments on the Company’s MSNs:
| Years ending December 31 | Future Maturities of Debt | |||
| Last 6 months of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
NOTE 5 - RESTRICTED CASH
The Company maintains multiple segregated accounts in trust for borrowers and investors. The value of these accounts is carried under the asset “Restricted Cash.”
The “In Trust for 1”
account holds the monthly tax and insurance payments collected from borrowers and distributes payments annually, on behalf of
borrowers, to the appropriate tax authorities and insurance companies. This account corresponds to the Escrow Payable liability. As
of June 30, 2024, and December 31, 2023, this account had balances of $
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 June 30, 2024, and December 31, 2023, this
account had balances of $
The Company maintains an account for
payment of quarterly Preferred Series B dividends that has balances of $
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 $
The Company invests a portion of the
restricted cash collected from borrowers in U.S. Treasury Bills with maturities of twelve months or less. The Restricted Investment account
had a balance of $
The Company invests a portion of restricted
cash from borrowers in a savings account with a balance of $
The Company has opened two cash management
accounts at J.W. Korth & Company that hold a portion of restricted cash. The balances as of June 30, 2024, were $
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 six months ended June 30, 2024, the Company
recorded a net loss attributable to the non-controlling interest of $
In March 2024, through foreclosure and via a special-purpose entity named KDM Nagog Park LLC, KDM now owns a 3 building office park in Acton, Massachusetts. Similarly, via deed in lieu of foreclosure in April 2024, KDM took ownership of an office in St. Louis, Missouri through a wholly owned subsidiary named KDM Cupples REO LLC. The activity of the wholly owned subsidiaries, KDM Nagog Park LLC and KDM Cupples REO LLC, are included in the Company’s consolidated financial statements beginning in the current quarter.
| 12 |
As part of the transaction, the Company
recognized a gain of $
| Fair value of Net Assets Acquired: | ||||
| Building and land | $ | |||
| Acquired operating leases | ||||
| Mortgage liability assumed | ( | ) | ||
| Gain on Settlement Agreement | $ | |||
NOTE 7 - COMMITMENTS
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.
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 six months ended
June 30, 2024, was $
As of June 30, 2024, the net present
value of the future lease liabilities, using the weighted-average discount rate of
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, 2024:
| Future
Lease Payments | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| Total Lease Payments | ||||
| Less: Imputed Interest | ( | ) | ||
| Present Value of Lease Liabilities | $ | |||
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 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.
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. In addition to KDM Stafford, the Company recently created KDM Nagog Park LLC and KDM Cupples REO, LLC in order to acquire two properties via foreclosure and deed in lieu of foreclosure, respectively.
The Company launched a debt fund called
KDM Capital Partners LP (“the Fund”) in June of 2024. The general partner of the Fund is KDM Capital Management LLC. The Company
has invested $
| 13 |
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, 2024:
| Deferred
Origination Fees | Deferred Origination Costs | Deferred Revenue, Net | ||||||||||
| Deferred Revenue at December 31, 2023 | $ | $ | ( | ) | $ | |||||||
| New loan deferrals | ( | ) | ||||||||||
| - | ||||||||||||
| Amortization of deferrals | ( | ) | ( | ) | ||||||||
| Deferred Revenue at June 30, 2024 | $ | $ | ( | ) | $ |
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 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 2023 were $ per share. The fair values of the stock-based awards granted were calculated with the following weighted-average assumptions:
| 2023 | ||
| Risk-free interest rate: | ||
| Expected term: | years | |
| Expected dividend yield: | ||
| Expected volatility: |
For the six months ended June 30, 2024, and June 30, 2023, 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, 2024, 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, 2024, is summarized as follows:
| 2019 Stock Option Plan: | Shares | Weighted Average Exercise Price | Weighted Remaining Contractual Life (Years) | |||||||||
| Options outstanding at January 1, 2024 | $ | |||||||||||
| Granted | - | |||||||||||
| Exercised | ||||||||||||
| Expired or forfeited | - | |||||||||||
| Options outstanding at June 30, 2024 | $ | |||||||||||
| Options exercisable at June 30, 2024 | $ | |||||||||||
| Options expected to vest at June 30, 2024 | $ | |||||||||||
| 14 |
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 $
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 $
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 $
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
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 $ 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.
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 assumptions that market participants would use in pricing the asset or liability, not assumptions specific to the entity.
ASC 820 establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial assets and liabilities at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:
Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
| 15 |
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.
On March 5, 2024, through a full credit
bid in the foreclosure auction, KDM, via its subsidiary KDM Nagog Park LLC, took ownership of the office property securing KDM2021-N015.
In April 2024, via a deed in lieu of foreclosure, a wholly owned subsidiary of KDM named KDM Cupples REO LLC took title to the office
property securing KDM2021-N022. Both loans went into default in late 2023 due to the departure of major tenants. As of June 30, 2024,
it was determined that the value of these two mortgages were impaired and recorded on the Statement of Operations in the amount of $
Due to the fact that the Company issues notes secured directly by underlying loans, our assets and liabilities in this category have similar 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, which is being recognized through net income at each reporting period This value uses several inputs that are highly subjective including: discount rate, constant prepayment rate, the current interest rate environment, and default rate assumptions. Since the Company has limited operating history and a small amount of loans outstanding, 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 owns , $
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.
| 16 |
Fair Value Disclosure
The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis:
| June 30, 2024 | ||||||||||||||||
| Total | Level I | Level II | Level III | |||||||||||||
| Financial Assets | ||||||||||||||||
| Mortgages Owned | $ | $ | $ | $ | ||||||||||||
| Mortgage Servicing | ||||||||||||||||
| Portfolio Loans | ||||||||||||||||
| Non-MSN Securities | ||||||||||||||||
| Total Financial Assets | $ | $ | $ | $ | ||||||||||||
| Financial Liabilities | ||||||||||||||||
| Mortgage Secured Notes Payable | $ | $ | $ | $ | ||||||||||||
| Warehouse Line of Credit | ||||||||||||||||
| Total Financial Liabilities | $ | $ | $ | $ | ||||||||||||
| December 31, 2023 | ||||||||||||||||
| Financial Assets | ||||||||||||||||
| Mortgages Owned | $ | $ | $ | $ | ||||||||||||
| Mortgage Servicing | ||||||||||||||||
| Portfolio Loans | ||||||||||||||||
| Non-MSN Securities | ||||||||||||||||
| Total Financial Assets | $ | $ | $ | $ | ||||||||||||
| Financial Liabilities | ||||||||||||||||
| Mortgage Secured Notes Payable | $ | $ | $ | $ | ||||||||||||
| Securities Sold Short | ||||||||||||||||
| Warehouse Line of Credit | ||||||||||||||||
| Total Financial Liabilities | $ | $ | $ | $ | ||||||||||||
Fair Value Measurements
Changes in Fair Value Measurements for the six months ended June 30, 2024
The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the unaudited consolidated statement of financial condition for June 30, 2024:
| Changes in assets: | ||||||||||||
| Period ended June 30, 2024 | Mortgage Servicing Value | Non-MSN Securities | Total Value | |||||||||
| Beginning balance at January 1, 2024 | $ | $ | $ | |||||||||
| Sales | ||||||||||||
| Unrealized Gain from newly issued mortgages | ||||||||||||
| Fair Value adjustment | ( | ) | ( | ) | ( | ) | ||||||
| Ending balance at June 30, 2024 | $ | $ | $ | |||||||||
The Company’s policy for recording transfers between levels of the fair value hierarchy is to recognize such transfers as of the
financial statement date. For the six months ended June 30, 2024, there were no transfers between levels.
| 17 |
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 June 30, 2024:
| Investment type | Fair Value | Valuation technique | Unobservable inputs | Values | ||||||||
| Mortgage servicing | $ | % | ||||||||||
| Non-MSN Securities | $ | % | ||||||||||
NOTE 14 – INCOME TAXES
The income tax benefit was $
The income tax benefit was $
NOTE 15 – PROPERTY AND EQUIPMENT
Property and Equipment are summarized as follows:
| June 30, 2024 | ||||
| Land & Building | $ | |||
| Equipment | ||||
| Furniture and fixtures | ||||
| Accumulated depreciation | ( | ) | ||
| Net Property Equipment | $ | |||
| December 31, 2023 | ||||
| Land & Building | $ | |||
| Equipment | ||||
| Furniture and fixtures | ||||
| Accumulated depreciation | ( | ) | ||
| Net Property Equipment | $ | |||
Depreciation
expenses for the periods ending June 30, 2024, and June 30, 2023, were $
| 18 |
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 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 $
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.
The Agreement was terminated on February 22, 2024. Fees and expenses associated with this transaction that were originally amortized over the 3-year term of the facility were realized upon cancellation and are captured in the Interest Expense caption on the Company’s consolidated statement of operations.
On October 13, 2023, KDM MFB LLC,
a Delaware limited liability company (the “KDM MFB”), a newly formed and wholly owned subsidiary of Korth Direct
Mortgage Inc. (the “Company”) entered into a $100,000,000 Master Repurchase and Securities Contract credit facility with
Churchill MRA Funding I LLC (the “Agreement”). The Company vis a vis KDM MFB, will use the credit facility provided by
the Agreement (the “MFB Line”) to finance the Company’s expansion of its lending operations in multi-family and
multifamily bridge financing. See Form 8-k filed October 19, 2023 for more information. As of December 31, 2023, the Company had a
balance of $
As of June
30, 2024, the Company had a balance of $
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 14, 2024, which is the date that the unaudited consolidated financial statements were available to be issued. During this period, the following events requiring disclosure.
| - | The Company paid off its contingent liability of $ |
| - | The Company closed an additional $ |
| - | The Fund received additional $ |
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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, 2023, filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2024; and (iii) our management’s discussion and analysis of financial condition and results of operations included in our 2023 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, 2023.
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 has a number of special purpose entities that it manages including KDM Capital Management LLC, KDM Stafford LLC, KDM Nagog Park, LLC, KDM Cupples REO, LLC, KDM Asset Management, LLC, and a wholly owned subsidiary named Citrus Servicing LLC which services the loans in our small balance multifamily program.
Results of Operations for the Six Months ended June 30, 2024
The Company generated revenues of $5,183,564 for the six months ended June 30, 2024, an increase of $321,268 compared with revenues of $4,862,296 for the six months ended June 30, 2023 As of June 30, 2024, the Company owned mortgages of $456,742,692 compared with mortgages of $484,484,408 as of December 31, 2023, and $485,500,864 as of June 30, 2023.
Gross profit increased by $472,064 to $3,685,850 during the six months ended June 30, 2024, compared with gross profit of $3,213,786 during the six months ended June 30, 2023. The increase in gross profit was due to additional rental revenues from buildings acquired via workouts; however new lending declined year over year. KDM originated 5 new loans in the first half of 2024 for total loan amount of $22,000,000 vs one loan at $55,000,000 for the same period in 2023.
Operating expenses were $4,682,208 during the six months ended June 30, 2024, which was an increase of $1,364,096 (41%) compared with operating expenses of $3,318,112 during the six months ended June 30, 2023. The increase in operating expenses was driven primarily by the increase of $580,315 in professional and legal due to defaults, foreclosures, and related expenses and includes additional expenses associated with operating the properties in our REO portfolio.
Other (expense)/income decreased by $308,381 to ($944,928) during the six months ended June 30, 2024, compared with other (expense)/income of ($636,547) during the six months ended June 30, 2023. The decline in unrealized gain, as well as the current loss, is due to realizing these future revenues faster than we are making new originations, as well as 24.8% of the decline due to loans paying off.
During the six months ended June 30, 2024, the Company recorded $482,857 in deferred income tax recovery due to increased net loss compared with $171,913 of deferred income tax recovery during the six months ended June 30, 2023.
Net loss is $1,433,700 for the six months ended June 30, 2024, compared with net loss of $551,085 during the six months ended June 30, 2023. The increase in 2024 was primarily attributed to the decrease in unrealized gain on mortgages due to slowed originations.
| 20 |
Financial Condition for the six Months Ended June 30, 2024
The Company’s Total Assets were $525,592,133 for the six months ended June 30, 2024, and $549,337,262 as of December 31, 2023. The decline in Total Assets of $23,745,129 is due primarily to $27,741,716 decrease in mortgages owned due to two loans completing foreclosure or deed in lieu of foreclosure and being marked down to management’s estimate of fair value from mortgages owned as well as two additional payoffs of $13,160,000. We also sold $5,550,669 of loans held for sale.
As of June 30, 2024, we had $3,521,162 in cash, $14,509,857 in restricted cash, loans totaling $470,523,389, consisting of $456,742,692 in mortgages and participations, $5,147,805 in portfolio loans and $524,258 in loans held for sale, and Mortgage Servicing Rights with a fair value of $8,108,634 on our unaudited consolidated statement of financial condition.
Liquidity and Capital Resources
The Company closed on a $100,000,000 financing repurchase facility on October 13, 2023. 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 October 2024 to June 2037 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. Additionally, we are actively raising capital in KDM Capital Partners LP (“the Fund”).
Status of KDM Loans
As of June 30, 2024, there were 3 CM Loans in payment default, and two loans that were foreclosed upon that still have MSNs outstanding. The Company has a creative office/flex space in the process of foreclosure where the owner has declared bankruptcy, a special purpose property that filed an Assignment for the Benefit of Creditors where the Company is a senior secured party, and a third owner occupied property that is behind on payments and we are working with them to get them back in compliance.
The special purpose property is a pool of 4 parcels and 3 are under contract to be sold and we expect the sale to close some time during the third quarter of this year.
Several of KDM’s current borrowers that have loans coming due within the next 12 months have requested loan extensions. For borrowers that have had good payment history, KDM expects to extend these loans at rates slightly higher than their current rate, while allowing the sponsors to wait for rates to move down to refinance. For one property, we will need to lower the rate. We view this as meeting simultaneous goals of not putting sponsors in distress in a difficult refinance during a high rate environment, while also continuing cash flow for our investors. We believe extending maturity is a better outcome than potential maturity defaults.
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 June 30, 2024, as required by Securities Exchange Act Rule 13a- 15(c). In making our assessment, we have utilized the criteria set forth by the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We concluded that based on our evaluation our internal control over financial reporting was effective as of June 30, 2024.
| 21 |
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not currently subject to any material legal proceedings other than in the course of ordinary business which upon the disposition thereof, in the opinion of management are likely to have a material adverse effect on our consolidated financial condition, cash flows, or results of operations.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
| 23 |
| 10.1 | Korth Direct Mortgage Inc. 2019 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 8-K filed June 29, 2019) |
| 10.2 |
Purchase Agreement dated July 31, 2020, among Korth Direct Mortgage Inc., a Florida corporation; J.W. Korth & Company Limited Partnership, a Michigan limited partnership; and JW Korth LLC, a Florida limited liability company (incorporated by reference to Current Report on Form 8-K filed August 6, 2020) |
| 10.3 |
First Amendment to Purchase Agreement (incorporated by reference to Registrant’s Report on Form 10-Q filed August 16, 2021) |
|
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) * |
* Filed herewith.
| 24 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KORTH DIRECT MORTGAGE INC. | |||
| Dated: August 14, 2024 | By: | /s/ Holly MacDonald-Korth | |
| Holly MacDonald-Korth, Chief Executive Officer and Chief Financial Officer | |||
25