10-Q

UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

or

o 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: 000-1695962

KORTH DIRECT MORTGAGE LLC

(Exact name of registrant as specified in its charter)

Florida	27-0644172
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2937 SW 27^th Avenue, Suite 307, Miami FL 33133

(Address of principal executive offices)

(305) 668-8485

(Registrant’s telephone number, including area code)

(Former name, former address and formal fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or, an 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 ☑

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Securities registered pursuant to Section 12(b) of the Act: None.

The registrant is a limited liability company, all of the common equity of which is held by affiliates. There is no market for the membership shares of Korth Direct Mortgage LLC. As of March 31, 2019, there were 1,000,000 shares of Korth Direct Mortgage LLC outstanding.

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TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Statements of Financial Condition	3
	Unaudited Statements of Operations	4
	Unaudited Statements of Cash Flows	5
	Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	12
Item 4.	Controls and Procedures	12
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	12
Item 1A.	Risk Factors	12
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	12
Item 3.	Defaults Upon Senior Securities	12
Item 4.	Mine Safety Disclosures	12
Item 5.	Other Information	12
Item 6.	Exhibits	13
SIGNATURES		13

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

KORTH DIRECT MORTGAGE LLC

UNAUDITED STATEMENTS OF FINANCIAL CONDITION

	March 31, 2019		December 31, 2018
ASSETS
Cash and Cash Equivalents	$	48,937	$	15,323
Restricted Cash		228,898		161,454
Mortgages Owned		27,708,513		13,173,466
Mortgage Servicing Rights, at Fair Value		614,984		215,459
Prepaid Expenses		10,584		10,584
TOTAL ASSETS	$	28,611,916	$	13,576,286
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
LIABILITIES
Due to Parent	$	-	$	494,122
Escrows Payable		193,611		125,045
Due to Investors		35,288		36,409
Accrued Expenses		20,500		15,000
Mortgage Secured Notes Payable		27,708,513		13,173,466
Total Liabilities		27,957,912		13,844,042
MEMBER'S EQUITY (DEFICIT)
Accumulated Equity (Deficit)		650,482		(271,278	)
Capital		3,522		3,522
Total Member's Equity (Deficit)		654,004		(267,756	)
TOTAL LIABILITIES AND MEMBER'S EQUITY (DEFICIT)	$	28,611,916	$	13,576,286

See accompanying notes to the unaudited financial statements.

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KORTH DIRECT MORTGAGE LLC

UNAUDITED STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1 THROUGH MARCH 31

	For the Three Months Ended			For the Three Months Ended
	March 31, 2019			March 31, 2018
REVENUES
Origination Revenue, Net	$	493,825		$	26,825
Servicing Revenue		4,116			6,025
Processing Revenue		1,500			-
Interest Income		270			-
Late Fees		5,119			-
Total Revenues		504,830			32,850
COST OF REVENUES
Broker Underwriting Expense		181,775			-
Mortgage Broker Expense		203,025			-
Bank Fees		2,702			545
Appraisal Costs		1,195			(7,000	)
Marketing		3,360			3,539
License and Registration		595			5,002
Ratings		26,000			-
Technology Fees		2,055			157
Total Cost of Revenues		420,707			2,243
GROSS PROFIT (LOSS)		84,123			30,607
OPERATING EXPENSES
Office Supplies		642			1,171
Accounting		5,500			-
Salaries		86,295			28,382
Payroll Taxes		4,372			4,203
Professional & Legal		4,791			34,050
SEC Filing Expense		-			748
Travel & Entertainment		7,919			204
Business Development		1,171			-
Total Expenses		110,690			68,758
Net Loss From Operations		(26,567	)		(38,151	)
Other Income
Unrealized Gain on Mortgages		399,525			130,043
Gain from Write-Off of Due to Parent		548,802			-
Total Other Income		948,327			130,043
NET INCOME	$	921,760		$	91,892

See accompanying notes to the unaudited financial statements.

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KORTH DIRECT MORTGAGE LLC

UNAUDITED STATEMENTS OF CASH FLOWS 

	For the Three Months Ended			For the Three Months Ended
	March 31, 2019			March 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	921,760		$	91,892
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Unrealized Gain on Motgages Owned		(399,525	)		(130,043	)
Changes in Operating Assets and Liabilities:
Restricted Cash		(67,444	)		(44,287	)
Mortgage Secured Notes Issued		14,535,047			2,188,729
Prepaid Expenses		-			748
Due to Parent		(494,122	)		48,301
Escrow Payable		68,566			28,118
Due to Investors		(1,121	)		16,168
Accrued Expenses		5,500			-
New Mortgage Lending		(14,535,047	)		(2,188,729	)
Total Adjustments		(888,146	)		(80,995	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		33,614			10,897
NET INCREASE IN CASH AND CASH EQUIVALENTS		33,614			10,897
CASH AND CASH EQUIVALENTS – Beginning of Year		15,323			19,844
CASH AND CASH EQUIVALENTS – End of Year	$	48,937		$	30,741

See accompanying notes to the unaudited financial statements.

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KORTH DIRECT MORTGAGE LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF BUSINESS

Korth Direct Mortgage LLC (the “Company”) is a limited liability company formed in the State of Florida. The Company is a wholly owned subsidiary of J. W. Korth & Company, L.P. (“J. W. Korth”), an SEC and FINRA registered broker dealer. The Company was created to sell Notes secured by mortgage loans.

The Company and J. W. Korth executed a support agreement that provides financial, managerial, and office support to the Company until it is fully operational and a going concern. Pursuant to this agreement, for any moneys owed by the Company to J. W Korth, J. W. Korth may not seek reimbursement from the Company until the Company shall maintain a liquid net worth of at least $1,000,000 for a minimum period of 90 days.

Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with US generally accepted accounting principles (“GAAP”) have been condensed or omitted. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying financial statements are solely for the Company. The financial statements of the parent company, J. W. Korth, have these accounts consolidated within them.

BASIS OF ACCOUNTING

The accompanying financial statements have been prepared on the accrual basis of accounting, in accordance with GAAP.

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

MORTGAGE VALUATION

Mortgages that are current are carried at the principal value owed by the borrower, as of the date of the financial statements, according to the amortization schedule for the loan. All mortgages owned as of the date of these financial statements are current. The net present value of the servicing revenue is recorded as mortgage servicing rights, at fair value on the Unaudited Statements of Financial Condition, and is recognized on the Unaudited Statement of Operations as an unrealized gain on mortgages owned.

MORTGAGE SECURED NOTES

The Company funds the mortgage loans that it makes by issuing Mortgage Secured Notes (“MSNs”), which are secured by those same mortgages. As of the date of these financial statements, the Company has funded loans totaling $27,740,250, and it issued MSNs secured by those loans, also in the amount of $27,740,250. The deals have been funded in multiple ways, including private placements, SEC registered deals, and 144A offerings.

REVENUE RECOGNITION

The Company has three primary sources of revenue: origination fees, servicing fees, and processing fees.

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 recognized as revenue at the time the loans are funded.

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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 Corresponding Mortgage Loan (“CM Loan”) interest received and the MSN interest payable. Servicing Fees are recognized as revenue as the related mortgage payments are received; similarly, loan servicing expenses are charged to operations as incurred.

Processing Fees

Processing fees are collected from the borrower at the time the commitment letter is signed and cover a variety of expenses during the underwriting process. If the Company cancels the transaction, then unused fees are refunded. If the transaction is unable to proceed for any reason not the fault of the Company, then the Company keeps the full processing fee. Revenues from processing fees are recognized at closing or at the time a transaction is canceled.

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 limited operating history and a small amount of loans outstanding, we have a limited basis to predict prepayment rates and default rates.

ESTIMATES

The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

DUE TO PARENT AND PAYABLES

Items due to parent are operating expenses due to the parent company, J. W. Korth, pursuant to the support agreement. On May 2, 2019 and as of March 31, 2019, J. W. Korth forgave its receivable $548,802 that was on the Company’s balance sheet as Due to Parent in order to assist KDM in strengthening its balance sheet and Members’ Equity.

INCOME TAXES

The Company is a limited liability company which is treated as a partnership for federal and state income tax. Accordingly, no provision for federal income taxes is required since the members report their proportionate share of company taxable income or loss on their respective income tax returns. Such income or losses are proportionately allocated to the members based upon their ownership interests.

In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 740 – Income Taxes, management has evaluated uncertain tax positions taken or expected to be taken in 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, 2019, the Company has no material uncertain tax positions to be accounted for in the financial statements.

NOTE 3 - RESTRICTED CASH

The Company maintains two segregated accounts in trust for borrowers and investors. The value of these accounts is carried under the asset “Restricted Cash.”

The “In Trust for 1” account holds the monthly tax and insurance payments collected from borrowers and distributes payments annually, on behalf of borrowers, to the appropriate tax authority and insurance companies. This account corresponds to the Escrow Payable liability. As of March 31, 2019, this account has a balance of $193,611.

The “In Trust for 2” account receives payments from borrowers, distributes payments to investors, and pays the servicing fee to the Company. This account corresponds to the Due to Investors liability. As of March 31, 2019, this account has a balance of $35,288 (commitment fees/accrued interest).

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NOTE 4 - COMMITMENTS

The Company relies partially on its parent, J. W. Korth, to provide office space, internet connectivity, phone service, and incidentals through the end of 2019.

NOTE 5 - INDEMNIFICATIONS

The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.

NOTE 6 - CUSTOMERS

As of March 31, 2019, the Company has nine customers. The Company defines customers as borrowers that have an active loan with the Company, or are in the midst of the underwriting process and have a commitment fee on deposit with the Company. Currently, 32% of loans, by unpaid balance, are geographically concentrated in the state of Ohio and 35% are concentrated in the state of New Jersey.

NOTE 7 – RELATED PARTY TRANSACTIONS

The Due to Parent account has been forgiven as of March 31, 2019 pursuant to the agreement dated May 1, 2019 by and between J. W. Korth (parent) and the Company. The Company was previously largely supported by its parent company, J. W. Korth. The Company owed J. W. Korth $548,802 on March 30, 2019. The cancelation of this liability resulted in a one-time gain, which is included on the Unaudited Statement of Operations for the three months ended March 31, 2019. The Company owed J.W. Korth $0 and $494,122 as of March 31, 2019 and December 31, 2018, respectively. The Support Agreement between the Company and J. W. Korth remains in place should it be necessary.

NOTE 8 – FAIR VALUE

GAAP 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.

Valuation Process

Cash and cash equivalents: 

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1 .

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Mortgages Owned and Mortgage Secured Notes Payable:

All of the loans on the balance sheet as of March 31, 2019 are carried at principal value, as are the corresponding Mortgage Secured Notes Payable. The Company has determined that the fair values were determined by the market at the time of sale and should be classified as Level II of the fair value hierarchy. The carrying amounts for these items approximate the fair value. For amortizing loans, the Company discounts those to remaining principal value.

Due to the fact that the Company issues notes secured directly by underlying loans, our assets and liabilities in this category have identical values and assets have offsetting balances.

Mortgage Servicing

The net present value of the servicing income is recognized at the time the mortgage is initiated as an unrealized gain. This value uses several inputs that are highly subjective including: discount rate, constant prepayment rate, the current interest rate environment, and default rate assumptions. Since the Company has limited operating history and a small amount of loans outstanding, we have a limited basis to predict prepayment rates and default rates, but have engaged a third party, MIAC Analytics, to assist us in our valuation of this asset. The amount is included on the Unaudited Statement of Financial Condition as “Mortgage Servicing Rights, at Fair Value.”

Fair Value Disclosure

The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis:

	March 31, 2019
	Total		Level I		Level II		Level III
Financial Assets
Mortgages Owned	$	27,708,513	$	-	$	27,708,513	$	-
Mortgage Servicing Rights		614,984		-		-		614,984
Total Financial Assets	$	28,323,497	$	-	$	27,708,513	$	614,984
Financial Liabilities
Mortgage Secured Notes Payable	$	27,708,513	$	-	$	27,708,513	$	-
	December 31, 2018
Financial Assets
Mortgages Owned	$	13,173,466	$	-	$	13,173,466	$	-
Mortgage Servicing Rights		215,459		-		-		215,459
Total Financial Assets	$	13,388,925	$	-	$	13,173,466	$	215,459
Financial Liabilities
Mortgage Secured Notes Payable	$	13,173,466	$	-	$	13,173,466	$	-

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Fair Value Measurements

Changes in Fair Value Measurements for the quarter ended March 31, 2019

The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the Statements of Financial Condition for the quarter ended March 31, 2019: 

Changes in assets:
Year ended March 31, 2019	Mortgage Servicing Value
Beginning balance at January 1, 2019	$	215,459
Purchases		-
Sales		-
Issues		-
Settlements		-
Net realized gain/loss		-
Unrealized Gain from newly issued mortgages		396,758
Fair Value adjustment		2,767
Transfers into Level 3		-
Transfers out of Level 3		-
Ending balance at March 31, 2019	$	614,984

The Company’s policy for recording transfers between levels of the fair value hierarchy is to recognize as of the financial statement date. For the quarter ended March 31, 2019, there were no transfers between levels.

The Company has established valuation processes and policies for its Level 3 investments to ensure that the methods used are fair and consistent in accordance with ASC 820 – Fair Value Measurements and Disclosures. The Company’s valuation committee performs reviews of the Level 3 investments’ valuations, which include reviewing any significant price changes reported from the prior period. When a Level 3 investment has a significant price change, the valuation committee reviews relevant market data to substantiate the price change.

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 March 31, 2019: 

Investment type	Fair Value		Valuation technique	Unobservable inputs	Values
Mortgage servicing	$	614,984	Net Present Value	Prepayment Discount		9.27	%
				Discount rate		15.00	%

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q; (ii) our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2019; and (iii) our management’s discussion and analysis of financial condition and results of operations included in our 2018 Form 10-K. This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed in “Forward-Looking Statements” herein and “Part I – Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018.

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Overview

Korth Direct Mortgage LLC (“KDM,” the “Company”, “we,” or “us”) was organized in Florida on July 24, 2009, under the name HCMK Consulting LLC.  We changed our name to J. W. Korth & Company LLC, in November 2010, and then to Korth Direct Mortgage LLC, on August 24, 2016. Our principal executive offices are located at 2937 SW 27^th Avenue Suite 307, Miami, Florida 33133, and our telephone number is (305) 668-8485. Our website address is www.korthdirect.com.

Korth Direct Mortgage LLC began its formal operations in October of 2016 when we engaged our Chief Lending Officer. KDM is a licensed Mortgage Lender Servicer with the State of Florida. Our NMLS License Number is 1579547. Our operating history is limited. We are partially supported by our parent company, J. W. Korth & Company, L.P. (“J.W. Korth & Company”), a FINRA and SEC registered broker-dealer founded in 1982. We believe we will become independent from our parent company by the end of 2019.  Over this period, we believe that we will achieve adequate revenue and cash-flow through making and servicing our mortgage loans to make us self-sufficient. During this period, we expect no research and development expenses and no expenses for plant and equipment, and that office space will continue to be shared with our parent company. We anticipate renting office space and adding staff as necessary as our lending and servicing grow; these expenses would be paid for by ordinary revenues.

The total support we have received from J. W. Korth & Company through March 31, 2019, is $752,302. In November 2018, $203,500 was repaid to J.W. Korth & Company, and subsequently, as of March 31, 2019, J.W. Korth & Company has forgiven the remaining receivable from KDM of $548,802. The Support Agreement remains in place.

Results of Operations for the Three Months ended March 31, 2019

The Company had net income of $921,760 for the three months ended March 31, 2019, largely attributed to a one-time gain from the cancelation of payable to J.W. Korth & Company of $548,802. The Company brought in $504,830 of revenue during the three-month period, 98% of which was attributable to origination revenue, and for the period we had servicing and processing revenue of $4,116 and $1,500, respectively. Servicing revenue was low because the majority of servicing rights were sold for 18 months beginning in January 2019. Costs were dominated by the mortgage broker and brokerage underwriting expense of $203,025 and $181,775, respectively, which together accounted for approximately 91% of direct costs. Current monthly servicing revenue from the two loans closed in the first quarter is $14,740. Gross profits grew to $84,123 a 175% increase over the same period in 2018, when gross profits amounted to $30,607. Operating expenses rose as well, but at a slower pace of 61% ($110,690 for the current period vs $68,758 for the same period in 2018.)

Higher expenses and costs were offset by the unrealized gain on mortgages owned, which was $399,525 at March 31, 2019, an increase of $184,066 over the prior quarter due to new lending, and a 207% increase over the same period last year, when the unrealized gain on mortgages was $130,043. A discussion of the assumptions underlying the valuation can be found in Note 8 of the Notes to our Unaudited Financial Statements.

Financial Condition for the Three Months Ended March 31, 2019

As of March 31, 2019, we had eight loans on our balance sheet for a total of $27,708,513 at fair value. The original loan amounts totaled $27,740,250; however, two loans are amortizing and are carried at their remaining principal balances. We have recognized an unrealized gain of $399,525, which is the change in net present value of the future servicing income we receive from the loans made to date. This value is highly subjective and includes such variables as constant prepayment rate (CPR), discount rate, and market pricing data; this value will be recalculated quarterly. The current value was provided by a third-party consulting firm and uses 15.0% for the discount rate and includes a 9.27% constant prepayment rate (“CPR”), along with other assumptions customary to the industry.

When J. W. Korth & Company forgave its receivable from the Company, it resulted in a large one-time gain as well as decline in the Due to Parent liability, resulting in a corresponding substantial increase to Member’s Equity of $548,802.

We have grown our origination team to 4 members and have a goal to close an additional $75M of loans this year. We do not expect to increase support staff by a material amount until we have sufficient pipeline and servicing to warrant additional outlay.

Although our liquidity needs are currently being met by operations, the Company may choose to raise capital in the coming months to support expansion and a reserve to guarantee interest payments on its MSNs. No explicit plans to do so exist as of the writing of this report.

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Status of KDM Loans

We have decided to start including our annual reviews of CM Loans as exhibits to our quarterly filings. Loans that are held by outside investors or securitized and reach the anniversary of their inception in the current quarter are included for review. Please see section 99 of the Exhibit list for the appropriate reports.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We have no instruments subject to market risk.

Item 4. Controls and Procedures.

We are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined by Securities Exchange Act Rule 13a-15(f). Our internal controls are designed to provide reasonable assurance as to the reliability of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting as of March 31, 2019, 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 March 31, 2019.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is not subject to any material legal proceeding. The Company is a defendant in a suit regarding a mortgage brokerage fee dispute. The Company is fully indemnified for the suit by the borrower in the transaction which is the subject of the suit. We do not believe that the proceeding is material under Item 103 of SEC Regulation S-K.

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, 2017, as amended. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

Exhibit
Number	Description
1.1	Underwriting Agreement
3.1	Operating Agreement of Korth Direct Mortgage LLC, a Florida limited liability company
3.2	Articles of Organization for HCMK Consulting LLC filed on July 24, 2009
3.3	Articles of Amendment to Articles of Organization Changing Name from HCMK Consulting LLC to J W Korth & Company LLC filed on November 18, 2010
3.4	Articles of Amendment to Articles of Organization Changing Name from J W Korth & Company LLC to Korth Direct Mortgage LLC, filed August 24, 2016
4.1	Trust Indenture and Security Agreement between Korth Direct Mortgage LLC, and Delaware Trust Company
4.2	Trust Indenture and Security Agreement (Rule 144A Offerings) between Korth Direct Mortgage LLC, and Delaware Trust Company
10.0	Support Agreement
25.	Statement of Eligibility of Trustee
31.1	Section 302 Certificate of Chief Executive Officer*
31.2	Section 302 Certificate of Chief Financial Officer *
32.1	Section 906 Certificate of Chief Executive Officer*
32.2	Section 906 Certificate of Chief Financial Officer*
99.1	Annual Loan Review – KDM2018-L001*
101.	Interactive Data File

*Filed herewith.

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 LLC
Dated:     May 13, 2019		By:	/s/ James W. Korth
		James W. Korth, Chief Executive Officer and Manager

13

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13a-14(a) OR 15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, James W. Korth, certify that:

1.           I have reviewed this Quarterly Report on Form 10-Q of Korth Direct Mortgage LLC (the “Registrant”);

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the unaudited condensed consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.           The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a.       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.       Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.       Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

d.       Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.           The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

a.       All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b.       Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated:     May 13, 2019	/s/ James W. Korth
	James W. Korth, Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULE 13a-14(a) OR 15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, Holly MacDonald-Korth, certify that:

1.           I have reviewed this Quarterly Report on Form 10-Q of Korth Direct Mortgage LLC (the “Registrant”);

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the unaudited condensed consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.           The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a.       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.       Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.       Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

d.       Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.           The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

a.       All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b.       Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated:     May 13, 2019	/s/ Holly MacDonald-Korth
	Holly MacDonald-Korth, Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, James W. Korth, the President and Chief Executive Officer of Korth Direct Mortgage LLC, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.       This Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

2.       The information contained in this Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:     May 13, 2019	/s/ James W. Korth
	James W. Korth, Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Holly MacDonald-Korth, the Chief Financial Officer of Korth Direct Mortgage LLC, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.       This Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

2.       The information contained in this Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:     May 13, 2019	/s/ Holly MacDonald-Korth
	Holly MacDonald-Korth, Chief Financial Officer

EX-99.1

Exhibit 99.1

 

Annual Loan/MSN Review

KDM Mortgage Secured Note: KDM 2018-N001

KDM Loan: KDM 2018-L001

Cusip: 50067AAE2

Date	3/13/2019			Yearly IO Payment	$120,250
Loan Amount	$1,850,000			Loan Term	5 Year IO
Interest Rate	5.25%			Maturity Date	4/25/2023
Original Appraisal	$2,775,000			Current Appraisal Estimate 03/08/19	$3,000,000
Original LTV	66.67%			Current LTV	61.67%
Property Address
345 NE 80 Street, Miami, FL 33138-4412
Income Statement			Analysis
Income	Year End 2017	Year End 2018		2017	2018
Rental Income	$240,670	$267,722	NOI	$206,611	$223,907
Vacancy Haircut 5.00%	-$12,033	-$13,386	Debt Service	-$120,250	-$120,250
Late Fee Income	$75	$3,372	Net Profit	$86,361	$103,657
Tax Income - Real Estate	$11,561	$8,310
Utilities & CAM Income	$13,909	$8,295	DSCR	1.72	1.86
			Debt Yield Ratio	11.17%	12.10%
Total Income	$254,181	$274,313	Expense Ratio	18.71%	18.38%
Expenses			Review
Management Fee 4.00%	$9,401	$10,709	The property is now 100% occupied with the addition of La Colombe Holdings signing a 3 year lease. Boxwood Means Inc. provided the yearly appraisal estimate and observed the property in good condition with no deferred maintenance and subsequently valued the property at $3,000,000. The Landlord has not reported any late or missed payments by the tenants. KDM affirms its A rating on the property based on the 100% occupancy and increased financial ratios due to the increased lease income.
Bank Service Charges	$830	$142
Dues & Subscriptions	$130	$0
Insurance Expense	$5,872	$9,855
Licenses & Permits	$0	$539
Professional Fees- Legal Fees	$488	$0
Repairs and Maintenance	$0	$983
Taxes - Property	$22,660	$21,801
Utilities	$6,185	$2,539
Waste Cleaning	$2,005	$3,838
Total Expense	$47,570	$50,406
NOI	$206,611	$223,907

Disclaimer: This report has been prepared for investors. It is based on information drawn from sources believed to be reliable; however, KDM cannot warrant the comprehensiveness, reliability, or accuracy of this report. The information contained herein is subject to change without notice. Any use of information contained herein is undertaken at the investor’s own risk, and KDM shall not be liable to any user, person, or entity, for any losses resulting from the use of any content herein. Nothing in this report should be construed as advice or recommendation.

XML

Document and Entity Information	3 Months Ended
	Mar. 31, 2019 shares
Document And Entity Information
Entity Registrant Name	Korth Direct Mortgage LLC
Entity Central Index Key	0001695963
Document Type	10-Q
Document Period End Date	Mar. 31, 2019
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity's Reporting Status Current	Yes
Entity Small Business	true
Entity Filer Category	Non-accelerated Filer
Entity Emerging Growth Company	true
Entity Ex Transition Period	false
Entity Common Stock, Shares Outstanding	1,000,000
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2019

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UNAUDITED STATEMENTS OF FINANCIAL CONDITION - USD ($)	Mar. 31, 2019	Dec. 31, 2018
ASSETS
Cash and Cash Equivalents	$ 48,937	$ 15,323
Restricted Cash	228,898	161,454
Mortgages Owned	27,708,513	13,173,466
Mortgage Servicing Rights, at Fair Value	614,984	215,459
Prepaid Expenses	10,584	10,584
TOTAL ASSETS	28,611,916	13,576,286
LIABILITIES
Due to Parent		494,122
Escrows Payable	193,611	125,045
Due to Investors	35,288	36,409
Accrued Expenses	20,500	15,000
Mortgage Secured Notes Payable	27,708,513	13,173,466
Total Liabilities	27,957,912	13,844,042
MEMBER'S EQUITY (DEFICIT)
Accumulated Equity (Deficit)	650,482	(271,278)
Capital	3,522	3,522
Total Member's Equity (Deficit)	654,004	(267,756)
TOTAL LIABILITIES AND MEMBER'S EQUITY (DEFICIT)	$ 28,611,916	$ 13,576,286

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UNAUDITED STATEMENTS OF OPERATIONS - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
REVENUES
Interest Income	$ 270
Total Revenues	504,830	32,850
COST OF REVENUES
Broker Underwriting Expense	181,775
Mortgage Broker Expense	203,025
Bank Fees	2,702	545
Appraisal Costs	1,195	(7,000)
Marketing	3,360	3,539
License and Registration	595	5,002
Ratings	26,000
Technology Fees	2,055	157
Total Cost of Revenues	420,707	2,243
GROSS PROFIT (LOSS)	84,123	30,607
OPERATING EXPENSES
Office Supplies	642	1,171
Accounting	5,500
Salaries	86,295	28,382
Payroll Taxes	4,372	4,203
Professional & Legal	4,791	34,050
SEC Filing Expense		748
Travel & Entertainment	7,919	204
Business Development	1,171
Total Expenses	110,690	68,758
Net Loss From Operations	(26,567)	(38,151)
Other Income
Unrealized Gain on Mortgages	399,525	130,043
Gain from Write-Off of Due to Parent	548,802
Total Other Income	948,327	130,043
NET INCOME	921,760	91,892
Origination Revenue [Member]
REVENUES
Total Revenues	493,825	26,825
Service [Member]
REVENUES
Total Revenues	4,116	6,025
Processing Revenue [Member]
REVENUES
Total Revenues	1,500
Late Fees [Member]
REVENUES
Total Revenues	$ 5,119

XML

UNAUDITED STATEMENTS OF CASH FLOWS - USD ($)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$ 921,760	$ 91,892
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Unrealized Gain on Motgages Owned	(399,525)	(130,043)
Changes in Operating Assets and Liabilities:
Restricted Cash	(67,444)	(44,287)
Mortgage Secured Notes Issued	14,535,047	2,188,729
Prepaid Expenses		748
Due to Parent	(494,122)	48,301
Escrow Payable	68,566	28,118
Due to Investors	(1,121)	16,168
Accrued Expenses	5,500
New Mortgage Lending	(14,535,047)	(2,188,729)
Total Adjustments	(888,146)	(80,995)
NET CASH PROVIDED BY OPERATING ACTIVITIES	33,614	10,897
NET INCREASE IN CASH AND CASH EQUIVALENTS	33,614	10,897
CASH AND CASH EQUIVALENTS - Beginning of Year	15,323	19,844
CASH AND CASH EQUIVALENTS - End of Year	$ 48,937	$ 30,741

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NATURE OF BUSINESS

3 Months Ended

Mar. 31, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

NATURE OF BUSINESS

NOTE 1 - NATURE OF BUSINESS

Korth Direct Mortgage LLC (the “Company”) is a limited liability company formed in the State of Florida. The Company is a wholly owned subsidiary of J. W. Korth & Company, L.P. (“J. W. Korth”), an SEC and FINRA registered broker dealer. The Company was created to sell Notes secured by mortgage loans.

The Company and J. W. Korth executed a support agreement that provides financial, managerial, and office support to the Company until it is fully operational and a going concern. Pursuant to this agreement, for any moneys owed by the Company to J. W Korth, J. W. Korth may not seek reimbursement from the Company until the Company shall maintain a liquid net worth of at least $1,000,000 for a minimum period of 90 days.

Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with US generally accepted accounting principles (“GAAP”) have been condensed or omitted. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2019

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying financial statements are solely for the Company. The financial statements of the parent company, J. W. Korth, have these accounts consolidated within them.

BASIS OF ACCOUNTING

The accompanying financial statements have been prepared on the accrual basis of accounting, in accordance with GAAP.

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

MORTGAGE VALUATION

Mortgages that are current are carried at the principal value owed by the borrower, as of the date of the financial statements, according to the amortization schedule for the loan. All mortgages owned as of the date of these financial statements are current. The net present value of the servicing revenue is recorded as mortgage servicing rights, at fair value on the Unaudited Statements of Financial Condition, and is recognized on the Unaudited Statement of Operations as an unrealized gain on mortgages owned.

MORTGAGE SECURED NOTES

The Company funds the mortgage loans that it makes by issuing Mortgage Secured Notes (“MSNs”), which are secured by those same mortgages. As of the date of these financial statements, the Company has funded loans totaling $27,740,250, and it issued MSNs secured by those loans, also in the amount of $27,740,250. The deals have been funded in multiple ways, including private placements, SEC registered deals, and 144A offerings.

REVENUE RECOGNITION

The Company has three primary sources of revenue: origination fees, servicing fees, and processing fees.

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 recognized as revenue at the time the loans 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 Corresponding Mortgage Loan (“CM Loan”) interest received and the MSN interest payable. Servicing Fees are recognized as revenue as the related mortgage payments are received; similarly, loan servicing expenses are charged to operations as incurred.

Processing Fees

Processing fees are collected from the borrower at the time the commitment letter is signed and cover a variety of expenses during the underwriting process. If the Company cancels the transaction, then unused fees are refunded. If the transaction is unable to proceed for any reason not the fault of the Company, then the Company keeps the full processing fee. Revenues from processing fees are recognized at closing or at the time a transaction is canceled.

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 limited operating history and a small amount of loans outstanding, we have a limited basis to predict prepayment rates and default rates.

ESTIMATES

The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

DUE TO PARENT AND PAYABLES

Items due to parent are operating expenses due to the parent company, J. W. Korth, pursuant to the support agreement. On May 2, 2019 and as of March 31, 2019, J. W. Korth forgave its receivable $548,802 that was on the Company's balance sheet as Due to Parent in order to assist KDM in strengthening its balance sheet and Members' Equity.

INCOME TAXES

The Company is a limited liability company which is treated as a partnership for federal and state income tax. Accordingly, no provision for federal income taxes is required since the members report their proportionate share of company taxable income or loss on their respective income tax returns. Such income or losses are proportionately allocated to the members based upon their ownership interests.

In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 740 – Income Taxes, management has evaluated uncertain tax positions taken or expected to be taken in 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, 2019, the Company has no material uncertain tax positions to be accounted for in the financial statements.

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RESTRICTED CASH

3 Months Ended

Mar. 31, 2019

Restricted Cash [Abstract]

RESTRICTED CASH

NOTE 3 - RESTRICTED CASH

The Company maintains two segregated accounts in trust for borrowers and investors. The value of these accounts is carried under the asset “Restricted Cash.”

The “In Trust for 1” account holds the monthly tax and insurance payments collected from borrowers and distributes payments annually, on behalf of borrowers, to the appropriate tax authority and insurance companies. This account corresponds to the Escrow Payable liability. As of March 31, 2019, this account has a balance of $193,611.

The “In Trust for 2” account receives payments from borrowers, distributes payments to investors, and pays the servicing fee to the Company. This account corresponds to the Due to Investors liability. As of March 31, 2019, this account has a balance of $35,288 (commitment fees/accrued interest).

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COMMITMENTS

3 Months Ended

Mar. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS

NOTE 4 - COMMITMENTS

The Company relies partially on its parent, J. W. Korth, to provide office space, internet connectivity, phone service, and incidentals through the end of 2019.

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INDEMNIFICATIONS

3 Months Ended

Mar. 31, 2019

Indemnifications

INDEMNIFICATIONS

NOTE 5 - INDEMNIFICATIONS

The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.

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CUSTOMERS

3 Months Ended

Mar. 31, 2019

Risks and Uncertainties [Abstract]

CUSTOMERS

NOTE 6 - CUSTOMERS

As of March 31, 2019, the Company has nine customers. The Company defines customers as borrowers that have an active loan with the Company, or are in the midst of the underwriting process and have a commitment fee on deposit with the Company. Currently, 32% of loans, by unpaid balance, are geographically concentrated in the state of Ohio and 35% are concentrated in the state of New Jersey.

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RELATED PARTY TRANSACTIONS

3 Months Ended

Mar. 31, 2019

Related Party Transactions [Abstract]

RELATED PARTY TRANSACTIONS

NOTE 7 – RELATED PARTY TRANSACTIONS

The Due to Parent account has been forgiven as of March 31, 2019 pursuant to the agreement dated May 1, 2019 by and between J. W. Korth (parent) and the Company. The Company was previously largely supported by its parent company, J. W. Korth. The Company owed J. W. Korth $548,802 on March 30, 2019. The cancelation of this liability resulted in a one-time gain, which is included on the Unaudited Statement of Operations for the three months ended March 31, 2019. The Company owed J.W. Korth $0 and $494,122 as of March 31, 2019 and December 31, 2018, respectively. The Support Agreement between the Company and J. W. Korth remains in place should it be necessary.

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FAIR VALUE

3 Months Ended

Mar. 31, 2019

Fair Value Disclosures [Abstract]

FAIR VALUE

NOTE 8 – FAIR VALUE

GAAP 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.

Valuation Process

Cash and cash equivalents: 

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1 .

Mortgages Owned and Mortgage Secured Notes Payable:

All of the loans on the balance sheet as of March 31, 2019 are carried at principal value, as are the corresponding Mortgage Secured Notes Payable. The Company has determined that the fair values were determined by the market at the time of sale and should be classified as Level II of the fair value hierarchy. The carrying amounts for these items approximate the fair value. For amortizing loans, the Company discounts those to remaining principal value.

Due to the fact that the Company issues notes secured directly by underlying loans, our assets and liabilities in this category have identical values and assets have offsetting balances.

Mortgage Servicing

The net present value of the servicing income is recognized at the time the mortgage is initiated as an unrealized gain. This value uses several inputs that are highly subjective including: discount rate, constant prepayment rate, the current interest rate environment, and default rate assumptions. Since the Company has limited operating history and a small amount of loans outstanding, we have a limited basis to predict prepayment rates and default rates, but have engaged a third party, MIAC Analytics, to assist us in our valuation of this asset. The amount is included on the Unaudited Statement of Financial Condition as “Mortgage Servicing Rights, at Fair Value.”

Fair Value Disclosure

The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis:

	March 31, 2019
	Total		Level I		Level II		Level III
Financial Assets
Mortgages Owned	$	27,708,513	$	-	$	27,708,513	$	-
Mortgage Servicing Rights		614,984		-		-		614,984
Total Financial Assets	$	28,323,497	$	-	$	27,708,513	$	614,984
Financial Liabilities
Mortgage Secured Notes Payable	$	27,708,513	$	-	$	27,708,513	$	-
	December 31, 2018
Financial Assets
Mortgages Owned	$	13,173,466	$	-	$	13,173,466	$	-
Mortgage Servicing Rights		215,459		-		-		215,459
Total Financial Assets	$	13,388,925	$	-	$	13,173,466	$	215,459
Financial Liabilities
Mortgage Secured Notes Payable	$	13,173,466	$	-	$	13,173,466	$	-

Fair Value Measurements

Changes in Fair Value Measurements for the quarter ended March 31, 2019

The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the Statements of Financial Condition for the quarter ended March 31, 2019: 

Changes in assets:
Year ended March 31, 2019	Mortgage Servicing Value
Beginning balance at January 1, 2019	$	215,459
Purchases		-
Sales		-
Issues		-
Settlements		-
Net realized gain/loss		-
Unrealized Gain from newly issued mortgages		396,758
Fair Value adjustment		2,767
Transfers into Level 3		-
Transfers out of Level 3		-
Ending balance at March 31, 2019	$	614,984

The Company’s policy for recording transfers between levels of the fair value hierarchy is to recognize as of the financial statement date. For the quarter ended March 31, 2019, there were no transfers between levels.

The Company has established valuation processes and policies for its Level 3 investments to ensure that the methods used are fair and consistent in accordance with ASC 820 – Fair Value Measurements and Disclosures. The Company’s valuation committee performs reviews of the Level 3 investments’ valuations, which include reviewing any significant price changes reported from the prior period. When a Level 3 investment has a significant price change, the valuation committee reviews relevant market data to substantiate the price change.

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 March 31, 2019: 

Investment type	Fair Value		Valuation technique	Unobservable inputs	Values
Mortgage servicing	$	614,984	Net Present Value	Prepayment Discount		9.27	%
				Discount rate		15.00	%

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2019

Accounting Policies [Abstract]

PRINCIPLES OF CONSOLIDATION

PRINCIPLES OF CONSOLIDATION

The accompanying financial statements are solely for the Company. The financial statements of the parent company, J. W. Korth, have these accounts consolidated within them.

BASIS OF ACCOUNTING

BASIS OF ACCOUNTING

The accompanying financial statements have been prepared on the accrual basis of accounting, in accordance with GAAP.

CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

MORTGAGE VALUATION

MORTGAGE VALUATION

Mortgages that are current are carried at the principal value owed by the borrower, as of the date of the financial statements, according to the amortization schedule for the loan. All mortgages owned as of the date of these financial statements are current. The net present value of the servicing revenue is recorded as mortgage servicing rights, at fair value on the Unaudited Statements of Financial Condition, and is recognized on the Unaudited Statement of Operations as an unrealized gain on mortgages owned.

MORTGAGE SECURED NOTES

MORTGAGE SECURED NOTES

The Company funds the mortgage loans that it makes by issuing Mortgage Secured Notes (“MSNs”), which are secured by those same mortgages. As of the date of these financial statements, the Company has funded loans totaling $27,740,250, and it issued MSNs secured by those loans, also in the amount of $27,740,250. The deals have been funded in multiple ways, including private placements, SEC registered deals, and 144A offerings.

REVENUE RECOGNITION

REVENUE RECOGNITION

The Company has three primary sources of revenue: origination fees, servicing fees, and processing fees.

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 recognized as revenue at the time the loans 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 Corresponding Mortgage Loan (“CM Loan”) interest received and the MSN interest payable. Servicing Fees are recognized as revenue as the related mortgage payments are received; similarly, loan servicing expenses are charged to operations as incurred.

Processing Fees

Processing fees are collected from the borrower at the time the commitment letter is signed and cover a variety of expenses during the underwriting process. If the Company cancels the transaction, then unused fees are refunded. If the transaction is unable to proceed for any reason not the fault of the Company, then the Company keeps the full processing fee. Revenues from processing fees are recognized at closing or at the time a transaction is canceled.

Unrealized Gain on Mortgages Owned

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 limited operating history and a small amount of loans outstanding, we have a limited basis to predict prepayment rates and default rates.

ESTIMATES

ESTIMATES

The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

DUE TO PARENT AND PAYABLES

DUE TO PARENT AND PAYABLES

Items due to parent are operating expenses due to the parent company, J. W. Korth, pursuant to the support agreement. On May 2, 2019 and as of March 31, 2019, J. W. Korth forgave its receivable $548,802 that was on the Company’s balance sheet as Due to Parent in order to assist KDM in strengthening its balance sheet and Members’ Equity.

INCOME TAXES

INCOME TAXES

The Company is a limited liability company which is treated as a partnership for federal and state income tax. Accordingly, no provision for federal income taxes is required since the members report their proportionate share of company taxable income or loss on their respective income tax returns. Such income or losses are proportionately allocated to the members based upon their ownership interests.

In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 740 – Income Taxes, management has evaluated uncertain tax positions taken or expected to be taken in 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, 2019, the Company has no material uncertain tax positions to be accounted for in the financial statements.

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FAIR VALUE (Tables)

3 Months Ended

Mar. 31, 2019

Fair Value Disclosures [Abstract]

Schedule of assets and liabilities measured at fair value

The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis:

	March 31, 2019
	Total		Level I		Level II		Level III
Financial Assets
Mortgages Owned	$	27,708,513	$	-	$	27,708,513	$	-
Mortgage Servicing Rights		614,984		-		-		614,984
Total Financial Assets	$	28,323,497	$	-	$	27,708,513	$	614,984
Financial Liabilities
Mortgage Secured Notes Payable	$	27,708,513	$	-	$	27,708,513	$	-
	December 31, 2018
Financial Assets
Mortgages Owned	$	13,173,466	$	-	$	13,173,466	$	-
Mortgage Servicing Rights		215,459		-		-		215,459
Total Financial Assets	$	13,388,925	$	-	$	13,173,466	$	215,459
Financial Liabilities
Mortgage Secured Notes Payable	$	13,173,466	$	-	$	13,173,466	$	-

Schedule of fair value measurements

The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the Statements of Financial Condition for the quarter ended March 31, 2019: 

Changes in assets:
Year ended March 31, 2019	Mortgage Servicing Value
Beginning balance at January 1, 2019	$	215,459
Purchases		-
Sales		-
Issues		-
Settlements		-
Net realized gain/loss		-
Unrealized Gain from newly issued mortgages		396,758
Fair Value adjustment		2,767
Transfers into Level 3		-
Transfers out of Level 3		-
Ending balance at March 31, 2019	$	614,984

Schedule of quantitative information

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 March 31, 2019:

Investment type	Fair Value		Valuation technique	Unobservable inputs	Values
Mortgage servicing	$	614,984	Net Present Value	Prepayment Discount		9.27	%
				Discount rate		15.00	%

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NATURE OF BUSINESS (Details Narrative)	3 Months Ended
	Mar. 31, 2019 USD ($)
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Liquid net worth	$ 1,000,000
Minimum period liquid net worth	90 days

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($)	Mar. 31, 2019	Dec. 31, 2018
Mortgage secured notes funded	$ 27,740,250
Mortgage second secured notes funded	27,740,250
Due to Parent		$ 494,122
J W Korth [Member]
Due to Parent	$ 548,802

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RESTRICTED CASH (Details Narrative) - USD ($)	Mar. 31, 2019	Dec. 31, 2018
Restricted Cash [Abstract]
Escrow Payable	$ 193,611	$ 125,045
Due to Investors	$ 35,288	$ 36,409

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CUSTOMERS (Details Narrative)	3 Months Ended
	Mar. 31, 2019 Customer
Number of customer	9
OHIO
Percentage of revenue	32.00%
NEW JERSEY
Percentage of revenue	35.00%

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RELATED PARTY TRANSACTIONS (Details Narrative) - USD ($)	Mar. 31, 2019	Dec. 31, 2018
Due to Parent		$ 494,122
J W Korth [Member]
Due to Parent	548,802
J W Korth [Member] | Private Placement [Member]
Due to Parent	$ 548,802

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FAIR VALUE (Details) - Fair Value, Measurements, Recurring [Member] - USD ($)	Mar. 31, 2019	Dec. 31, 2018
Financial Assets
Mortgages Owned	$ 27,708,513	$ 13,173,466
Mortgage Servicing	614,984	215,459
Total Financial Aseets	28,323,497	13,388,925
Financial Liabilities
Mortgage Secured Notes Payable	27,708,513	13,173,466
Fair Value, Inputs, Level 1 [Member]
Financial Assets
Mortgages Owned
Mortgage Servicing
Total Financial Aseets
Financial Liabilities
Mortgage Secured Notes Payable
Fair Value, Inputs, Level 2 [Member]
Financial Assets
Mortgages Owned	27,708,513	13,173,466
Mortgage Servicing
Total Financial Aseets	27,708,513	13,173,466
Financial Liabilities
Mortgage Secured Notes Payable	27,708,513	13,173,466
Fair Value, Inputs, Level 3 [Member]
Financial Assets
Mortgages Owned
Mortgage Servicing	614,984	215,459
Total Financial Aseets	614,984	215,459
Financial Liabilities
Mortgage Secured Notes Payable

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FAIR VALUE (Details 1)	3 Months Ended
	Mar. 31, 2019 USD ($)
Fair Value Disclosures [Abstract]
Beginning balance at January 1, 2019	$ 215,459
Purchases
Sales
Issues
Settlements
Net realized gain/loss
Unrealized Gain from newly issued mortgages	396,758
Fair Value adjustment	2,767
Transfers into Level 3
Transfers out of Level 3
Ending balance at December 31, 2018	$ 614,984

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FAIR VALUE (Details 2) - Fair Value, Measurements, Recurring [Member]	3 Months Ended
	Mar. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)
Fair Value	$ 614,984	$ 215,459
Valuation technique	Net Present Value
Unobservable input	Discount rate
Value	0.15
Prepayment Discount [Member]
Value	0.0927