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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____________________________________________________________________
(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. ☑
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). ☑
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.
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| ☐ | 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 ☐
| 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, 2021 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 Cash Flows | 6 | |
| Unaudited Consolidated Statement of Changes in Stockholders’ Equity | 7 | |
| Notes to Unaudited Consolidated Financial Statements | 8 | |
| Item 2. | Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Consolidated Operations | 19 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 20 |
| Item 4. | Controls and Procedures | 20 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 21 |
| Item 1A. | Risk Factors | 21 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 21 |
| Item 3. | Defaults Upon Senior Securities | 21 |
| Item 4. | Mine Safety Disclosures | 21 |
| Item 5. | Other Information | 21 |
| Item 6. | Exhibits | 22 |
| SIGNATURES | 23 | |
| 3 |
PART I—FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| June 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Restricted Cash | ||||||||
| Mortgages Owned | ||||||||
| Mortgage Servicing Rights, at Fair Value | ||||||||
| Portfolio Loans | ||||||||
| Securities | ||||||||
| ROU Leased Asset | ||||||||
| Goodwill | ||||||||
| Property & equipment, net of depreciation | ||||||||
| Deposits | ||||||||
| Prepaid Expenses | ||||||||
| Accounts Receivable | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| LIABILITIES | ||||||||
| Escrows Payable | $ | $ | ||||||
| Due to Investors | ||||||||
| Due to clearinghouse brokers | ||||||||
| Lease liability | ||||||||
| Preferred Dividend Payable | ||||||||
| Deferred Revenue, net | ||||||||
| Deferred Tax Liability | ||||||||
| Accrued Expenses | ||||||||
| Contingent liability, net | ||||||||
| PPP loan payable | - | |||||||
| Mortgage Secured Notes Payable | ||||||||
| Accounts Payable | ||||||||
| Total Liabilities | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Accumulated Earnings | ||||||||
| Additional Paid-in Capital | ||||||||
| Common Stock, $ par value, shares authorized | ||||||||
| shares issued and outstanding at June 30, 2021 and December 31, 2020 | ||||||||
| Series A Preferred Stock, $ par value, shares authorized, | ||||||||
| shares issued and outstanding at June 30, 2021 and December 31, 2020 | ||||||||
| Series B Preferred Stock, $ par value, shares authorized, and shares | ||||||||
| issued and outstanding at June 30, 2021, and December 31, 2020, respectiviely | ||||||||
| 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, 2021 | June 30, 2020 | |||||||
| REVENUES | ||||||||
| Origination Revenue, Net | $ | $ | ||||||
| Servicing Revenue | ||||||||
| Processing Revenue | ||||||||
| Underwriting Income | ||||||||
| Trading Profits | ||||||||
| Interest Income | ||||||||
| Commissions | ||||||||
| Late Fees | ||||||||
| Total Revenues | ||||||||
| COST OF REVENUES | ||||||||
| Broker Underwriting Expense | ||||||||
| Mortgage Broker Expense | ||||||||
| Co-Manager Engagement Fee | ||||||||
| Bank Transaction Fees | ||||||||
| Appraisal Costs | ||||||||
| Marketing | ||||||||
| License and Registration | ||||||||
| Insurance Review | - | |||||||
| Ratings | ||||||||
| Technology Fees | ||||||||
| Total Cost of Revenues | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES | ||||||||
| Office Supplies | ||||||||
| Accounting | ||||||||
| Salaries & Commissions | ||||||||
| Payroll Taxes | ||||||||
| Other Payroll Related Costs | ||||||||
| Professional & Legal | ||||||||
| Rent Expense | - | |||||||
| Utilities | - | |||||||
| Travel & Entertainment | ||||||||
| Tradeshow Expense | ||||||||
| Business Insurance | ||||||||
| Business Development | - | - | ||||||
| Depreciation | - | |||||||
| 401K Match | - | |||||||
| Stock Compensation | ||||||||
| Total Expenses | ||||||||
| Net Gain/(Loss) From Operations | ( | ) | ( | ) | ||||
| Other Income / (Expenses/Loss) | ||||||||
| Unrealized Gain on Mortgages | ||||||||
| Unrealized Gain/(Loss) on Mortgage Secured Notes | ( | ) | ||||||
| Interest Expense | ( | ) | - | |||||
| Gain from forgiveness of PPP Loan | - | |||||||
| Total Other Income | ||||||||
| Net income before provision for income taxes | ||||||||
| Provision for income taxes | ||||||||
| Net Income | ||||||||
| Series A Preferred Dividends | ||||||||
| Net income attributable to common stockholder | $ | $ | ( | ) | ||||
See accompanying notes to the unaudited consolidated financial statements.
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KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Six Months Ended | For the Six Months Ended | ||||||||
| June 30, 2021 | June 30, 2020 | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
| Net Income | $ | $ | |||||||
| Adjustments to Reconcile Net Income to | |||||||||
| Net Cash (Used In)/Provided by Operating Activities: | |||||||||
| Unrealized Gain on Mortgages Owned | ( | ) | ( | ) | |||||
| Unrealized Loss on Mortgage Security Notes | ( | ) | |||||||
| Gain from forgiveness of PPP loan | ( | ) | - | ||||||
| Stock compensation expense | |||||||||
| Depreciation | - | ||||||||
| Deferred rent expense from operating lease | - | ||||||||
| Deferred income taxes | |||||||||
| Changes in Operating Assets and Liabilities: | |||||||||
| Restricted Cash | ( | ) | ( | ) | |||||
| Mortgage Secured Notes Issued | |||||||||
| Mortgage Secured Notes Purchased | ( | ) | ( | ) | |||||
| Portfolio Loans | ( | ) | |||||||
| Accounts Receivable | ( | ) | |||||||
| Prepaid Expenses | ( | ) | ( | ) | |||||
| Deposits | ( | ) | - | ||||||
| Due to Parent | - | ( | ) | ||||||
| Deferred Revenue, net | |||||||||
| Escrow Payable | |||||||||
| Due to Investors | |||||||||
| Due to clearinghouse brokers | ( | ) | - | ||||||
| Interest payable | ( | ) | - | ||||||
| Accrued Expenses | ( | ) | |||||||
| Accounts Payable | |||||||||
| New Mortgage Lending | ( | ) | ( | ) | |||||
| Total Adjustments | ( | ) | |||||||
| NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES | ( | ) | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
| Purchase of property and equipment | ( | ) | - | ||||||
| Purchase of preferred interest in related party affiliate | - | ( | ) | ||||||
| NET CASH (USED IN) INVESTING ACTIVITIES | ( | ) | ( | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
| Payment of Series A preferred stock dividends | ( | ) | ( | ) | |||||
| Net proceeds from the sale of Series B preferred stock | - | ||||||||
| NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES | ( | ) | |||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | |||||||
| CASH AND CASH EQUIVALENTS – Beginning of Period | |||||||||
| CASH AND CASH EQUIVALENTS – End of Period | $ | $ | |||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION | |||||||||
| Cash paid during the quarter for interest | $ | $ | |||||||
See accompanying notes to the unaudited consolidated financial statements.
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KORTH DIRECT MORTGAGE INC.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
| Series A Preferred Stock | Series B Preferred Stock | Common Stock | Additional Paid | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | in Capital | Earnings | Totals | ||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Options issued to employees and directors | - | - | - | - | ||||||||||||||||||||||||||||||||
| Series A preferred stock dividends declared | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Sale of Series B preferred stock | - | - | - | |||||||||||||||||||||||||||||||||
| Reclass | - | - | - | ( | ) | - | - | |||||||||||||||||||||||||||||
| Net income | - | - | - | - | ||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
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”) is incorporated in the State of Florida. The Company was created to originate mortgages and fund those mortgages with notes secured by mortgage loans. On July 31, 2020, the Company acquired substantially all of the equity of J.W. Korth & Company Limited Partnership, a Michigan limited partnership (“J.W. Korth”), and its general partner, J.W. Korth, LLC, a Florida limited liability company. J.W. Korth is an SEC and FINRA registered securities broker dealer. The financials of J. W. Korth were integrated into the financials of the Company as of August 1, 2020.
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 2020 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 consolidated financial statements include the accounts of the Company and J.W. Korth, its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated upon consolidation.
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared on the accrual basis of accounting, in accordance with GAAP.
USE OF 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.
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 Statements of Financial Condition, and is recognized on the Statement of Operations as an unrealized gain on mortgages.
MORTGAGE SECURED NOTES
The Company funds the mortgage loans (”CM Loans”) that it makes by issuing Mortgage Secured Notes (“MSNs”) in series, each of which MSN series is secured by the mortgage or mortgages funded from proceeds of the MSN series. Our MSNs have been funded in multiple ways, including private placements, SEC registered offerings, and Rule 144A offerings. As of the date of these financial statements, the Company has funded CM Loans totaling $
PORTFOLIO LOANS
The Company recognizes loans made with its own capital, or those not securitized, under the caption “Portfolio Loans” on the balance sheet. As of June 30, 2021, the Company had issued Portfolio Loans in the amount of $. These loans were funded by the Company, as well as affiliates.
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GOODWILL
Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Section 350 requires an annual assessment of the recoverability of goodwill using a two-step process. The first step of the impairment test involves a comparison of the fair value of the reporting unit to its carrying value. If the carrying value is higher than the fair value or there is an indication that impairment may exist, a second step must be performed to compute the amount of the impairment. Management conducted its annual assessment of goodwill impairment and determined that there were no indicators of goodwill impairment and therefore did not record an impairment loss for the period ending June 30, 2021.
REVENUE RECOGNITION
The Company’s primary sources of revenue are origination fees, servicing fees, processing fees, underwriting income, trading profits, and interest income.
Origination Fees
Loan origination fees represent revenue earned from originating mortgage loans; net of any credits given to the borrower. Loan origination fees generally represent flat, per-loan fee amounts and are deferred and recognized as revenue over the life of the loan. The associated loan origination costs are also deferred and recognized as expense over the life of the loan. The deferred portion of the loan origination fees is netted against the deferred portion of the loan origination costs, which include mortgage broker expenses, and reported as a net deferred revenue liability on the Company’s Statement of Financial Condition.
Servicing Fees
Loan servicing fees represent revenue earned for servicing loans for various investors. Loan servicing fees are a percentage of the outstanding unpaid principal balance and represent the difference between the interest received from our CM Loans and the MSN interest payable. Servicing fees are recognized as revenue as the related mortgage payments are received; similarly, loan servicing expenses are charged to operations as incurred.
Processing Fees
Processing fees are collected from the borrower at the time the commitment letter is signed and cover a variety of expenses during the underwriting process. If the Company cancels the transaction, then unused fees are refunded. If the transaction is unable to proceed for any reason not the fault of the Company, then the Company keeps the full processing fee. Revenues from processing fees are recognized at closing or at the time a transaction is canceled.
Underwriting Income
Underwriting income represents revenue earned by J.W. Korth for underwriting and distribution of the Company’s securities. Revenues from underwriting income are recognized on the settlement date of the trades.
Trading Profits
Trading profits represent revenue generated through the trading of securities either for its own account or on behalf of J.W. Korth’s clients. Revenue from trading profits is recognized upon settlement of the securities transactions.
Interest Income
Interest Income is primarily derived from interest earned on Portfolio Loans and includes interest earned on cash and securities.
LEASES
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The standard requires organizations to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet and disclose key information about leases that were historically classified as operating leases under previous generally accepted accounting principles. Leases will be classified as financing or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company adopted the new lease standard on January 1, 2019, and has chosen to use that date as the effective date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new lease guidance provides a number of optional practical expedients in transition. The Company has elected the “package of practical expedient,” which permits it to not reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. As part of the adoption of this standard, the Company recognized 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 adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
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The Company estimates the fair values of share-based payments on the date of grant using a Black-Scholes option pricing model. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize forfeitures as they occur.
The Black-Scholes option pricing model requires assumptions for the expected volatility of the share price of our common stock, the expected dividend yield, and a risk-free interest rate over the expected term of the stock-based award. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
Unrealized Gain on Mortgages Owned
The net present value of the servicing income is recognized at the time the mortgage is initiated. This value uses several inputs that are highly subjective including: discount rate, prepayment rate, the current interest rate environment, and default rate assumptions. Since the Company has a short operating history and a small number of loans outstanding, we have a limited basis to predict prepayment rates and default rates.
DUE TO CLEARINGHOUSE BROKERS
J.W. Korth, a wholly owned subsidiary
of the Company, operates as an SEC and FINRA registered securities broker dealer. 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, 2021, the Company had a net amount due to clearinghouse
brokers of $
DEPRECIATION
Depreciation is provided on a straight-line basis using estimated useful lives of to years.
INCOME TAXES
On June 6, 2019, the Company converted from a Florida limited liability company into a Florida corporation. Effective with the conversion into a Florida corporation, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the 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 financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense
NOTE 3 – ACQUISITION OF RELATED PARTY AFFILIATE
On
The Company was founded by J.W. Korth with James W. Korth, its Chairman and Chief Executive Officer, and his daughter, Holly MacDonald-Korth, the Company’s President and Chief Financial Officer. Mr. Korth is the Managing Partner of J.W. Korth and Ms. MacDonald-Korth is J.W. Korth’s Managing Director and Chief Financial Officer. J.W. Korth is registered with the Securities and Exchange Commission as a broker-dealer and investment advisor, and with the Financial Industry Regulatory Authority (“FINRA”) as a broker-dealer. Together, prior to closing of the Acquisitions Mr. Korth and Ms. MacDonald-Korth together owned approximately 80% of J.W. Korth’s partnership interests and controlled the business and operations of J.W. Korth. J.W. Korth funded the organization and operation of the Company pursuant to a support agreement with the Company from inception until April 2019, at which time the Company became self-sustaining and J.W. Korth forgave a receivable owed to it by the Company. Until the closing of the Acquisitions, the Company was controlled by J.W. Korth, which owned all of its voting common stock.
| 10 |
The Company originates, funds and services loans which it makes to commercial borrowers. The loans are held by the Company as lender. The Company funds its loans 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. The Company and J.W. Korth determined that the Company could operate more efficiently if J.W. Korth became a wholly-owned subsidiary of the Company. J.W. Korth submitted its then-proposed sale to FINRA, as required by FINRA rules, and FINRA advised J.W. Korth that it could proceed with the closing.
Pursuant to the Purchase Agreement, as a condition of closing J.W. Korth agreed to distribute all of its shares of common stock in the Company to its partners ratably in accordance with their partnership interests in J.W. Korth pursuant to exemptions from registration available under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated under the Securities Act.
Prior to the closing, J. W. Korth LLC
owned
At closing, after the distribution
to its members of the Company shares distributed to J W Korth LLC,
As post-closing commitments the Company
agreed to
The following table summarizes the consideration paid, or to be paid, for the Acquisitions:
| Consideration | ||||
| Accrued & unpaid dividends to the Preferred Capital Interest partners | $ | |||
| JW Korth LLC’s Common Capital Interest account | ||||
| Contingent liability to redeem J.W. Korth Preferred Capital Interest Partners | ||||
| Disposition of outstanding loan due from J.W. Korth Executive Officer | ||||
| Total Consideration Paid | $ | |||
The following table summarizes the net book value of assets and liabilities acquired as of the closing date, July 31, 2020:
| Net Book Value | ||||
| J.W. Korth Net Book Value | $ | |||
| Less: Preferred Interest in J.W. Korth by Company prior to acquisition | ( | ) | ||
| Adjusted Net Book Value acquired | $ | |||
Since the acquisition was between
related parties, the transaction was recorded at net book value as of the closing date. The difference of $
| 11 |
NOTE 4 – CONTINGENT LIABILITY
As part of the acquisition of related
party affiliate discussed above in Note 3, 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, 2021:
| Contingent liability to redeem J.W. Korth Preferred Capital Interest Partners | ||||
| Accrued quarterly dividends recorded as interest expense through June 30, 2021 | ||||
| Contingent Liability, net | $ |
NOTE 5 - RESTRICTED CASH
The Company maintains multiple segregated accounts in trust for borrowers and investors. The value of these accounts is carried under the asset “Restricted Cash.”
The “In Trust for 1” account
holds the monthly tax and insurance payments collected from borrowers and distributes payments annually, on behalf of borrowers, to the
appropriate tax authority and insurance companies. This account corresponds to the Escrow Payable liability. As of June 30, 2021, this
account has a balance of $
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 June 30, 2021, this account has a balance of $
The Company also maintains multiple
lockbox accounts that collect rental payments directly from tenants on the borrowers’ behalf. These accounts typically net out funds
monthly. The lockbox account balances as of June 30, 2021 were $
NOTE 6 - COMMITMENTS
Prior to the acquisition of J.W. Korth in July 2020, the Company relied entirely on J.W. Korth to provide office space, internet connectivity, phone service, and incidentals. In November 2020, the Company signed a lease for new office space in Miami, Florida, for a term of sixty-two months with the right to extend the term of the lease for two additional, successive periods of two years upon the same terms and conditions as the initial term. In December 2020, the Company entered into a Sublease Agreement to sublet a portion of the office space described above. The subtenant has agreed to cover the proportionate amount of the lease costs associated with the office space based on essentially the same terms as the lease described above, including the rights to extend for two successive two-year periods.
On January 13, 2021, J.W. Korth negotiated a five-month early termination of its lease for its Miami office and will rely entirely on its parent for office space at the Coral Gables location. The J. W. Korth Michigan office has renegotiated a new lease which began in May 2021.
The net present value of future lease payments pursuant to the operating lease agreements are included in the ROU Leased Asset and the Lease Liability accounts on the Consolidated Statement of Financial Condition. The ROU Leased Asset represents the right to use an underlying asset for the remaining lease term. The Lease Liability represents the obligation to make lease payments pursuant to the terms of the lease agreements.
Rental expense for the quarter ended
June 30, 2021 was $
As of June 30, 2021, the net present
value of the future lease liabilities, using the weighted-average discount rate of
| 12 |
The following is a schedule of the maturities of future lease payments over the remaining life of the operating leases, reconciled to the net present value of as of June 30, 2021:
|
|
Future Lease Payments | |||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total Lease Payments | ||||
| Less: Imputed Interest | ( |
|||
| Present Value of Lease Liabilities | $ | |||
PPP Loan
In April 2020, J. W. Korth, at that
time the parent company of KDM, availed itself of a Paycheck Protection Program loan (“PPP Loan”) in the amount of $
NOTE 7 - INDEMNIFICATIONS
The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.
NOTE 8 - CUSTOMERS
As of June 30, 2021, the Company had
NOTE 9 – RELATED PARTY TRANSACTIONS
As of December 31, 2020, the intercompany transactions and balances between the Company and J.W. Korth have been eliminated upon consolidation as a result of the acquisition.
In March 2020, the Company purchased
an MSN in the amount of $
On April 1, 2020, the Company closed
a first lien and corresponding MSN,
On May 13, 2020, the Company executed
a preferred partner subscription agreement with J.W. Korth in the amount of $
As of June 30, 2021, the Company paid
underwriting fees of $
On February 12, 2021, the Company closed
a first lien and corresponding MSN,
| 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 Statement of Financial Condition.
The following is a summary of the loan originating fees and costs deferred and amortized for the three months ended June 30, 2021:
| Deferred Origination Fees | Deferred Origination Costs | Deferred Revenue, Net | ||||||||||
| Deferred Revenue at December 31, 2020 | $ | $ | ( | ) | $ | |||||||
| New loan deferrals | ( | ) | ||||||||||
| Amortization of deferrals | ( | ) | ( | ) | ||||||||
| Deferred Revenue at June 30, 2021 | $ | $ | ( | ) | $ | |||||||
On June 28, 2019, the Company’s Board of Directors adopted the 2019 Stock Option Plan (the “Incentive Plan”). The Incentive Plan provides for the grant of both incentive and non-statutory stock options to key employees, directors or other persons having a service relationship with the Company for the purchase of up to an aggregate of shares of the Company’s unissued, or reacquired, common stock, $ par value. The Plan will be administered by the Board of Directors or a committee appointed by the Board.
| 2020 | |||
| Risk-free interest rate: | |||
| Expected term: | |||
| Expected dividend yield: | |||
| Expected volatility: |
For the six months ended June 30, 2021, the Company recorded $ of stock-based compensation expense. As of June 30, 2021, there was $ in total unrecognized compensation expense related to non-vested employee stock options granted under the Incentive Plan, which is expected to be recognized over .
| 2019 Stock Option Plan: | Shares | Weighted Average Exercise Price | Weighted Remaining Contractual Life (Years) | |||||||
| Options outstanding at January 1, 2021 | $ | |||||||||
| Granted | ||||||||||
| Exercised | ||||||||||
| Expired or forfeited | ||||||||||
| Options outstanding at June 30, 2021 | $ | |||||||||
| Options exercisable at June 30, 2021 | $ | |||||||||
| Options expected to vest at June 30, 2021 | $ | |||||||||
| 14 |
NOTE 12 – PREFERRED EQUITY
On September 27, 2019, the Company
issued shares of its Series A 6% Cumulative Perpetual Convertible Preferred Stock for net proceeds of $
On June 29, 2021, the Company issued
The Series B preferred stock is non-convertible
and will pay cumulative dividends, if and when declared by the Company’s board of directors, at a rate of
The Company is required to use commercially reasonable efforts to maintain a nationally-recognized statistical ratings organization, or NRSRO, rating for so long as any shares of Series B preferred stock remain outstanding. If the Company fails to maintain an NRSRO rating for the Series B preferred stock of at least BBB (or the equivalent thereof), the dividend rate applicable to the Series B preferred stock will be increased by 25 basis points, and in the event the Company fails to maintain an NRSRO rating of at least BBB- (or the equivalent thereof), the dividend rate applicable to the Series B preferred stock will be increased by an additional 25 basis points.
The Series B preferred stock is redeemable
at the Company’s option,
| · | 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 will be 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 be 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:
| 15 |
Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Valuation Process
Cash and cash equivalents:
The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
Mortgages Owned and Mortgage Secured Notes Payable:
Mortgage loans for which the Company has the intention and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding principal balances, net of any unearned income, premiums or discounts. If a decline in fair value below the carrying balance is other-than-temporary, an unrealized impairment loss is recorded and the loan is recorded at the lower fair value at each reporting period. To date, the Company has not recorded any impairment losses related to the mortgage loans.
Due to the fact that the Company issues notes secured directly by underlying loans, our assets and liabilities in this category have identical values and assets have offsetting balances.
Mortgage Servicing:
The net present value of the servicing income is recognized at the time the mortgage is initiated as an unrealized gain. This value uses several inputs that are highly subjective including: discount rate, constant prepayment rate, the current interest rate environment, and default rate assumptions. Since the Company has limited operating history and a small amount of loans outstanding, we have a limited basis to predict prepayment rates and default rates, but have engaged a third party, MIAC Analytics, to assist us in our valuation of this asset. The amount is included on the Unaudited Statement of Financial Condition as “Mortgage Servicing Rights, at Fair Value.”
Mortgage Secured Notes Receivable:
From time to time the Company may buy-back mortgage secured notes previously issued to investors. These securities are available for sale, but may be held until maturity. These securities are recorded at fair value each quarter with the change in fair value recognized as an unrealized gain or loss each reporting period. The fair value estimate 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.
Securities
J. W. Korth holds $
KDM also holds a small amount of its own MSNs in an account which it may buy from time to time to provide liquidity to clients of J. W. Korth. These bonds are carried at the published statement values.
| 16 |
Fair Value Disclosure
The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis:
| June 30, 2021 | ||||||||||||||||
| Total | Level I | Level II | Level III | |||||||||||||
| Financial Assets | ||||||||||||||||
| Mortgages Owned | $ | $ | $ | $ | ||||||||||||
| Mortgage Servicing | ||||||||||||||||
| Securities | ||||||||||||||||
| Total Financial Assets | $ | $ | $ | $ | ||||||||||||
| Financial Liabilities | ||||||||||||||||
| Mortgage Secured Notes Payable | $ | $ | $ | $ | ||||||||||||
| December 31, 2020 | ||||||||||||||||
| Financial Assets | ||||||||||||||||
| Mortgages Owned | $ | $ | $ | $ | ||||||||||||
| Mortgage Servicing | ||||||||||||||||
| Securities | ||||||||||||||||
| Total Financial Assets | $ | $ | $ | $ | ||||||||||||
| Financial Liabilities | ||||||||||||||||
| Mortgage Secured Notes Payable | $ | $ | $ | $ | ||||||||||||
Fair Value Measurements
Changes in Fair Value Measurements for the six months ended June 30, 2021
The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the Statements of Financial Condition for the six months ended June 30, 2021:
| Changes in assets: | ||||||||||||
| Period ended June 30, 2021 | Mortgage Servicing Value | Securities | Total Value | |||||||||
| Beginning balance at January 1, 2021 | $ | $ | $ | |||||||||
| Purchases | - | - | - | |||||||||
| Trades | - | ( | ) | ( | ) | |||||||
| Sales | - | |||||||||||
| Issues | - | - | - | |||||||||
| Settlements | - | - | - | |||||||||
| Net realized gain/loss or Interest income | - | |||||||||||
| Unrealized Gain from newly issued mortgages | - | |||||||||||
| Fair Value adjustment | ( | ) | ( | ) | ||||||||
| Transfers into Level 3 | - | - | - | |||||||||
| Transfers out of Level 3 | - | - | - | |||||||||
| Ending balance at June 30, 2021 | $ | $ | $ | |||||||||
| 17 |
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 six months ended June 30, 2021, 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 June 30, 2021:
| Investment type | Fair Value | Valuation technique | Unobservable inputs | Values | ||||||||
| Mortgage servicing | $ | % | ||||||||||
| % | ||||||||||||
| Securities | $ | |||||||||||
NOTE 14 – INCOME TAXES
The provision for income taxes was
$
The provision for income taxes was
$
NOTE 15 – PROPERTY AND EQUIPMENT
Property and Equipment are summarized as follows:
| Equipment | $ | |||
| Furniture and fixtures | $ | |||
| $ | ||||
| Accumulated depreciation | $ | ( | ) | |
| Net Property Equipment | $ |
Depreciation expense for the period
ending June 30, 2021 was $
| 18 |
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, 2020, filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021; and (iii) our management’s discussion and analysis of financial condition and results of operations included in our 2020 Form 10-K. This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed in “Forward-Looking Statements” herein and “Part I – Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020.
Overview
Korth Direct Mortgage Inc. (“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 Korth Direct Mortgage, LLC, on August 24, 2016. On June 3, 2019, we converted from a limited liability company to a corporation, Korth Direct Mortgage Inc. Concurrently with our conversion into a corporation, James W. Korth was named Chief Executive Officer, Holly MacDonald-Korth was named President and Chief Financial Officer, and we appointed a board of directors.
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”).
KDM began its formal operations in October of 2016 when we engaged our Chief Lending Officer. We are a licensed in Florida as a Mortgage Lender Servicer. Our NMLS License Number is 1579547.
Prior to July 31, 2020, we were wholly owned by J.W. Korth, a FINRA and SEC registered broker-dealer founded in 1982. On July 31, 2020, we acquired substantially all of the equity of J.W. Korth.
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 directly in the capital markets through issuance of Mortgage Secured Notes (“MSNs” or “Notes”), which are sold through J.W. Korth as underwriter or placement agent through exemptions from registration available under Rule 144A, Regulation D, and other exemptions from registration.
Results of Operations for the six Months ended June 30, 2021
The Company generated revenues of $3,305,696 for the six months ended June 30, 2021, an increase of $2,549,115 compared with revenues of $756,581 for the six months ended June 30, 2020, a 337% increase. As of June 30, 2021, the Company owned mortgages of $254,310,056 compared with mortgages of $175,370,580 as of December 31, 2020 and $102,972,421 as of June 30, 2020, a 45% and 147% increase, respectively.
Gross profits increased by $2,100,283 to $2,560,470 during the six months ended June 30, 2021, compared with gross profits of $460,187 during the six months ended June 30, 2020. The increase in gross profits was primarily attributed to the increase in the amount of mortgages serviced during the six months ended June 30, 2021 with lower levels of mortgage related costs as a percentage of revenues, which generated higher gross margins.
Operating expenses were $2,654,484 during the six months ended June 30, 2021, which was an increase of $1,973,568 compared with operating expenses of $680,916 during the six months ended June 01, 2020. The increase in operating expenses was driven primarily by the increase of $1,184,402 in payroll related costs and $338,257 in professional and legal, $881,777 of the year over year increase in payroll expense was due to acquisition of J. W. Korth which was acquired July 31, 2020.
Other income increased by $2,977,738 to $3,235,248 during the six months ended June 30, 2021, compared with other income of $257,510 during the six months ended June 30, 2020. The increase in other income was due to the unrealized gain of $3,093,810 on mortgage servicing rights.
During the six months ended June 30, 2021, the Company recorded $1,425,121 in deferred income tax expense compared with $393,104 of deferred income tax expense from June 30, 2020.
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Net income increased $3,104,453 to $3,141,234 for the six months ended June 30, 2021, compared with net income of $36,781 during the six months ended June 30, 2020. The increase in 2021 was primarily attributed to the increase in other income of $2,977,738, and a decrease in net loss from operations of $126,715, compared with the six months ended June 30, 2020.
Financial Condition for the six Months Ended June 30, 2021
As of June 30, 2021, we had $19,889,664 in cash, forty-three loans totaling $256,366,322, consisting of $254,310,056 in mortgages and $2,056,266 in portfolio loans, and Mortgage Servicing Rights with a fair value of $6,958,266 on our balance sheet. We have had four loans partially or completely pay off in the amount of $8,722,136 for the six months ended June 30, 2021.
Liquidity and Capital Resources
The Company issued 19,000 shares of Series B Secured Preferred Stock for a net capital infusion of $18,302,481 on June 29, 2021. The Series B Preferred is secured by the Company’s servicing revenue. (See Note 12 to the Financial Statements for more detailed information.) We believe that this capital will provide us with sufficient liquidity for growth for near term.
The Company is also looking to secure lines of credit and lender financing in forms that will comply with covenants of our trust indentures, but allow us the flexibility to continue to grow our business.
Status of KDM Loans
We post the annual reviews of each of our mortgage loans (“CM Loans”) on the korthdirect.com website along with any pertinent updates. All CM Loans are currently performing. We have not seen any negative impact of COVID-19 so far on our borrowers’ ability to pay their mortgages.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We have no instruments subject to market risk.
Item 4. Controls and Procedures.
We are responsible for establishing and maintaining adequate internal control over financial reporting as such item is defined by Securities Exchange Act Rule 13a - 15(f). Our internal controls are designed to provide reasonable assurance as to the reliability of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting as of June 30, 2021, as required by Securities Exchange Act Rule 13a- 15(c). In making our assessment, we have utilized the criteria set forth by the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We concluded that based on our evaluation our internal control over financial reporting was effective as of June 30, 2021.
| 20 |
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not subject to any legal proceedings. The Company was a defendant in a suit regarding a mortgage brokerage fee dispute. The suit was dismissed with prejudice via summary judgement in favor of the Company on March 23, 2021.
The Company’s broker-dealer subsidiary and its principals are subject to an investigation of technical aspects of its financial advisory activities by the SEC regarding the reporting and treatment of certain trades and the disclosures made in the subsidiary’s financial advisory brochure. The inquiry involves rule interpretations by the subsidiary of the technical aspects of recording and reporting for purchases and sales of bonds and the relevance of certain disclosures in the brochure. The transactions in question do not involve KDM issued securities. The firm is fully cooperating with the SEC and believes at this time the outcome of the investigation is not expected to have a material adverse financial effect on KDM.
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, 2020. 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.
See Current Report on Form 8-K with respect to the Company’s issuance of Series B Preferred Stock on June 29, 2021..
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
| 21 |
Item 6. Exhibits.
*Filed herewith.
| 22 |
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 13, 2021 | By: | /s/ James W. Korth | |
| James W. Korth, Chief Executive Officer | |||
23
Exhibit 10.3
FIRST AMENDMENT TO PURCHASE AGREEMENT
This First Amendment to Purchase Agreement (the “Amendment”) is executed on August 16, 2021 is effective as of July 31, 2020, and amends that certain Purchase Agreement dated and effective as of July 31, 2020 (the “Purchase Agreement”), by and among KORTH DIRECT MORTGAGE INC., a Florida corporation (“KDM”); J.W. KORTH & COMPANY LIMITED PARTNERSHIP, a Michigan limited partnership (the “Partnership”); and JW KORTH LLC, a Florida limited liability company (“General Partner”) (each a “Party” and collectively the “Parties.”)
WHEREAS, Pursuant Section 7 of the Purchase Agreement the Parties wish to amend the Purchase Agreement to clarify the intent and substance of the transactions set forth in the Purchase Agreement and to conform the Purchase Agreement to the intention of the Parties at the time of which the Purchase Agreement was executed;
WHEREAS, KDM has issued and outstanding 5,000,000 shares of common stock, $0.0001 par value, (the “KDM Stock”) which is KDM’s sole voting class of stock, all of which KDM Stock the Partnership owned of record prior to the execution of the Purchase Agreement and was accordingly the controlling shareholder of KDM; and
WHEREAS, as of July 31, 2020, each of the Common Capital Partners of the Partnership (the “Partners”) exchanged its respective percentage Common Partnership interest for a pro rata percentage of the 5,000,000 shares of KDM Stock held by the Partnership, and KDM has recorded on its stock ledger that number of shares of KDM Stock held by each Common Partner as a consequence of, and in accordance with, the intention of the Purchase Agreement, as more particularly described and clarified in this Amendment; and
WHEREAS, it was the intention of the Parties that the exchange of each Partner’s partnership interest in the Partnership for an equivalent percentage number of the 5,000,000 shares of KDM be an exchange pursuant to Internal Revenue Code (IRC) Section 351.
WHEREAS, pursuant to the IRC Section 351 exchange, the Partnership became a wholly owned subsidiary of KDM; and
WHEREAS, the parties desire to (i) make no changes in the management, clearing and bank accounts, staffing, and registrations of the Partnership; and (ii) maintain the Partnership’s SEC registrations as a broker-dealer and investment advisor and FINRA registration a broker- dealer.
NOW, THEREFORE, in consideration of the representations, warranties and covenants herein contained, and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the Parties hereto, intending legally to be bound, agree as follows:
1. Amendment. The Purchase Agreement is amended and restated herein in its entirety.
2. Name of Agreement. The Agreement shall be renamed the Exchange Agreement.
3. Exchange of KDM Common Stock.
| 1 |
A. Limited Partners. As of July 31, 2020, KDM shall be deemed to have exchanged by distribution 732,480 of its 5,000,000 shares of the common stock of KDM (the “KDM Shares”) to the Limited Common Capital Partners pro rata in accordance with each Limited Common Capital Partner’s partnership interest as defined in the Partnership’s Limited Partnership Agreement dated February 20, 1990 (the “Limited Partnership Agreement”) and each such Limited Common Capital Partner has exchanged his, her or its Limited Common Capital Partner’s Partnership interest for KDM Shares by execution and delivery to KDM of an assignment of his, her or its percentage interest in the Partnership.
B. As of July 31, 2020, KDM shall be deemed to have exchanged by distribution 2,943,586 of its 5,000,000 shares of the common stock of KDM (the “KDM Shares”) to James W. Korth in exchange for his 80% interest in the General Partner, JW Korth LLC and James W. Korth has exchanged his 80% interest in the General Partner, JW Korth LLC by execution and delivery to KDM of an assignment of his 80% of the General Partner, JW Korth LLC.
C. As of July 31, 2020, KDM shall be deemed to have exchanged by distribution 735,897 of its 5,000,000 shares of the common stock of KDM (the “KDM Shares”) to Holly MacDonald Korth in exchange for her 20% interest in the General Partner, JW Korth LLC and Holly MacDonald Korth has exchanged her 20% interest in the General Partner, JW Korth LLC by execution and delivery to KDM of an assignment of her 20% of the General Partner, JW Korth LLC.
4. KDM Shares to Be Issued and Fully Paid and Non-Assessable. The KDM Shares exchanged pursuant to Paragraph 3 above have been duly issued and are fully paid and non-assessable.
5. Intent of the Parties and Substance of Exchange. The intent of the Parties and the substance of the exchange is that this exchange shall qualify for an exchange pursuant to IRC Section 351.
6. Restriction on transfer of KDM Shares. The KDM shares may not be sold, offered for sale, pledged or hypothecated in the absence of an effective registration statement under the Securities Act of 1933 or an opinion of counsel satisfactory to the corporation that such registration is not required.
7. Share Certificates. All certificates representing any of the shares of KDM are subject to the provisions of this Agreement shall have endorsed thereon the following legends:
These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the absence of an effective registration statement as to the securities under said Act or an opinion of counsel satisfactory to the corporation that such registration is not required.
8. Transfers in Violation of Agreement. KDM shall not be required: (i) to transfer on its books any of the shares of KDM which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement; or (ii) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred.
9. Additional Payment to James W. Korth. KDM shall pay to James Korth the sum of $150,000 as consideration in addition to the 3,079,287 KDM common shares.
10. Certain Actions to be taken by James Korth and Holly MacDonald-Korth at Closing. James Korth and Holly MacDonald-Korth shall assign their respective member interests in the General Partner to KDM.
11. Effective Date of Exchange. The effective date of the exchange contemplated by this Agreement shall be July 31, 2020 (the “Effective Date”).
12. Control. After completion of the aforementioned exchange of partnership interests for KDM Shares, the former partners of the Partnership shall be in control of KDM, as defined by IRC Section 368(c).
13. Additional Commitments of KDM. KDM agrees to take the following actions after Closing:
(a) Retain James Korth as the Partnership’s Managing Partner, retain Holly MacDonald-Korth as the Partnership’s Chief Financial Officer, and retain all other employees of the Partnership employed on the Effective Date.
(b) Operate the Partnership as a broker-dealer and investment advisor, and in accordance with the rules and regulations of, and registered with, the SEC and FINRA.
1. Additional Actions. If at any time after the Effective Date KDM shall consider or be advised that any assignments, assurances, subscription for shares or any other acts or things are necessary, desirable or proper to confirm, evidence or carry out the purposes of the Purchase Agreement
(1) KDM shall take such actions as may reasonably be necessary to
(a) vest, perfect or confirm, of record or otherwise, in KDM, its right, title or interest in, to any partnership interests of any of the Common Capital Partners.
(b) vest perfect or conform of record or otherwise in the name of each former Common Capital Partner his or her pro rata shares of the then issued and outstanding 5,000,000 shares of KDM.
(c) carry out the purposes of this Agreement, and to that end KDM and its officers and directors or their designees shall, to the fullest extent allowed under applicable law execute and deliver, in the name and on behalf of each Common Capital Partner, his or her respective pro rata number of KDM Shares of KDM and to vest, perfect or confirm his or her right, title or interest in such KDM Shares; and
(2) the Common Capital Partners shall execute and deliver to KDM such instruments as may be necessary to confirm and evidence the assignment of the Common Limited Partners’ Partnership percentage and interest to KDM.
2. Managers and Officers of the General Partner; Partnership Employees and Representatives. At all times after the exchange (i) James W. Korth shall remain the Managing Partner, and Holly MacDonald-Korth shall remain the Chief Financial Officer, of the General Partner of the Partnership, and (ii) all representatives of the Partnership as of the date of Closing shall remain employed by the Partnership, subject to such new hires or terminations as James W. Korth shall determine in his sole discretion.
3. Matters Concerning the SEC and FINRA; Certificate of Limited Partnership; and the Limited Partnership Agreement of the Partnership. At or prior to Closing, as it shall determine in its sole discretion the General Partner shall cause the Partnership to (i) notify the SEC and FINRA of the transactions which are the subject of this Agreement and make such other regulatory filings as may be necessary to cause the Partnership to continue as a duly licensed broker-dealer and investment advisor by all federal and state agencies as may be necessary to continue the Partnership’s registrations as a broker-dealer and investment advisor, (ii) make such state filings as may be necessary to continue the Partnership as a Michigan limited partnership and as otherwise may be appropriate to effect and carry out fully the purposes of this Agreement.
4. Counterparts. This agreement may be signed in counterparts, each of which shall be deemed an original.
5. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid or by overnight private delivery service and addressed to the other party hereto at its regular place of business or as such other party may designate.
6. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon KDM and its successors and assigns. This Agreement shall inure to the benefit of and, subject to the restrictions on transfer herein set forth, be binding upon each former Common Capital Partner of the Partnership and their successors and assigns.
7. Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof.
8. Governing Law. This Agreement shall be governed by and construed under the laws of the State of Florida and IRC Sections 351.
In Witness Whereof, the Parties have executed this Agreement on August 16, 2021, effective as of July 31, 2021.
| /s/ James W Korth | |
| James Wilder Korth, | |
| Managing Member of J. W. Korth LLC | |
| /s/ James W Korth | |
| James Wilder Korth, Managing Partner of | |
| J. W. Korth & Company Limited Partnership | |
| /s/ James W Korth | |
| James Wilder Korth, Executive Officer of | |
| Korth Direct Mortgage Inc. | |
| /s/ Holly MacDonald-Korth | |
| Holly MacDonald-Korth, | |
| President of Korth Direct Mortgage Inc. |
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 Inc. (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: August 13, 2021 | /s/ James W. Korth | |
| James W. Korth, Chief Executive Officer |
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 Inc. (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: August 13, 2021 | /s/ Holly MacDonald-Korth | |
| Holly MacDonald-Korth, President and Chief Financial Officer |
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 Chief Executive Officer of Korth Direct Mortgage Inc., 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 June 30, 2021 (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: August 13, 2021 | /s/ James W. Korth | |
| James W. Korth, Chief Executive Officer |
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 President and Chief Financial Officer of Korth Direct Mortgage Inc., 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 June 30, 2021 (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: August 13, 2021 | /s/ Holly MacDonald-Korth | |
| Holly MacDonald-Korth, President and Chief Financial Officer |
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Parenthetical) - $ / shares |
Jun. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Common Stock, Par or Stated Value Per Share | $ 0.001 | $ 0.001 |
| Common Stock, Shares Authorized | 60,000,000 | 60,000,000 |
| Common Stock, Shares, Issued | 5,000,000 | 5,000,000 |
| Common Stock, Shares, Outstanding | 5,000,000 | 5,000,000 |
| Series A Preferred Stock [Member] | ||
| Preferred Stock, Par or Stated Value Per Share | $ 0.001 | $ 0.001 |
| Preferred Stock, Shares Authorized | 40,000,000 | 40,000,000 |
| Preferred Stock, Shares Issued | 200,000 | 200,000 |
| Preferred Stock, Shares Outstanding | 200,000 | 200,000 |
| Series B Preferred Stock [Member] | ||
| Preferred Stock, Par or Stated Value Per Share | $ 0.001 | $ 0.001 |
| Preferred Stock, Shares Authorized | 20,000 | 20,000 |
| Preferred Stock, Shares Issued | 19,000 | 19,000 |
| Preferred Stock, Shares Outstanding | 0 | 0 |
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - 6 months ended Jun. 30, 2021 - USD ($) |
Series A Preferred Stock [Member] |
Series B Preferred Stock [Member] |
Common Stock [Member] |
Additional Paid-in Capital [Member] |
Retained Earnings [Member] |
Total |
|---|---|---|---|---|---|---|
| Beginning balance, value at Dec. 31, 2020 | $ 200 | $ 500 | $ 5,020,639 | $ 1,365,653 | $ 6,386,992 | |
| Balance at beginning (in shares) at Dec. 31, 2020 | 200,000 | (0) | 5,000,000 | |||
| Options issued to employees and directors | 12,906 | 12,906 | ||||
| Series A preferred stock dividends declared | (150,000) | (150,000) | ||||
| Sale of Series B preferred stock | $ 19 | 18,302,481 | 18,302,500 | |||
| Sale of Series B preferred stock (in shares) | 19,000 | |||||
| Reclass | 4,500 | (4,500) | ||||
| Net income | 2,333,473 | 2,333,473 | ||||
| Ending balance, value at Jun. 30, 2021 | $ 200 | $ 19 | $ 5,000 | $ 23,331,526 | $ 3,549,126 | $ 26,885,871 |
| Balance at ending (in shares) at Jun. 30, 2021 | 200,000 | 19,000 | 5,000,000 |
NATURE OF BUSINESS |
6 Months Ended |
|---|---|
Jun. 30, 2021 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| NATURE OF BUSINESS | NOTE 1 - NATURE OF BUSINESS
Korth Direct Mortgage Inc. (the “Company”) is incorporated in the State of Florida. The Company was created to originate mortgages and fund those mortgages with notes secured by mortgage loans. On July 31, 2020, the Company acquired substantially all of the equity of J.W. Korth & Company Limited Partnership, a Michigan limited partnership (“J.W. Korth”), and its general partner, J.W. Korth, LLC, a Florida limited liability company. J.W. Korth is an SEC and FINRA registered securities broker dealer. The financials of J. W. Korth were integrated into the financials of the Company as of August 1, 2020.
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 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
6 Months Ended |
|---|---|
Jun. 30, 2021 | |
| Accounting Policies [Abstract] | |
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and J.W. Korth, its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated upon consolidation.
BASIS OF ACCOUNTING The accompanying financial statements have been prepared on the accrual basis of accounting, in accordance with GAAP.
USE OF 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.
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 Statements of Financial Condition, and is recognized on the Statement of Operations as an unrealized gain on mortgages.
MORTGAGE SECURED NOTES The Company funds the mortgage loans (”CM Loans”) that it makes by issuing Mortgage Secured Notes (“MSNs”) in series, each of which MSN series is secured by the mortgage or mortgages funded from proceeds of the MSN series. Our MSNs have been funded in multiple ways, including private placements, SEC registered offerings, and Rule 144A offerings. As of the date of these financial statements, the Company has funded CM Loans totaling $254,310,056 and issued MSNs secured by those loans in the amount of There is one CM Loan that was part of a single MSN series issuance closed after the quarter end, resulting in an excess value of MSNs compared to Mortgages Owned of approximately The CM Loan was completed and funded on July 27, 2021.
PORTFOLIO LOANS The Company recognizes loans made with its own capital, or those not securitized, under the caption “Portfolio Loans” on the balance sheet. As of June 30, 2021, the Company had issued Portfolio Loans in the amount of $. These loans were funded by the Company, as well as affiliates.
GOODWILL Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Section 350 requires an annual assessment of the recoverability of goodwill using a two-step process. The first step of the impairment test involves a comparison of the fair value of the reporting unit to its carrying value. If the carrying value is higher than the fair value or there is an indication that impairment may exist, a second step must be performed to compute the amount of the impairment. Management conducted its annual assessment of goodwill impairment and determined that there were no indicators of goodwill impairment and therefore did not record an impairment loss for the period ending June 30, 2021.
REVENUE RECOGNITION The Company’s primary sources of revenue are origination fees, servicing fees, processing fees, underwriting income, trading profits, and interest income.
Origination Fees Loan origination fees represent revenue earned from originating mortgage loans; net of any credits given to the borrower. Loan origination fees generally represent flat, per-loan fee amounts and are deferred and recognized as revenue over the life of the loan. The associated loan origination costs are also deferred and recognized as expense over the life of the loan. The deferred portion of the loan origination fees is netted against the deferred portion of the loan origination costs, which include mortgage broker expenses, and reported as a net deferred revenue liability on the Company’s Statement of Financial Condition.
Servicing Fees Loan servicing fees represent revenue earned for servicing loans for various investors. Loan servicing fees are a percentage of the outstanding unpaid principal balance and represent the difference between the interest received from our CM Loans and the MSN interest payable. Servicing fees are recognized as revenue as the related mortgage payments are received; similarly, loan servicing expenses are charged to operations as incurred.
Processing Fees Processing fees are collected from the borrower at the time the commitment letter is signed and cover a variety of expenses during the underwriting process. If the Company cancels the transaction, then unused fees are refunded. If the transaction is unable to proceed for any reason not the fault of the Company, then the Company keeps the full processing fee. Revenues from processing fees are recognized at closing or at the time a transaction is canceled.
Underwriting Income Underwriting income represents revenue earned by J.W. Korth for underwriting and distribution of the Company’s securities. Revenues from underwriting income are recognized on the settlement date of the trades.
Trading Profits Trading profits represent revenue generated through the trading of securities either for its own account or on behalf of J.W. Korth’s clients. Revenue from trading profits is recognized upon settlement of the securities transactions.
Interest Income Interest Income is primarily derived from interest earned on Portfolio Loans and includes interest earned on cash and securities.
LEASES In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The standard requires organizations to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet and disclose key information about leases that were historically classified as operating leases under previous generally accepted accounting principles. Leases will be classified as financing or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company adopted the new lease standard on January 1, 2019, and has chosen to use that date as the effective date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new lease guidance provides a number of optional practical expedients in transition. The Company has elected the “package of practical expedient,” which permits it to not reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. As part of the adoption of this standard, the Company recognized 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 adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
The Company estimates the fair values of share-based payments on the date of grant using a Black-Scholes option pricing model. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize forfeitures as they occur.
The Black-Scholes option pricing model requires assumptions for the expected volatility of the share price of our common stock, the expected dividend yield, and a risk-free interest rate over the expected term of the stock-based award. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
Unrealized Gain on Mortgages Owned The net present value of the servicing income is recognized at the time the mortgage is initiated. This value uses several inputs that are highly subjective including: discount rate, prepayment rate, the current interest rate environment, and default rate assumptions. Since the Company has a short operating history and a small number of loans outstanding, we have a limited basis to predict prepayment rates and default rates.
DUE TO CLEARINGHOUSE BROKERS J.W. Korth, a wholly owned subsidiary of the Company, operates as an SEC and FINRA registered securities broker dealer. 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, 2021, the Company had a net amount due to clearinghouse brokers of $1,681.
DEPRECIATION Depreciation is provided on a straight-line basis using estimated useful lives of to years.
INCOME TAXES On June 6, 2019, the Company converted from a Florida limited liability company into a Florida corporation. Effective with the conversion into a Florida corporation, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the 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 financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense
|
ACQUISITION OF RELATED PARTY AFFILIATE |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition Of Related Party Affiliate | |||||||||||||||||||||||||||||||||||||||||||||||||||
| ACQUISITION OF RELATED PARTY AFFILIATE | NOTE 3 – ACQUISITION OF RELATED PARTY AFFILIATE
On July 31, 2020, the Company acquired substantially all of the equity of J.W. Korth, a Michigan limited partnership, and its general partner, J.W. Korth, LLC, a Florida limited liability company. The Company’s acquisitions of J.W. Korth and J.W. Korth, LLC are together referred to as the “Acquisitions.”
The Company was founded by J.W. Korth with James W. Korth, its Chairman and Chief Executive Officer, and his daughter, Holly MacDonald-Korth, the Company’s President and Chief Financial Officer. Mr. Korth is the Managing Partner of J.W. Korth and Ms. MacDonald-Korth is J.W. Korth’s Managing Director and Chief Financial Officer. J.W. Korth is registered with the Securities and Exchange Commission as a broker-dealer and investment advisor, and with the Financial Industry Regulatory Authority (“FINRA”) as a broker-dealer. Together, prior to closing of the Acquisitions Mr. Korth and Ms. MacDonald-Korth together owned approximately 80% of J.W. Korth’s partnership interests and controlled the business and operations of J.W. Korth. J.W. Korth funded the organization and operation of the Company pursuant to a support agreement with the Company from inception until April 2019, at which time the Company became self-sustaining and J.W. Korth forgave a receivable owed to it by the Company. Until the closing of the Acquisitions, the Company was controlled by J.W. Korth, which owned all of its voting common stock.
The Company originates, funds and services loans which it makes to commercial borrowers. The loans are held by the Company as lender. The Company funds its loans 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. The Company and J.W. Korth determined that the Company could operate more efficiently if J.W. Korth became a wholly-owned subsidiary of the Company. J.W. Korth submitted its then-proposed sale to FINRA, as required by FINRA rules, and FINRA advised J.W. Korth that it could proceed with the closing.
Pursuant to the Purchase Agreement, as a condition of closing J.W. Korth agreed to distribute all of its shares of common stock in the Company to its partners ratably in accordance with their partnership interests in J.W. Korth pursuant to exemptions from registration available under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated under the Securities Act.
Prior to the closing, J. W. Korth LLC owned 73.6% of the Common Capital interest of J.W. Korth and at closing received shares of the Company. Simultaneously J W Korth LLC distributed the Company shares it received from J.W. Korth to its members James Korth and Holly MacDonald-Korth according to their membership interests which were 80% and 20% respectively.
At closing, after the distribution to its members of the Company shares distributed to J W Korth LLC, the Company acquired all of the membership interests in JW Korth LLC from Mr. Korth and Ms. MacDonald-Korth for consideration of the payment to (i) the Preferred Capital Interest partners of J.W. Korth of accrued and unpaid 6% dividends through July 31, 2020, and (ii) James Korth of $150,000 in payment of the value of his JW Korth LLC’s Common Capital Interest account.
As post-closing commitments the Company agreed to (i) retain Mr. Korth as the managing partner of J.W. Korth, Ms. MacDonald-Korth as J.W. Korth’s chief financial officer, and all other employees of JW Korth who were employed at closing of the Transactions; (ii) operate J.W. Korth as an SEC registered broker-dealer and investment advisor; (iii) pay the JW Korth Preferred Capital Interest Partners quarterly dividends concurrently with its payment of the Company’s Series A Preferred Stock dividends at least annually; (iv) in such years as it pays Series A Preferred dividends, redeem 25% annually of the JW Korth Preferred Capital Interest partners through a capital contribution to JW Korth; and (v) make a discretionary redemption of all accounts of the limited partners of J.W. Korth under the J.W. Korth partnership agreement. Upon redemption of the limited partners’ accounts and the payment of the other consideration to described above to the JW Korth partners, KDM will own 100% of the voting interests in JW Korth.
The following table summarizes the consideration paid, or to be paid, for the Acquisitions:
The following table summarizes the net book value of assets and liabilities acquired as of the closing date, July 31, 2020:
Since the acquisition was between related parties, the transaction was recorded at net book value as of the closing date. The difference of $490,345 between the consideration paid and the net book value of the assets and liabilities acquired was recorded as an offset to equity, specifically to Additional Paid-in Capital. Disclosure of supplemental pro forma information for revenue and earnings related to the acquisition, assuming the acquisition was made at the beginning of the earliest period presented, has not been disclosed since the effects of the acquisition would not have been material to the results of operation for the periods presented. |
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CONTINGENT LIABILITY |
6 Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2021 | ||||||||||||||||
| Business Combination and Asset Acquisition [Abstract] | ||||||||||||||||
| CONTINGENT LIABILITY | NOTE 4 – CONTINGENT LIABILITY
As part of the acquisition of related party affiliate discussed above in Note 3, the Company agreed to pay (i) the Preferred Capital Interest partners of J.W. Korth accrued and unpaid dividends of 6% per annum through July 31, 2020; (ii) the JW Korth Preferred Capital Interest Partners quarterly dividends concurrently with its payment of the Company’s Series A Preferred Stock dividends at least annually; and (iii) in such years as it pays Series A Preferred dividends, redeem 25% annually of the JW Korth Preferred Capital Interest partners through a capital contribution to JW Korth.
The following table summarizes the unpaid Contingent Liability outstanding as of June 30, 2021:
|
RESTRICTED CASH |
6 Months Ended |
|---|---|
Jun. 30, 2021 | |
| Disclosure Restricted Cash Abstract | |
| RESTRICTED CASH | NOTE 5 - RESTRICTED CASH
The Company maintains multiple segregated accounts in trust for borrowers and investors. The value of these accounts is carried under the asset “Restricted Cash.”
The “In Trust for 1” account holds the monthly tax and insurance payments collected from borrowers and distributes payments annually, on behalf of borrowers, to the appropriate tax authority and insurance companies. This account corresponds to the Escrow Payable liability. As of June 30, 2021, this account has a balance of $9,642,629.
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 June 30, 2021, this account has a balance of $8,992,316, which consists of borrower early payments and commitments and also a balance of $9,405,000 pending closing of one loan. This account corresponds to the Due to Investors liability.
The Company also maintains multiple lockbox accounts that collect rental payments directly from tenants on the borrowers’ behalf. These accounts typically net out funds monthly. The lockbox account balances as of June 30, 2021 were $116,101. There is an additional account that consists of reserves for one borrower in the amount of $2,029,492. |
COMMITMENTS |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||
| COMMITMENTS | NOTE 6 - COMMITMENTS
Prior to the acquisition of J.W. Korth in July 2020, the Company relied entirely on J.W. Korth to provide office space, internet connectivity, phone service, and incidentals. In November 2020, the Company signed a lease for new office space in Miami, Florida, for a term of sixty-two months with the right to extend the term of the lease for two additional, successive periods of two years upon the same terms and conditions as the initial term. In December 2020, the Company entered into a Sublease Agreement to sublet a portion of the office space described above. The subtenant has agreed to cover the proportionate amount of the lease costs associated with the office space based on essentially the same terms as the lease described above, including the rights to extend for two successive two-year periods.
On January 13, 2021, J.W. Korth negotiated a five-month early termination of its lease for its Miami office and will rely entirely on its parent for office space at the Coral Gables location. The J. W. Korth Michigan office has renegotiated a new lease which began in May 2021.
The net present value of future lease payments pursuant to the operating lease agreements are included in the ROU Leased Asset and the Lease Liability accounts on the Consolidated Statement of Financial Condition. The ROU Leased Asset represents the right to use an underlying asset for the remaining lease term. The Lease Liability represents the obligation to make lease payments pursuant to the terms of the lease agreements.
Rental expense for the quarter ended June 30, 2021 was $148,977, which includes additional expenses for common area, direct operating expense, utilities, parking, and taxes.
As of June 30, 2021, the net present value of the future lease liabilities, using the weighted-average discount rate of 4.24%, which is commensurate with the Company’s secured borrowing rate, over the weighted-average remaining life of was $1,081,288.
The following is a schedule of the maturities of future lease payments over the remaining life of the operating leases, reconciled to the net present value of as of June 30, 2021:
PPP Loan
In April 2020, J. W. Korth, at that time the parent company of KDM, availed itself of a Paycheck Protection Program loan (“PPP Loan”) in the amount of $161,600, which was forgiven in April 2021. |
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INDEMNIFICATIONS |
6 Months Ended |
|---|---|
Jun. 30, 2021 | |
| Indemnifications | |
| INDEMNIFICATIONS | NOTE 7 - INDEMNIFICATIONS
The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications. |
CUSTOMERS |
6 Months Ended |
|---|---|
Jun. 30, 2021 | |
| Risks and Uncertainties [Abstract] | |
| CUSTOMERS | NOTE 8 - CUSTOMERS
As of June 30, 2021, the Company had forty-six 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. We do not have any over concentration with a single borrower or location other than three large loans in the states of Ohio, Virginia, and California for a total of approximately 109,000,000. |
RELATED PARTY TRANSACTIONS |
6 Months Ended |
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| Related Party Transactions [Abstract] | |
| RELATED PARTY TRANSACTIONS | NOTE 9 – RELATED PARTY TRANSACTIONS
As of December 31, 2020, the intercompany transactions and balances between the Company and J.W. Korth have been eliminated upon consolidation as a result of the acquisition.
In March 2020, the Company purchased an MSN in the amount of $100,000 included on the statement of financial condition as Securities.
On April 1, 2020, the Company closed a first lien and corresponding MSN, along with a second lien loan of $500,000 on the same property. The funding for the second lien was provided by 110 Capital LLC, an entity controlled by a KDM director and employee. KDM services both notes.
On May 13, 2020, the Company executed a preferred partner subscription agreement with J.W. Korth in the amount of $250,000, which was eliminated upon consolidation as a result of the acquisition of J.W. Korth in July 2020 (see Note 4 above).
As of June 30, 2021, the Company paid underwriting fees of $152,267 to J.W. Korth in 2021.
On February 12, 2021, the Company closed a first lien and corresponding MSN, along with a second lien loan of $200,000 on the same property. The funding for the second lien was provided by 110 Capital LLC, an entity controlled by a KDM director and employee. KDM services both notes. |
DEFERRED REVENUE, NET |
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| Revenue from Contract with Customer [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DEFERRED REVENUE, NET | 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 Statement of Financial Condition.
The following is a summary of the loan originating fees and costs deferred and amortized for the three months ended June 30, 2021:
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EMPLOYEE AND DIRECTOR STOCK OPTIONS |
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| Share-based Payment Arrangement [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EMPLOYEE AND DIRECTOR STOCK OPTIONS |
On June 28, 2019, the Company’s Board of Directors adopted the 2019 Stock Option Plan (the “Incentive Plan”). The Incentive Plan provides for the grant of both incentive and non-statutory stock options to key employees, directors or other persons having a service relationship with the Company for the purchase of up to an aggregate of shares of the Company’s unissued, or reacquired, common stock, $ par value. The Plan will be administered by the Board of Directors or a committee appointed by the Board.
For the six months ended June 30, 2021, the Company recorded $ of stock-based compensation expense. As of June 30, 2021, there was $ in total unrecognized compensation expense related to non-vested employee stock options granted under the Incentive Plan, which is expected to be recognized over .
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PREFERRED EQUITY |
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| Equity [Abstract] | ||||||||||||||||
| PREFERRED EQUITY | NOTE 12 – PREFERRED EQUITY
On September 27, 2019, the Company issued shares of its Series A 6% Cumulative Perpetual Convertible Preferred Stock for net proceeds of $4,750,000. The Company paid $250,000 in expenses related to the preferred stock issuance to J. W. Korth as underwriter and distributor. Each share was sold for $25, and is convertible into common stock at a ratio of 5 shares of common stock for each share of Series A Preferred Stock.
On June 29, 2021, the Company issued 19,000 shares of its Series B 6.50% Cumulative Non-Voting Redeemable Secured Preferred Stock, with a liquidation preference of $1,000 per share, for net proceeds of $18,302,500. The Company paid $697,500 in expenses related to the preferred stock issuance to its financial advisor and placement agent.
The Series B preferred stock is non-convertible and will pay cumulative dividends, if and when declared by the Company’s board of directors, at a rate of 6.50% per annum. Dividends declared will be payable quarterly in arrears on the 15th day of January, April, July and October of each year. The Series B preferred stock ranks senior to KDM’s outstanding Series A 6% Cumulative Perpetual Convertible Preferred Stock, par value $ per share, or Series A preferred stock, and all of KDM’s common stock, and will rank pari passu with, or senior to, all future issuances of preferred stock of KDM.
The Company is required to use commercially reasonable efforts to maintain a nationally-recognized statistical ratings organization, or NRSRO, rating for so long as any shares of Series B preferred stock remain outstanding. If the Company fails to maintain an NRSRO rating for the Series B preferred stock of at least BBB (or the equivalent thereof), the dividend rate applicable to the Series B preferred stock will be increased by 25 basis points, and in the event the Company fails to maintain an NRSRO rating of at least BBB- (or the equivalent thereof), the dividend rate applicable to the Series B preferred stock will be increased by an additional 25 basis points.
The Series B preferred stock is redeemable at the Company’s option, in whole or in part, on or after June 29, 2026, at a redemption price per share equal to $ 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:
The Company’s obligations to redeem the Series B preferred stock will be 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 be subject to a thirty (30)-day grace period. |
FAIR VALUE |
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| Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| FAIR VALUE | 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.
Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Valuation Process
Cash and cash equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
Mortgages Owned and Mortgage Secured Notes Payable: Mortgage loans for which the Company has the intention and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding principal balances, net of any unearned income, premiums or discounts. If a decline in fair value below the carrying balance is other-than-temporary, an unrealized impairment loss is recorded and the loan is recorded at the lower fair value at each reporting period. To date, the Company has not recorded any impairment losses related to the mortgage loans.
Due to the fact that the Company issues notes secured directly by underlying loans, our assets and liabilities in this category have identical values and assets have offsetting balances.
Mortgage Servicing: The net present value of the servicing income is recognized at the time the mortgage is initiated as an unrealized gain. This value uses several inputs that are highly subjective including: discount rate, constant prepayment rate, the current interest rate environment, and default rate assumptions. Since the Company has limited operating history and a small amount of loans outstanding, we have a limited basis to predict prepayment rates and default rates, but have engaged a third party, MIAC Analytics, to assist us in our valuation of this asset. The amount is included on the Unaudited Statement of Financial Condition as “Mortgage Servicing Rights, at Fair Value.”
Mortgage Secured Notes Receivable: From time to time the Company may buy-back mortgage secured notes previously issued to investors. These securities are available for sale, but may be held until maturity. These securities are recorded at fair value each quarter with the change in fair value recognized as an unrealized gain or loss each reporting period. The fair value estimate 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.
Securities
J. W. Korth holds $225,000 of defaulted Banco Cruzeiro del Sur bonds which it reasonably believes it will receive par value for from the receiver handling the liquidation in Brazil. Local counsel has informed us that the bank has sufficient cash to pay off our bonds. We therefore carry them at par value.
KDM also holds a small amount of its own MSNs in an account which it may buy from time to time to provide liquidity to clients of J. W. Korth. These bonds are carried at the published statement values.
Fair Value Disclosure
The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis:
Fair Value Measurements
Changes in Fair Value Measurements for the six months ended June 30, 2021
The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the Statements of Financial Condition for the six months ended June 30, 2021:
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 six months ended June 30, 2021, 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 June 30, 2021:
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INCOME TAXES |
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Jun. 30, 2021 | |
| Income Tax Disclosure [Abstract] | |
| INCOME TAXES | NOTE 14 – INCOME TAXES
The provision for income taxes was $807,762 for the six months ended June 30, 2021. The effective tax rate was 25.7% of the income before income taxes of $3,141,235, which differs from the federal statutory rate of 21% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.
The provision for income taxes was $12,868 for the six months ended June 30, 2020. The effective tax rate was 35.0% of the income before income taxes of $36,781, which differs from the federal statutory rate of 21% due to state income taxes and certain of the Company’s expenses that are not deductible for tax purposes. |
PROPERTY AND EQUIPMENT |
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| PROPERTY AND EQUIPMENT | NOTE 15 – PROPERTY AND EQUIPMENT
Property and Equipment are summarized as follows:
Depreciation expense for the period ending June 30, 2021 was $16,193. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
6 Months Ended |
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Jun. 30, 2021 | |
| Accounting Policies [Abstract] | |
| PRINCIPLES OF CONSOLIDATION | PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and J.W. Korth, its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated upon consolidation. |
| BASIS OF ACCOUNTING | BASIS OF ACCOUNTING The accompanying financial statements have been prepared on the accrual basis of accounting, in accordance with GAAP. |
| USE OF ESTIMATES | USE OF 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. |
| 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 Statements of Financial Condition, and is recognized on the Statement of Operations as an unrealized gain on mortgages. |
| MORTGAGE SECURED NOTES | MORTGAGE SECURED NOTES The Company funds the mortgage loans (”CM Loans”) that it makes by issuing Mortgage Secured Notes (“MSNs”) in series, each of which MSN series is secured by the mortgage or mortgages funded from proceeds of the MSN series. Our MSNs have been funded in multiple ways, including private placements, SEC registered offerings, and Rule 144A offerings. As of the date of these financial statements, the Company has funded CM Loans totaling $254,310,056 and issued MSNs secured by those loans in the amount of There is one CM Loan that was part of a single MSN series issuance closed after the quarter end, resulting in an excess value of MSNs compared to Mortgages Owned of approximately The CM Loan was completed and funded on July 27, 2021. |
| PORTFOLIO LOANS | PORTFOLIO LOANS The Company recognizes loans made with its own capital, or those not securitized, under the caption “Portfolio Loans” on the balance sheet. As of June 30, 2021, the Company had issued Portfolio Loans in the amount of $. These loans were funded by the Company, as well as affiliates. |
| GOODWILL | GOODWILL Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Section 350 requires an annual assessment of the recoverability of goodwill using a two-step process. The first step of the impairment test involves a comparison of the fair value of the reporting unit to its carrying value. If the carrying value is higher than the fair value or there is an indication that impairment may exist, a second step must be performed to compute the amount of the impairment. Management conducted its annual assessment of goodwill impairment and determined that there were no indicators of goodwill impairment and therefore did not record an impairment loss for the period ending June 30, 2021. |
| REVENUE RECOGNITION | REVENUE RECOGNITION The Company’s primary sources of revenue are origination fees, servicing fees, processing fees, underwriting income, trading profits, and interest income.
Origination Fees Loan origination fees represent revenue earned from originating mortgage loans; net of any credits given to the borrower. Loan origination fees generally represent flat, per-loan fee amounts and are deferred and recognized as revenue over the life of the loan. The associated loan origination costs are also deferred and recognized as expense over the life of the loan. The deferred portion of the loan origination fees is netted against the deferred portion of the loan origination costs, which include mortgage broker expenses, and reported as a net deferred revenue liability on the Company’s Statement of Financial Condition.
Servicing Fees Loan servicing fees represent revenue earned for servicing loans for various investors. Loan servicing fees are a percentage of the outstanding unpaid principal balance and represent the difference between the interest received from our CM Loans and the MSN interest payable. Servicing fees are recognized as revenue as the related mortgage payments are received; similarly, loan servicing expenses are charged to operations as incurred.
Processing Fees Processing fees are collected from the borrower at the time the commitment letter is signed and cover a variety of expenses during the underwriting process. If the Company cancels the transaction, then unused fees are refunded. If the transaction is unable to proceed for any reason not the fault of the Company, then the Company keeps the full processing fee. Revenues from processing fees are recognized at closing or at the time a transaction is canceled.
Underwriting Income Underwriting income represents revenue earned by J.W. Korth for underwriting and distribution of the Company’s securities. Revenues from underwriting income are recognized on the settlement date of the trades.
Trading Profits Trading profits represent revenue generated through the trading of securities either for its own account or on behalf of J.W. Korth’s clients. Revenue from trading profits is recognized upon settlement of the securities transactions.
Interest Income Interest Income is primarily derived from interest earned on Portfolio Loans and includes interest earned on cash and securities. |
| LEASES | LEASES In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The standard requires organizations to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet and disclose key information about leases that were historically classified as operating leases under previous generally accepted accounting principles. Leases will be classified as financing or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company adopted the new lease standard on January 1, 2019, and has chosen to use that date as the effective date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new lease guidance provides a number of optional practical expedients in transition. The Company has elected the “package of practical expedient,” which permits it to not reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. As part of the adoption of this standard, the Company recognized 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 adoption of this standard did not have a material impact on the Company’s consolidated financial statements. |
| STOCK-BASED COMPENSATION |
The Company estimates the fair values of share-based payments on the date of grant using a Black-Scholes option pricing model. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize forfeitures as they occur.
The Black-Scholes option pricing model requires assumptions for the expected volatility of the share price of our common stock, the expected dividend yield, and a risk-free interest rate over the expected term of the stock-based award. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. |
| 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 a short operating history and a small number of loans outstanding, we have a limited basis to predict prepayment rates and default rates. |
| DUE TO CLEARINGHOUSE BROKERS | DUE TO CLEARINGHOUSE BROKERS J.W. Korth, a wholly owned subsidiary of the Company, operates as an SEC and FINRA registered securities broker dealer. 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, 2021, the Company had a net amount due to clearinghouse brokers of $1,681. |
| DEPRECIATION | DEPRECIATION Depreciation is provided on a straight-line basis using estimated useful lives of to years. |
| INCOME TAXES | INCOME TAXES On June 6, 2019, the Company converted from a Florida limited liability company into a Florida corporation. Effective with the conversion into a Florida corporation, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the 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 financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense |
ACQUISITION OF RELATED PARTY AFFILIATE (Tables) |
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Jun. 30, 2021 | |||||||||||||||||||||||||||||||
| Acquisition Of Related Party Affiliate | |||||||||||||||||||||||||||||||
| The following table summarizes the consideration paid, or to be paid, for the Acquisitions: | The following table summarizes the consideration paid, or to be paid, for the Acquisitions:
|
||||||||||||||||||||||||||||||
| The following table summarizes the net book value of assets and liabilities acquired as of the closing date, July 31, 2020: | The following table summarizes the net book value of assets and liabilities acquired as of the closing date, July 31, 2020:
|
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CONTINGENT LIABILITY (Tables) |
6 Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2021 | ||||||||||||||||
| Business Combination and Asset Acquisition [Abstract] | ||||||||||||||||
| The following table summarizes the unpaid Contingent Liability outstanding as of June 30, 2021: | The following table summarizes the unpaid Contingent Liability outstanding as of June 30, 2021:
|
COMMITMENTS (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||
| The following is a schedule of the maturities of future lease payments over the remaining life of the operating leases, reconciled to the net present value of as of June 30, 2021 | The following is a schedule of the maturities of future lease payments over the remaining life of the operating leases, reconciled to the net present value of as of June 30, 2021:
|
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DEFERRED REVENUE, NET (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue from Contract with Customer [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The following is a summary of the loan originating fees and costs deferred and amortized for the three months ended June 30, 2021: | The following is a summary of the loan originating fees and costs deferred and amortized for the three months ended June 30, 2021:
|
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EMPLOYEE AND DIRECTOR STOCK OPTIONS (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based Payment Arrangement [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The fair values of the stock-based awards granted were calculated with the following weighted-average assumptions: |
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| Stock option activity for the six months ended June 30, 2021, is summarized as follows: |
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FAIR VALUE (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis | The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis:
|
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| The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the Statements of Financial Condition for the six months ended June 30, 2021 | The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the Statements of Financial Condition for the six months ended June 30, 2021:
|
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| 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, 2021 | 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, 2021:
|
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PROPERTY AND EQUIPMENT (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2021 | ||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||
| Property and Equipment are summarized as follows: | Property and Equipment are summarized as follows:
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) |
6 Months Ended | |
|---|---|---|
Jun. 30, 2021 |
Dec. 31, 2020 |
|
| Property, Plant and Equipment [Line Items] | ||
| Portfolio Loans | $ 6,958,226 | $ 2,042,414 |
| Due to clearinghouse brokers | $ 1,681 | |
| Minimum [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Estimated useful lives | 3 years | |
| Maximum [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Estimated useful lives | 7 years | |
| Actual Basis [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Mortgage secured notes funded | $ 254,310,056 | |
| Mortgage second secured notes funded | 263,715,056 | |
| Mortgages Owned | $ 9,405,000 |
The following table summarizes the consideration paid, or to be paid, for the Acquisitions: (Details) |
6 Months Ended |
|---|---|
|
Jun. 30, 2021
USD ($)
| |
| Acquisition Of Related Party Affiliate | |
| Accrued & unpaid dividends to the Preferred Capital Interest partners | $ 213,443 |
| JW Korth LLC’s Common Capital Interest account | 150,000 |
| Contingent liability to redeem J.W. Korth Preferred Capital Interest Partners | 696,253 |
| Disposition of outstanding loan due from J.W. Korth Executive Officer | 69,780 |
| Total Consideration Paid | $ 1,129,476 |
The following table summarizes the net book value of assets and liabilities acquired as of the closing date, July 31, 2020: (Details) - J W Korth And J W Korth LLC [Member] |
Jul. 31, 2020
USD ($)
|
|---|---|
| Acquired Indefinite-lived Intangible Assets [Line Items] | |
| J.W. Korth Net Book Value | $ 889,131 |
| Less: Preferred Interest in J.W. Korth by Company prior to acquisition | (250,000) |
| Adjusted Net Book Value acquired | $ 639,131 |
ACQUISITION OF RELATED PARTY AFFILIATE (Details Narrative) - USD ($) |
Jul. 31, 2020 |
Jun. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|---|
| Acquired Indefinite-lived Intangible Assets [Line Items] | |||
| Goodwill | $ 407,164 | $ 110,000 | |
| J W Korth And J W Korth LLC [Member] | |||
| Acquired Indefinite-lived Intangible Assets [Line Items] | |||
| Date of acquisition | Jul. 31, 2020 | ||
| Goodwill | $ 490,345 | ||
| J W Korth [Member] | |||
| Acquired Indefinite-lived Intangible Assets [Line Items] | |||
| Percentage of partnership interests | 73.60% | ||
| Number of share received on closing | 3,680,000 | ||
| J W Korth [Member] | James Korth [Member] | |||
| Acquired Indefinite-lived Intangible Assets [Line Items] | |||
| Percentage of partnership interests | 80.00% | ||
| J W Korth [Member] | Holly MacDonald-Korth [Member] | |||
| Acquired Indefinite-lived Intangible Assets [Line Items] | |||
| Percentage of partnership interests | 20.00% | ||
| J W Korth [Member] | Purchase Agreement [Member] | |||
| Acquired Indefinite-lived Intangible Assets [Line Items] | |||
| Number of shares distribute to its partners | 5,000,000 | ||
| J.W. Korth LLC [Member] | |||
| Acquired Indefinite-lived Intangible Assets [Line Items] | |||
| Description of distribution after closing of business | the Company acquired all of the membership interests in JW Korth LLC from Mr. Korth and Ms. MacDonald-Korth for consideration of the payment to (i) the Preferred Capital Interest partners of J.W. Korth of accrued and unpaid 6% dividends through July 31, 2020, and (ii) James Korth of $150,000 in payment of the value of his JW Korth LLC’s Common Capital Interest account. | ||
| Description of post-closing commitments | (i) retain Mr. Korth as the managing partner of J.W. Korth, Ms. MacDonald-Korth as J.W. Korth’s chief financial officer, and all other employees of JW Korth who were employed at closing of the Transactions; (ii) operate J.W. Korth as an SEC registered broker-dealer and investment advisor; (iii) pay the JW Korth Preferred Capital Interest Partners quarterly dividends concurrently with its payment of the Company’s Series A Preferred Stock dividends at least annually; (iv) in such years as it pays Series A Preferred dividends, redeem 25% annually of the JW Korth Preferred Capital Interest partners through a capital contribution to JW Korth; and (v) make a discretionary redemption of all accounts of the limited partners of J.W. Korth under the J.W. Korth partnership agreement. Upon redemption of the limited partners’ accounts and the payment of the other consideration to described above to the JW Korth partners, KDM will own 100% of the voting interests in JW Korth. |
The following table summarizes the unpaid Contingent Liability outstanding as of June 30, 2021: (Details) |
6 Months Ended |
|---|---|
|
Jun. 30, 2021
USD ($)
| |
| Business Combination and Asset Acquisition [Abstract] | |
| Contingent liability to redeem J.W. Korth Preferred Capital Interest Partners | $ 696,253 |
| Accrued quarterly dividends recorded as interest expense through June 30, 2021 | 12,434 |
| Contingent Liability, net | $ 708,687 |
CONTINGENT LIABILITY (Details Narrative) - Michigan Limited Partnership [Member] |
6 Months Ended |
|---|---|
Jun. 30, 2021 | |
| Business Acquisition [Line Items] | |
| Dividend rate | 6.00% |
| Dividends payable, date to be paid | Jul. 31, 2020 |
| Series A Preferred Stock [Member] | |
| Business Acquisition [Line Items] | |
| Dividend rate | 25.00% |
RESTRICTED CASH (Details Narrative) |
Jun. 30, 2021
USD ($)
|
|---|---|
| New Accounting Pronouncements or Change in Accounting Principle [Line Items] | |
| Mortgage second secured notes funded | $ 9,642,629 |
| Escrow payable liability account | 116,101 |
| Borrower [Member] | |
| New Accounting Pronouncements or Change in Accounting Principle [Line Items] | |
| Escrow payable liability account | 2,029,492 |
| Actual Basis [Member] | |
| New Accounting Pronouncements or Change in Accounting Principle [Line Items] | |
| Due to investors liability including commitment fees and accrued interest | 8,992,316 |
| Closing of one loan | $ 9,405,000 |
The following is a schedule of the maturities of future lease payments over the remaining life of the operating leases, reconciled to the net present value of as of June 30, 2021 (Details) |
Jun. 30, 2021
USD ($)
|
|---|---|
| Commitments and Contingencies Disclosure [Abstract] | |
| 2021 | $ 121,976 |
| 2022 | 249,957 |
| 2023 | 256,920 |
| 2024 | 264,087 |
| 2025 | 271,470 |
| 2026 | 30,504 |
| Total Lease Payments | 1,194,914 |
| Less: Imputed Interest | (113,626) |
| Present Value of Lease Liabilities | $ 1,081,288 |
COMMITMENTS (Details Narrative) - USD ($) |
6 Months Ended | ||
|---|---|---|---|
Jun. 30, 2021 |
Dec. 31, 2020 |
Apr. 30, 2020 |
|
| Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves [Line Items] | |||
| Rent expense | $ 148,977 | ||
| Weighted-average discount rate | 4.24% | ||
| Weighted-average remaining life | 4 years 7 months 6 days | ||
| Future lease liabilities | $ 1,081,288 | ||
| PPP loan payable | $ 161,600 | ||
| J W Korth [Member] | |||
| Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves [Line Items] | |||
| PPP loan payable | $ 161,600 |
CUSTOMERS (Details Narrative) |
6 Months Ended |
|---|---|
|
Jun. 30, 2021
Customer
| |
| Risks and Uncertainties [Abstract] | |
| Number of customer | 46 |
| Loans outstanding description | single borrower or location other than three large loans in the states of Ohio, Virginia, and California for a total of approximately 109,000,000 |
RELATED PARTY TRANSACTIONS (Details Narrative) - USD ($) |
6 Months Ended | |||
|---|---|---|---|---|
Feb. 12, 2021 |
Apr. 01, 2020 |
Jun. 30, 2021 |
May 13, 2020 |
|
| J W Korth [Member] | ||||
| Related Party Transaction [Line Items] | ||||
| Due to Parent | $ 250,000 | |||
| Underwriting fees | $ 152,267 | |||
| Mortgage Secured Notes [Member] | ||||
| Related Party Transaction [Line Items] | ||||
| Purchase of debt | $ 100,000 | |||
| Description of corresponding | along with a second lien loan of $200,000 on the same property. The funding for the second lien was provided by 110 Capital LLC, an entity controlled by a KDM director and employee. KDM services both notes. | along with a second lien loan of $500,000 on the same property. The funding for the second lien was provided by 110 Capital LLC, an entity controlled by a KDM director and employee. KDM services both notes. |
The following is a summary of the loan originating fees and costs deferred and amortized for the three months ended June 30, 2021: (Details) - USD ($) |
6 Months Ended | 12 Months Ended |
|---|---|---|
Jun. 30, 2021 |
Dec. 31, 2020 |
|
| Deferred origination fees | $ 3,566,087 | $ 2,617,443 |
| Deferred origination costs | (2,726,509) | (2,117,313) |
| Deferred revenue, net | 839,578 | $ 500,130 |
| New Loan Deferrals [Member] | ||
| Deferred origination fees | 1,296,131 | |
| Deferred origination costs | (872,582) | |
| Deferred revenue, net | 423,549 | |
| Amortization Of Deferrals [Member] | ||
| Deferred origination fees | (347,487) | |
| Deferred origination costs | 263,386 | |
| Deferred revenue, net | $ (84,101) |
The fair values of the stock-based awards granted were calculated with the following weighted-average assumptions: (Details) |
6 Months Ended |
|---|---|
Jun. 30, 2021 | |
| Share-based Payment Arrangement [Abstract] | |
| Risk-free interest rate: | 1.76% |
| Expected term | 5 years 9 months |
| Expected dividend yield: | 0.00% |
| Expected volatility: | 35.01% |
Stock option activity for the six months ended June 30, 2021, is summarized as follows: (Details) - $ / shares |
6 Months Ended | 12 Months Ended |
|---|---|---|
Jun. 30, 2021 |
Dec. 31, 2020 |
|
| Share-based Payment Arrangement [Abstract] | ||
| Balance, beginning (in shares) | 835,000 | |
| Balance, beginning (in dollars per share) | $ 1.00 | |
| Balance, ending | 8 years 6 months | |
| Granted | ||
| Exercised | ||
| Expired or forfeited | ||
| Balance, ending (in shares) | 835,000 | 835,000 |
| Balance, ending (in dollars per share) | $ 1.00 | $ 1.00 |
| Balance, ending | 8 years | |
| Options exercisable, ending | 417,500 | |
| Options exercisable, ending | $ 1.00 | |
| Exercisable, ending | 8 years | |
| Options expected to vest, ending | 417,500 | |
| Options expected to vest, ending | $ 1.00 | |
| Options expected to vest, ending | 8 years |
EMPLOYEE AND DIRECTOR STOCK OPTIONS (Details Narrative) - USD ($) |
6 Months Ended | |||
|---|---|---|---|---|
Jun. 28, 2019 |
Jun. 30, 2021 |
Jun. 30, 2020 |
Dec. 31, 2020 |
|
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||
| Common stock, par value (in dollars per share) | $ 0.001 | $ 0.001 | ||
| Stock-based compensation expense | $ 12,906 | $ 12,906 | ||
| Non-vested employee stock options term | 8 years | |||
| 2019 Stock Option Plan (Incentive Plan) [Member] | ||||
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||
| Stock-based compensation expense | $ 25,816 | |||
| Non-vested employee stock options term | 1 year | |||
| 2019 Stock Option Plan (Incentive Plan) [Member] | Director [Member] | ||||
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||
| Number of shares purchase | 1,000,000 | |||
| Common stock, par value (in dollars per share) | $ 0.001 | |||
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, 2021 (Details) - Fair Value, Recurring [Member] |
6 Months Ended | |
|---|---|---|
|
Jun. 30, 2021
USD ($)
|
Dec. 31, 2020
USD ($)
|
|
| Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ||
| Fair Value | $ 6,958,226 | $ 3,864,416 |
| Unobservable input | Discount rate | |
| Value | 0.1500 | |
| Mortgage Servicing [Member] | ||
| Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ||
| Fair Value | $ 6,958,226 | |
| Valuation technique | Net Present Value | |
| Unobservable input | Prepayment Discount | |
| Value | 0.1482 | |
| Securities [Member] | ||
| Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | ||
| Fair Value | $ 407,164 | |
| Valuation technique | Net Present Value |
FAIR VALUE (Details Narrative) |
Jun. 30, 2021
USD ($)
|
|---|---|
| J W Korth [Member] | Securities [Member] | |
| Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves [Line Items] | |
| Defaulted bonds amount | $ 225,000 |
INCOME TAXES (Details Narrative) - USD ($) |
6 Months Ended | |
|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
|
| Income Tax Disclosure [Abstract] | ||
| Provision for income taxes | $ 807,762 | $ 12,868 |
| Effective tax rate | 25.70% | 35.00% |
| Income before income taxes | $ 3,141,235 | $ 36,781 |
| Statutory corporate tax rate | 21.00% | 21.00% |
Property and Equipment are summarized as follows: (Details) - USD ($) |
Jun. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Property, Plant and Equipment [Line Items] | ||
| Total | $ 379,652 | |
| Accumulated depreciation | (56,990) | |
| Net property equipment | 1,038,050 | $ 186,703 |
| Equipment [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Total | 203,795 | |
| Furniture and Fixtures [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Total | $ 175,857 |
PROPERTY AND EQUIPMENT (Details Narrative) |
6 Months Ended |
|---|---|
|
Jun. 30, 2021
USD ($)
| |
| Property, Plant and Equipment [Abstract] | |
| Depreciation expense | $ 16,193 |
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