UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedMarch 31, 2019
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the transition period from | to | ||
Commission File Number:000-1695962
KORTH DIRECT MORTGAGE LLC
(Exact name of registrant as specified in its charter)
| Florida | 27-0644172 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2937 SW 27th Avenue, Suite 307, Miami FL 33133 |
| (Address of principal executive offices) |
| (305) 668-8485 |
| (Registrant’s telephone number, including area code) |
| (Former name, former address and formal fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yeso No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
xYesoNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or, an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company”, in Rule 12b-2 of the Exchange Act.
| Large accelerated filer☐ | Accelerated filer☐ | |
| Non-accelerated filer☐ | Smaller reporting company ☑ | |
| Emerging growth company ☑ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Securities registered pursuant to Section 12(b) of the Act: None.
The registrant is a limited liability company, all of the common equity of which is held by affiliates. There is no market for the membership shares of Korth Direct Mortgage LLC. As of March 31, 2019, there were 1,000,000 shares of Korth Direct Mortgage LLC outstanding.
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PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements | 3 |
| Unaudited Statements of Financial Condition | 3 | |
| Unaudited Statements of Operations | 4 | |
| Unaudited Statements of Cash Flows | 5 | |
| Notes to Financial Statements | 6 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 12 |
| Item 4. | Controls and Procedures | 12 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 12 |
| Item 1A. | Risk Factors | 12 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 12 |
| Item 3. | Defaults Upon Senior Securities | 12 |
| Item 4. | Mine Safety Disclosures | 12 |
| Item 5. | Other Information | 12 |
| Item 6. | Exhibits | 13 |
| SIGNATURES | 13 | |
| 2 |
PART I—FINANCIAL INFORMATION
KORTH DIRECT MORTGAGE LLC
UNAUDITED STATEMENTS OF FINANCIAL CONDITION
| March 31, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Cash and Cash Equivalents | $ | 48,937 | $ | 15,323 | ||||
| Restricted Cash | 228,898 | 161,454 | ||||||
| Mortgages Owned | 27,708,513 | 13,173,466 | ||||||
| Mortgage Servicing Rights, at Fair Value | 614,984 | 215,459 | ||||||
| Prepaid Expenses | 10,584 | 10,584 | ||||||
| TOTAL ASSETS | $ | 28,611,916 | $ | 13,576,286 | ||||
| LIABILITIES AND MEMBER'S EQUITY (DEFICIT) | ||||||||
| LIABILITIES | ||||||||
| Due to Parent | $ | - | $ | 494,122 | ||||
| Escrows Payable | 193,611 | 125,045 | ||||||
| Due to Investors | 35,288 | 36,409 | ||||||
| Accrued Expenses | 20,500 | 15,000 | ||||||
| Mortgage Secured Notes Payable | 27,708,513 | 13,173,466 | ||||||
| Total Liabilities | 27,957,912 | 13,844,042 | ||||||
| MEMBER'S EQUITY (DEFICIT) | ||||||||
| Accumulated Equity (Deficit) | 650,482 | (271,278 | ) | |||||
| Capital | 3,522 | 3,522 | ||||||
| Total Member's Equity (Deficit) | 654,004 | (267,756 | ) | |||||
| TOTAL LIABILITIES AND MEMBER'S EQUITY (DEFICIT) | $ | 28,611,916 | $ | 13,576,286 | ||||
See accompanying notes to the unaudited financial statements.
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KORTH DIRECT MORTGAGE LLC
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1 THROUGH MARCH 31
| For the Three Months Ended | For the Three Months Ended | |||||||
| March 31, 2019 | March 31, 2018 | |||||||
| REVENUES | ||||||||
| Origination Revenue, Net | $ | 493,825 | $ | 26,825 | ||||
| Servicing Revenue | 4,116 | 6,025 | ||||||
| Processing Revenue | 1,500 | - | ||||||
| Interest Income | 270 | - | ||||||
| Late Fees | 5,119 | - | ||||||
| Total Revenues | 504,830 | 32,850 | ||||||
| COST OF REVENUES | ||||||||
| Broker Underwriting Expense | 181,775 | - | ||||||
| Mortgage Broker Expense | 203,025 | - | ||||||
| Bank Fees | 2,702 | 545 | ||||||
| Appraisal Costs | 1,195 | (7,000 | ) | |||||
| Marketing | 3,360 | 3,539 | ||||||
| License and Registration | 595 | 5,002 | ||||||
| Ratings | 26,000 | - | ||||||
| Technology Fees | 2,055 | 157 | ||||||
| Total Cost of Revenues | 420,707 | 2,243 | ||||||
| GROSS PROFIT (LOSS) | 84,123 | 30,607 | ||||||
| OPERATING EXPENSES | ||||||||
| Office Supplies | 642 | 1,171 | ||||||
| Accounting | 5,500 | - | ||||||
| Salaries | 86,295 | 28,382 | ||||||
| Payroll Taxes | 4,372 | 4,203 | ||||||
| Professional & Legal | 4,791 | 34,050 | ||||||
| SEC Filing Expense | - | 748 | ||||||
| Travel & Entertainment | 7,919 | 204 | ||||||
| Business Development | 1,171 | - | ||||||
| Total Expenses | 110,690 | 68,758 | ||||||
| Net Loss From Operations | (26,567 | ) | (38,151 | ) | ||||
| Other Income | ||||||||
| Unrealized Gain on Mortgages | 399,525 | 130,043 | ||||||
| Gain from Write-Off of Due to Parent | 548,802 | - | ||||||
| Total Other Income | 948,327 | 130,043 | ||||||
| NET INCOME | $ | 921,760 | $ | 91,892 | ||||
See accompanying notes to the unaudited financial statements.
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KORTH DIRECT MORTGAGE LLC
UNAUDITED STATEMENTS OF CASH FLOWS
| For the Three Months Ended | For the Three Months Ended | |||||||
| March 31, 2019 | March 31, 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net Income | $ | 921,760 | $ | 91,892 | ||||
| Adjustments to Reconcile Net Income to | ||||||||
| Net Cash Provided by Operating Activities: | ||||||||
| Unrealized Gain on Motgages Owned | (399,525 | ) | (130,043 | ) | ||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Restricted Cash | (67,444 | ) | (44,287 | ) | ||||
| Mortgage Secured Notes Issued | 14,535,047 | 2,188,729 | ||||||
| Prepaid Expenses | - | 748 | ||||||
| Due to Parent | (494,122 | ) | 48,301 | |||||
| Escrow Payable | 68,566 | 28,118 | ||||||
| Due to Investors | (1,121 | ) | 16,168 | |||||
| Accrued Expenses | 5,500 | - | ||||||
| New Mortgage Lending | (14,535,047 | ) | (2,188,729 | ) | ||||
| Total Adjustments | (888,146 | ) | (80,995 | ) | ||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 33,614 | 10,897 | ||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 33,614 | 10,897 | ||||||
| CASH AND CASH EQUIVALENTS – Beginning of Year | 15,323 | 19,844 | ||||||
| CASH AND CASH EQUIVALENTS – End of Year | $ | 48,937 | $ | 30,741 | ||||
See accompanying notes to the unaudited financial statements.
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KORTH DIRECT MORTGAGE LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
| NOTE 1 - | NATURE OF BUSINESS |
Korth Direct Mortgage LLC (the “Company”) is a limited liability company formed in the State of Florida. The Company is a wholly owned subsidiary of J. W. Korth & Company, L.P. (“J. W. Korth”), an SEC and FINRA registered broker dealer. The Company was created to sell Notes secured by mortgage loans.
The Company and J. W. Korth executed a support agreement that provides financial, managerial, and office support to the Company until it is fully operational and a going concern. Pursuant to this agreement, for any moneys owed by the Company to J. W Korth, J. W. Korth may not seek reimbursement from the Company until the Company shall maintain a liquid net worth of at least $1,000,000 for a minimum period of 90 days.
Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with US generally accepted accounting principles (“GAAP”) have been condensed or omitted. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
| NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements are solely for the Company. The financial statements of the parent company, J. W. Korth, have these accounts consolidated within them.
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared on the accrual basis of accounting, in accordance with GAAP.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
MORTGAGE VALUATION
Mortgages that are current are carried at the principal value owed by the borrower, as of the date of the financial statements, according to the amortization schedule for the loan. All mortgages owned as of the date of these financial statements are current. The net present value of the servicing revenue is recorded as mortgage servicing rights, at fair value on the Unaudited Statements of Financial Condition, and is recognized on the Unaudited Statement of Operations as an unrealized gain on mortgages owned.
MORTGAGE SECURED NOTES
The Company funds the mortgage loans that it makes by issuing Mortgage Secured Notes (“MSNs”), which are secured by those same mortgages. As of the date of these financial statements, the Company has funded loans totaling $27,740,250, and it issued MSNs secured by those loans, also in the amount of $27,740,250. The deals have been funded in multiple ways, including private placements, SEC registered deals, and 144A offerings.
REVENUE RECOGNITION
The Company has three primary sources of revenue: origination fees, servicing fees, and processing fees.
Origination Fees
Loan origination fees represent revenue earned from originating mortgage loans, net of any credits given to the borrower. Loan origination fees generally represent flat, per-loan fee amounts and are recognized as revenue at the time the loans are funded.
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Servicing Fees
Loan servicing fees represent revenue earned for servicing loans for various investors. Loan servicing fees are a percentage of the outstanding unpaid principal balance and represent the difference between the Corresponding Mortgage Loan (“CM Loan”) interest received and the MSN interest payable. Servicing Fees are recognized as revenue as the related mortgage payments are received; similarly, loan servicing expenses are charged to operations as incurred.
Processing Fees
Processing fees are collected from the borrower at the time the commitment letter is signed and cover a variety of expenses during the underwriting process. If the Company cancels the transaction, then unused fees are refunded. If the transaction is unable to proceed for any reason not the fault of the Company, then the Company keeps the full processing fee. Revenues from processing fees are recognized at closing or at the time a transaction is canceled.
Unrealized Gain on Mortgages Owned
The net present value of the servicing income is recognized at the time the mortgage is initiated. This value uses several inputs that are highly subjective including: discount rate, prepayment rate, the current interest rate environment, and default rate assumptions. Since the Company has limited operating history and a small amount of loans outstanding, we have a limited basis to predict prepayment rates and default rates.
ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
DUE TO PARENT AND PAYABLES
Items due to parent are operating expenses due to the parent company, J. W. Korth, pursuant to the support agreement. On May 2, 2019 and as of March 31, 2019, J. W. Korth forgave its receivable $548,802 that was on the Company’s balance sheet as Due to Parent in order to assist KDM in strengthening its balance sheet and Members’ Equity.
INCOME TAXES
The Company is a limited liability company which is treated as a partnership for federal and state income tax. Accordingly, no provision for federal income taxes is required since the members report their proportionate share of company taxable income or loss on their respective income tax returns. Such income or losses are proportionately allocated to the members based upon their ownership interests.
In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 740 –Income Taxes, management has evaluated uncertain tax positions taken or expected to be taken in the Company’s tax returns. In order for a benefit to be recognized, a tax position must be more-likely-than-not to be sustained when challenged or examined by the applicable taxing authority. For the three months ended March 31, 2019, the Company has no material uncertain tax positions to be accounted for in the financial statements.
| NOTE 3 - | RESTRICTED CASH |
The Company maintains two segregated accounts in trust for borrowers and investors. The value of these accounts is carried under the asset “Restricted Cash.”
The “In Trust for 1” account holds the monthly tax and insurance payments collected from borrowers and distributes payments annually, on behalf of borrowers, to the appropriate tax authority and insurance companies. This account corresponds to the Escrow Payable liability. As of March 31, 2019, this account has a balance of $193,611.
The “In Trust for 2” account receives payments from borrowers, distributes payments to investors, and pays the servicing fee to the Company. This account corresponds to the Due to Investors liability. As of March 31, 2019, this account has a balance of $35,288 (commitment fees/accrued interest).
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| NOTE 4 - | COMMITMENTS |
The Company relies partially on its parent, J. W. Korth, to provide office space, internet connectivity, phone service, and incidentals through the end of 2019.
| NOTE 5 - | INDEMNIFICATIONS |
The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.
| NOTE 6 - | CUSTOMERS |
As of March 31, 2019, the Company has nine customers. The Company defines customers as borrowers that have an active loan with the Company, or are in the midst of the underwriting process and have a commitment fee on deposit with the Company. Currently, 32% of loans, by unpaid balance, are geographically concentrated in the state of Ohio and 35% are concentrated in the state of New Jersey.
| NOTE 7 – | RELATED PARTY TRANSACTIONS |
The Due to Parent account has been forgiven as of March 31, 2019 pursuant to the agreement dated May 1, 2019 by and between J. W. Korth (parent) and the Company. The Company was previously largely supported by its parent company, J. W. Korth. The Company owed J. W. Korth $548,802 on March 30, 2019. The cancelation of this liability resulted in a one-time gain, which is included on the Unaudited Statement of Operations for the three months ended March 31, 2019. The Company owed J.W. Korth $0 and $494,122 as of March 31, 2019 and December 31, 2018, respectively. The Support Agreement between the Company and J. W. Korth remains in place should it be necessary.
| NOTE 8 – | FAIR VALUE |
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial assets and liabilities at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:
Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Valuation Process
Cash and cash equivalents:
The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1 .
| 8 |
Mortgages Owned and Mortgage Secured Notes Payable:
All of the loans on the balance sheet as of March 31, 2019 are carried at principal value, as are the corresponding Mortgage Secured Notes Payable. The Company has determined that the fair values were determined by the market at the time of sale and should be classified as Level II of the fair value hierarchy. The carrying amounts for these items approximate the fair value. For amortizing loans, the Company discounts those to remaining principal value.
Due to the fact that the Company issues notes secured directly by underlying loans, our assets and liabilities in this category have identical values and assets have offsetting balances.
Mortgage Servicing
The net present value of the servicing income is recognized at the time the mortgage is initiated as an unrealized gain. This value uses several inputs that are highly subjective including: discount rate, constant prepayment rate, the current interest rate environment, and default rate assumptions. Since the Company has limited operating history and a small amount of loans outstanding, we have a limited basis to predict prepayment rates and default rates, but have engaged a third party, MIAC Analytics, to assist us in our valuation of this asset. The amount is included on the Unaudited Statement of Financial Condition as “Mortgage Servicing Rights, at Fair Value.”
Fair Value Disclosure
The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis:
| March 31, 2019 | ||||||||||||||||
| Total | Level I | Level II | Level III | |||||||||||||
| Financial Assets | ||||||||||||||||
| Mortgages Owned | $ | 27,708,513 | $ | - | $ | 27,708,513 | $ | - | ||||||||
| Mortgage Servicing Rights | 614,984 | - | - | 614,984 | ||||||||||||
| Total Financial Assets | $ | 28,323,497 | $ | - | $ | 27,708,513 | $ | 614,984 | ||||||||
| Financial Liabilities | ||||||||||||||||
| Mortgage Secured Notes Payable | $ | 27,708,513 | $ | - | $ | 27,708,513 | $ | - | ||||||||
| December 31, 2018 | ||||||||||||||||
| Financial Assets | ||||||||||||||||
| Mortgages Owned | $ | 13,173,466 | $ | - | $ | 13,173,466 | $ | - | ||||||||
| Mortgage Servicing Rights | 215,459 | - | - | 215,459 | ||||||||||||
| Total Financial Assets | $ | 13,388,925 | $ | - | $ | 13,173,466 | $ | 215,459 | ||||||||
| Financial Liabilities | ||||||||||||||||
| Mortgage Secured Notes Payable | $ | 13,173,466 | $ | - | $ | 13,173,466 | $ | - | ||||||||
| 9 |
Fair Value Measurements
Changes in Fair Value Measurements for the quarter ended March 31, 2019
The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the Statements of Financial Condition for the quarter ended March 31, 2019:
| Changes in assets: | ||||
| Year ended March 31, 2019 | Mortgage Servicing Value | |||
| Beginning balance at January 1, 2019 | $ | 215,459 | ||
| Purchases | - | |||
| Sales | - | |||
| Issues | - | |||
| Settlements | - | |||
| Net realized gain/loss | - | |||
| Unrealized Gain from newly issued mortgages | 396,758 | |||
| Fair Value adjustment | 2,767 | |||
| Transfers into Level 3 | - | |||
| Transfers out of Level 3 | - | |||
| Ending balance at March 31, 2019 | $ | 614,984 | ||
The Company’s policy for recording transfers between levels of the fair value hierarchy is to recognize as of the financial statement date. For the quarter ended March 31, 2019, there were no transfers between levels.
The Company has established valuation processes and policies for its Level 3 investments to ensure that the methods used are fair and consistent in accordance with ASC 820 –Fair Value Measurements and Disclosures. The Company’s valuation committee performs reviews of the Level 3 investments’ valuations, which include reviewing any significant price changes reported from the prior period. When a Level 3 investment has a significant price change, the valuation committee reviews relevant market data to substantiate the price change.
The following table presents quantitative information regarding the significant unobservable inputs the Company uses to determine the fair value of Level 3 investments held as of March 31, 2019:
| Investment type | Fair Value | Valuation technique | Unobservable inputs | Values | ||||||||
| Mortgage servicing | $ | 614,984 | Net Present Value | Prepayment Discount | 9.27 | % | ||||||
| Discount rate | 15.00 | % | ||||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q; (ii) our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2019; and (iii) our management’s discussion and analysis of financial condition and results of operations included in our 2018 Form 10-K. This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed in “Forward-Looking Statements” herein and “Part I – Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018.
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Overview
Korth Direct Mortgage LLC (“KDM,” the “Company”, “we,” or “us”) was organized in Florida on July 24, 2009, under the name HCMK Consulting LLC. We changed our name to J. W. Korth & Company LLC, in November 2010, and then to Korth Direct Mortgage LLC, on August 24, 2016. Our principal executive offices are located at 2937 SW 27th Avenue Suite 307, Miami, Florida 33133, and our telephone number is (305) 668-8485. Our website address iswww.korthdirect.com.
Korth Direct Mortgage LLC began its formal operations in October of 2016 when we engaged our Chief Lending Officer. KDM is a licensed Mortgage Lender Servicer with the State of Florida. Our NMLS License Number is 1579547. Our operating history is limited. We are partially supported by our parent company, J. W. Korth & Company, L.P. (“J.W. Korth & Company”), a FINRA and SEC registered broker-dealer founded in 1982. We believe we will become independent from our parent company by the end of 2019. Over this period, we believe that we will achieve adequate revenue and cash-flow through making and servicing our mortgage loans to make us self-sufficient. During this period, we expect no research and development expenses and no expenses for plant and equipment, and that office space will continue to be shared with our parent company. We anticipate renting office space and adding staff as necessary as our lending and servicing grow; these expenses would be paid for by ordinary revenues.
The total support we have received from J. W. Korth & Company through March 31, 2019, is $752,302. In November 2018, $203,500 was repaid to J.W. Korth & Company, and subsequently, as of March 31, 2019, J.W. Korth & Company has forgiven the remaining receivable from KDM of $548,802. The Support Agreement remains in place.
Results of Operations for the Three Months ended March 31, 2019
The Company had net income of $921,760 for the three months ended March 31, 2019, largely attributed to a one-time gain from the cancelation of payable to J.W. Korth & Company of $548,802. The Company brought in $504,830 of revenue during the three-month period, 98% of which was attributable to origination revenue, and for the period we had servicing and processing revenue of $4,116 and $1,500, respectively. Servicing revenue was low because the majority of servicing rights were sold for 18 months beginning in January 2019. Costs were dominated by the mortgage broker and brokerage underwriting expense of $203,025 and $181,775, respectively, which together accounted for approximately 91% of direct costs. Current monthly servicing revenue from the two loans closed in the first quarter is $14,740. Gross profits grew to $84,123 a 175% increase over the same period in 2018, when gross profits amounted to $30,607. Operating expenses rose as well, but at a slower pace of 61% ($110,690 for the current period vs $68,758 for the same period in 2018.)
Higher expenses and costs were offset by the unrealized gain on mortgages owned, which was $399,525 at March 31, 2019, an increase of $184,066 over the prior quarter due to new lending, and a 207% increase over the same period last year, when the unrealized gain on mortgages was $130,043. A discussion of the assumptions underlying the valuation can be found in Note 8 of the Notes to our Unaudited Financial Statements.
Financial Condition for the Three Months Ended March 31, 2019
As of March 31, 2019, we had eight loans on our balance sheet for a total of $27,708,513 at fair value. The original loan amounts totaled $27,740,250; however, two loans are amortizing and are carried at their remaining principal balances. We have recognized an unrealized gain of $399,525, which is the change in net present value of the future servicing income we receive from the loans made to date. This value is highly subjective and includes such variables as constant prepayment rate (CPR), discount rate, and market pricing data; this value will be recalculated quarterly. The current value was provided by a third-party consulting firm and uses 15.0% for the discount rate and includes a 9.27% constant prepayment rate (“CPR”), along with other assumptions customary to the industry.
When J. W. Korth & Company forgave its receivable from the Company, it resulted in a large one-time gain as well as decline in the Due to Parent liability, resulting in a corresponding substantial increase to Member’s Equity of $548,802.
We have grown our origination team to 4 members and have a goal to close an additional $75M of loans this year. We do not expect to increase support staff by a material amount until we have sufficient pipeline and servicing to warrant additional outlay.
Although our liquidity needs are currently being met by operations, the Company may choose to raise capital in the coming months to support expansion and a reserve to guarantee interest payments on its MSNs. No explicit plans to do so exist as of the writing of this report.
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Status of KDM Loans
We have decided to start including our annual reviews of CM Loans as exhibits to our quarterly filings. Loans that are held by outside investors or securitized and reach the anniversary of their inception in the current quarter are included for review. Please see section 99 of the Exhibit list for the appropriate reports.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We have no instruments subject to market risk.
Item 4. Controls and Procedures.
We are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined by Securities Exchange Act Rule 13a-15(f). Our internal controls are designed to provide reasonable assurance as to the reliability of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Internal control over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting as of March 31, 2019, as required by Securities Exchange Act Rule 13a-15(c). In making our assessment, we have utilized the criteria set forth by the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We concluded that based on our evaluation our internal control over financial reporting was effective as of March 31, 2019.
PART II—OTHER INFORMATION
The Company is not subject to any material legal proceeding. The Company is a defendant in a suit regarding a mortgage brokerage fee dispute. The Company is fully indemnified for the suit by the borrower in the transaction which is the subject of the suit. We do not believe that the proceeding is material under Item 103 of SEC Regulation S-K.
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as amended. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
None.
| 12 |
*Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KORTH DIRECT MORTGAGE LLC | |||
| Dated: May 13, 2019 | By: | /s/ James W. Korth | |
| James W. Korth, Chief Executive Officer and Manager | |||
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