Korth Direct Mortgage 10-Q 2019 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period endedSeptember 30, 2019

or

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

For the transition period from_______________________________________________to________________________________________________

Commission File Number:000-1695962

KORTH DIRECT MORTGAGE INC

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices)

(305) 668-8485

(Registrant’s telephone number, including area code)

_________________________________Korth Direct Mortgage LLC___________________________________

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

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

xYes   ¨No

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).

xYes   ¨No

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

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☐ Nox

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.

As of September 30, 2019, there were 5,000,000 shares of Common Stock, Korth Direct Mortgage Inc. outstanding.

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TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Statements of Financial Condition	3
	Unaudited Statements of Operations	4
	Unaudited Statements of Cash Flows	5
	Notes to Unaudited Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	12
Item 4.	Controls and Procedures	12
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	13
Item 1A.	Risk Factors	13
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3.	Defaults Upon Senior Securities	13
Item 4.	Mine Safety Disclosures	13
Item 5.	Other Information	13
Item 6.	Exhibits	14
SIGNATURES		14

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

KORTH DIRECT MORTGAGE INC

UNAUDITED STATEMENTS OF FINANCIAL CONDITION

	September 30, 2019		December 31, 2018
	(Unaudited)
ASSETS
Cash and Cash Equivalents	$	4,759,417	$	15,323
Restricted Cash		4,656,085		161,454
Mortgages Owned		41,798,402		13,173,466
Mortgage Servicing Rights, at Fair Value		1,447,892		215,459
Portfolio Loans		460,000		-
Accounts Receivable		130,000		-
Prepaid Expenses		10,584		10,584
TOTAL ASSETS	$	53,262,380	$	13,576,286
LIABILITIES AND  STOCKHOLDER'S EQUITY (DEFICIT)
LIABILITIES
Due to Parent	$	84,495	$	494,122
Escrow Payable		391,780		125,045
Due to Investors		106,305		36,409
Preferred Dividend Payable		2,500		-
Accrued Expenses		20,470		15,000
Mortgage Secured Notes Payable		45,956,402		13,173,466
Notes Payable		460,000		-
Estimated Tax Payable		3,785		-
Total Liabilities		47,025,737		13,844,042
STOCKHOLDER'S EQUITY (DEFICIT)
Retained Earnings (Deficit)		1,483,121		(271,278	)
Capital		3,522		3,522
Common Equity. No shares authorized/outstanding on an
actual basis and 5,000,000 shares outstanding out of
60,000,000 authorized on an adjusted basis		-		-
Series A Preferred Stock .01 Par Value. 200,000 outstanding on
an actual basis and 400,000 outstanding out of 40,000,000		4,750,000		-
authorized on an adjusted basis
Total Stockholder's Equity (Deficit)		6,236,643		(267,756	)
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)	$	53,262,380	$	13,576,286

See accompanying notes to the unaudited financial statements.

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KORTH DIRECT MORTGAGE INC

UNAUDITED STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1 THROUGH SEPTEMBER 30

	For the Nine Months Ended			For the Nine Months Ended
	September 30, 2019			September 30, 2018
REVENUES
Origination Revenue, Net	$	969,275		$	174,866
Servicing Revenue		119,791			37,685
Processing Revenue		9,420			4,150
Interest Income		790			87
Late Fees		18,999			-
Total Revenues		1,118,275			216,788
COST OF REVENUES
Broker Underwriting Expense		457,275			101,160
Mortgage Broker Expense		231,720			-
Co-Manager Engagement Fee		7,113			-
Bank Fees		7,410			2,344
Appraisal Costs		1,995			5,555
Marketing		18,520			23,743
License and Registration		7,351			13,498
Ratings		40,000			30,000
Technology Fees		4,377			5,030
Total Cost of Revenues		775,761			181,330
GROSS PROFIT		342,514			35,458
OPERATING EXPENSES
Office Supplies		2,850			1,818
Accounting		26,000			29,480
Salaries		227,538			107,881
Payroll Taxes		13,462			7,116
Professional & Legal		64,843			89,450
SEC Filing Expense		-			989
Travel & Entertainment		25,603			1,286
Business Development		2,768			599
Total Expenses		363,064			238,619
Net Loss From Operations		(20,550	)		(203,161	)
Other Income
Unrealized Gain on Mortgages		1,232,433			423,038
Gain from Write-Off of Due to Parent		548,802			-
Total Other Income		1,781,235			423,038
Other Expense
Preferred Dividend Expense		2,500			-
Estimated Tax Expense		3,785			-
Total Other Expense		6,285			-
NET INCOME	$	1,754,400		$	219,877

See Accompanying notes to the unaudited financial statements.

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KORTH DIRECT MORTGAGE INC

UNAUDITED STATEMENTS OF CASH FLOWS

	For the Nine Months Ended			For the Nine Months Ended
	September 30, 2019			September 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	1,754,400		$	219,877
Adjustments to Reconcile Net Income to
Net Cash Provided by/(Used In) Operating Activities:
Unrealized Gain on Mortgages Owned		(1,232,433	)		(423,038	)
Changes in Operating Assets and Liabilities:		-
Restricted Cash		(4,494,631	)		(84,191	)
Mortgage Secured Notes Issued		32,782,936			11,179,219
Portfolio Loans		(460,000	)		-
Accounts Receivable		(130,000	)		-
Prepaid Expenses		-			748
Due to Parent		(409,627	)		214,506
Preferred Dividend Payable		2,500			-
Escrow Payable		266,735			93,099
Due to Investors		69,896			(8,908	)
Accrued Expenses		5,470			(5,250	)
Estimated Tax Payable		3,785			-
Notes Payable		460,000			-
New Mortgage Lending		(28,624,937	)		(11,179,219	)
Total Adjustments		(1,760,306	)		(213,034	)
NET CASH USED IN OPERATING ACTIVITIES		(5,906	)		6,843
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of preferred stock		4,750,000			-
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES		4,750,000			-
NET INCREASE IN CASH AND CASH EQUIVALENTS		4,744,094			6,843
CASH AND CASH EQUIVALENTS – Beginning of Period		15,323			19,844
CASH AND CASH EQUIVALENTS – End of Period	$	4,759,417		$	26,687

See accompanying notes to the unaudited financial statements.

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KORTH DIRECT MORTGAGE INC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF BUSINESS

Korth Direct Mortgage Inc. (the “Company” or “KDM”) is a Florida corporation. In June 2019, the Company converted to a corporation from a limited liability company formerly known as Korth Direct Mortgage, LLC. 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 originates and funds loans made to commercial real estate borrowers. The loans are held by KDM as lender. KDM also services its loans, though it may use a sub-servicer for some loans. KDM funds its loans directly in the capital markets through issuance of Mortgage Secured Notes (“MSNs” or “Notes”). The MSNs are special obligations of KDM, payable to the extent that the underlying mortgage is paid by the borrower. MSNs are secured by KDM’s interest in the underlying corresponding mortgage loan (“CM Loan”). CM Loans are secured obligations of the borrowers that are generally a single-purpose entity that owns the underlying property that KDM finances.

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 Statements 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 $45,956,402 and it issued MSNs secured by those loans, in the amount of $41,798,402. The deals have been funded in multiple ways, including private placements, SEC registered deals, and 144A offerings.

PORTFOLIO LOANS

The Company recognizes loans made with its own capital, or those not securitized, under the caption “Portfolio Loans” on the balance sheet. In August 2019, the Company made a bridge loan to a customer to assist in getting the loan closed which it planned to be repaid upon that customer’s next loan funding. This $460,000 loan was funded by the Company as well as affiliates, and was paid off in October 2019.

REVENUE RECOGNITION

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

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Origination Fees

Loan origination fees represent revenue earned from originating mortgage loans, net of any credits given to the borrower. Origination fees may be on loans where KDM or another party is lender and KDM has acted as a broker in the transaction. Loan origination fees generally represent flat, per-loan fee amounts and are recognized as revenue at the time the loans are funded.

Servicing Fees

Loan servicing fees represent revenue earned for servicing loans for various investors. Loan servicing fees are a percentage of the outstanding unpaid principal balance and represent the difference between the 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 a short operating history and a small number 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 At September 30, 2019, the Company owed J.W Korth $84,495. On May 2, 2019, and as of March 31, 2019, J. W. Korth forgave its receivable of $548,802 that was on the Company’s balance sheet as Due to Parent in order to assist the Company in strengthening its balance sheet and Stockholder’s Equity.

INCOME TAXES

The Company converted to a corporation from a limited liability company in June of this year. The Company was previously a limited liability company and disregarded entity. As of June 4, 2019, the company has estimated income taxes at 21%.

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 nine months ended September 30, 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 September 30, 2019, this account has a balance of $391,780.

7

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 September 30, 2019, this account has a balance of $4,264,305 (commitment fees/accrued interest), which includes a balance of $4,158,000 pending closing of a loan.

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 September 30, 2019, the Company has ten customers excluding the $460K portfolio loan. 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, 22% of loans, by unpaid balance, are geographically concentrated in the state of Ohio and 23% are concentrated in the state of New Jersey.

NOTE 7 – RELATED PARTY TRANSACTIONS

The Due to Parent account is used to account for bills and expenses paid by J. W. Korth on behalf of 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; however, this debt was forgiven as of March 31, 2019 pursuant to an agreement dated May 1, 2019, between J. W. Korth and the Company. The cancellation of this liability resulted in a one-time gain, which is included on the Unaudited Statements of Operations for the nine months ended September 30, 2019. The Company owed J.W. Korth $84,495 and $494,122 as of September 30, 2019 and December 31, 2018, respectively. The support agreement between the Company and J. W. Korth remains in place to facilitate accounting and payables.

NOTE 8 – PREFERRED EQUITY

On September 27, 2019, the Company issued 200,000 shares of its Series A 6% Cumulative Perpetual Convertible Preferred Stock. The Company paid $250,000 in expenses related to the 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.

NOTE 9 – 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.

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Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Valuation Process

Cash and cash equivalents: 

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

Mortgages Owned and Mortgage Secured Notes Payable:

All of the loans on the balance sheet as of September 30, 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:

	September 30, 2019
	Total		Level I		Level II		Level III
Financial Assets
Mortgages Owned	$	41,798,402	$	-	$	41,798,402	$	-
Mortgage Servicing		1,447,892		-		-		1,447,892
Total Financial Assets	$	43,246,294	$	-	$	41,798,402	$	1,447,892
Financial Liabilities
Mortgage Secured Notes Payable	$	45,956,402	$	-	$	45,956,402	$	-
		December 31, 2018
Financial Assets
Mortgages Owned	$	13,173,466	$	-	$	13,173,466	$	-
Mortgage Servicing		215,459		-		-		215,459
Total Financial Assets	$	13,388,925	$	-	$	13,173,466	$	215,459
Financial Liabilities
Mortgage Secured Notes Payable	$	13,173,466	$	-	$	13,173,466	$	-

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Fair Value Measurements

Changes in Fair Value Measurements for the nine months ended September 30, 2019

The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the Statements of Financial Condition for the nine months ended September 30, 2019:

Changes in assets:
Nine months ended September 30, 2019	Mortgage Servicing Value
Beginning balance at January 1, 2019	$	215,459
Purchases		-
Sales of Mortgage Servicing Rights		-
Issues		-
Settlements		-
Net realized gain/loss		-
Unrealized Gain from newly issued mortgages		1,209,051
Fair Value adjustment		23,382
Transfers into Level 3		-
Transfers out of Level 3		-
Ending balance at September 30, 2019	$	1,447,892

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 nine months ended September 30, 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 September 30, 2019:

Investment type	Fair Value		Valuation technique	Unobservable inputs	Values
Mortgage servicing	$	1,447,892	Net Present Value	Prepayment Discount		10.76	%
				Discount rate		15.00	%

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

The following is a discussion of our historical 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.

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 2937 SW 27^th Avenue Suite 307, Miami, Florida 33133, and our telephone number is (305) 668-8485. Our website address iswww.korthdirect.com.

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. Our operating history is limited. As of September 30, 2019, we were wholly owned by 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. We do not anticipate incurring any research and development expenses nor expenses for plant and equipment, and that office space will continue to be shared with our parent company during calendar year 2019. We anticipate renting office space in 2020 and adding support staff by the end of that year as our lending and servicing activities require.

The total support we have received from J. W. Korth & Company through March 31, 2019, was $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 forgave the remaining receivable from KDM of $548,802. For the quarter ended September 30, 2019, KDM owed J W Korth & Company $84,495, as part of inter-company receivables. The Support Agreement remains in place.

Results of Operations for the Nine Months ended September 30, 2019

The Company had net income of $1,754,400 for the nine months ended September 30, 2019, substantially attributable to a one-time gain from the cancelation of a payable to J.W. Korth & Company of $548,802. The Company had revenues of $1,118,275 during the nine-month period, 87% of which was attributable to origination revenue, and for the period we had servicing and processing revenue of $119,791 and $9,420, respectively. Servicing revenue was reduced by the sale of approximately $200,000 of servicing rights for 18 months which began in January 2019. Costs were dominated by mortgage broker and brokerage underwriting expenses of $231,720 and $457,275, respectively, which together accounted for approximately 60% of direct costs. Gross profits grew to $342,514, an 866% increase over the same period in 2018, when the Company had gross profits of $35,458. Operating expenses rose as well, but at a slower pace of 52% ($363,064 for the current period compared to $238,619 for the same period in 2018) as we shift more salaries and expenses to KDM that were previously being paid by J. W. Korth.

Higher expenses and costs were offset by the unrealized gain on mortgages owned, which was $1,232,433 at September 30, 2019, an increase of $634,072 over the prior quarter due to new lending. A discussion of the assumptions underlying the valuation can be found in Note 8 of the Notes to our Unaudited Financial Statements.

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Financial Condition for the nine Months Ended September 30, 2019

As of September 30, 2019, we had eleven loans including the 460K portfolio loan on our balance sheet for a total of $42,258,402 ($41,798,402 without $460K) at fair value. The original loan amounts totaled $42,300,250 ($41,840,250, without $460K); however, two loans are amortizing and are carried at their remaining principal balances. We have recognized an unrealized gain of $1,232,433, 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 10.76% constant prepayment rate (“CPR”), along with other assumptions customary to the industry.

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

On September 27, 2019, we completed our first round of equity funding by an issuance of $5,000,000 Series A 6% Cumulative Perpetual Convertible Preferred Stock. The proceeds of sale of this preferred equity allow us to have a reserve for advancing payments to noteholders, providing additional funding to our borrowers, and capital needed for accelerating growth of the Company.

We have grown our origination team to 4 members and have a goal to close an additional $50M of loans in 2019.

Capital and Liquidity Needs

The Company completed a $5,000,000 (less issue costs of $250,000) Series A 6% Cumulative Perpetual Convertible Preferred Stock in September 2019. We expect to raise additional preferred capital, as necessary, in 2019 and succeeding years.

Status of KDM Loans

We include our annual reviews of CM Loans as exhibits to our quarterly reports on SEC Form 10-Q. Loans that are held by outside investors or securitized and reach the anniversary of their inception in a current reporting quarter are included as an exhibit to each report.

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 June 30, 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 September 30, 2019.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, 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.

See Item 3.01 of our Current Report on Form 8-K filed on June 12, 2019, for a description of the issuance of equity securities to our parent company pursuant to our conversion from a limited liability company to a corporation.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

Exhibit
Number	Description
1.1	Underwriting Agreement
3.1	Articles of Conversion from Korth Direct Mortgage LLC to Korth Direct Mortgage Inc.dated May 31, 2019
3.2	Articles of Incorporation of Korth Direct Mortgage Inc.dated May 31, 2019
3.3	Bylaws of Korth Direct Mortgage Inc. dated May 31, 2019
4.1	Trust Indenture and Security Agreement between Korth Direct Mortgage LLC, and Delaware Trust Company
4.2	Trust Indenture and Security Agreement (Rule 144A Offerings) between Korth Direct Mortgage LLC, and Delaware Trust Company
10.0	Support Agreement
25.	Statement of Eligibility of Trustee
31.1	Section 302 Certificate of Chief Executive Officer*
31.2	Section 302 Certificate of Chief Financial Officer *
32.1	Section 906 Certificate of Chief Executive Officer*
32.2	Section 906 Certificate of Chief Financial Officer*
99.1	Annual Loan Review – KDM2018-N005*
101.	Interactive Data File

*Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	KORTH DIRECT MORTGAGE INC.
Dated:     November 12, 2019	By:	/s/ James W. Korth
	James W. Korth, Chief Executive Officer

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