Korth Direct Mortgage 10-Q 2021 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

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 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.)

135 San Lorenzo Avenue, Suite 600, Coral Gables, FL 33146

(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.         þYes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).         þ Yes   o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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	o	Accelerated filer	o
Non-accelerated filer	o	Smaller Reporting company	þ
		Emerging growth company	þ

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).         Yes o No þ

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 September 30, 2021 there were 5,000,000 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

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PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

KORTH DIRECT MORTGAGE INC.

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

		September 30, 2021			December 31, 2020
ASSETS
Cash and Cash Equivalents	$	13,610,286		$	2,037,177
Restricted Cash		27,925,255			6,605,288
Mortgages Owned		281,403,866			175,370,850
Mortgage Servicing Rights, at Fair Value		7,958,479			3,864,416
Portfolio Loans		9,384,423			2,042,414
Securities		427,066			329,152
ROU Leased Asset		987,011			1,031,126
Goodwill		110,000			110,000
Property & equipment, net of depreciation		317,344			186,703
Deposits		359,872			140,359
Prepaid Expenses		160,504			120,770
Accounts Receivable		56,831			19,577
TOTAL ASSETS	$	342,700,937		$	191,857,832
LIABILITIES AND  STOCKHOLDERS' EQUITY
LIABILITIES
Escrows Payable	$	9,478,493		$	6,462,394
Due to Investors		428,762			142,894
Due (from) to clearinghouse brokers		(10,911	)		240,942
Lease liability		1,031,677			1,037,538
Preferred Dividend Payable		273,222			12,500
Deferred Revenue, net		984,548			500,130
Deferred Tax Liability		1,642,953			641,111
Accrued Expenses		88,880			57,197
Contingent liability, net		489,952			773,405
PPP loan payable		-			161,600
Mortgage Secured Notes Payable		298,421,866			175,370,850
Accounts Payable		76,780			70,279
Total Liabilities		312,906,222			185,470,840
STOCKHOLDERS' EQUITY
Accumulated Earnings		4,076,517			1,365,653
Additional Paid-in Capital		25,712,879			5,020,639
Common Stock, $0.001 par value, 60,000,000 shares authorized
5,000,000 shares issued and outstanding at September 30, 2021 and December 31, 2020		5,000			500
Series A Preferred Stock, $0.001 par value, 40,000,000 shares authorized,
300,000 shares issued and outstanding at September 30, 2021 and December 31, 2020		300			200
Series B Preferred Stock, $0.001 par value, 20,000 shares authorized, 19,000 and 0 shares
issued and outstanding at September 30, 2021, and December 31, 2020, respectiviely		19			0
Total Stockholders' Equity		29,794,715			6,386,992
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	342,700,937		$	191,857,832

See accompanying notes to the unaudited consolidated financial statements.

4

KORTH DIRECT MORTGAGE INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1 THROUGH SEPTEMBER 30

	For the Nine Months Ended			For the Nine Months Ended
	September 30, 2021			September 30, 2020
REVENUES
Origination Revenue, Net	$	629,369		$	299,794
Servicing Revenue		1,988,943			784,955
Processing Revenue		60,285			38,919
Underwriting Income		797,693			85,685
Trading Profits		1,466,528			223,987
Interest Income		160,826			130,763
Commissions		72,622			2,849
Late Fees		16,161			8,434
Total Revenues		5,192,427			1,575,386
COST OF REVENUES
Broker Underwriting Expense		247,908			147,428
Mortgage Broker Expense		508,069			181,904
Co-Manager Engagement Fee		2,630			2,640
Bank Transaction Fees		51,219			10,127
Appraisal Costs		27,920			16,069
Marketing		48,799			42,155
License and Registration		68,563			31,943
Insurance Review		-			1,000
Ratings		83,900			31,759
Technology Fees		186,780			50,374
Total Cost of Revenues		1,225,788			515,399
GROSS PROFIT		3,966,639			1,059,987
OPERATING EXPENSES
Office Supplies		68,149			14,176
Accounting		104,855			56,203
Salaries & Commissions		2,543,283			973,355
Payroll Taxes		137,058			54,640
Other Payroll Related Costs		67,224			27,591
Professional & Legal		543,754			95,996
Rent Expense		211,393			17,311
Utilities		17,416			4,106
Travel & Entertainment		30,423			8,342
Tradeshow Expense		90,969			9,199
Business Insurance		63,269			31,274
Depreciation		25,474			600
401K Match		46,451			-
Stock Compensation		19,359			19,359
Total Expenses		3,969,077			1,312,152
Net (Loss) From Operations		(2,438	)		(252,165	)
Other Income / (Expenses/Loss)
Unrealized Gain on Mortgages		4,094,063			836,484
Unrealized Gain/Loss on Mortgage Secured Notes		1,754			(839	)
Interest Expense		(30,300	)		(6,963	)
Interest Income		-			3,639
Gain from forgiveness of PPP Loan		161,600			-
Gain from Forgiveness of EIDL Advance		-			10,000
Total Other Income		4,227,117			842,321
Net income before provision for income taxes		4,224,679			590,156
Provision for income taxes		1,028,093			154,852
Net Income		3,196,586			435,304
Series A Preferred Dividends		225,000			225,000
Series B Preferred Dividends		260,722			-
Net income attributable to common stockholder	$	2,710,864		$	210,304

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 Nine Months Ended			For the Nine Months Ended
	September 30, 2021			September 30, 2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	3,196,586		$	435,304
Adjustments to Reconcile Net Income to
Net Cash (Used In)/Provided by Operating Activities:
Unrealized Gain on Mortgages Owned		(4,094,063	)		(836,484	)
Unrealized (gain) loss on Mortgage Secured Notes		(1,754	)		839
Gain from forgiveness of PPP loan		(161,600	)		-
Gain from forgiveness of EIDL advance		-			(10,000	)
Stock compensation expense		19,359			19,359
Depreciation		25,474			600
Deferred rent expense from operating lease		38,254			-
Deferred income taxes		1,001,842			154,852
Changes in Operating Assets and Liabilities:
Restricted Cash		(21,319,967	)		(12,405,263	)
Mortgage Secured Notes Issued		123,051,016			47,001,180
Mortgage Secured Notes Purchased		(96,160	)		(101,717	)
Portfolio Loans		(7,342,009	)		742,570
Accounts Receivable		(37,254	)		36,623
Prepaid Expenses		(39,734	)		(75,820	)
Deposits		(219,513	)		(41,717	)
Due to Parent		-			(45,247	)
Deferred Revenue, net		484,418			86,089
Escrow Payable		3,016,099			5,020,659
Due to Investors		285,868			138,792
Due to clearinghouse brokers		(251,853	)		92,805
Interest payable		(67,951	)		6,963
Accrued Expenses		31,683			(40,965	)
Accounts Payable		6,501			76,618
New Mortgage Lending		(106,033,016	)		(39,755,370	)
Total Adjustments		(11,704,360	)		65,366
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES		(8,507,774	)		500,670
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of propert and equipment		(156,115	)		(132,610	)
Acquisition of related party affiliate, net of cash acquired		(215,502	)		229,141
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES		(371,617	)		96,531
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Series A preferred stock dividends		(225,000	)		(225,000	)
Net proceeds from the sale of Series A preferred stock		2,375,000			-
Net proceeds from the sale of Series B preferred stock		18,302,500			-
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES		20,452,500			(225,000	)
NET INCREASE  IN CASH AND CASH EQUIVALENTS		11,573,109			372,201
CASH AND CASH EQUIVALENTS – Beginning of Period		2,037,177			2,378,716
CASH AND CASH EQUIVALENTS – End of Period	$	13,610,286		$	2,750,917
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the quarter for interest	$	30,300		$	-

See accompanying notes to the unaudited consolidated financial statements.

6

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		200,000	$	200		-	$	-		5,000,000	$	500	$	5,020,639		$	1,365,653		$	6,386,992
Options issued to employees and directors		-		-		-		-		-		-		19,359			-			19,359
Series A & Series B preferred stock dividends declared		-		-		-		-				-		-			(485,722	)		(485,722	)
Issuance of Series A Preferred Stock		100,000		100						-		-		2,374,900			-			2,375,000
Sale of Series B preferred stock		-		-		19,000		19		-		-		18,302,481			-			18,302,500
Reclassification										-		4,500		(4,500	)					-
Net income		-		-		-		-		-		-		-			3,196,586			3,196,586
Balance at September 30, 2021		300,000	$	300		19,000	$	19		5,000,000	$	5,000	$	25,712,879		$	4,076,517		$	29,794,715

See accompanying notes to the unaudited consolidated financial statements.

7

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 $317,658,746 since inception and issued MSNs secured by those loans in the amount of $313,670,750. Currently, the Company has $281,403,866 in Mortgages Owned, with $298,421,866 of MSNs outstanding. There is one CM Loan that was part of a single MSN series issuance that did not close as of the quarter end, resulting in an excess value of MSNs compared to Mortgages Owned of approximately $18,018,000.

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 September 30, 2021, the Company had issued Portfolio Loans in the amount of $9,384,423. These loans were funded by the Company, as well as affiliates.

8

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 September 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.

9

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

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 September 30, 2021, the Company had a net amount due from clearinghouse brokers of $10,911.

DEPRECIATION

Depreciation is provided on a straight-line basis using estimated useful lives of three to seven 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 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.

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 5,000,000 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 3,680,000 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:

	Consideration
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:

	Net Book Value
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

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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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 September 30, 2021:

Contingent liability to redeem J.W. Korth Preferred Capital Interest Partners		696,253
Contingent liability payment		(215,502	)
Accrued quarterly dividends recorded as interest expense through September 30, 2021		9,201
Contingent Liability, net	$	489,952

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 September 30, 2021, this account has a balance of $8,113,315.

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, 2021, this account has a balance of $18,446,762, which consists of borrower early payments and commitments and also a balance of $18,018,000 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 September 30, 2021 were $50,600. There is an additional account that consists of reserves for one borrower in the amount of $1,314,578.

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 September 30, 2021 was $211,393, which includes additional expenses for common area, direct operating expense, utilities, parking, and taxes.

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As of September 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 4.6 years was $1,031,677.

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 September 30, 2021:

	Future Lease Payments
2021	$	60,988
2022		249,957
2023		256,920
2024		264,087
2025		271,470
2026		30,504
Total Lease Payments		1,133,926
Less: Imputed Interest		(102,249	)
Present Value of  Lease Liabilities	$	1,031,677

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.

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 September 30, 2021, the Company had NaN 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 $109,370,280.

NOTE 9 – RELATED PARTY TRANSACTIONS

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 and September 2021, the Company purchased an MSN in the amount of $100,000 and $900,000, respectively, which were eliminated during consolidation and are not included on the statement of financial condition as securities and mortgage secured notes payble.

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).

For the period ended September 30, 2021, the Company paid underwriting fees of $277,546 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.

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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 nine months ended September 30, 2021:

Schedule of loan originating fees and costs deferred and amortized

	Deferred Origination Fees			Deferred Origination Costs			Deferred Revenue, Net
Deferred Revenue at December 31, 2020	$	2,617,443		$	(2,117,313	)	$	500,130
New loan deferrals		1,826,845			(1,146,333	)		680,512
Amortization of deferrals		(629,369	)		433,275			(196,094	)
Deferred Revenue at September 30, 2021	$	3,814,919		$	(2,830,371	)	$	984,548

NOTE 11 – 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 1,000,000 shares of the Company’s unissued, or reacquired, common stock, $0.001 par value. The Plan will be administered by the Board of Directors or a committee appointed by the Board.

In June 2019, the Company issued options to purchase 835,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The weighted-average grant date fair values of options granted was $0.1855 per share. The fair values of the stock-based awards granted were calculated with the following weighted-average assumptions:

Schedule of estimated fair value of stockoptions weighted-average assumptions

	2020
Risk-free interest rate:	1.76%
Expected term:	5.75 years
Expected dividend yield:	0%
Expected volatility:	35.01%

For the nine months ended September 30, 2021, the Company recorded $19,359, of stock-based compensation expense. As of September 30, 2021, there was $19,362 in total unrecognized compensation expense related to non-vested employee stock options granted under the Incentive Plan, which is expected to be recognized over the next nine months.

Stock option activity for the nine months ended September 30, 2021, is summarized as follows:

Schedule of stock option activity

2019 Stock Option Plan:	Shares		Weighted Average Exercise Price		Weighted Remaining Contractual Life (Years)
Options outstanding at January 1, 2021		835,000	$	1.00		8.5
Granted		-
Exercised		-
Expired or forfeited		-
Options outstanding at September 30, 2021		835,000	$	1.00		7.75
Options exercisable at September 30, 2021		417,500	$	1.00		7.75
Options expected to vest at September 30, 2021		417,500	$	1.00		8.0

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NOTE 12 – PREFERRED EQUITY

On September 27, 2019, the Company issued 200,000 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 September 15, the Company sold an additional 100,000 shares of its Series A 6% Cumulative Perpetual Convertible Preferred Stock for net proceeds of $2,375,000.

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 $0.001 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 $1,000.00 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 $1,000.00 per share, plus accrued and unpaid dividends, as follows:

· 10% of the originally-issued shares of Series B preferred stock on June 29, 2027;

· 10% of the originally-issued shares of Series B preferred stock on June 29, 2028;

· 10% of the originally-issued shares of Series B preferred stock on June 29, 2029;

· 20% of the originally-issued shares of Series B preferred stock on June 29, 2030; and

· 50% of the originally-issued shares of Series B preferred stock on June 29, 2031.

The Company’s obligations to redeem the Series B preferred stock 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.

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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.

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Fair Value Disclosure

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

	September 30, 2021
	Total		Level I		Level II		Level III
Financial Assets
Mortgages Owned	$	281,403,866	$	-	$	281,403,866	$	-
Mortgage Servicing		7,958,479		-		-		7,958,479
Securities		427,066		-		-		427,066
Total Financial Assets	$	289,789,411	$	-	$	281,403,866	$	8,385,545
Financial Liabilities
Mortgage Secured Notes Payable	$	298,421,866	$	-	$	298,421,866	$	-

	December 31, 2020
Financial Assets
Mortgages Owned	$	175,370,850	$	-	$	175,370,850	$	-
Mortgage Servicing		3,864,416		-		-		3,864,416
Securities		329,152		-		46		329,152
Total Financial Assets	$	179,564,418	$	-	$	175,370,896	$	4,193,568
Financial Liabilities
Mortgage Secured Notes Payable	$	175,370,850	$	-	$	175,370,850	$	-

Fair Value Measurements

Changes in Fair Value Measurements for the nine months ended September 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 nine months ended September 30, 2021:

Changes in assets:
Period ended September 30, 2021	Mortgage Servicing Value			Securities			Total Value
Beginning balance at January 1, 2021	$	3,864,416		$	329,106		$	4,193,522
Purchases		-			890,475			890,475
Trades		-			26,043			26,043
Sales		-			175,000			175,000
Eliminating entry					(1,000,000	)		(1,000,000	)
Issues		-			-			-
Settlements		-			-			-
Net realized gain/loss or Interest income		-			4,688			4,688
Unrealized Gain from newly issued mortgages		4,596,273			-			4,596,273
Fair Value adjustment		(502,210	)		1,754			(500,456	)
Transfers into Level 3		-			-			-
Transfers out of Level 3		-			-			-
Ending balance at September 30, 2021	$	7,958,479		$	427,066		$	8,385,545

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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, 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 September 30, 2021:

Investment type	Fair Value		Valuation technique	Unobservable inputs	Values
Mortgage servicing	$	7,958,479	Net Present Value	Prepayment Discount		15.31	%
				Discount rate		15.00	%
Securities	$	427,066	Net Present Value

NOTE 14 – INCOME TAXES

The provision for income taxes was $1,028,093 for the nine months ended September 30, 2021. The effective tax rate was 24.3% of the income before income taxes of $4,224,679, 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 $154,852 for the nine months ended September 30, 2020. The effective tax rate was 26.2% of the income before income taxes of $590,156, 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.

NOTE 15 – PROPERTY AND EQUIPMENT

Property and Equipment are summarized as follows:

Schedule of property and equipment

Equipment	$	207,757
Furniture and fixtures	$	175,857
	$	383,614
Accumulated depreciation	$	(66,270	)
Net Property Equipment	$	317,344

Depreciation expense for the period ending September 30, 2021 was $25,474.

NOTE 16 – SUBSEQUENT EVENTS

The Company has evaluated all events or transactions that occurred after September 30, 2021, through the date of these financial statements, which is the date that the financial statements were available to be issued. During this period, there were no material subsequent events requiring disclosure, other than those noted below.

An MSN issued in September with a notional value of $18,200,000, and included on our balance sheet for the period ending September 30, 2021, was redeemed via special redemption on October 13, 2021, because the loans underlying the offering failed to close. Accordingly, the Company’s Restricted Cash asset and Mortgaged Secured Notes Payable liabilities were reduced by $18,018,000, which is the notional value net of a dealer credit of $182,000. In October 2021, we recaptured $150,000 of the dealer credit from J.W Korth.We also paid interest in the amount of $77,610 to the noteholders for the period the MSNs were outstanding.

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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, 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 nine Months ended September 30, 2021

The Company generated revenues of $5,192,427 for the nine months ended September 30, 2021, an increase of $3,617,041 compared with revenues of $1,575,386 for the nine months ended September 30, 2020, a 303% increase. As of September 30, 2021, the Company owned mortgages of $281,403,866 compared with mortgages of $175,370,580 as of December 31, 2020 and $125,448,182 as of September 30, 2020, a 60% and 89% increase, respectively.

Gross profits increased by $2,906,652 to $3,966,639 during the nine months ended September 30, 2021, compared with gross profits of $1,059,987 during the nine months ended September 30, 2020. The increase in gross profits was primarily attributed to the increase in the amount of mortgages serviced during the nine months ended September 30, 2021 with lower levels of mortgage related costs as a percentage of revenues, which generated higher gross margins.

Operating expenses were $3,969,077 during the nine months ended September 30, 2021, which was an increase of $2,656,925 compared with operating expenses of $1,312,152 during the nine months ended September 30, 2020. The increase in operating expenses was driven primarily by the increase of $1,569,928 in payroll related costs and $447,758 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 $3,384,796 to $4,227,117 during the nine months ended September 30, 2021, compared with other income of $842,321 during the nine months ended September 30, 2020. The increase in other income was due to the unrealized gain of $4,094,063 on mortgage servicing rights.

During the nine months ended September 30, 2021, the Company recorded $1,612,539 in deferred income tax expense compared with $641,111 of deferred income tax expense from September 30, 2020.

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Net income increased $2,761,282 to $3,196,586 for the nine months ended September 30, 2021, compared with net income of $435,304 during the nine months ended September 30, 2020. The increase in 2021 was primarily attributed to the increase in other income of $4,227,117, and a decrease in net loss from operations of $2,438, compared with the nine months ended September 30, 2020.

Financial Condition for the nine Months Ended September 30, 2021

As of September 30, 2021, we had $13,610,286 in cash, forty-seven loans totaling $290,788,289, consisting of $281,403,866 in mortgages and $9,384,423 in portfolio loans, and Mortgage Servicing Rights with a fair value of $9,384,423 on our balance sheet. We have had six loans partially or completely pay off in the amount of $11,773,290 for the nine months ended September 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 issued an additional 100,000 shares of Series A Convertible Perpetual Preferred Stock on September 15, 2021 for a net capital infusion of $2,375,000.

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. All of our CM Loans are performing.

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 September 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 September 30, 2021.

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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.

Without admitting or denying responsibility, the Company’s broker dealer subsidiary and its principals, James Korth and Holly MacDonald-Korth, agreed to a settlement with the United States Securities and Exchange Commission (“SEC”). Accordingly, by a consent order issued on September 13, 2021, the SEC determined that the broker dealer violated Sections 206(3) and 206(4) of the Investment Advisers Act of 1940 (the “Advisers Act”),  as well as Rule 206(4)-7.

The SEC determined that 201 transactions executed between March 2015 and October 2018 were riskless principal transactions which would have required us to make certain written disclosures and obtain client consent prior to the completion of the transactions, and that we did not have sufficient policies and procedures to avoid the error.

Pursuant to the consent order, the broker dealer was censured and ordered to pay disgorgement of $46,857, prejudgment interest of $4,676, and a civil penalty of $125,000. James Korth and Holly MacDonald-Korth were ordered to pay civil fines of $50,000 and $25,000, respectively.

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.

The Company issued an additional 100,000 shares of Series A Convertible Perpetual Preferred Stock on September 15, 2021 for a net capital infusion of $2,375,000.

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
3.1	Articles of Conversion from Korth Direct Mortgage LLC to Korth Direct Mortgage Inc. dated May 31, 2019 (incorporated by reference to our Current Report on Form 8-K filed June 12, 2019
3.2	Articles of Incorporation of Korth Direct Mortgage Inc. dated May 31, 2019 (incorporated by reference to Current Report on Form 8-K filed June 12, 2019)
3.3	Amendment to Articles of Incorporation of Korth Direct Mortgage Inc. and Certificate of Designation of Series A 6% Cumulative Perpetual Convertible Preferred Stock, as filed with the Florida Secretary of State on September 20, 2019 (incorporated by reference to Current Report on Form 8-K filed July 1, 2021)
3.4	Amendment to Articles of Incorporation of Korth Direct Mortgage Inc. and Amended Certificate of Designation of Series A 6% Cumulative Perpetual Convertible Preferred Stock, as filed with the Florida Secretary of State on March 20, 2020 (incorporated by reference to Current Report on Form 8-K filed July 1, 2021)
3.5	Amendment to Articles of Incorporation of Korth Direct Mortgage Inc. and Amendment to Amended Certificate of Designation of Series A 6% Cumulative Perpetual Convertible Preferred Stock, as filed with the Florida Secretary of State on June 25, 2021 (incorporated by reference to Current Report on Form 8-K filed July 1, 2021)
3.6	Articles of Amendment to Articles of Incorporation of Korth Direct Mortgage Inc. and Certificate of Designation of Series B 6.50% Cumulative Non-Voting Redeemable Secured Preferred Stock, as filed with the Florida Secretary of State on June 25, 2021 (incorporated by reference to Current Report on Form 8-K filed July 1, 2021)
3.7	Bylaws of Korth Direct Mortgage Inc. dated May 31, 2019 (incorporated by reference to Current Report on Form 8-K filed June 12, 2019)
4.1	Trust Indenture and Security Agreement between Korth Direct Mortgage LLC, and Delaware Trust Company dated November 17, 2017 (incorporated by reference to our Registration Statement on Form S-1 filed on February 22, 2018)
4.2	Trust Indenture and Security Agreement (Rule 144A Offerings) between Korth Direct Mortgage LLC, and Delaware Trust Company dated September 20, 2018 (incorporated by reference to Quarterly Report on Form 10-Q filed November 13, 2018)
4.3	Trust Indenture and Security Agreement (Private Placements) between Korth Direct Mortgage Inc. and Delaware Trust Company dated September 30, 2020 (incorporated by reference to Current Report of Form 8-K filed October 7, 2020)
10.1	2019 Stock Option Plan (incorporated by reference to Current Report on Form 8-k filed June 28, 2019)
10.2	Purchase Agreement dated July 31, 2020, among Korth Direct Mortgage Inc., a Florida corporation; J.W. Korth & Company Limited Partnership, a Michigan limited partnership; and JW Korth LLC, a Florida limited liability company (incorporated by reference to Current Report on Form 8-K filed August 6, 2020)
10.3	First Amendment to Purchase Agreement
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*
101	Interactive Data File*
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)*

*Filed herewith.

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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 15, 2021	By:	/s/ James W. Korth
		James W. Korth, Chief Executive Officer

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