Korth Direct Mortgage 10-Q 2022 Q3 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 March 31, 2022

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

The Registrant voluntarily files Exchange Act Reports and has filed all Exchange Act reports for the preceding 12 months.

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.

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

As of March 31, 2022 there were 5,000,000 shares of Common Stock of Korth Direct Mortgage Inc. outstanding.

2

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	4
	Unaudited Consolidated Statements of Financial Condition	4
	Unaudited Consolidated Statements of Income	5
	Unaudited Consolidated Statement of Changes in Stockholders’ Equity	6
	Unaudited Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Consolidated Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
Item 4.	Controls and Procedures	20
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Mine Safety Disclosures	20
Item 5.	Other Information	20
Item 6.	Exhibits	21
SIGNATURES		22

3

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

KORTH DIRECT MORTGAGE INC.

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	March 31, 2022		December 31, 2021
ASSETS
Cash and Cash Equivalents	$	9,100,306	$	9,137,672
Restricted Cash		7,501,098		10,343,671
Mortgages Owned		362,172,539		326,312,345
Mortgage Servicing Rights, at Fair Value		10,468,042		9,616,357
Portfolio Loans		9,111,152		14,749,862
Securities		225,000		225,006
ROU Leased Asset		882,995		935,323
Goodwill		110,000		110,000
Property and equipment, net of depreciation		297,536		304,203
Other Assets		1,882,964		312,019
TOTAL ASSETS	$	401,751,632	$	372,046,458
LIABILITIES AND  STOCKHOLDERS' EQUITY
LIABILITIES
Escrows Payable	$	6,730,514	$	9,613,634
Lease Liability		929,528		981,418
Deferred Revenue, net		1,406,167		1,157,672
Deferred Tax Liability		2,164,979		2,050,220
Contingent Liability, net		489,952		489,952
Mortgage Secured Notes Payable		356,883,064		326,212,364
Other Liabilities and Payables		2,530,195		931,102
Total Liabilities		371,134,399		341,436,362
STOCKHOLDERS' EQUITY
Accumulated Earnings		4,886,129		4,885,445
Additional Paid-in Capital		25,725,785		25,719,332
Common Stock, $0.001 par value, 60,000,000 shares authorized 5,000,000 shares issued and outstanding at March 31, 2022 and December 31, 2021		5,000		5,000
Series A Preferred Stock, $0.001 par value, 400,000 shares authorized, 300,000 shares issued and outstanding at March 31, 2022 and December 31, 2021		300		300
Series B Preferred Stock, $0.001 par value, 20,000 shares authorized, 19,000 issued and outstanding at March 31, 2022 and December 31, 2021		19		19
Total Stockholders' Equity		30,617,233		30,610,096
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	401,751,632	$	372,046,458

See accompanying notes to the unaudited consolidated financial statements.

4

KORTH DIRECT MORTGAGE INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE PERIOD FROM JANUARY 1 THROUGH MARCH 31

	For the Three Months Ended			For the Three Months Ended
	March 31, 2022			March 31, 2021
REVENUES
Origination Revenue, Net	$	245,473		$	158,173
Servicing Revenue		1,105,947			478,822
Underwriting Income		240,000			224,639
Other Revenue		446,908			723,946
Total Revenues		2,038,328			1,585,580
COST OF REVENUES
Broker Underwriting Expense		443,498			196,211
Administrative Expenses		217,185			123,394
Total Cost of Revenues		660,683			319,605
GROSS PROFIT		1,377,645			1,265,975
OPERATING EXPENSES
Office		116,297			133,835
Compensation and Related Benefits		1,058,733			938,905
Professional & Legal		149,179			107,030
Advertising		83,372			5,507
Depreciation		16,837			7,977
Total Expenses		1,424,418			1,193,254
Net Income/(Loss) From Operations		(46,773	)		72,721
Other Income / (Expenses/Loss)
Unrealized Gain on Mortgages		851,685			783,823
Unrealized Loss on Mortgage Secured Notes		(155,506	)		(886	)
Interest Expense		(4,856	)		(10,444	)
Interest Income		-			9,888
Total Other Income		691,323			782,381
Net income before provision for income taxes		644,550			855,102
Provision for income taxes		167,717			224,655
Net Income		476,833			630,447
Series A Preferred Dividends		112,500			75,000
Series B Preferred Dividends		308,750			-
Net income attributable to common stockholder	$	55,583		$	555,447

See accompanying notes to the unaudited consolidated financial statements.

5

KORTH DIRECT MORTGAGE INC.

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THREE MONTHS ENDED MARCH 31, 2022 AND 2021

	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	$	5,000	$	5,016,139	$	1,365,653		$	6,386,992
Share-based compensation		-		-		-		-		-		-		6,453		-			6,453
Series A & Series B preferred stock dividends declared		-		-		-		-		-		-		-		(75,000	)		(75,000	)
Net income		-		-		-		-		-		-		-		630,447			630,447
Balance at March 31, 2021		200,000	$	200		-	$	-		5,000,000	$	5,000	$	5,022,592	$	1,921,100		$	6,948,892
Balance at January 1, 2022		300,000		300		19,000		19		5,000,000		5,000		25,719,332		4,885,445			30,610,096
Share-based compensation		-		-						-		-		6,453		-			6,453
Series A & Series B preferred stock dividends declared		-		-		-		-		-		-		-		(476,149	)		(476,149	)
Net income		-		-		-		-		-		-		-		476,833			476,833
						-		-
Balance at March 31, 2022		300,000	$	300		19,000	$	19		5,000,000	$	5,000	$	25,725,785	$	4,886,129		$	30,617,233

See accompanying notes to the unaudited consolidated financial statements.

6

KORTH DIRECT MORTGAGE INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Three Months Ended			For the Three Months Ended
	March 31, 2022			March 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	476,833		$	630,447
Adjustments to Reconcile Net Income to Net Cash (Used In)/Provided by Operating Activities:
Unrealized Gain on Mortgages Owned		(851,685	)		(783,823	)
Unrealized Loss on Mortgage Security Notes		155,506			886
Stock Compensation		6,453			6,453
Depreciation		16,837			7,977
Deferred rent expense from operating lease		438			35,540
Deferred income taxes		114,759			205,737
Changes in Operating Assets and Liabilities:
Mortgage Secured Notes Issued		30,670,700			27,016,742
Mortgage Secured Notes Purchased		(155,500	)		(98,014	)
Portfolio Loans		5,638,710			(81,481	)
Other Assets		(1,570,945	)		(228,181	)
Deferred Revenue, net		248,495			154,586
Escrow Payable		(2,883,120	)		1,644,689
Other Liabilities and Payables		1,544,194			1,473,777
New Mortgage Lending		(35,860,194	)		(24,859,532	)
Total Adjustments		(2,925,352	)		4,495,356
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES		(2,448,519	)		5,125,803
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(10,170	)		(97,948	)
NET CASH (USED IN) INVESTING ACTIVITIES		(10,170	)		(97,948	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Series A preferred stock dividends		(112,500	)		(75,000	)
Payment of Series B preferred stock dividends		(308,750	)		-
NET CASH (USED IN) FINANCING ACTIVITIES		(421,250	)		(75,000	)
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS		(2,879,939	)		4,952,855
CASH, CASH EQUIVALENTS AND RESTRICTED CASH – Beginning of Period		19,481,343			8,642,465
CASH, CASH EQUIVALENTS AND RESTRICTED CASH – End of Period	$	16,601,404		$	13,595,320
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the period for interest	$	4,856		$	10,444

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” or “KDM”) is incorporated in the State of Florida. The Company was created to originate mortgages and fund those mortgages with Notes secured by mortgage loans. J.W. Korth & Company Limited Partnership (“J.W. Korth”) is a wholly owned subsidiary of KDM.

J.W. Korth is a securities broker dealer registered with the Securities Exchange Commission and the states of Michigan, Florida, and various other states and an SEC registered investment adviser under the Investment Advisers Act of 1940. J.W. Korth is a licensed member of the Financial Industry Regulatory Authority (FINRA), the Securities Investor Protection Corporation, as well as a Municipal Securities Rulemaking Board (MSRB) registrant.

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 Generally Accepted Accounting Principles (“GAAP”). The accompanying financial statements have also been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

BASIS OF PRESENTATION

Beginning in the first quarter of 2022, we have condensed certain categories of information in our financial statements to enhance the readability and understanding of those statements by making them more succinct. As a result, certain footnote disclosures we normally include in our annual consolidated financial statements have been omitted, but remain prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our unaudited consolidated statements of financial condition, income, changes in stockholders’ equity, and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on March 31, 2022.

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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. 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.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash to amounts shown in the consolidated statements of cash flows as of March 31, 2022 and 2021:

	3/31/2022		3/31/2021
Cash and Cash Equivalents	$	9,100,306	$	1,638,276
Restricted Cash		7,501,098		11,957,044
Total Cash, Cash Equivlents and Restricted Cash	$	16,601,404	$	13,595,320

The Company maintains cash and restricted cash balances at financial institutions in excess of federally insured limits. The Company has not experienced any losses related to these balances. The Federal Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. The Company holds cash and restricted cash at well-known banks and does not believe that it is exposed to any significant credit risk on cash and cash equivalents

8

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. 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 consolidated Statements of Financial Condition, and is recognized on the consolidated Statements of Income 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 March 31, 2022, the Company has funded loans totaling $369,812,345 since inception and it issued MSNs secured by those loans in the amount of $369,712,364.

PORTFOLIO LOANS

The Company recognizes loans made with its own capital, or those not securitized, under the caption “Portfolio Loans” on the statement of financial position. As of March 31, 2022, the Company had issued Portfolio Loans in the amount of $11,535,000 and currently holds $9,111,152. These loans were funded by the Company, as well as affiliates.

GOODWILL

Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Section 350 requires an annual assessment of the recoverability of goodwill using a two-step process. The first step of the impairment test involves a comparison of the fair value of the reporting unit to its carrying value. If the carrying value is higher than the fair value or there is an indication that impairment may exist, a second step must be performed to compute the amount of the impairment. Management conducted its annual assessment of goodwill impairment and determined that there were no indicators of goodwill impairment and therefore did not record an impairment loss for the period ending March 31, 2022.

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 Statements 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.

9

LEASES

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).” The standard requires organizations to recognize right-of-use (“ROU”) assets and lease liabilities on the statement of financial position and disclose key information about leases that were historically classified as operating leases under previous GAAP. As part of the adoption of this standard, the Company recognizes 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.

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.

DEPRECIATION

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

INCOME TAXES

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.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13 Financial Instruments, Measurement of Credit Losses on Financial Instruments. This ASU updates the existing incurred loss model to a current expected credit loss (“CECL”) model for financial assets and net investments in leases that are not accounted for at fair value through earnings. The amendments affect cash and cash equivalents, reverse repurchase agreements, certain loans, held-to-maturity debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures and any other financial assets not excluded from the scope.  There are also limited amendments to the impairment model for available-for-sale debt securities. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2022 for public smaller reporting companies, including interim reporting periods within those fiscal years. Early adoption is permitted, but not before annual reporting periods beginning after December 15, 2018. Management is currently evaluating the impact that the adoption of ASU 2016-13 will have on the Company’s consolidated financial statements.

NOTE 3 – CONTINGENT LIABILITY

As part of the acquisition of J. W. Korth, 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 J. W. Korth.

10

The following table summarizes the unpaid Contingent Liability outstanding as of March 31, 2022 and December 31, 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 March 31, 2022		9,201
Contingent Liability, net	$	489,952

NOTE 4 – MORTGAGE SECURED NOTES PAYABLE

As stated above in Note 2, the Company funds mortgage loans that it makes by issuing Mortgage Secured Notes (“MSNs”), which are secured by those same mortgages. As of March 31, 2022 and December 31, 2021, the Company has funded loans totaling $362,172,539 and $326,312,345, respectively, and it issued MSNs secured by those loans in the amount of $356,883,064 and $326,212,364, respectively. The deals have been funded in multiple ways, including private placements, loan participations, SEC registered deals, and 144A offerings.

The MSNs are typically five-year interest-only notes with the principal balance due at maturity, but terms can vary. Interest rates on the MSNs range from 4.25% to 6.50% and mature at various dates from September 2023 to February 2027. The MSNs are payable to the extent that the Company receives payment from the borrower of the mortgage loans. Payments are received from the borrowers and passed through to the MSN noteholders.

The following table presents the future scheduled principal payments on the Company’s MSNs:

	Future Maturities of Debt
Last 9 months of 2022	$	356,914
2023		10,968,185
2024		108,727,917
2025		102,247,523
2026		118,372,000
Thereafter		16,210,525
Total	$	356,883,064

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 March 31, 2022, and December 31, 2021, this account has a balance of $6,684,743 and $9,519,859, respectively.

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, which is included in other liabilities and payables. As of March 31, 2022 and December 31, 2021, this account has a balance of $461,834 and $421,286, respectively, which consists of borrower early payments and commitments.

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 March 31, 2022 and December 31, 2021 were $45,771 and $93,775, respectively. This account is included as part of the Escrow Payable liability account.

The Company maintains an account for payment of quarterly Preferred Series B dividends that has a balance of $308,750 as of March 31, 2022, and December 31, 2021, respectively.

11

NOTE 6 - COMMITMENTS

In November 2020, the Company signed a lease for 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.

The Company also maintains an office in Lansing, Michigan for J.W. Korth.

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 Statements 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 March 31, 2022 was $62,640 compared to $86,160 for the year ended March 31, 2021, which includes additional expenses for common area, direct operating expense, utilities, parking, and taxes.

As of March 31, 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 3.8 years was $929,528.

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 March 31, 2022:

	Future Lease Payments
2022	$	187,978
2023		256,920
2024		264,087
2025		271,470
2026		30,504
Total Lease Payments		1,010,959
Less: Imputed Interest		(81,431	)
Present Value of Lease Liabilities	$	929,528

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 – RELATED PARTY TRANSACTIONS

From time to time, the Company purchases MSNs and holds them in its brokerage account. These MSNs are included on the statements of financial condition as mortgages owned. Also, from time to time, second lien or balance sheet loans may be all or partially funded by entities controlled by KDM directors or employees; such loans are serviced by KDM. In some circumstances, in the event a foreclosure becomes necessary, KDM may acquire properties where MSNs are in default as a deed in lieu of foreclosure, KDM may create single purpose entities to take title to such properties and liquidate them to satisfy any debts due under an MSN.

12

NOTE 9 – 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 consolidated Statements of Financial Condition.

The following is a summary of the loan origination fees and costs deferred and amortized for the three months ended March 31, 2022:

	Deferred			Deferred
	Origination			Origination			Deferred
	Fees			Costs			Revenue, net
Deferred Revenue at January 1, 2022	$	4,226,325		($	3,068,653	)	$	1,157,672
New loan deferrals		725,000			(438,890	)		286,110
Amortization of deferrals		(245,473	)		207,858			(37,615	)
Deferred Revenue at March 31, 2022	$	4,705,852		($	3,299,685	)	$	1,406,167

NOTE 10 – 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

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

For the three months ended March 31, 2022, and March 31, 2021, the Company recorded $6,453 of stock-based compensation expense. As of March 31, 2022, there was $6,453 in total unrecognized compensation expense related to non-vested employee stock options granted under the Incentive Plan, which is expected to be recognized during the second quarter of fiscal year 2022.

Stock option activity for the three months ended March 31, 2022, is summarized as follows:

2019 Stock Option Plan:	Shares	Weighted Average Exercise Price		Weighted Remaining Contractual Life (Years)
Options outstanding at January 1, 2022	835,000	$	1.00	7.50
Granted	-
Exercised	-
Expired or forfeited	-
Options outstanding at March 31, 2022	835,000	$	1.00	7.25
Options exercisable at March 31, 2022	417,500	$	1.00	7.25
Options expected to vest at March 31, 2022	417,500	$	1.00	7.25

NOTE 11 – 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.

13

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 subject to a thirty (30)-day grace period.

NOTE 12 – FAIR VALUE

FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not assumptions specific to the entity.

ASC 820 establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial assets and liabilities at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:

Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

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

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

14

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.

15

Fair Value Disclosure

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

	March 31, 2022
	Total		Level I		Level II		Level III
Financial Assets
Mortgages Owned	$	362,172,539	$	-	$	362,172,539	$	-
Mortgage Servicing		10,468,042		-		-		10,468,042
Portfolio Loans		9,111,152				9,111,152
Non-MSN Securities		225,000		-		-		225,000
Total Financial Assets	$	381,976,733	$	-	$	371,283,691	$	10,693,042
Financial Liabilities
Mortgage Secured Notes Payable	$	356,883,064	$	-	$	356,883,064	$	-

	December 31, 2021
Financial Assets
Mortgages Owned	$	326,312,345	$	-	$	326,312,345	$	-
Mortgage Servicing		9,616,357		-		-		9,616,357
Portfolio Loans		14,749,862				14,749,862
Non- MSN Securities		225,006		-		-		225,006
Total Financial Assets	$	350,903,570	$	-	$	341,062,207	$	9,841,363
Financial Liabilities
Mortgage Secured Notes Payable	$	326,212,364	$	-	$	326,212,364	$	-

Fair Value Measurements

Changes in Fair Value Measurements for the three months ended March 31, 2022

The following table presents a reconciliation of changes in Level 3 assets and liabilities reported in the Statements of Financial Condition for March 31, 2022:

Changes in assets:
Period ended March 31, 2022	Mortgage Servicing Value		Non- MSN Securities			Total Value
Beginning balance at January 1, 2022	$	9,616,357	$	225,006		$	9,841,363
Purchases		-		-			-
Trades		-		-			-
Sales		-		(6	)		(6	)
Issues		-		-			-
Settlements		-		-			-
Net realized gain/loss or Interest income		-		-			-
Unrealized Gain from newly issued mortgages		480,376		-			480,376
Fair Value adjustment		371,309		-			371,309
Transfers into Level 3		-		-			-
Transfers out of Level 3		-		-			-
Ending balance at March 31, 2022	$	10,468,042	$	225,000		$	10,693,042

16

The Company’s policy for recording transfers between levels of the fair value hierarchy is to recognize such transfers as of the financial statement date. For the three months ended March 31, 2022, there were no transfers between levels.

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

The following table presents quantitative information regarding the significant unobservable inputs the Company uses to determine the fair value of Level 3 investments held as of March 31, 2022:

			3/31/2022
Investment type	Fair Value		Valuation technique	Unobservable inputs	Values
Mortgage servicing	$	10,468,042	Net Present Value	Prepayment Discount		13.54	%
				Discount rate		15.00	%
Non-MSN Securities	$	225,000	Net Par Value

NOTE 13 – INCOME TAXES

The provision for income taxes was $167,717 for the three months ended March 31, 2022. The effective tax rate was 26% of the income before income taxes of $644,550, 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 $224,655 for the three months ended March 31, 2021. The effective tax rate was 26% of the income before income taxes of $855,102, 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 14 – PROPERTY AND EQUIPMENT

Property and Equipment are summarized as follows:

Schedule of property and equipment

March 31, 2022
Equipment	$	217,553
Furniture and fixtures		182,242
		399,795
Accumulated depreciation		(102,259	)
Net Property Equipment	$	297,536

December 31, 2021
Equipment	$	210,953
Furniture and fixtures		178,672
		389,625
Accumulated depreciation		(85,422	)
Net Property Equipment	$	304,203

Depreciation expense for the periods ending March 31, 2022 and March 31, 2021 was $16,837 and $7,977, respectively.

17

NOTE 15 – FINANCING ARRANGEMENTS

On March 31, 2022, The Company entered into a Master Repurchase Agreement and Securities Contract (the “Agreement”) with Signature Bank (“Signature”), for the provision of an uncommitted warehouse facility up to $100,000,000 (the “Line”). The Agreement provides for approximately a three-year term and may be terminated in accordance therein.

The Agreement provides that from time to time the Company may receive proceeds under the Line to originate first priority lien mortgages on real property. Signature will purchase the first lien commercial real estate mortgage loans (the “Loans”) pursuant to the Agreement. Each of the Loans will be originated in accordance with the underwriting and ratings criteria of the Company as further described in the Agreement. The Company will repurchase the Loans from Signature coincident with securitization or other disposition or pooling of the Loans under the terms and timeframes set forth in more detail in the Agreement. No amount has been drawn on the line as of March 31, 2022.

The Line has a back-up security interest grant secured by collateral specified in the Agreement in the event the Agreement is recharacterized as a secured loan. The Agreement contains financial covenants of the Company, including limitations on the Company’s incurrence of certain debt and requirements that the Company maintain certain financial ratios and minimum net worth.

The Company is in compliance with these covenants as of and for the quarter ended March 31, 2022.

In connection with entering into the Line, the Company incurred loans fees of approximately $1,500,000 included in other assets in the accompanying consolidated balance sheets. Loans fees associated with the Line will be amortized on a straight-line basis over the term of the Line.

NOTE 16 – SUBSEQUENT EVENTS

The Company has evaluated all events or transactions that occurred after March 31, 2022, through the date of these financial statements, which is the date that the consolidated financial statements were available to be issued. During this period, there were no material subsequent events requiring disclosure, other than those noted below.

KDM closed a loan for $33,000,000.

See “Status of KDM Loans” for updates on our loans.

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, 2021, 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”) began operations in October of 2016. We were founded by J. W. Korth & Company, LP, a FINRA and SEC registered broker-dealer, which is now a wholly owned subsidiary.

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”).

We are a licensed in Florida as a Mortgage Lender Servicer. Our NMLS License Number is 1579547.

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 in a variety of ways, including 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 three Months ended March 31, 2022

The Company generated revenues of $2,038,328 for the three months ended March 31, 2022, an increase of $452,748 compared with revenues of $1,585,580 for the three months ended March 31, 2021, a 29% increase. As of March 31, 2022, the Company owned mortgages of $362,172,539 compared with mortgages of $326,312,345 as of December 31, 2021 and $200,230,382 as of March 31, 2021, a 11% and 81% increase, respectively.

18

Gross profits increased by $111,670 to $1,377,645 during the three months ended March 31, 2022, compared with gross profit of $1,265,975 during the three months ended March 31, 2021. The increase in gross profits was primarily attributed to the increase in the amount of mortgages serviced during the three months ended March 31, 2022.

Operating expenses were $1,424,418 during the three months ended March 31, 2022, which was an increase of $231,164 compared with operating expenses of $1,193,254 during the three months ended March 31, 2021. The increase in operating expenses was driven primarily by the increase of $119,827 in compensation and related benefits and $77,865 in advertising expenses.

Other income decreased by $91,058 to $691,323 during the three months ended March 31, 2022, compared with other income of $782,381 during the three months ended March 31, 2021. The decrease in other income was due primarily to the unrealized loss on Mortgage Secured Notes of $155,506 during the three months ended March 31, 2022 compared to $886 during three months ended March 31, 2021. The unrealized loss is due to mark to market pricing of the MSNs we hold in our brokerage account, which have declined in market value due to interest rate rises.

During the three months ended March 31, 2022, the Company recorded $114,759 in deferred income tax expense compared with $205,737 of deferred income tax expense from March 31, 2021.

Net income decreased $153,614 to $476,833 for the three months ended March 31, 2022, compared with net income of $630,447 during the three months ended March 31, 2021. The decrease in 2022 was primarily attributed to the market shock created by the Russian invasion of Ukraine which stalled security issuance, and therefore loan closing for the last 6 weeks of the quarter.

Financial Condition for the three Months Ended March 31, 2022

As of March 31, 2022, we had $9,100,306 in cash, loans totaling $371,283,691, consisting of $362,172,539 in mortgages and $9,111,152 in portfolio loans, and Mortgage Servicing Rights with a fair value of $10,468,042 on our balance sheet. We have had loans partially or completely pay off in the amount of $13,139,806 for the three months ended March 31, 2022.

Liquidity and Capital Resources

The Company closed on a $100,000,000 financing repurchase facility on March 31, 2022.

Status of KDM Loans

All CM Loans are currently paying as agreed, however 2 are in technical default.

Except as set forth below, all of our CM Loans as of the date of this filing are performing.  One of our CM Loans is in technical default as a result of, inter alia, the borrower’s failure to properly follow loss payee provisions for insurance proceeds under the loan agreements.  All payments by the borrower under this loan continue to be made as required under the loan agreements.   Additionally, a separate CM Loan borrower is currently in pre-foreclosure. The borrower has failed to pay off a junior KDM mortgage upon maturity and triggered cross default provisions under the senior CM Loan.  KDM has activated the lockbox and is collecting rent directly from the tenants; the rents collected should be sufficient to service any MSN obligations under the first mortgage. KDM has been advised by the borrower that it is attempting to refinance the property to pay off all amounts due.  If the borrower is unable to secure such financing, it has agreed to convey the property to KDM as a deed in lieu of foreclosure.  KDM does not believe that there would be a deficiency on a sale of the property under either the first or second mortgage, but anticipates that in the event that it acquires the property,  it may invest an additional $1,500,000 to complete a secure information facility build out in progress, which would maximize the value of the building on sale.  KDM expect that during such time, debt service from collected rents would continue to be adequate to service the first mortgage, and other than the initial costs associated with the build out described above, expects to recover all principal, interest and build out costs subsequent to a proposed sale.

19

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 March 31, 2022.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is not currently subject to any material legal proceedings other than in the course of ordinary business which upon the disposition thereof, in the opinion of management are likely to have a material adverse effect on our consolidated financial position, cash flows, or results of operations.

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, 2021. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

20

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.

21

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: May 13, 2022	By:	/s/ James W. Korth
		James W. Korth, Chief Executive Officer

22