{"url_path":"/sec/cik-0001695963/10-k/2026/item-1","section_key":"item-1","section_title":"Item 1 Business**","topic":"sec","document":{"doc_type":"10-K","doc_date":"2026-06-01","source_url":"https://www.sec.gov/Archives/edgar/data/1695963/0001214659-26-006969-index.html","accession_number":"0001214659-26-006969","cik":"0001695963","ticker":null,"issuer_name":"Korth Direct Mortgage Inc.","edgar_url":"https://www.sec.gov/Archives/edgar/data/1695963/0001214659-26-006969-index.html","primary_entity_key":"0001695963","primary_entity_name":"Korth Direct Mortgage Inc."},"word_count":3947,"has_tables":true,"body_markdown":"**Item 1. Business**\n\n \n\nThroughout this Report we use the terms “KDM,” “we,”\n“Company,” and “us” to refer to Korth Direct Mortgage Inc, and its subsidiaries.\n\n \n\nOur principal executive offices are located at\n135 San Lorenzo Avenue Suite 600, Coral Gables, Florida 33146, and our telephone number is (305) 668-8485. Our website address is korthdirect.com.\n\n \n\nKorth Direct Mortgage Inc. began its formal operations\nin October of 2016 when we engaged our Chief Lending Officer. KDM is a licensed Mortgage Lender Servicer with the State of Florida. Our\nNMLS License Number is 1579547. KDM converted from a Florida limited liability company to a Florida corporation effective June 6, 2019.\nOn July 31, 2020, KDM’s ownership was reorganized, and its former sole shareholder, J. W. Korth & Company Limited Partnership\n(“J. W. Korth”), a Michigan limited partnership which is a FINRA and SEC registered broker-dealer founded in 1982, became\na wholly-owned subsidiary of the Company.\n\n** **\n\n**Overview**\n\n \n\nKDM originates and funds loans secured by commercial\nreal estate (each a “CM Loan” and collectively the “CM Loans”). CM Loans are held by KDM or its wholly-owned subsidiary\nKDM Funding I, LLC, as lender. KDM is also the servicer of the CM Loans, though it may use a sub-servicer for some loans. KDM funds its\nCM Loans directly in the capital markets through issuance of Mortgage Secured Notes (“MSNs” or “Notes”), through\ndirect participations, or other means (see “The KDM Process”). The MSNs are special obligations of KDM, payable to the extent\nthat the underlying mortgage is paid by the borrower. MSNs are secured by KDM’s interest in the underlying CM Loan. CM Loans are\nsecured obligations of the borrowers, which are generally a single-purpose entity formed or existing that owns the underlying property\nthat is financed.\n\n \n\nKDM’s primary business line is lending and\nservicing. KDM also has an additional business segment, asset management, in which we manage the properties that we have taken back from\nour borrowers due to non-performance. See “Segment Reporting” for more information on each segment.\n\n \n\nOur loan origination team is comprised of employees\nand a network of brokers that have joined the KDM Broker Network to submit loans to us via our website and email. We have created software\nthat integrates with our customer relationship management (“CRM”) software to optimize our digital marketing campaigns and\nstreamline our origination program. We also engage in traditional email, internet, trade show, and telephone marketing as well as leveraging\nour broker network to source new deals.\n\n \n\n 4 \n\n [Table of Contents](#toc)\n\n \n\nWe have positioned ourselves in the lending market\nas a source for commercial real estate loans of higher quality borrowers and borrowers that may not qualify or may not want to go through\nthe process for bank loans, but whose loans have strong property and mortgage-related metrics. We fill the gap between traditional lenders\nand hard money lenders, what we call Middle-Money.TM. Property metrics depend on the type of CM Loan being offered and are\ndescribed below.\n\n \n\nKDM is currently focused on the market for multi-family\nvalue-add bridge loans and loans secured by mortgages on commercial tenanted properties, including multi-family housing, specialty offices,\nindustrial, retail and warehouses, but may fund other types of commercial real estate.\n\n \n\nKDM funds its loans in a variety of ways, including\nby securitizing them in the capital markets as MSNs. J. W. Korth may act as the initial purchaser of MSN Notes and distribute them to\ninstitutional investors. The proceeds from the closing of each MSN issuance are used to complete the funding of the CM Loan or CM Loans\nunderlying each MSN or to repurchase the CM Loan from our warehouse line. KDM also sells loan participations, and senior and subordinated\nnotes sometimes alongside an MSN, and sometimes separately. KDM may hold loans in part or in their entirety on its balance with and without\nfinancing (“Portfolio Loans”).\n\n \n\nWhile KDM has funded the bulk of its loans via\nMSNs, KDM’s business has broadened beyond MSNs.; we have diversified our funding channels. In order to encompass all of the options,\nthroughout this document when referring to KDM’s business as a whole, we will refer to CM Investments and CM Investors. These terms\ninclude our MSN program and its Noteholders, loan participations and the participants, senior note sales and their purchasers, funds and\ntheir investors, and separately managed accounts and their investors.\n\n \n\n**The KDM Process**\n\n \n\nWhen KDM identifies a property proposed for financing,\nit is screened by KDM’s origination underwriting team. If the proposed financing passes preliminary underwriting and meets criteria\nfor one of KDM’s lending programs and/or the KDM Rating process, KDM will put out a term sheet to the prospective borrower. Once\nthe term sheet is signed and deposit is received, KDM orders an appraisal and other third-party reports that it has determined are necessary\nto underwrite the file. Depending on the type of planned loan funding, KDM will begin its CM Investor sales process on a parallel path\nwith underwriting. Once underwriting is complete, KDM closes the loan.\n\n \n\nKDM may market the loan as an MSN, for participation,\nor close the loan on a warehouse line, distributing the interests in the loan to investors later.\n\n \n\nIf the loan is being funded by a simultaneous\nMSN issuance, the initial purchaser will execute orders and funds will transfer on the settlement date to one of KDM’s segregated\naccounts. KDM will then fund the CM Loan and issue the MSNs.\n\n \n\nKDM receives monthly interest and principal payments\nfrom CM Loan borrowers. KDM collects its service fee from the interest portion of the payment and then disburses the remaining interest\nand principal via wire transfer, ACH, or to DTC for credit to CM Investors’ accounts at their respective DTC member or those brokerage\nfirms corresponding with DTC members, or directly, as the case may be.\n\n \n\nWe make CM Loans to borrowers throughout the United\nStates. As of the date of this Report we were not dependent on any single party for a material amount of our revenue.\n\n \n\nBorrowers identify their intended use of CM Loan\nproceeds in their initial CM Loan request. In some cases, we do not verify or monitor a borrower’s actual use of funds following\nthe funding of a CM Loan unless otherwise specified in the offering memorandum for the MSN.\n\n \n\n**The KDM Ratings System**\n\n \n\nIn order to assist us with pricing and underwriting\nCM Loans, KDM has created an internal CM Loan rating system which we use for our MSN program.\n\n \n\nThe scoring matrix consists of seven factors,\neach weighted according to its relative importance in how we view the loans we choose to make. The seven factors are: loan to value, debt\nservice coverage ratio, property type, property/improvement age, property demand/metropolitan statistical area, building condition, and\nsponsor experience. For bridge loans, we consider additional factors including: business plan, take-out lenders, development/lease up\nschedule, take-out loan sizing.\n\n \n\nWe grade each CM Loan on these factors when it\nis presented to us, which results in a numerical figure that we then translate to a traditional AAA-BBB scale with + and – gradation.\nWe publish our KDM Rating along with each note term sheet and offering memorandum and update it annually in our annual reviews in the\nquarterly or annual report that corresponds with the anniversary of the CM Loan issuance.\n\n \n\n 5 \n\n [Table of Contents](#toc)\n\n \n\nThe KDM Loan Committee meets annually to review\nthe KDM Ratings System. We review the performance, the factors, and how well those factors are weighted. The KDM Loan Rating Committee\nmet on March 13, 2025 to review the KDM rating methodology, but made no changes to its current metrics. The methodology considers seven\nkey criteria and is then subject to adjustment on a deal-by-deal basis. The seven criteria are: LTV (Loan to Value), DSCR (Debt Service\nCoverage Ratio), Property Type, Lease terms, Location, Building Condition and Sponsor Experience. We added additional criteria and weightings\nfor multi-family bridge lending that include non-GSE geographic criteria, different occupancy categories, building class, and project\ntype.\n\n** **\n\n**THE KDM UNDERWRITING PROCESS**\n\n \n\nKDM has several different loan programs, each of which has its own\nunderwriting guidelines. Our account executives source loans from commercial mortgage brokers or directly from borrowers which fit our\nloan parameters.\n\n \n\nOnce we receive a full loan package, we pre-underwrite the loan to\nconfirm that it roughly fits the target loan program. If it does, we provide either a soft-quote or a term sheet to the prospective borrower.\nIf the estimated terms are accepted, then the term sheet is signed and a deposit is collected. The loan is then considered “under\napplication” and we use the borrower’s deposit funds to order third party reports, including: appraisal, appraisal review,\nenvironmental assessment, property condition assessment, title, and any other report we deem necessary depending on the property location\nand business plan for the property. Simultaneously, KDM gathers all of the additional diligence and credit documentation and then prepares\nany capital raise pitch decks or other offering documents, depending on the planned disposition for the loan.\n\n \n\nOnce KDM receives the third party reports and\ncompletes all of its property and underwriting diligence, KDM prepares a commitment letter for the borrower. KDM will also have a third\nparty underwrite the loan in certain circumstances. When the borrower executes the commitment letter, it pays KDM a commitment fee, which\nis credited at closing along with the application fee.\n\n \n\nKDM may close and fund CMLs before securitization\neither with its own funds, or on its warehouse line, or simultaneously with securitization.\n\n \n\n*MSN Closing*\n\n \n\nKDM will schedule closing for the CML on or within\na few days after the settlement date of the MSN. However, as with all loan closings, and particularly with multi-state, multi-property\nloans, at times there may be certain delays in closing. KDM does not expect closing delays to exceed a few business days, but in some\ninstances the delay may be longer than anticipated. On the Settlement Date, funds, net of selling concession, will be wired by the Initial\nPurchaser or the underwriter, as the case may be, to KDM’s segregated account for loan funding. KDM will wire such funds to the\nclosing agent for the CML as soon as good title to the property is received and KDM authorizes funding of the CML. Barring any delays\nin closing, this occurs on the Settlement Date, and KDM wires funds to the title company handling the transaction as soon as practicable\nafter receipt.\n\n \n\nOnce funds are collected, the CML will be finalized\nwith documents filed in the proper jurisdiction showing KDM as mortgagee. Documents will also be filed, pursuant to the Indenture, assuring\nthe Trustee a first perfected interest in the CML. At the same time, KDM will create and execute a physical note for issuance to Cede\n& Company and delivery to DTC, or its agent. DTC will credit each participating dealer with the appropriate face amount of the\nnote for further credit to each of its participating client accounts. \n\n \n\nIn the event that a CML was closed by a correspondent\nlender, such CML will be closed in the name of the correspondent lender and will be assigned to KDM at closing. Any other material aspects\nof the process remain the same.\n\n \n\n*Non-MSN Closing*\n\n \n\nDepending on the plans for the CML post-closing,\nKDM may close the loan on its warehouse line, with its own capital, with capital from participants, or table-fund via assignment or participation.\nThe warehouse lender provides a percentage of the capital to close the loan, and KDM provides the balance, according to the terms of\nits warehouse repurchase agreement. KDM may also lend additional funds to CML Borrowers using its own capital. These loans are junior\nto any CML and KDM may elect to sell or assign the rights to receive payments under these loans to a third party, provided however that** **these\nnotes shall remain in the name of KDM, and KDM shall continue providing the servicing of such notes until such time that the CMLs for\nthe underlying property have been paid in full. \n\n** **\n\n**How KDM Prices CM Loans and CM Investments**\n\n \n\nNote maturities and yields to CM Investors must\nbe competitive with other options they have for secured investments. Notes are not guaranteed by any federal agency, so they must be competitively\npriced when compared with other types of asset-secured debt, such as lower investment grade corporate bonds or other mortgage loans. Borrowers\nmay have other options for acquiring new mortgage funding. KDM must be competitive with these options in order to acquire new CM Loans.\nThe dynamic between these two marketplaces is a principal factor in the determination of the terms of KDM Notes and other CM Investments.\n\n** **\n\n****\n\n 6 \n\n [Table of Contents](#toc)\n\n** **\n\n**How our Servicing Fee Applies**\n\n \n\nKDM services the underlying CM Loans and manages\nthe distribution and payment of interest and principal on the corresponding CM Investments. For these services it charges an annual servicing\nfee (“Servicing Fee”) targeted at 1.00% for MSNs. The Company also has contractual servicing agreements with related parties\nand third parties that are significantly lower. The Servicing Fee could be lower or higher for a given CM Loan based on that CM Loan and\nthe corresponding CM Investment’s terms, as disclosed in the offering material for each CM Investment. For some of its lending programs,\nKDM has a fixed contractual servicing rate. The Servicing Fee accrues to KDM and is paid by the borrower from the borrower’s CM\nLoan interest payments. For CM Investments where there is not an explicit servicing agreement, the Servicing Fee is the difference between\nthe rate paid by the borrower and the rate paid to investors on the CM Investment. However, the Servicing Fee may sometimes be shared\nwith other parties, and not accrue directly to KDM. The Servicing Fee is applied to every interest payment received on the underlying\nCM Loan. Therefore, if we receive 7.00% interest annually from the underlying CM Loan and the Servicing Fee is 1%, the Note payments will\nbe 6.00% annually, barring any other expenses. For the year ended December 31, 2025, the average Servicing Fee collected was 1.031%. KDM\nmay also derive Servicing Fees from loans that it sells to third parties. The rates received for servicing these loans are set by the\npurchaser and KDM.\n\n \n\n**CM Loan Servicing**\n\n \n\nKDM is responsible for servicing and asset management\non all the loans it makes. This includes collecting payments from borrowers and delivering payments to investors and on its Notes. KDM\nalso manages the tax and insurance escrow accounts of the borrowers and their annual tax and insurance payments. KDM also handles all\nloan requests, lease reviews and approvals, draw requests and annual reviews within its asset management department. KDM has a multi-disciplinary\nstaff with extensive servicing and asset management experience and uses a suite of servicing software and homegrown reporting software\nto manage the ongoing servicing of our book of CM Loans. Currently KDM services 100% of its loans itself, though we may engage a third-party\nservicer in the future.\n\n \n\nKDM makes advances of funds from time-to-time\nas it believes necessary. KDM may advance payments to CM Investors if it believes a borrower will return to current status promptly. KDM\nalso may advance payments to local tax authorities, ground lessors, and insurance carriers as it believes necessary to protect the CM\nLoan or underlying collateral.\n\n \n\nKDM has custodial responsibility for the CM Loans\nand pursuant to the Trust Indenture for the Notes. There are no limitations in KDM’s liability as servicer of its loans.\n\n \n\nKDM retains a Servicing Fee for each CM Loan.\nSee “How our Servicing Fee Applies,” above. KDM has relationships with other servicers and but is currently performing both\nprimary and special servicing for its current book of loans.. Should a specific backup or special servicer be named for an offering, it\nwill be specified in the offering documents for that CM Investment.\n\n \n\nCM Loan payments are deposited or transmitted\nvia ACH to the KDM In Trust For 2 Segregated Account. This segregated account collects payments from all CM Loans, except where otherwise\nspecified in the offering documents, and is segregated from the KDM operating funds. This account is managed as an omnibus account and\nfunds received are disbursed for their respective payment on the CM Investments. We also debit this account for our Servicing Fee as described\nabove.\n\n \n\nCM Loans may also retain an impound or escrow\namount for taxes, ground rent, and insurance and a replacement reserve for roof repairs, tenant improvements, leasing commissions, debt\nservice, or other items necessary to the proper functioning of the property. Such escrowed funds are currently in the KDM In Trust For\n1 Segregated account. In most cases, KDM reserves the right as servicer to release any impounded amounts or reserved where permitted by\nthe loan documents or when in its reasonable business judgement, such releases are warranted as they do not impair the borrower’s\nability to repay the CM Loan.\n\n \n\nIn the event it becomes necessary to expend funds\nfor the collection or protection of a CM Loan, or for the preservation or protection of a CM Loan property, including the institution\nof foreclosure proceedings, such expenses will initially be covered by KDM and recouped at disposition of the property or upon repayment\nby the Borrower should the CM Loan be brought into compliance. Ultimately, all costs and expenses will be funded (or reimbursed to us)\nfrom the proceeds of any foreclosure or settlement, including reimbursement to us of any expenses we have disbursed toward collection\nof a CM Loan. These expenses may reduce interest or principal payments on a Note. See “Risk Factors.”\n\n \n\nOn our website, www.korthdirect.com, we disclose\nborrowers’ payment performance on our CM Loans at least annually. We have made arrangements for collection procedures in the event\nof borrower default. When a CM Loan is past due and payment has not been received, we contact the borrower to request payment. After a\ngrace period as permitted under the applicable CM Loan agreements, we may, in our discretion, assess a late payment fee. This fee may\nbe charged only once per late payment. Amounts equal to any late payment fees we receive are paid to holders of the CM Investment if and\nonly if a payment on the CM Investment is also late. We may waive a late payment fee when a borrower promises to return a delinquent CM\nLoan to current status and fulfills that promise. Each time a payment request is denied due to insufficient funds in the borrower’s\naccount or for any other reason, we may assess an unsuccessful payment fee to the borrower in an amount of $35.00 per unsuccessful payment,\nor such lesser amount as may be provided by applicable law. We retain 100% of this unsuccessful payment fee to cover our costs incurred\ndue to the denial of the payment.\n\n \n\n 7 \n\n [Table of Contents](#toc)\n\n \n\nIf the CM Loan becomes 31 days overdue (see “Certain\nDefinitions,” below), we will identify the CM Loan as “Late (31-120),” and we may refer the CM Loan to a real estate\nattorney for foreclosure proceedings. However, we may pursue other remedies to bring the loan back to performance before foreclosure.\nIn these cases, the interest rate on the CM Loan is increased to the highest legal rate in the state in which the property is located.\nThe costs from a foreclosure and resale of a defaulted CM Loan and mortgaged property are applied against the proceeds payable to CM Investors.\nIf funds remain after a property is resold and all expenses are paid, they will be distributed to CM Investors on a pro-rata basis.\n\n \n\n**Asset Management**\n\n \n\nKDM has an internal Asset Management\ndepartment that handles delinquent and defaulted loans. In 2025, 4 loans entered  or were in delinquent or defaulted status,\none property in REO status was given back to the ground owner, and KDM took over 2 more loans via foreclosure and deed in lieu,\nwhich are now part of its REO portfolio, and 2 more loans are in foreclosure as of the date of these financial statements. All three\nloans are in process of foreclosure or negotiated default. To handle these issues, KDM uses a combination of inside and outside\ncounsel, asset management, third parties, and servicing staff. As of the date of this report, KDM owns four total properties in its\nREO portfolio. Please see “Segment Reporting” for more information.\n\n \n\nKDM works in the best interest of investors to\nmaximize recovery value on all properties in asset management. Recovery timelines can vary from as short as 4 months to as long as several\nyears. Properties may not have current cash flow that exceeds expenses and CM Investors may not receive cash flow for an extended period\nfor loans that are in Asset Management.\n\n \n\n**Certain Definitions**\n\n \n\nWe define *delinquent accounts* as accounts\nthat are more than 31 days overdue with no immediate plan to repair the delinquency. Charge-offs are defined as the unpaid principal balance\nof a specific CM Loan minus the expected recovery based on current market conditions for the foreclosed property. *Uncollectable accounts*\nare defined as those CM Loans where no recovery is expected to be made. These definitions are regardless of any grace period, re-aging,\nrestructure, or partial payments received. A CM Loan that is categorized as a *delinquent account* could be re-categorized as current\nif the borrower brought all payments up to date. *Charge-offs* would be adjusted for properties in foreclosure based on an annual\nreview of the current market conditions for the geography of the property. *Uncollectible accounts* will be reviewed quarterly and\ncould be reclassified as *collectible* if market conditions change for the property subject to the mortgage and foreclosure. See\n“Status of our CM Loans”.\n\n** **\n\n**Intellectual Property**\n\n \n\nWe have intellectual property that is our brand,\nour process, our ratings system, our KDM Broker Network, our correspondent network, and our internal applications and systems. We have\na trademark for the term “Middle-Money” and have filed trademark applications on our name and logo. We also have internal\napplications that we have developed that assist in managing our business.\n\n \n\n**Employees**\n\n \n\nAs of the date of this Report, we employ twenty-four\nfull-time people, and five contract people.\n\n \n\n**Facilities**\n\n \n\nWe maintain offices at 135 San Lorenzo Avenue,\nSuite 600, Coral Gables, Florida 33146, and J.W. Korth & Company has an office in Lansing, Michigan.\n\n \n\n**Subsidiaries**\n\n \n\nAs of the date of this report, KDM has several subsidiaries, many of\nwhich are special-purpose entities.\n\n \n\nJ. W. Korth, a FINRA and SEC registered broker-dealer\nfounded in 1982 by James W. Korth. J. W. Korth was previously the parent company of KDM. The companies were reorganized as of July 31,\n2020, when KDM, directly and indirectly, acquired all of the equity of J. W. Korth.\n\n \n\nKDM Funding I, LLC is a wholly owned subsidiary\nof KDM formed for the purpose of issuing MSNs on CM Loans that are originated and serviced by KDM.\n\n \n\n 8 \n\n [Table of Contents](#toc)\n\n \n\nKDM now owns all of the interest in KDM Stafford LLC, which is a special-purpose\nentity that owns a building we acquired in Virginia.\n\n \n\nKDM holds a controlling interest in KDM Capital\nLLC, the general partner of KDM Capital Partners, LP.\n\n \n\nKDM Asset Management, LLC is the owner of each\nof KDM’s Real Estate Owned (“REO”) limited liability companies.\n\n \n\nKDM MFB LLC, a Delaware limited liability company,\nis a wholly owned subsidiary of KDM.\n\n \n\nThere are also a variety of entities created to\nown real estate received through foreclosure or deed in lieu of foreclosure, the fund manager, the manager of the real estate assets,\nand other various special purposes. If and when these become material they will be reported on as necessary.\n\n \n\nAll of these entities are consolidated into our\nfinancial statements."}