{"url_path":"/sec/cik-0001695963/10-k/2026/item-1a","section_key":"item-1a","section_title":"Item 1A Risk Factors**","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":5222,"has_tables":true,"body_markdown":"**Item 1A. Risk Factors**\n\n \n\nThe following discussion of risk factors contains\n“forward-looking statements,” as discussed in the forward-looking statements Section of this Form 10-K Report. These risk\nfactors may be important to understanding any statement in this Annual Report on Form 10-K or elsewhere. The following information should\nbe read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations section and\nthe Financial Statements and related notes of this Report on Form 10-K. Any of these factors, or others, many of which are beyond the\nCompany’s control, could negatively affect the Company’s revenues, profitability or cash flow in the future. The risks and\nuncertainties described below are not the only ones we face but do represent those risks and uncertainties that we believe are material\nto our business, operating results, prospects and financial condition. Additional risks and uncertainties not presently known to us or\nthat we currently deem immaterial may also harm our business.\n\n** **\n\n**Difficult conditions in the mortgage, residential\nand commercial real estate markets, or in the financial markets and the economy generally, including market volatility, and geopolitical\ntensions, may cause us to experience market losses related to our holdings. There is no assurance that these conditions now existing,\nwill improve in the near future.**\n\nOur results of operations are materially affected\nby conditions in the mortgage market, the residential and commercial real estate markets, the financial markets and the economy generally.\nDifficult market conditions, as well as inflation, energy costs, geopolitical issues, health epidemics, unemployment and the availability\nand cost of credit, can contribute to increased volatility and diminished expectations for the economy and markets. The U.S. mortgage\nmarket has been severely affected by changes in the lending landscape and has experienced defaults, credit losses and significant liquidity\nconcerns, and there is no assurance that these conditions have fully stabilized or that existing conditions will not worsen. Disruptions\nin mortgage markets negatively impact new demand for real estate. Further, disruptions in the broader financial markets, including the\noccurrence of unforeseen or catastrophic events such as the effects of COVID-19\nor other widespread health emergencies, geopolitical tensions or terrorist attacks, could adversely affect our business and operations.\nAny such disruption could adversely impact our ability to raise capital, cause increases in borrower defaults and decreases\nin the value of our assets, cause continued interest rate volatility and movements that could make obtaining financing or refinancing\nour debt obligations more challenging or more expensive, and could lead to operational difficulties that could impair our ability to manage\nour business.\n\n \n\n**The market for real estate assets constituting\ncommercial office space have experienced a significant downturn.**\n\nThe market for commercial office real estate assets\nhas seen a significant downturn due to changes in the workforce practices of many organizations. These changes have seen many office tenants\nabandoning traditional office footprints and/or downsizing their positions in the same in favor of remote or hybrid working environments.\nThis practice has had a significant effect on the valuation of these assets and nationwide has caused an uptick in defaults by the owners\nof such assets on their debt service obligations as the revenue from these tenants has disappeared. Many property owners have struggled\nto relet some of these spaces causing outright maturity defaults, DSCR covenant violations and limited exit options for borrowers through\na softer demand for such properties on the real estate market, and reduced leasing activity for vacant spaces. These changes have been\nexacerbated by continued high interest rates that make it difficult for borrowers to refinance existing debt at rates that generate sufficient\nDSCR coverage. The result of these factors have created situations where lenders have to foreclose on such loans and manage the assets\nuntil they can sell the collateral at a rate sufficient to cover the debt owed, or forcing lenders to extend the terms of the existing\ndebt at interest rates that may not be current market rates. See the Inflation risk factor below.\n\n \n\n**KDM’s lending of additional subordinated\nfunds to a Borrower may provide the Borrower needed funds to stabilize or complete needed renovations to subject properties but may also\ncause the property to be leveraged higher than would be acceptable under the current CM Loans underwriting guidelines.**\n\nKDM may lend a CM Loan Borrower additional funds\nthrough a subordinated real estate mortgage loan. KDM may elect to do so when it seems that the CM Loan Borrower needs such additional\nfunds to complete or stabilize the subject property. This in turn may limit the ability of a CM Loan Borrower to refinance a loan and\nmay over-leverage the subject property if the valuation of the property does not increase as expected, if market conditions change or\nof the CM Loan Borrower does not properly execute its business plan, which may increase the risk of a maturity or monetary default.\n\n** **\n\n 9 \n\n [Table of Contents](#toc)\n\n \n\n**Inflation in the U.S. is expected to continue at an elevated\nlevel in the near- to medium-term, which may have an adverse impact on the valuation of our loans and affect our borrowers’ ability\nto refinance.**\n\nHeightened competition for workers, supply chain\nissues, the relocation of foreign production and manufacturing businesses to the U.S., and rising energy and commodity prices have contributed\nto increasing wages and other economic inputs. Inflation can negatively impact the profitability of real estate assets with long-term\nleases that do not provide for short-term rent increases or that provide for rent increases with a lower annual percentage increase than\ninflation. Continued inflation, particularly at higher levels, may have an adverse impact on the valuation of the properties underlying\nthe CM Loans as well as the sponsors’ ability to refinance.\n\n \n\n**CM Investors may lose some or all of their CM Investment.**\n\nThe regular payment of a CM Investment depends\nentirely on payments to KDM of a borrower’s CM Loan. The Notes are special, limited obligations of KDM payable only from KDM’s\nreceipts of CM Loan proceeds, net of KDM’s Servicing Fee and cost of collection. If a borrower defaults on the CM Loan, CM Investors\nin that CM Loan will be dependent on proceeds from the Assignment of Rents held by KDM and on the proceeds, if any, from foreclosure of\nthe CM Loan mortgage for payments on the their Notes. The failure of a borrower to repay a CM Loan is not an event of default by KDM.\nNotes are suitable purchases only for investors of adequate financial means who, in the event of a default on the underlying CM Loan,\nmay have to wait for a foreclosure and subsequent sale to recover some or all of the principal invested in their Note. In some cases the\nproperty may not be sold quickly and workouts may take years.\n\n \n\n**We rely on third-party appraisals to value\nthe property securing the CM Loan, and information from the borrower on cash flow and profitability of the income property.**\n\nWhile we make every effort to engage responsible\nlicensed third-party appraisers, we cannot be certain that the information and presentations they make are reliable. Appraisals are subject\nto mistakes that could affect the value of a property. Further, appraisers may make judgments of value based on cash flow presented by\nborrowers. If a borrower were to falsify its cash flow, it could affect the value shown in the appraisal. To verify cash flows, we receive\nbank statements from borrowers. Although we engage appraisal review firms, some errors may not be caught. KDM is not responsible for mistakes\nor fraudulent activities of borrowers or appraisers.\n\n** **\n\n**As we are highly dependent on information technology. System\nfailures or security breaches could materially disrupt our business.**\n\nOur business is highly dependent on information technology and our ability\nto process, record and monitor many complex transactions and large amounts of data efficiently and accurately. In the ordinary course\nof our business, we store sensitive data, including our proprietary business information and that of our business partners, and non-public\npersonally identifiable information of mortgage borrowers, on our networks. The secure maintenance and transmission of this information\nis critical to our operations. Computer malware, viruses, ransomware and phishing attacks remain widespread and are increasingly sophisticated.\nWe are from time to time the target of attempted cyber threats. We continuously monitor and develop our information technology networks\nand infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events\nthat could have a security impact. Despite these security measures, our information technology and infrastructure may be vulnerable to\nattacks by hackers or breached due to employee or service provider error, malfeasance or other disruptions. Any such breach could compromise\nour networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other\nloss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information,\nregulatory penalties, disruption to our operations, or disruption to our trading activities or damage our reputation, which could have\na material adverse effect on our financial results and negatively affect our ability to pay dividends to stockholders.\n\n \n\nThe resources required to protect our information\ntechnology and infrastructure, and to comply with the laws and regulations related to data and privacy protection, are continuously evolving.\nEven in circumstances where we are able to successfully protect such technology and infrastructure from attacks, we may incur significant\nexpenses in connection with our responses to such attacks. Government and regulatory scrutiny of the measures taken by companies to protect\nagainst cybersecurity attacks has resulted in heightened cybersecurity requirements and additional regulatory oversight. Any of the foregoing\nissues may adversely impact our results of operations and financial condition.\n\n \n\n**If we believe it is in the best interest\nof CM Investors, we have the right to adjust the terms of a CM Loan.** It is possible that due to natural disasters, local disruption\nof services, political unrest, changes in local laws, market competition or disruptions and other unforeseen events that affect the property\npledged under a CM Loan or affect the borrower’s ability to make its CM Loan payments, it might be in the best interest of the CM\nInvestors to provide a borrower with an accommodation regarding loan terms rather than be forced to foreclose on a loan. If we adjust\na CM Loan, that may reduce interest payments, suspend interest payments, lengthen the time when principal may be received or change other\nterms of the CM Loan, any of which could reduce the expected benefits of the CM Loan to the CM Investors.\n\n \n\n 10 \n\n [Table of Contents](#toc)\n\n \n\nKDM may also choose to extend a performing CM\nLoan for an additional term due to market conditions, or may modify a loan for a good borrower to extend their period while adjusting\ntheir rate to current market level, if we believe such modification will not be detrimental to Noteholders.\n\n \n\n**There may be a default on a CM Loan.**\n\nCM Loan default rates may be significantly affected\nby general economic conditions beyond our control and beyond the control of the individual borrower. Default on a CM Loan is subject to\nmany factors, such as prevailing interest rates, the rate of unemployment, the level of consumer confidence, residential or commercial\nreal estate values, the value of the U.S. dollar, energy prices, changes in consumer spending, the number of personal bankruptcies, disruptions\nin the credit markets, and other factors, none of which can be predicted with certainty.\n\n** **\n\n**Any costs or delays involved in the completion\nof a foreclosure or liquidation of the underlying property may further reduce proceeds from the property and may increase the loss.**\n\nIt is possible that we may find it necessary or\ndesirable to foreclose on certain CM Loans we acquire or originate, and the foreclosure process may be lengthy and expensive. Borrowers\nmay resist mortgage foreclosure actions by asserting numerous claims, counterclaims and defenses against us including, without limitation,\nnumerous lender liability claims and defenses, even when such assertions may have no basis in fact, in an effort to prolong the foreclosure\naction and force us into a modification of the loan or a favorable buy-out of the borrower’s position. In some states, foreclosure\nactions can sometimes take several years or more to litigate. At any time prior to or during the foreclosure proceedings, the borrower\nmay file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the foreclosure process.\nForeclosure may create a negative public perception of the related mortgaged property, resulting in a decrease in its value. Even if we\nare successful in foreclosing on the loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover\nour cost basis in the CM Loan, resulting in a loss to CM Investors. Furthermore, any costs or delays involved in the completion of a foreclosure\nof the CM Loan or a liquidation of the underlying property will further reduce the proceeds and thus increase the loss. Any such reductions\ncould materially and adversely affect the return to the CM Investor.\n\n \n\n**Real estate properties acquired through foreclosure subject us\nto additional risks associated with owning real estate.**\n\nWhen a CM Loan defaults, KDM may, on behalf of\nCM Investors, acquire the property through foreclosure or a deed in lieu of foreclosure. Depending on the market environment at the time,\nwe may need to own the properties for an extended period of time before sale. We have acquired real estate properties through foreclosure,\nwhich exposes us to additional risks, including, but not limited to, the following:\n\n●facing difficulties in integrating these properties with our existing business operations;\n\n●incurring costs to carry, and in some cases make repairs or improvements, which results in additional\nexpenses and requires additional liquidity that could exceed our original estimates and impact our operating results;\n\n●being unable to realize sufficient amounts from sales of the properties to avoid losses;\n\n●being unable to sell properties, which are not liquid assets, in a timely manner, or at all, when we need\nto increase liquidity;\n\n●maintaining occupancy of the properties;\n\n●controlling operating expenses;\n\n●coping with general and local market conditions;\n\n●complying with changes in laws and regulations pertaining to taxes, use, zoning and environmental protection;\n\n●possible liability for injury to persons and property;\n\n●possible uninsured losses related to environmental events such as earthquakes, floods or mudslides; and\n\n●possible liability for environmental remediation.\n\n \n\n**Information supplied by the borrower could\nbe inaccurate or intentionally false.**\n\nWhile we perform due diligence on each borrower,\nincluding verifying property ownership, rent collections, property values, coverage ratios and other appropriate due diligence materials,\na borrower could present us with false information which we may not discover during our due diligence process.\n\n \n\n**In many cases, we do not monitor our borrowers’\nuse of funds.**\n\nUnless specified otherwise, KDM does not monitor\nborrowers’ use of funds. It is possible the borrower may not use the funds for the purposes it has asserted, for example, to improve\nthe property. Additionally, the borrower could potentially misuse the proceeds it receives from the loan in a way that negatively impacts\ntheir ability to make timely payments on the CM Loan, their credit, or the value of the underlying property.\n\n \n\n**CM Loan Guarantees May Not Be Collectable**\n\nSome CM Loans may have a personal guarantee. We\nmay ask for guarantees from the owners, or the owners of the owner, if the owner is not an individual. Because we primarily focus our\nunderwriting on the value of the mortgaged property, the loan to value ratio, and the debt service coverage ratio, we generally do not\ninvestigate the net worth of the borrowers, and therefore, the ultimate value of the guarantee on a CM Loan, if any. In the event a CM\nLoan goes into foreclosure and the money realized in the foreclosure does not pay off the entire principal owed on the CM Loan, investors\nshould not count on the guarantee being collectible. Should such a situation arise, investors may not see repayment of the entire principal\namount of their Notes.\n\n \n\n 11 \n\n [Table of Contents](#toc)\n\n \n\n**If payments on a CM Loan are not paid when\ndue, CM Investors may not receive the full principal and interest payments that they expect to receive on Notes**.\n\nPayment to holders of Notes is completely dependent\non payments received from corresponding CM Loans. If the borrower fails to make a required payment on a CM Loan within 30 days of a due\ndate, we will pursue collection. If we refer a CM Loan to an attorney, we will monitor that CM Loan until either the CM Loan is paid or\nthe property is foreclosed and resold and investors are paid. We may also pursue collection of a delinquent CM Loan directly. In the case\nof collection efforts, the cost of attorney’s fees will be charged against the CM Loan and will reduce the net payments on a Note.\n\n \n\n**The CM Loans underlying the Notes are typically\npayable on an interest-only basis until maturity, at which time the entire principal balance is due. Therefore, borrowers may have to\nrefinance to pay off a balloon payment on the CM Loan.**\n\nIf a borrower must refinance to pay off a CM Loan,\nsuch refinancing could be impossible due to market conditions or other factors. In such a case, the CM Loan would default. Such a default\ncould reduce or eliminate principal payment of the Notes.\n\n \n\nThe borrower may prepay some or all of the principal\namount of a CM Loan. A borrower may decide to prepay all, or a portion of, the remaining principal at any time subject to any prepayment\npenalties (if any) listed in the CM Loan. The amount of any prepayment penalty will depend on the type of loan product and the borrower.\nCM Investors will receive such prepayment net of our servicing fee. Interest will not accrue after the date on which the CM Loan is paid\nin full. If the borrower prepays a portion of the remaining unpaid principal balance on the CM Loan, we will reduce the outstanding principal\namount and interest will cease to accrue on the prepaid portion. On an amortizing loan, we will require the borrower to pay the same amount\non the CM Loan as the borrower paid prior to any partial repayment of principal. As a result of the combination of the reduced principal\namount and the unchanged monthly payment, the effective term of the CM Loan will decrease. On an interest-only CM Loan, the monthly payment\nCM Investors receive will be reduced proportionally by the amount of principal repaid. If the borrower prepays the CM Loan in full or\nin part, CM Investors will in all probability not receive all the interest payments that they expected to receive on their Notes.\n\n \n\n**The current interest rate environment and/or\nmarket volatility may make it difficult for a CM Loan to refinance.**\n\nSharp increases in prevailing interest rates may\nmake it difficult or in some cases, not possible, for some CM Loan borrowers to refinance out of the CM Loan. Sharp increases in prevailing\ninterest rates and or inflationary pressures may negatively impact the profitability of the collateral secured by the CM Loans, causing\nsome assets to lose their ability to be cash flow positive or maintain the debt service covenants of lenders at the time they need to\nrefinance. Similarly, market volatility reduces the amount of lenders in the marketplace when outcomes of the current environment are\nunpredictable. Accordingly, such changes may make it difficult, or in some cases, not possible for some CM Loan Borrowers to refinance\na CM Loan at maturity, affecting the CM Loan Investors’ ability to realize a return of their principal and or interest payments.\n\n** **\n\n**Prevailing interest rates may change during\nthe term of the CM Loan on which a Note is dependent.**\n\nIf a CM Loan is prepaid, CM Investors may be unable\nto invest prepaid Note proceeds at a rate comparable to the interest payable on the Notes. Further, for our MSNs, if interest rates rise\nand there is a market for the Notes, and a Noteholder decides to sell a Note prior to maturity, the Noteholder may receive a discounted\nreturn on the Note.\n\n \n\n**Investor funds in a KDM segregated account\ndo not earn interest.**\n\nProceeds of the sale of the Notes are held in\na non-interest bearing segregated account pending completion of the Note Offering. Further, we place borrower loan payments in a segregated\naccount under our control and pay all loan payments collected from the prior payment date at least four business days prior to the payment\ndate on the twenty-fifth day of each month, with an extension to the next business day if required. Funds held in segregated accounts\ndo not earn interest. These segregated accounts are held at BankUnited, RBC, or Chase and are managed by KDM. There is no escrow agreement\nwith the bank.\n\n \n\n**We may have to limit our business to avoid being deemed an investment\ncompany under the Investment Company Act.**\n\nIn general, a company\nthat is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities may be deemed\nto be an investment company under the Investment Company Act of 1940, as amended (“Investment Company Act”). The Investment\nCompany Act contains substantive legal requirements that regulate the manner in which “investment companies” are permitted\nto conduct their business activities. We believe we are excluded from registration by Section 3(c)(5)(c) of the Investment Company Act\nand have conducted, and we intend to continue to conduct, our business in a manner that does not result in our Company being characterized\nas an investment company. This section of the Investment Company Act contains an exemption for companies that make mortgages and do not\nissue redeemable shares. To avoid being deemed an investment company, we may not be able to broaden our offerings, which could require\nus to forego attractive opportunities. If we are ever deemed to be an investment company under the Investment Company Act, we may be required\nto institute burdensome compliance requirements and our activities may be restricted, which could materially adversely affect our business,\nfinancial condition, and results of operations.\n\n** **\n\n****\n\n 12 \n\n [Table of Contents](#toc)\n\n** **\n\n**Funds Received for all CM Loans are held on an omnibus basis\nin a Segregated Account.**\n\nWe hold all funds received from CM Loans in a\nsegregated account titled In-Trust For 2 at BankUnited bank. We then use our internal accounting system to determine which funds are applied\nto which Note investors. While our internal accounting system is backed up into separate record keeping systems managed by service providers,\nshould our systems fail and the back-up systems fail for any reason, we may have difficulty determining which payments are to be applied\nto which Noteholder and your payments could be delayed until such a determination is made.\n\n \n\nIn the event of a KDM bankruptcy, general creditors\nof KDM may assert a claim that funds on deposit in the segregated account maintained by KDM for the benefit of CM Investors, and the separate\nsegregated account maintained by KDM for real estate tax and insurance payments, are subject to the claims of general creditors. Principal\nand interest payments on CM Loans are deposited in a segregated bank account, and payments of real estate taxes and insurance on mortgaged\nproperties are deposited in another segregated account, when and as received by KDM. Receipts deposited in those accounts are disbursed\nto CM Investors monthly and annually to property insurers and taxing authorities. KDM performs all accounting for these accounts, including\nsub-accounts for each CM Investment and property, and maintains all accounting records at its principal office. Under the Trust Indenture\nfor the MSNs, the Trustee will have a first lien on the principal and interest account for the benefit of Noteholders. If the bankruptcy\ncourt were to determine that the funds in the account were subject to claims of creditors other than Noteholders or the Trustee acting\non their behalf, the amount that Noteholders would receive from the account could be adversely affected. Further, amounts on deposit to\npay real estate taxes and insurance could be reduced or entirely eliminated if paid to general creditors of KDM in the bankruptcy proceeding.\nThe bankruptcy court could temporarily stay disbursements to CM Investors, taxing authorities and insurers even if the court were ultimately\nto determine that the funds in the account should be distributed to the CM Investors, the Trustee acting on their behalf, and, also, as\nappropriate, to taxing authorities and property insurers, resulting in delays to CM Investors in the receipt of payments on their Notes\nand penalties imposed by insurers and taxing authorities.\n\n \n\n**We rely on third-party banks to disburse\nCM Loan proceeds and process CM Loan payments, and we rely on third-party computer hardware and software. If we are unable to continue\nutilizing these services, our business and ability to service the CM Loans may be adversely affected.**\n\nWe rely on a third-party bank to disburse CM Loan\namounts. Additionally, because we are not a bank, we cannot belong to and directly access the ACH payment network, and we must rely on\nan FDIC-insured depository institution to process our transactions, including CM Loan payments and remittances to CM Investors. We also\nrely on computer hardware purchased and software licensed from third parties. This purchased or licensed hardware and software may not\ncontinue to be available on commercially reasonable terms, or at all. If we cannot continue to obtain such services from this institution\nor elsewhere, or if we cannot transition to another processor quickly, our ability to process payments will suffer and the ability to\nreceive principal and interest payments on the Notes will be delayed or impaired.\n\n \n\n**Competition for our employees is strong,\nand we may not be able to attract and retain the highly skilled employees that we need to support our business.**\n\nThe market for hiring highly skilled technical\nand financial personnel is competitive. We may not be able to hire and retain personnel at compensation levels consistent with our existing\ncompensation and salary structure. Many of the companies with which we compete for experienced employees have greater resources than we\nhave and may be able to offer more attractive terms of employment.\n\n \n\nIn addition, we invest significant time and expense\nin training our employees, which increases their value to competitors that may seek to recruit them. If we fail to retain our employees,\nwe could incur significant expenses in hiring and training their replacements and the quality of our services and our ability to service\nthe CM Loans could diminish, resulting in a material adverse effect on our business and our ability to service the Notes.\n\n \n\n**If we fail to retain our key personnel,\nwe may not be able to achieve our anticipated level of growth and our business could suffer.**\n\nOur future depends, in part, on our ability to\nattract and retain key personnel. Our future also depends on the continued contributions of our executive officers and other key technical\npersonnel, each of whom would be difficult to replace. The loss of the services of any of the executive officers or key personnel, and\nthe process to replace any key personnel would involve significant time and expense and may significantly delay or prevent the achievement\nof our business objectives.\n\n \n\n**Purchasers of CM Investments will have no\ncontrol over KDM and will not be able to influence KDM corporate matters.**\n\nOur CM Investments grant no equity interest in\nKDM to the purchaser nor grant the purchaser the ability to vote on or influence our management decisions, including forbearance or foreclosure.\n\n \n\n**Unforeseeable Adverse Events**.\n\nEvents beyond our control may damage our ability\nto maintain adequate records, or perform our servicing obligations. If such events result in a system failure, CM Investors’ ability\nto receive principal and interest payments on CM Investments could be substantially harmed.\n\n \n\n 13 \n\n [Table of Contents](#toc)\n\n \n\nIf a catastrophic event resulted in an outage\nand physical data loss, our ability to perform our servicing obligations would be materially and adversely affected. Such events include,\nbut are not limited to, fires, earthquakes, hurricanes, terrorist attacks, natural disasters, computer viruses and telecommunications\nfailures. We store back-up records via cloud storage services via several different companies. If our electronic data storage and backup\nstorage system are affected by such events, we cannot guarantee that CM Investors would be able to recoup their investment.\n\n \n\n**Federal and State regulatory bodies may\ncreate new rules and regulations that could adversely affect our business.**\n\nIn the wake of the last financial crisis, banking\nand finance regulation continues to evolve, and increasing regulation by federal and state governments may become more likely. Our business\ncould be negatively affected by the application of existing laws and regulations or the enactment of new laws applicable to lending, mortgages,\nmortgage servicing, or securities distribution. The cost to comply with such laws or regulations could be significant and would increase\nour operating expenses, and we may be unable to pass along those costs to our investors in the form of increased fees.\n\n \n\n**If we discover a material weakness in our\ninternal control over financial reporting which we are unable to remedy, or otherwise fail to maintain effective internal control over\nfinancial reporting, our ability to report our financial results on a timely and accurate basis may be adversely affected.**\n\nShould we or our auditors discover a material\nweakness in our internal controls, our ability to report our financial results on a timely and accurate basis may be adversely affected.\n\n \n\n**New Government Regulation may limit our\nability to make CM Loans**\n\nWe do not believe that we are subject to Risk\nRetention under RR (17 CFR 246), as our entity type is not within scope of the rule according to 12 CFR 244.1(c). However, if we become\nsubject to risk retention rules, we could be required to raise significant capital in order to continue doing business.\n\n \n\n**Our Proprietary Ratings System is untested\nand is based on broad assumptions for which we have little statistical basis**\n\nWe created the KDM Ratings System internally and\nbased it on very broad assumptions. It should be noted that our staff members have no experience in creating a ratings system. We are\nnot affiliated with any commercial rating agency, nor do we have experience in creating ratings of debt or mortgage securities. The Rating\nSystem has a short track record and has not been tested against any known data set. The Rating System is still evolving as we add items\nand add property types. It is not intended to be and should not be relied upon as a predictable measure of performance of the underlying\nCM Loan at this time. We also have conflicts of interest with respect to our Ratings System. See “Conflicts of Interest Regarding\nOur Proprietary Ratings System.”\n\n \n\n**Risks Related to the Banking System and\nFinancial Markets**\n\nKDM depends on the functioning of the U.S. banking\nsystem and bond markets to raise the capital needed to fund CM Loans which are the core of its business. Should the banking system or\nbond markets enter into a prolonged downturn or suffer a crisis of confidence, KDM’s ability to raise money to originate new CM\nLoans may be adversely impacted, causing it to reduce the number of loans it originates."}