Attached files
| file | filename |
|---|---|
| EX-32 - CERTIFICATION - GENESIS FINANCIAL INC | ex321.htm |
| EX-32 - CERTIFICATION - GENESIS FINANCIAL INC | ex322.htm |
| EX-31 - CERTIFICATION - GENESIS FINANCIAL INC | ex312.htm |
| EX-31 - CERTIFICATION - GENESIS FINANCIAL INC | ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ending March 31, 2016
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission file number: 333-103331
Genesis Financial, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Wyoming | 03-0377717 |
(State of Incorporation) | (IRS Employer Identification No.) |
|
|
3773 West Fifth Avenue, Suite 301 Post Falls, ID. | 83854 |
(Address of principal executive offices) | (Zip Code) |
Issuer’s telephone number: (208) 457-9442
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ], Accelerated filer [ ], Non-accelerated filer [ ], Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ON TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act subsequent to the distribution of securities under a plan confirmed by the court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 6, 2016 there were 17,023,870 shares of common stock issued and outstanding.
1
Table of Contents
PART 1 – FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.
Item 3. Defaults upon Senior Securities.
Item 4. Mine Safety Disclosures.
2
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements
See accompanying notes to financial statements.
3
| GENESIS FINANCIAL, INC. | ||||||
| Condensed Statements of Operations and Comprehensive Income (Loss) | ||||||
| (Unaudited) | ||||||
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| Three Months Ended | ||
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| March 31, | ||
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| 2016 |
| 2015 |
| REVENUE: |
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| ||
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| Interest, processing fees and other income | $ | 19,530 | $ | 19,214 | |
|
| Rental income |
| 5,500 |
| 16,500 | |
|
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| Total revenues |
| 25,030 |
| 35,714 |
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| EXPENSES: |
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| ||
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| Loss (income) on investment in real estate LLC |
| (138,111) |
| (48) | |
|
| (Gain) on sale of loan |
| (21,258) |
| - | |
|
| Salaries |
| 12,750 |
| 12,750 | |
|
| Interest expense, related party |
| 2,155 |
| 5,041 | |
|
| Interest expense, other |
| 1,536 |
| 1,875 | |
|
| Financing expense, related party |
| 29,000 |
| - | |
|
| Depreciation |
| 877 |
| 877 | |
|
| Amortization |
| 5,161 |
| 5,161 | |
|
| Rental Property expense |
| 2,109 |
| 9,122 | |
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| Office occupancy and other |
| 46,802 |
| 34,423 | |
|
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| Total operating (income) expenses |
| (58,979) |
| 69,201 |
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| NET INCOME (LOSS) | $ | 84,009 | $ | (33,487) | ||
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| COMPREHENSIVE INCOME (LOSS): |
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| ||
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| Unrealized loss on available for sale securities |
| (13,285) |
| (147,608) | |
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| COMPREHENSIVE INCOME (LOSS) | $ | 70,724 | $ | (181,095) | ||
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| BASIC AND DILUTED EARNINGS (LOSS) PER SHARE | $ | 0.01 | $ | (Nil) | ||
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| WEIGHTED AVERAGE SHARES BASIC AND DILUTED |
| 16,613,156 |
| 12,078,176 | ||
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See accompanying notes to financial statements.
4
GENESIS FINANCIAL, INC. | |||||
Condensed Statements of Cash Flows | |||||
(Unaudited) | |||||
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| Three Months Ended | ||
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| March 31, | ||
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| 2016 |
| 2015 |
CASH FLOWS FROM OPERATING ACTIVITIES | $ | (177,660) | $ | (24,457) | |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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| |
| Proceeds from sale of real estate limited liability company |
| 389,934 |
| - |
| Net cash provided by investing activities |
| 389,934 |
| - |
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|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
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| |
| Borrowings (repayment) line of credit with affiliated company, net |
| - |
| (15,000) |
| Borrowings (repayment) from line of credit from bank, net | (170,000) |
| 40,000 | |
| Payments on notes payable |
| (376) |
| (1,599) |
| Net cash provided (used) by financing activities |
| (170,376) |
| 23,401 |
|
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| 41,898 |
| (1,056) | |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 31,301 |
| 64,493 | ||
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CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 73,199 | $ | 63,437 | |
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NONCASH INVESTING AND FINANCING TRANSACTIONS |
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| |
Convertible note payable to officer converted to common stock |
| 250,000 |
| - | |
Preferred stock converted to common stock |
| - |
| 10,000 | |
Convertible note receivable settled with investment |
| - |
| 150,000 | |
|
|
|
|
|
|
See accompanying notes to financial statements.
5
Genesis Financial, Inc.
Notes to Consolidated Financial Statements
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization:
Genesis Financial, Inc. (“the Company” or “GFI”) was incorporated in Washington State on January 24, 2002 and on January 26, 2016 we moved our corporate domicile to the State of Wyoming. The Company is primarily engaged in the business of purchasing and selling real estate receivable loans and periodically providing bridge capital funding. Loans consist of real estate loans and mortgage notes collateralized by primarily first position liens on residential and commercial real estate. The loans collateralized by real estate are typically non-conventional either because they are originated as a result of seller financing, or the underlying property is non-conventional.
The Company invests in loans using investor funds, equity funds and funds generated from external borrowings including a line of credit facility from an affiliated stockholder.
Summary of Significant Accounting Policies:
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates used herein include those relating to management’s estimate of fair value of loans held for sales, real estate owned, and long-term investments. It is reasonably possible that actual results could differ from those and other estimates used in preparing these financial statements and such differences could be material.
Fair value measurements - The following information for each class of assets and liabilities that are measured at fair value is disclosed:
1.
the fair value measurement;
2.
the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3);
3.
for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following:
a.
total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings, and a description of where those gains or losses included in earnings are reported in the statement of operations;
b.
the amount of these gains or losses attributable to the change in unrealized gains or losses relating to those assets or liabilities still held at the reporting period date and a description of where those unrealized gains or losses are reported;
c.
purchases, sales, issuances, and settlements (net); and
d.
transfers into and/or out of Level 3.
4.
the amount of the total gains or losses for the period in (3)(a) included in earnings that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date and a description of where those unrealized gains or losses are reported in the statement of operations; and
5.
in annual periods only, the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period.
Real estate leasehold interest – Leasehold interests in real estate are stated at cost unless circumstances indicate that cost cannot be recovered, in which case, an adjustment to the carrying value of the property is made to reduce it to its estimated fair value. Project costs clearly associated with the development of the leasehold interest are capitalized. As portions of the leasehold interest are rented, depreciation expense is recognized over the term of the leasehold interest. Rental income received on the interests is recognized in the period earned.
6
Genesis Financial, Inc.
Notes to Consolidated Financial Statements
Loans held for sale – Loans held for sale are initially recorded at the lower of cost or fair value. Loans held for sale are then re-measured at fair value on a recurring basis. Fair value for these loans is determined by assessing the probability of borrower default using historical payment performance and available cash flows to the borrower, then projecting the amount and timing of cash flows, including collateral liquidation if repayment weaknesses exist. The Company considers any valuation inputs related to loans held for sale to be Level 3 inputs. Interest on loans held for sale is included in interest income during the period held for sale. Typically, the Company attempts to sell loans three to twelve months after acquisition. It is the policy of the Company not to hold any loans for investment purposes.
Real estate owned – Real estate owned (“REO”) (acquired through a loan default) is recorded at fair value on a non-recurring basis. Upon transfer of a loan held for sale to REO, properties are recorded at amounts which are equal to fair value of the properties based on the following inputs: (1) appraisal provided by a certified appraiser, (2) BPO (Broker’s Pricing Opinion) provided by a qualified real estate broker, (3) site inspection by qualified management of the Company, or (4) a combination of all of the above. Periodically, non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on the same inputs. The Company considers any valuation inputs related to REO to be Level 3 inputs. The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations.
Income tax – Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets, subject to a valuation allowance, are recognized for future benefits of net operating losses being carried forward. The Company effective tax rate for 2015 is expected to be 0%.
Earnings per share – Basic earnings per common share have been computed on the basis of the weighted-average number of common shares outstanding during the period presented. Diluted earnings per common share are computed on the basis of the number of shares that are currently outstanding plus the number of shares that would be issued pursuant to outstanding warrants, stock options and common stock issuable on conversion of preferred stock unless such shares are deemed to be anti-dilutive such as when a net loss is present. The dilutive effect of options, convertible debt and convertible securities, in periods of future income, would be as follows as of March 31, 2015 and March 31, 2016;
| March 31, | ||
| 2016 |
| 2015 |
Stock options | 261,000 |
| 261,000 |
Convertible preferred stock | - |
| 4,098,750 |
Convertible debt | - |
| 625,000 |
Total possible dilution | 261,000 |
| 4,984,750 |
Reclassifications – Certain reclassifications have been made to conform prior periods’ data to the current presentation. These reclassifications have no effect on the results of reported operations or stockholders’ equity.
NOTE 2 — LOANS HELD FOR SALE AND CONVERTIBLE NOTE:
The Company's fair value of loans held for sale and convertible notes consisted of the following:
|
| March 31, 2016 |
| December 31, 2015 |
Residential | $ | 151,788 | $ | 253,853 |
Other |
| 10,000 |
| 10,000 |
Commercial |
| 241,973 |
| 240,037 |
Loans held for sale - Total | $ | 403,761 | $ | 503,890 |
The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the quarters ended March 31, 2016 and 2015:
7
Genesis Financial, Inc.
Notes to Consolidated Financial Statements
|
| March 31, | ||
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| 2016 |
| 2015 |
Beginning Balance | $ | 503,890 | $ | 611,400 |
Principal payments received |
| (1,464) |
| (1,529) |
Proceeds from sale of loans |
| (120,000) |
| - |
Gain on sale of loan |
| 21,258 |
| - |
Repossession expenses |
| 77 |
| (858) |
Ending Balance | $ | 403,761 | $ | 610,729 |
During the quarter ended March 31, 2016, the Company sold one loans with a basis of $98,742 for $120,000 in cash. A gain of $21,258 was recognized.
NOTE 3- REAL ESTATE OWNED:
The Company's REO consisted of the following:
|
| March 31, 2016 |
| December 31, 2015 |
Land | $ | 23,441 | $ | 23,441 |
Commercial |
| 4,010 |
| 4,010 |
Total | $ | 27,451 | $ | 27,451 |
NOTE 4 — OTHER ASSETS:
Long term investments:
Flyback Energy, Inc.:
In December 2015, the Company reduced the carrying value of its Flyback Energy common shares to $0.067 per share, or $212,619, and recorded an impairment change of $1,037,381 based on the last known common share sale. Flyback Energy, Inc. is still a development stage company being financed by outside sources of capital. At this time, Flyback is not assured of future financing capital and is subject to changing world conditions.
Digi Outdoor Media, Inc.:
In 2014, the Company loaned Placer Creek Mining Company (“Placer”) $150,000. The loan interest rate is 5.0% and the Company has an option to convert any or all of the amount due into an equity private placement of Placer. The Placer transaction is treated as a related party transaction. (See Note 8:Michael Lavigne)
On February 24, 2015, the Company converted the loan into 300,000 shares of common stock of Digi Outdoor Media, Inc. (“Digi”), the successor in interest to Placer. The Company determined that the fair value of the shares received on the conversion to be $150,000 based upon the loan balance of $150,000 because Digi is not publicly traded and has had no recent cash sale of its common stock. The fair value was determined using Level 2 inputs under the fair value hierarchy.
Digi Outdoor Media, Inc. is a startup company in the business of building and leasing outdoor advertising signs.
Investments in Available for Sale Securities:
Ambient Water Corporation (Formerly AWG International Water Corp.):
The Company purchased 109,906 shares of the AWG International Water Corp, a Nevada corporation, (“AWGI”) common stock for $500,000 ($250,000 each in 2010 and 2011). In July 2012, AWGI was acquired by MIP Solutions, Inc. in a share exchange transaction (the "Acquisition"). In connection with the Acquisition, the Company’s 109,906 shares of AWGI common stock were converted into 7,380,433 shares of AWG International Water Corp (formerly MIP Solutions, Inc.).
8
Genesis Financial, Inc.
Notes to Consolidated Financial Statements
At March 31, 2016 the quoted market value of AWGI was $0.0018 per share, or $13,285, resulting in an unrealized loss of $13,285 for the quarter ended March 31, 2016. Total unrealized loss on AWGI is $486,715 as of March 31, 2016. The investment is measured using Level 1 fair value inputs. Management has concluded that the unrealized loss is not other-than-temporary because the common stock price per share has only been less than the Company’s cost basis for a short period of time.
Investments in Real Estate Limited Liability Companies:
At the end of 2012, the Company acquired investments in two Washington state real estate limited liability companies for $225,000. In 2013, the Company contributed its investment in one real estate owned property with a basis of $51,600 to a newly formed limited liability company in exchange for a 12.9% interest in the new company. In 2014, the Company contributed its investment in one real estate owned property with a basis of $47,925 to a newly formed limited liability company in exchange for 31.95% interest in the new company. These companies are 100% controlled and managed by Genesis Finance Corporation and John Coghlan, related parties. (See Note 8)
Investments are accounted for using the equity method. During the quarters ended March 31, 2016 and 2015, the Company recorded (income) loss of $(138,111) and ($48), respectively. Losses generally represent our portion of this real estate company’s loss for the same period. During the quarter ended March 31, 2016 one limited liability company was sold for $399,934 resulting in a gain of $139,821.
Rental Properties:
At the end of 2013, the Company foreclosed on a loan previously held for sale in Lebanon, Oregon through the bankruptcy courts, and is accounting for the company’s carrying value of $85,534 as a rental property. The property was subsequently leased on a three year lease agreement for $1,500 per month. During the quarter ended March 31, 2016 and 2015, the company recognized $4,500 in rental income. This is a commercial building being depreciated over thirty-nine (39) years. The company recorded depreciation of $536 for the quarters ended March 31, 2016 and 2015.
Real Estate Leasehold Interest:
On May 31, 2013, the Company completed the acquisition of a real property leasehold interest in approximately 63 acres with fifty (50) RV/residential lots located in Dunn County, North Dakota, (the "Halliday Project"). Total consideration for the leasehold interest was $619,250. The Company may place recreational vehicles, mobile homes, or construct cabins on the lots and offer them for rent or lease. In 2015 the Company purchased two travel trailers for $30,000 from JC Housing, LLC, a related party (see Note 8). The Company recorded amortization of $5,161 for the quarters ended March 31, 2016 and 2015, respectively. At March 31, 2016 and 2015, the Company had none and thirteen lots leased and had rental income for the three month ended March 31, 2016 and 2015 of $1,000 and $12,000, respectively.
The lease consists of approximately 63 acres in the city of Halliday, North Dakota. The lease term is fifteen years and commenced on September 15, 2012. The Company has an option to renew the lease for an additional fifteen year term. The monthly rent on the lease is Fifty ($50.00) Dollars for each occupied and rented trailer, cabin or lot. The Company is obligated to pay any and all real and personal property taxes, general taxes, special assessments and other charges levied against the property and its improvements. During the lease term, the Company will own title to all of the improvements and personal property. At the expiration of the lease or termination, all improvements and personal property located on the premises will revert to the Lessors.
At December 31, 2015, the Company decided to adjust the carrying value of the property to a fair value estimated of $195,065 (not including travel trailers), based on management’s estimate of discounted cash flows received from the property.
9
Genesis Financial, Inc.
Notes to Consolidated Financial Statements
NOTE 5 — LINES OF CREDIT:
GFI has a $250,000 line of credit with Riverbank. At March 31, 2016 and December 31, 2015 the balance owing is $0 and $170,000. The line has a term of twelve months, and an origination fee of 1/2%, or $1,250. Accrued interest is paid monthly. The Riverbank line of credit is senior to the Coghlan Family Corporation, Inc. (“CFC”) line of credit and is collateralized by the assets of GFI. On June 30, 2015 the line of credit was extended to July 1, 2016 at which time the loan renewed at a four and a half (4.5%) percent interest rate with a renewal fee of ½%, or $1,250. The Riverbank line requires that the CFC line may not be paid down lower than the amount owing to Riverbank at any time during the term of the loan. The line is payable on demand and is personally guaranteed by John R. and Wendy Coghlan, related parties of the Company.
The Company has a $2,500,000 Warehouse Line of Credit Promissory Note Agreement with the CFC. At March 31, 2016 and December 31, 2015 the balance owing was $1,260,000. CFC is an affiliated company controlled by John R. Coghlan. At the time the agreement was made the default interest rate was twelve (12%) percent. Interest was payable monthly. The line had a term of 12 months and an origination fee of 1/2% or $12,500. The credit line is collateralized by all of GFI’s assets and is subordinate to the Riverbank line of credit. The line of credit agreement requires that the Company maintain a debt to equity ratio of no greater than 3.0. Borrowings under the line are personally guaranteed by Michael A. Kirk, the Secretary of the Company. Because of the economic conditions, CFC agreed to waive the interest and origination fees starting October 1, 2010 and also agreed to waive the 3.0 debt to equity ratio requirement as well as the 12% default rate. This waiver agreement is still in effect at March 31, 2016. (See 8-K filed February 8, 2016)
NOTE 6 — NOTES PAYABLE:
Convertible Note Payable to Officer:
On December 15, 2010, the Company entered into a convertible note agreement for $250,000 with John R. Coghlan, a related party (see Note 8). The note accrues interest at eight (8%) percent per annum with interest and balance initially due on December 15, 2012. The note is convertible at any time by Mr. Coghlan into one (1) share of the Company’s Series “B” Preferred stock for every $1.00 outstanding of the note payable and related accrued interest. In connection with the issuance of this note, the Company recognized a beneficial conversion feature of $128,750 that resulted in a discount to the note payable. The discount was amortized into earnings over the initial term of the note and was fully amortized at December 31, 2012. The note is collateralized by 290,000 shares of the Company’s Series “B” Preferred stock. On October 16, 2012, the Company and Coghlan agreed to extend the due date of the note to December 15, 2016.
On February 8, 2016, Mr. Coghlan elected to convert his note into shares of the Company’s common stock. The note was originally convertible into 250,000 shares of Series "B", or 625,000 shares of common stock equivalents, at the option of Mr. Coghlan. However, Mr. Coghlan agreed to accept 725,000 common shares in lieu of full payment. The 100,000 additional common shares represents a financing cost to the Company and as such, financing expense of $29,000 was recognized in the quarter ended March 31, 2016.
Note Payable:
In 2013, the Company assumed a note payable totaling $62,699 relating to a loan it had made in 2005. When the Company funded the loan in 2005, it sold 100% of its interest to various investors. During 2013, the Company began foreclosure proceedings on behalf of the investors because the borrower was delinquent on payments. During the proceedings, it was determined that the Company had failed to obtain first position in the underlying property and that a separate creditor was in first position. To uphold its agreement with the investors, the Company assumed the balance of the note with the creditor and recognized a loss for the entire amount in 2013. The term of the assumed note is 9.5% until paid in full and monthly payments are $832. At March 31, 2016, the balance owing is $29,658.
10
Genesis Financial, Inc.
Notes to Consolidated Financial Statements
NOTE 7 — SERIES B PREFERRED STOCK:
On November 11, 2010 the Company filed Articles of Amendment to the Amended and Restated Articles of Incorporation creating 2,000,000 shares of Series B Preferred Stock. The designated Series B Preferred Stock consists of 2,000,000 shares with a par value $1.00; is non-dividend bearing, convertible to Common Stock at $.40 per share subject to any recapitalization. The Company subsequently amended the share amount to 2,290,000. The holders of the Preferred Stock will be entitled to receive, prior and in preference to any Distributions of any assets of the Corporation to the holders of the Common Stock. Each share of the Preferred Stock is convertible into two and one-half common stock shares at the option of the holder. Each share of Series B Preferred Stock can be automatically converted immediately prior to the closing of a firm commitment underwritten initial public offering pursuant to an effective registration statement filed under the Securities Act of 1933 or upon the receipt by the Corporation of a written request for such request for such conversion from the holders of the majority of the Series B Preferred Stock holders.
On May 18, 2015, the Company by majority consent of Preferred Shareholder agreed to convert all of the outstanding shares of Series B Preferred to common stock. On June 26, 2015, 1,649,500 shares of Series B Preferred were converted into 4,123,750 common shares.
As of March 31, 2016 and December 31, 2015, no shares of Series B Preferred Stock are issued, outstanding or obligated.
NOTE 8— RELATED-PARTY TRANSACTIONS:
Related parties are defined as Officers, Directors, and/or those Shareholders owning or controlling more than 5% of the common stock of GFI, or any entities that are owned or controlled by Officers, Directors, and/or those Shareholders owning or controlling more than 5% of the common stock of GFI.
Coghlan Family Corporation, Coghlan, LLC and West 3773 Fifth, LLC are controlled by John R. Coghlan, a Company director, CFO and majority shareholder. Coghlan Family Corporation is owned 100% by Coghlan, LLC, which is owned by the Coghlan family members. John R. and Wendy Coghlan (husband and wife) collectively own 35.65% of Coghlan, LLC and are co-managers. West 3773 Fifth, LLC is owned 100% by John and Wendy Coghlan (husband and wife). JC Housing, LLC is owned 33.33% by John R. Coghlan and 33.33% by Clint Lohman. Mr. Lohman is a director of GFI. Genesis Financial Corporation is a company which is owned 100% by Michael Kirk, who is a director and officer of GFI. GFI provides accounting, office services and supplies, and office space for his services provided to Genesis Financial Corporation. The services are valued at $1,500 per month. Genesis Finance Corporation and John R. Coghlan has managing agreement with the real estate limited liability companies. Michael Lavigne is an officer and director of Placer Creek Mining Company. Mr. Lavigne is a director of GFI.
In addition to transactions described in Notes 4, 5 and 6, Genesis Financial, Inc. had the following related party transactions for the quarters ended March 31, 2016 and year ended December 31, 2015.
John R. Coghlan
On June 30, 2015, John R. Coghlan personally guaranteed our Riverbank line of credit.
As of March 31, 2016, the Company continues a managing agreement for the investment in real estate limited liability companies. The agreement is stated in the operating agreement of each limited liability companies.
On February 8, 2016, John R. Coghlan converted his $250,000 note for 725,000 shares of common stock. (See Note 7)
Coghlan Family Corporation “CFC”
There was no activity for the year ending December 31, 2015.
In February 2016, Coghlan Family Corporation amended the Warehouse Line of Credit. (See Note 5)
11
Genesis Financial, Inc.
Notes to Consolidated Financial Statements
Coghlan, LLC
There was no activity for the years ending December 31, 2015 and quarter ended March 31, 2016.
JC Housing, LLC
For the year ended December 31, 2015, the Company purchased two travel trailers from JC Housing, LLC for $30,000.
West 3773 Fifth, LLC
As of March 31, 2016, the Company continues a month-to-month tenancy with monthly rent of $1,250.
Genesis Finance Corporation “GFC”
As of March 31, 2016, the Company continues a managing agreement for the investment in real estate limited liability companies. The agreement is stated in the operating agreement of each limited liability company.
Michael Lavigne, Director
For the year ended December 31, 2015, the Company converted the Placer Creek Mining Company loan of $150,000 to 300,000 shares of Digi Outdoor Media, Inc., the successor to Placer Creek Mining Company. (See Note 4)
There was no activity for the quarter ended March 31, 2016.
Clint Lohman, Director
There was no activity for the quarter ended March 31, 2016.
NOTE 9— SUBSEQUENT ENVENT:
On April 12, 2016, the Company granted 100,000 restricted common stock shares to Virginia Walters, executive officer for services. The stock was valued at the bid price of the stock on April 12, 2016, the date of issuance which was $0.15 per share.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
When used in this Form 10-Q and in our future filings with the Securities and Exchange Commission, the words or phrases will likely result, management expects, or we expect, will continue, is anticipated, estimated or similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. These statements are subject to risks and uncertainties, some of which are described below. Actual results may differ materially from historical earnings and those presently anticipated or projected. We have no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect anticipated events or circumstances occurring after the date of such statements.
Background
Genesis Financial, Inc. is engaged in the business of buying and selling seller financed real estate loans ("loans"), and originating commercial real estate hard money loans and providing startup capital funding. We purchase loans at a discount and hold them for sale for a relatively short period to provide seasoning and value appreciation. After the holding period, we sell the loans. We expect to derive operating revenues from resales of loans at a profit, and from interest income derived from loans during the holding period. We originate commercial real estate loans and sell the loan, or participations in those loans, to accredited private investors. From time to time, we also consider other forms of cash flow instruments when warranted. Genesis has also invested in two private companies with a view toward diversifying its investment portfolio.
Additional details about our business are set forth in our Annual Report on Form 10-K for the year ending December 31, 2015. The following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report on Form 10-Q.
The purpose of this section is to discuss and analyze our financial condition, liquidity and capital resources and results of operations. You should read this analysis in conjunction with the financial statements and notes that appear elsewhere in this Quarterly Report on Form 10-Q. This section contains certain "forward-looking statements" within the meaning of federal securities laws that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. The Company’s actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under "Disclosure Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q.
PLAN OF OPERATIONS.
Over the course of the next twelve months, we will continue to concentrate on resolving delinquencies and repossession situations, raising capital to acquire income producing real estate, and make new short term bridge loans in the real estate industry. We are not capitalized at a level that allows holding of significant amounts of loans and as a result, we will continue to work toward short term turnover.
We plan to reduce the number of loan purchase transactions. We intend to focus our efforts on real estate development lending transactions both as a lender or as a participant which we believe will improve our cash flow.
RESULTS OF OPERATIONS
Quarter ended March 31, 2016 compared to quarter ended March 31, 2015.
Revenues
Total revenues for the quarter ending March 31, 2016 were $25,030 compared to $35,714 for the same quarter ending March 31, 2015. The majority of the revenue for the quarter ended March 31, 2016 and 2015 was from interest, loan fee and rental income. For the quarter ended March 31, 2016 there was a significant decrease in rental income due to the decline in oil price that impacted our rental property in North Dakota.
Net income (loss) from operations was $84,009 and $(33,487), respectively, for the quarters ending March 31, 2016 and 2015.
Of the loans held for sale at March 31, 2016, loans held for sale with value of $393,664 were in payment default. We believe the defaults and repossessions are directly related to the national real estate market collapse.
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General and Administrative Expenses
General and administrative expenses (“G&A”) for the quarters ended March 31, 2016 and 2015 were $59,553 and $56,295, respectively. G&A primarily consists of management and professional fees for legal and auditing, which can be found under Salaries and Office occupancy and other on the statement of operation. The changes for the fiscal quarters ended March 31, 2016 and 2015 were $3,258 and $19,115, respectively.
Interest Expense
For the quarters ending March 31, 2016 and 2015, interest expense amounted to $3,691 and $6,916, respectively.
Interest expense was incurred on borrowings under lines of credit with Riverbank, an unaffiliated lender, and the convertible note payable with John R. Coghlan, an affiliated person. The Coghlan Family Corporation, an affiliated company, has waived current interest payments on its line of credit.
We are currently operating under a primary $250,000 line of credit with Riverbank, an unaffiliated lender, with a variable interest rate equal to the prime rate index rate (as published in the Wall Street Journal) plus 1%, with a floor of four and one-half percent. The line of credit also included a one-half percent origination fee. The line of credit expires July 1, 2016.
We also are currently operating under a secondary $2,500,000 line of credit with Coghlan Family Corporation, an affiliated company, with a variable interest rate equal to the prime index rate (as published in the Wall Street Journal), plus 1%. The line of credit also includes a one-half percent origination fee. Because of the weak economic conditions, effective January 1, 2012, CFC had agreed to (1) extend the due date to January 1, 2016, waive all interest beginning October 1, 2010, (2) waive the 12% default rate, (3) waive the financial covenants and (4) waive the commitment fee. On February 8, 2016 the maturity date was extended to December 31, 2016.
We consider the terms of the lines of credit to be acceptable. As of March 31, 2016 and December 31, 2015, the balances on the lines of credit were $1,260,000 and $1,430,000, respectively. Interest expense on the line of credit will fluctuate in future periods with inventory levels.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2016 and December 31, 2015, we had cash available of $73,199 and $31,301, respectively, and $250,000 and $80,000 were available under our bank line of credit. Management considers the capital resources to be adequate to meet the current operating needs of the Company for the next twelve months.
Genesis is currently operating under a primary $250,000 line of credit with Riverbank, an unaffiliated lender, with a variable interest rate equal to the prime rate index rate (as published in the Wall Street Journal) plus 1%, with a floor of four and one-half percent. The line of credit also included a one-half percent origination fee. The line of credit expires July 1, 2016. The line is payable on demand and is personally guaranteed by John and Wendy Coghlan. At March 31, 2016 the balance was $0.
At March 31, 2016, the Company had a $2,500,000 Line of Credit Agreement with the Coghlan Family Corporation, Inc. (“CFC”) with a balance of $1,260,000. CFC is an affiliated company controlled by a director and principal shareholder of the Company. The interest rate on the line is a variable interest rate equal to the prime rate index (as published in the Wall Street Journal) plus 1%. The line has a term of 12 months and an origination fee of 1/2% or $12,500. The credit line is collateralized by all of Genesis’ assets but is subordinate to the RiverBank line of credit. The line of credit agreement requires that the Company maintain a debt to equity ratio of no greater than 3.0. Borrowings under the line are personally guaranteed by an officer of the Company. Because of the weak economic conditions, effective January 1, 2012, CFC had agreed to (1) extend the due date to January 1, 2016, waive all interest beginning October 1, 2010, (2) waive the 12% default rate, (3) waive the financial covenants and (4) waive the commitment fee. On February 8, 2016 the maturity date was extended to December 31, 2016.
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Our capital resources have been adequate to fund our operations at a reasonable level during the quarter covered by this Quarterly Report. We have paid close attention to our contract purchases and loans and maintained our funding requirements within our available resources. We receive interest and principal reductions (typically monthly) on contracts and loans which we hold in inventory. We would require an increase in our capital base, and an improvement in the real estate markets, in order to grow the company, and improve profitability. At this point, management does not believe that the real estate markets have bottomed out, and we will continue to wait until we believe that real estate market begins to improve, before we will attempt to recapitalize.
For the quarters ending March 31, 2016 and 2015, our net cash flows from operating activities were ($177,660) and $(24,457), respectively. The reason for the decrease was the sale of a loans held for sale.
For the period ended March 31, 2016 and 2015 the cash flows used by investing activities was $389,934 and $-0-. The reason for the increase was the sale of a real estate limited liability company.
During these periods our net cash provided by (used by) financing activities was $(170,376) and $23,401, respectively. The reason for the decrease for the period ended March 31, 2016 was the pay down of the Riverbank line of credit.
The Company’s principal sources of cash are from interest, loan fees, rental income, related party loans, unaffiliated party loans, funding agreements and common and preferred stock private placements. The Company anticipates that our primary uses of cash will need to be supplemented in order to meet the demands upon its current operations, and the need for additional funds to finance ongoing acquisitions of seller financed real estate receivables and originations of commercial real estate hard money loans, and the expense of the litigating of delinquent contracts and loans, and the maintenance and resale costs of repossessed properties.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable to Smaller Reporting Companies
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “ SEC”), and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Principal Financial Officer (Chairman of the Board), of the effectiveness of the design and operation of our disclosure controls and procedures.
Based upon that evaluation, management concluded that our disclosure controls and procedures are effective as of March 31, 2016 to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer (Chairman of the Board), as appropriate, to allow timely decisions regarding required disclosure.
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Changes in Internal Control over Financial Reporting
There was no change in our internal controls over financial reporting identified in connection with the requisite evaluation that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations
Our management, including our Chief Executive Officer and Principal Financial Officer (Chairman of the Board), does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Presently, we are not subject to any material legal proceedings. In the normal course of business, Genesis is the initiator of legal proceedings associated with judicial foreclosures related to our loan portfolio.
Item 1A. Risk Factors
Not Applicable to Smaller Reporting Companies.
Item 2. Unregistered Sale 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.
On April 12, 2016, the Company granted 100,000 restricted common stock shares to Virginia Walters, a Named Executive Officer for services. The shares were valued based on the bid price of the stock on April 12, 2016, the date of issuance which was $0.15 per share.
The securities were issued pursuant to an exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. This was a private transaction which did not involve a public offering. Ms. Walters is (i) deemed an “accredited investor” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended, (ii) is knowledgeable, sophisticated and experienced in making investment decisions of this kind, and (iii) has had adequate access to information about the Company.
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Item 6. Exhibits
(a) Exhibits
Exhibit No. | Description |
31.1 | CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
31.2 | CFO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
32.1 | CEO Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
32.2 | CFO Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
101* | The following materials from Genesis Financial, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flow, and (iv) Notes to Consolidated Financial Statements. |
* In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: May 12, 2016
Genesis Financial, Inc.
(Registrant)
/s/ John R. Coghlan
________________________
By: John R. Coghlan
Title: President, Chief Executive Officer
Chief Financial Officer (Principal Accounting Officer)
/s/ Virginia Walters
________________________
By: Virginia Walters
Title: Treasurer and Director
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