Attached files
file | filename |
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EX-32.2 - EX-32.2 - True North Finance Corp | c58703exv32w2.htm |
EX-32.1 - EX-32.1 - True North Finance Corp | c58703exv32w1.htm |
EX-31.1 - EX-31.1 - True North Finance Corp | c58703exv31w1.htm |
EX-31.2 - EX-31.2 - True North Finance Corp | c58703exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period ended March 31, 2010.
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number: 333-129919
True North Finance Corporation
(Exact name of small business issuer as specified in its
charter)
DELAWARE (State or other jurisdiction of incorporation or organization) |
20-3345780 (I.R.S. Employer Identification No.) |
4999 France Avenue South, Suite 248
Minneapolis, Minnesota 55410
(Address of principal executive offices)
Minneapolis, Minnesota 55410
(Address of principal executive offices)
Issuers Telephone Number: (952) 358-6120
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes þ No o
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
o No o
Indicate by check mark whether the registrant is a large-accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of accelerated filer,
large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date: The number of shares outstanding of the Registrants Series A common stock
and Series B common stock as of June 18, 2010, was 1,000,000, and 67,354,092, respectively, and the
number of the Registrants preferred shares outstanding was 36,643.
Transitional Small Business Disclosure Format (check one): Yes o No þ
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements (Unaudited). |
TRUE NORTH FINANCE CORPORATION
(FORMERLY CS FUND GENERAL PARTNER, LLC)
CONSOLIDATED FINANCIAL STATEMENTS
3
Table of Contents
TABLE OF CONTENTS
FINANCIAL SECTION
PAGE | ||||
Financial Statements: |
||||
5 | ||||
6 | ||||
7 | ||||
8 |
4
Table of Contents
TRUE NORTH FINANCE CORPORATION
(FORMERLY CS FUND GENERAL PARTNER, LLC)
(FORMERLY CS FUND GENERAL PARTNER, LLC)
CONSOLIDATED BALANCE SHEETS
March 31, 2010 | ||||||||
(Unaudited) | December 31, 2009 | |||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash |
$ | 237,205 | $ | 69,220 | ||||
Interest receivable |
| 3,798 | ||||||
Other current assets |
40,865 | 70,559 | ||||||
Total current assets |
278,070 | 143,577 | ||||||
Property and equipment (net) |
121,576 | 128,460 | ||||||
Investments
in notes receivable net of allowance of $1,643,485 and $1,643,485 as of March 31, 2010 and December 31, 2009 respectively |
960,000 | 1,250,000 | ||||||
Investments
in notes receivable, related party, net of allowance of $0 and $0 as of March 31, 2010 and December 31, 2009 respectively |
218,224 | 171,489 | ||||||
Investments
in real estate loans, net of allowance of $0 and $0 as of March 31, 2010 and December 31, 2009 respectively |
6,426,000 | 6,426,000 | ||||||
Real estate held for sale |
39,540,000 | 39,540,000 | ||||||
Deposits and other assets |
1,089,422 | 1,112,768 | ||||||
Total assets |
$ | 48,633,292 | $ | 48,772,294 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT
CURRENT LIABILITIES |
||||||||
Accounts payable |
$ | 896,572 | $ | 1,056,922 | ||||
Accounts payable, related party |
113,600 | 59,464 | ||||||
Current portion of notes payable |
60,782,223 | 60,782,223 | ||||||
Current portion of notes payable, related party |
1,300,000 | 1,300,000 | ||||||
Other current liabilities, related party |
586,590 | 538,784 | ||||||
Other current liabilities |
9,905,795 | 7,934,675 | ||||||
Total current liabilities |
73,584,780 | 71,672,068 | ||||||
LONG TERM LIABILITIES |
||||||||
Notes payable |
9,930,000 | 9,930,000 | ||||||
Notes payable, related party |
2,168,000 | 628,000 | ||||||
Total liabilities commitments and contingencies |
85,682,780 | 82,230,068 | ||||||
STOCKHOLDERS DEFICIT |
||||||||
Preferred stock, $1,000 stated value, 50,000 shares
authorized; 35,473 shares issued and outstanding |
16,700,298 | 16,700,298 | ||||||
Common stock
(Series A), $.01 par value, 1,000,000 shares authorized; 1,000,000 shares issued and outstanding |
10,000 | 10,000 | ||||||
Common stock
(Series B), $.01 par value, 150,000,000 shares authorized; 67,354,092 and 67,354,092 shares issued and
outstanding at March 31, 2010 and December 31, 2009, respectively |
673,541 | 673,541 | ||||||
Additional paid-in capital |
41,687 | 41,687 | ||||||
Accumulated (deficit) |
(50,115,505 | ) | (46,951,058 | ) | ||||
Total True North Finance Corporation stockholders deficit |
(32,689,979 | ) | (29,525,532 | ) | ||||
Noncontrolling interests |
(4,359,509 | ) | (3,932,242 | ) | ||||
Total stockholders deficit |
(37,049,488 | ) | (33,457,774 | ) | ||||
Total liabilities and stockholders deficit |
$ | 48,633,292 | $ | 48,772,294 | ||||
The accompanying notes are an integral part of these financial statements.
5
Table of Contents
TRUE NORTH FINANCE CORPORATION
(FORMERLY CS FUND GENERAL PARTNER, LLC)
(FORMERLY CS FUND GENERAL PARTNER, LLC)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Unaudited)
For the Three | For the Three | |||||||
Months Ended | Months Ended | |||||||
March 31, 2010 | March 31, 2009 | |||||||
INTEREST AND FEE INCOME |
||||||||
Interest and fee income |
$ | | $ | | ||||
Interest and fee income, related party |
2,981 | | ||||||
2,981 | | |||||||
OPERATING EXPENSES |
||||||||
Insurance |
29,889 | | ||||||
Payroll |
166,583 | | ||||||
Professional fees |
101,779 | | ||||||
Interest expense |
2,235,625 | | ||||||
Interest expense, related party |
50,291 | |||||||
Other expense |
703,838 | |||||||
Other expense, related party |
375,065 | | ||||||
Total operating expenses |
3,663,070 | | ||||||
Loss from operations |
(3,660,089 | ) | | |||||
INCOME
(LOSS) FROM REAL ESTATE HELD FOR SALE |
||||||||
Income related to real estate held for sale |
119,156 | | ||||||
Expenses related to real estate held for sale |
(135,281 | ) | | |||||
Total loss from real estate held for sale |
(16,125 | ) | | |||||
OTHER INCOME |
||||||||
Gain from sale of investments |
84,500 | | ||||||
Total other income |
84,500 | |||||||
Loss before provision for income taxes |
(3,591,714 | ) | | |||||
Deferred income tax benefit |
| | ||||||
Net loss |
(3,591,714 | ) | | |||||
Net loss attributable to noncontrolling interests |
427,267 | | ||||||
Net loss attributable to True North |
$ | (3,164,447 | ) | $ | | |||
Loss per share: |
||||||||
Basic and diluted attributable to True North Stockholders |
$ | (0.05 | ) | $ | | |||
Weighted average basic and diluted shares outstanding |
68,354,092 | 37,331,993 | ||||||
The accompanying notes are an integral part of these financial statements.
6
Table of Contents
TRUE NORTH FINANCE CORPORATION
(FORMERLY CS FUND GENERAL PARTNER, LLC)
(FORMERLY CS FUND GENERAL PARTNER, LLC)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Unaudited)
For the Three | For the Three | |||||||
Months Ended | Months Ended | |||||||
March 31, 2010 | March 31, 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (3,591,714 | ) | $ | | |||
Adjustments
to reconcile net loss to net cash used by operating activities: |
||||||||
Depreciation |
6,884 | | ||||||
Gain on sale of investments |
(84,500 | ) | ||||||
Amortization of debt fees |
22,346 | | ||||||
Amortization of prepaid expenses |
1,000 | |||||||
Changes in operating assets and liabilities: |
||||||||
Interest receivable |
3,798 | | ||||||
Other current assets |
29,694 | | ||||||
Accounts payable and accrued liabilities |
(53,222 | ) | | |||||
Accrued interest |
1,965,934 | | ||||||
Net cash used by operating activities |
(1,699,780 | ) | | |||||
Cash flows from investing activities: |
||||||||
Proceeds from investments |
434,500 | | ||||||
Purchase of notes receivable |
(106,735 | ) | ||||||
Net cash used by investing activities |
327,765 | | ||||||
Cash flows from financing activities: |
||||||||
Proceeds from Notes Payable |
1,540,000 | | ||||||
Net cash provided by financing activities |
1,540,000 | | ||||||
Net change in cash and cash equivalents |
167,985 | | ||||||
Cash and cash equivalents, beginning of period |
69,220 | | ||||||
Cash and cash equivalents, end of period |
$ | 237,205 | $ | | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 319,982 | $ | | ||||
Cash paid for income taxes |
$ | | $ | | ||||
The accompanying notes are an integral part of these financial statements.
7
Table of Contents
TRUE NORTH FINANCE CORPORATION
(FORMERLY CS FUND GENERAL PARTNER, LLC)
(FORMERLY CS FUND GENERAL PARTNER, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 Nature of Operations and Summary of Significant Accounting Policies
Reference to the Company
References to we, us, our, True North or the Company in these notes to the consolidated
financial statements refer to True North Finance Corporation, a Delaware corporation, and its
subsidiaries. On June 22, 2009, CS Financing Corporation changed its name to True North Finance
Corporation. As discussed below, the financial statements prior to June 30, 2009 are those of CS
Fund General Partner, LLC.
Reverse Acquisition Accounting
CS Fund General Partner, LLC became a wholly owned subsidiary of True North Finance Corporation
pursuant to a merger on June 30, 2009. Under the purchase method of accounting in a business
combination effected through an exchange of equity interests, the entity that issues the equity
interests is generally the acquiring entity. In some business combinations (commonly referred to
as reverse acquisitions), however, the acquired entity issues the equity interests. FASB ASC
805-10, Business Combinations requires consideration of the facts and circumstances surrounding a
business combination that generally involve the relative ownership and control of the entity by
each of the parties subsequent to the merger. Based on a review of these factors, the June 2009
merger with CS Fund General Partner, LLC (the Merger) was accounted for as a reverse acquisition
(i.e. True North Finance Corporation was considered as the acquired company and CS Fund General
Partner, LLC was considered as the acquiring company). As a result, True North Finance
Corporations assets and liabilities as of June 30, 2009, the date of the Merger closing, have been
incorporated into CS Fund General Partner, LLCs balance sheet based on the fair values of the net
assets acquired, which equaled the consideration paid for the acquisition. FASB ASC 805-10 also
requires an allocation of the acquisition consideration to individual assets and liabilities
including tangible assets, and financial assets. Further, the Companys operating results (post
Merger) include CS Fund General Partner, LLCs operating results prior to the date of closing and
the results of the combined entity following the closing of the Merger. Although CS Fund General
Partner, LLC was considered the acquiring entity for accounting purposes, the Merger was structured
so that CS Fund General Partner, LLC became a wholly owned subsidiary of True North Finance
Corporation.
Also on June 30, 2009, the Company issued 40,000 shares of preferred stock to Capital Solutions
Monthly Income Fund, L.P. On that same date, Capital Solutions Monthly Income Fund, L.P.
distributed 36,643 shares of the preferred stock to certain limited partners in complete
liquidation of their capital accounts. Other limited partners indicated an interest in converting
their limited partner interests to Series 1 Notes. Accordingly, they did not receive preferred
stock and remained as limited partners on June 30, 2009. These limited partners are reflected on
the balance sheet as non-controlling interests. In July 2009, $886,707 of the limited partnership
interests was liquidated in exchange for Series 1 Notes. As a result of these transactions, the
Company obtained control of Capital Solutions Monthly Income Fund, L.P. and True North Finance
Corporation.
CS Fund General Partner, LLC is the general partner of Capital Solutions Monthly Income Fund. The
investment in Capital Solutions Monthly Income Fund, L.P. is reflected on the balance sheet as
Non-controlling interest of ($4,359,509) and ($3,932,242) as of March 31, 2010 and December 31,
2009 respectively.
Nature of Operations
The Company was incorporated in Delaware on August 19, 2005. The Company primarily finances real
estate and other transactions from proceeds of the Companys offering of Five Year Notes-Series A
(the Notes Offering).
CS Fund General Partner, LLC, a Delaware Limited Liability Company, was formed on November 24,
2004. CS Fund General Partner, LLC was the general partner of Capital Solutions Monthly Income
Fund.
Capital Solutions Monthly Income Fund, L.P. (the Partnership), a Delaware limited partnership, was
formed on November 4, 2004. The Partnership was originally formed to achieve advantageous rates of
return through purchasing secured, but subordinated, notes relating to the financing for
residential and commercial real estate development, construction and investment property. In June
of 2008, the Partnership foreclosed on assets secured by the outstanding notes. The Partnership
continues to own real estate for the purpose of investment and development.
Condensed Financial Statements
The accompanying condensed unaudited financial statements of the Company have been prepared in
accordance with U.S. generally accepted accounting principles for interim financial statements and
pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. In the
opinion of management, the accompanying unaudited financial statements reflect all adjustments
consisting of normal recurring adjustments necessary for a fair presentation of its financial
position and results of operations. Interim results of operations are not necessarily indicative of
the results that may be achieved for the full year. The financial statements and related notes do
not include all information and footnotes required by U.S. generally accepted accounting principles
for annual reports. This quarterly report should be read in conjunction with the financial
statements included in the Companys report on Form 10-K filed on May 26, 2009 with the U.S.
Securities and Exchange Commission for the year ended December 31, 2009.
8
Table of Contents
NOTE 1 Nature of Operations and Summary of Significant Accounting Policies (cont.)
Consolidated Financial Statements
In the consolidated financial statements and the notes thereto, all references to historical
information, balances and results of operations are related to CS Fund General Partner LLC as the
predecessor company pursuant to reverse acquisition accounting rules. Although pre-merger True
North Finance Corporation was an operating company since 2006, under reverse acquisition accounting
rules, the merged Companys consolidated financial statements reflect our results as an operating
company since January 1, 2008. Accordingly, the Companys operating results (post-Merger) include
the operating results of CS Fund General Partner LLC prior to the date of the Merger and the
results of the combined entity following the closing of the Merger.
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain
amounts previously reported have been reclassified to conform to the current year presentation.
Management 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization.
Depreciation is provided using the straight-line method over the estimated useful lives of the
related assets, generally three to seven years. Amortization on capital leases is over the lesser
of the estimated useful life or the term of the lease. Expenditures for repairs and maintenance
are charged to operations as incurred. We periodically evaluate whether events and circumstances
have occurred that may warrant revision of the estimated useful lives of fixed assets or whether
the remaining balance of fixed assets should be evaluated for possible impairment. We use an
estimate of the related undiscounted cash flows over the remaining life of the fixed assets in
measuring their recoverability.
Revenue Recognition
Interest on our investments in notes receivable is recognized as revenue when earned according to
the terms of the loans, using the effective interest method. We do not accrue interest income on
loans once they are determined to be non-performing. A loan is considered non-performing: (1)
when, based on current information and events, it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement; or (2) when the payment of
interest is 90 days past due.
Cash receipts will be allocated to interest income, except when such payments are specifically
designated by the terms of the loan as principal reduction or when management does not believe our
investment in the loan is fully recoverable.
Investments in Real Estate Loans
We may from time to time acquire or sell investments from or to our manager or other related
parties without a premium. The primary purpose is to either free up capital to provide liquidity
for various reasons, such as loan diversification, or place excess capital in investments to
maximize the use of our capital. Selling or buying loans allows us to diversify our loan portfolio
within these parameters. Due to the short-term nature of the loans we make and the similarity of
interest rates in loans we normally would invest in, the fair value of a loan typically
approximates its carrying value. Accordingly, discounts or premiums typically do not apply upon
sales of loans and therefore, generally no gain or loss is recorded on these transactions,
regardless of whether to a related or unrelated party.
Investments in real estate loans are generally secured by deeds of trust or mortgages. Generally,
our real estate loans require interest only payments with a balloon payment of the principal at
maturity. We have also made loans that defer interest and principal until maturity. We have both
the intent and ability to hold real estate loans until maturity and therefore, real estate loans
are classified and accounted for as held for investment and are carried at amortized cost. Loans
sold to or purchased from affiliates are accounted for at the principal balance and no gain or loss
is recognized by us or any affiliate.
Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and
are updated, when new appraisals are received, to reflect subsequent changes in value estimates.
Such appraisals are generally dated within 12 months of the date of loan origination and may be
commissioned by the borrower.
The Company considers a loan to be impaired when, based upon current information and events, it
believes it is probable that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The Companys impaired loans include troubled debt
restructuring, and performing and non-performing loans in which full payment of principal or
interest is not expected. The Company calculates an
9
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NOTE 1 Nature of Operations and Summary of Significant Accounting Policies (cont.)
allowance required for impaired loans based on the present value of expected future cash flows
discounted at the loans effective interest rate, or at the loans observable market price of the
fair value of its collateral.
Loans that have been modified from their original terms are evaluated to determine if the loan
meets the definition of a Troubled Debt Restructuring (TDR). When the Company modifies the terms
of an existing loan that is considered a TDR, it is considered performing as long as it is in
compliance with the modified terms of the loan agreement. If the modification calls for deferred
interest, it is recorded as interest income as cash is collected.
Allowance for Loan Losses
We maintain an allowance for loan losses on our investments in real estate loans for estimated
credit impairment. Managements estimate of losses is based on a number of factors including the
types and dollar amounts of loans in the portfolio, adverse situations that may affect the
borrowers ability to repay, prevailing economic conditions and the underlying collateral securing
the loan. Additions to the allowance are provided through a charge to earnings and are based on an
assessment of certain factors, which may indicate estimated losses on the loans. Actual losses on
loans are recorded as
a charge-off or a reduction to the allowance for loan losses. Generally, subsequent recoveries of
amounts previously charged off are added back to the allowance and included as income.
Estimating allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency and cooperation of
the related borrower and specific legal issues that affect loan collections or taking possession of
the property.
Additional facts and circumstances may be discovered as we continue our efforts in the collection
and foreclosure processes. This additional information often causes management to reassess its
estimates. Circumstances that may cause significant changes in our estimated allowance include,
but are not limited to:
| Changes in the level and trends relating to non-performing receivables including past due interest payments and past due principal payments; | ||
| Declines in real estate market conditions, which can cause a decrease in expected market value; | ||
| Discovery of undisclosed lines (including but not limited to, community improvement bonds, easements and delinquent property taxes); | ||
| Lack of progress on real estate developments after we advance funds. We will customarily monitor progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances; | ||
| Unanticipated legal or business issues that may arise subsequent to loan origination or loan advances or upon the sale of foreclosed property; and | ||
| Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the current value of the property. |
The Company considers a loan to be impaired when based on current information and events, it is
probable that Company will be unable to collect all amounts due according to the contractual terms
of the loan agreement or when the payment of interest or principal is 90 days past due.
Fair Value Disclosures
As of March 31, 2010, we had no assets or liabilities utilizing Level 1 or Level 2 inputs and
assets and liabilities utilizing Level 3 inputs included investments in real estate loans,
unsecured borrowings.
To the extent that valuation is based on models or inputs that are less observable or unobservable
in the market, the determination of fair value requires more judgment. Accordingly, our degree of
judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, an asset or liability will be classified in its entirety based on
the lowest level of input that is significant to the measurement of fair value.
Fair value is a market-based measure considered from the perspective of a market participant who
holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when
market assumptions are not readily available, our own assumptions are set to reflect those that
market participants would use in pricing the asset or liability at the measurement date. We use
prices and inputs that are current as of the measurement date, including during periods of market
dislocation, such as the recent illiquidity in the auction rate securities market. In periods of
market dislocation,
10
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NOTE 1 Nature of Operations and Summary of Significant Accounting Policies (cont.)
the observability of prices and inputs may be reduced for many instruments. This condition may
cause our financial instruments to be reclassified from Level 1 to Level 2 or Level 3 and/or vice
versa.
Our valuation techniques will be consistent with at least one of the three possible approaches: the
market approach, income approach and/or cost approach. Our Level 1 inputs are based on the market
approach and consist primarily of quoted prices for identical items on active securities exchanges.
Our Level 2 inputs are primarily based on the market approach of quoted prices in active markets
or current transactions in inactive markets for the same or similar collateral that do not require
significant adjustment based on unobservable inputs. Our Level 3 inputs are primarily based on the
income and cost approaches, specifically, discounted cash flow analyses, which utilize significant
inputs based on our estimates and assumptions.
The following tables presents the valuation of our financial assets and liabilities as of March 31,
2010 and December 31, 2009, measured at fair value on a recurring basis by input levels:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||
Active Markets For | Significant Other | Significant | ||||||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | Carrying Value on Balance | |||||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Balance at 3/31/2010 | Sheet at 3/31/2010 | ||||||||||||||||
Assets |
||||||||||||||||||||
Investment in
real estate held
for sale |
$ | | $ | | $ | 39,540,000 | $ | 39,540,000 | $ | 39,540,000 | ||||||||||
Investments in
notes receivable |
$ | | $ | | $ | 1,178,224 | $ | 1,178,224 | $ | 1,178,224 | ||||||||||
Investments in
real estate
loans |
$ | | $ | | $ | 6,426,000 | $ | 6,426,000 | $ | 6,426,000 | ||||||||||
Liabilities |
||||||||||||||||||||
Notes payable |
$ | | $ | | $ | 74,180,223 | $ | 74,180,223 | $ | 74,180,223 |
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||
Active Markets For | Significant Other | Significant | Carrying Value on | |||||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | Balance Sheet at | |||||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Balance at 12/31/2009 | 12/31/2009 | ||||||||||||||||
Assets |
||||||||||||||||||||
Investment in
real estate held
for sale |
$ | | $ | | $ | 39,540,000 | $ | 39,540,000 | $ | 39,540,000 | ||||||||||
Investments in
notes receivable |
$ | | $ | | $ | 1,421,489 | $ | 1,421,489 | $ | 1,421,489 | ||||||||||
Investments in
real estate
loans |
$ | | $ | | $ | 6,426,000 | $ | 6,426,000 | $ | 6,426,000 | ||||||||||
Liabilities |
||||||||||||||||||||
Notes payable |
$ | | $ | | $ | 72,090,223 | $ | 72,090,223 | $ | 72,090,223 |
11
Table of Contents
The following table presents the changes in our financial assets and liabilities that are measured
at fair value on a recurring basis using significant unobservable inputs (Level 3) from December
31, 2009 to March 31, 2010:
Assets | ||||||||||||
Investment in | Investment in notes | Investments in real | ||||||||||
real estate held for sale | receivable | estate loans | ||||||||||
Balance on December 31, 2009 |
$ | 39,540,000 | $ | 1,421,489 | $ | 6,426,000 | ||||||
Change in temporary valuation adjustment included in net loss |
||||||||||||
Increase in allowance for loan losses |
| | ||||||||||
Impairment on assets |
| | | |||||||||
Sales, purchases, pay downs and reduction of assets |
| |||||||||||
Sale of investments |
| (350,000 | ) | | ||||||||
Purchase of investments |
| 106,735 | | |||||||||
Transfer to Level 1 |
| | | |||||||||
Transfer from Level 2 |
| | ||||||||||
Balance on March 31, 2010, net of temporary valuation
adjustment |
$ | 39,540,000 | $ | 1,178,224 | $ | 6,426,000 | ||||||
Liabilities | ||||
Notes Payable | ||||
Balance on December 31, 2009 |
$ | 72,640,223 | ||
Increase in Series 1 Notes Payable |
||||
Increase in Series A Notes Payable |
1,540,000 | |||
Principal payments on notes payable |
| ) | ||
Transfer to Level 1 |
| |||
Transfer to Level 2 |
| |||
Balance on March 31, 2010, net of temporary valuation adjustment |
$ | 74,180,223 | ||
Stock Based Compensation
The Company applies Generally Accepted Accounting Principles (GAAP) for all compensation related to
stock, options, or warrants. GAAP requires the recognition of compensation cost using a fair value
based method whereby compensation is measured at the grant date based on the value of the award and
is recognized over the service period, which is usually the vesting period. The Company uses the
Black-Scholes pricing model to calculate the fair value of options and warrants issued to employees
and non-employees. Stock issued for compensation is valued using the market price of the stock on
the date of the related agreement.
Real Estate Held for Sale
Real estate held for sale includes real estate acquired through purchases and foreclosure and will
be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the
propertys estimated fair value, less estimated costs to sell, with fair value based upon
appraisals and knowledge of local market conditions. The carrying values of real estate held for
sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase
offers. Third party appraisals are obtained annually. Impairment losses are recorded if the third
party appraisals are less than the net recorded value.
Management classifies real estate held for sale when the following criteria are met:
| Management commits to a plan to sell the properties; | ||
| The property is available for immediate sale in its present condition subject only to the terms that are usual and customary; | ||
| An active program to locate a buyer and other actions required to complete a sale have been initiated; | ||
| The sale of the property is probable; | ||
| The property is being actively marketed for sale at a reasonable price; | ||
| Withdrawal or significant modification of the sale is not likely. |
12
Table of Contents
NOTE 1 Nature of Operations and Summary of Significant Accounting Policies (cont.)
Our investments in real estate held for sale are accounted for at the lower of cost or fair value
less costs to sell with fair value based on appraisals and knowledge of local market conditions.
Classification of Operating Results from Real Estate Held for Sale
US GAAP generally requires operating results from long lived assets held for sale to be classified
as discontinued operations as a separately stated component of net income. Our operations related
to real estate held for sale are separately identified in the accompanying consolidated statements
of income.
Income Taxes
The Company accounts for its income taxes in accordance with GAAP, which requires recognition of
deferred tax assets and liabilities for future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
The Company accounts for uncertainty in tax positions in accordance with GAAP which requires the
recognition of a tax position when it is more likely than not that the tax position will be
sustained upon examination by relevant taxing authorities, based on the technical merits of the
position.
Earnings Per Share
Basic earnings per common shares (EPS) is calculated by dividing net income available to common
stockholders by the weighted average number of shares outstanding during the period. For periods
prior to the Merger, to determine the weighted average number of shares outstanding, the number of
True North Finance Corporation common shares issued for outstanding CS Fund General Partner, LLC
member shares was equated to member shares issued and outstanding during prior periods.
Recent accounting policies
In January 2010, the FASB issued ASU No. 2010-06 regarding fair value measurements and disclosures
and improvement in the disclosure about fair value measurements. This ASU requires additional
disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value
measurements, including a description of the reasons for the transfers. Further, this ASU requires
additional disclosures for the activity in Level 3 fair value measurements, requiring presentation
of information about purchases, sales, issuances, and settlements in the reconciliation for fair
value measurements. This ASU is effective for fiscal years beginning after December 15, 2010, and
for interim periods within those fiscal years. We are currently evaluating the impact of this ASU;
however, we do not expect the adoption of this ASU to have a material impact on our consolidated
financial statements.
In February 2010, the FASB issued ASU No. 2010-09 regarding subsequent events and amendments to
certain recognition and disclosure requirements. Under this ASU, a public company that is a SEC
filer, as defined, is not required to disclose the date through which subsequent events have been
evaluated. This ASU is effective upon the issuance of this ASU. The adoption of this ASU did not
have a material impact on our consolidated financial statements.
In April 2010, the FASB issued ASU No. 2010-18 regarding improving comparability by eliminating
diversity in practice about the treatment of modifications of loans accounted for within pools
under Subtopic 310-30 Receivable Loans and Debt Securities Acquired with Deteriorated Credit
Quality (Subtopic 310-30). Furthermore, the amendments clarify guidance about maintaining the
integrity of a pool as the unit of accounting for acquired loans with credit deterioration. Loans
accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt
restructuring accounting provisions within Subtopic 310-40, ReceivablesTroubled Debt
Restructurings by Creditors. The amendments in this Update are effective for modifications of
loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual
period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early
adoption is permitted. We are currently evaluating the impact of this ASU; however, we do not
expect the adoption of this ASU to have a material impact on our consolidated financial statements.
13
Table of Contents
NOTE 2 Going Concern and Managements Plan of Action
The Companys financial statements are presented on a going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of business. The Company
has experienced losses from operations during the last year that raise substantial doubt as to its
ability to continue as a going concern. The Companys ability to continue as a going concern is
contingent upon its ability to obtain the capital necessary to attain profitable operations,
devising a management plan to develop a profitable operation and lowering the level of problem
assets to an acceptable level and meeting current working capital requirements.
In this regard, management has developed a capital plan, which includes, but is not limited to: (1)
Raising capital through the Companys Note offering which we anticipate will occur in 2010. (2)
Selling real estate currently held by the Company. (3) Raising capital through secured mortgages
on real estate currently held by the Company. (4) Utilize the option obtained on the first
mortgage of Cape Haze Marina property and foreclosing on subordinate lien holders and thus reducing
approximately $6,000,000 of debt currently on the Companys books.
The financial statements do not include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amounts and classification of liabilities
that may result from the possible inability of the Company to continue as a going concern.
14
Table of Contents
NOTE 3 Investments in Notes Receivable
Investments in Notes receivable consist of the following as of March 31, 2010:
As of March 31, 2010 | ||||||||||||
Allowance | Balance, net of | |||||||||||
Balance | for loan losses | allowance | ||||||||||
The Company
acquired a note
receivable secured
by residential
property |
$ | 900,000 | $ | | $ | 900,000 | ||||||
Note receivable to
a related party
(our controlling
shareholder)
bearing interest at
6%, unsecured with
the entire unpaid
balance of
principal and
interest due upon
demand |
218,224 | | 218,224 | |||||||||
Note receivable to
DuraBan Worldwide,
Inc. bearing
interest at 18%,
unsecured with the
entire unpaid
balance of
principal and
interest due upon
demand |
60,000 | | 60,000 | |||||||||
The Company issued
secured notes
receivable to RES.
The notes were
secured by real
estate in Northern
California. RES is
controlled by
former directors of
True North. As of
December 31, 2009,
this note was the
subject of
litigation and was
delinquent.
Accordingly, we
have reserved the
entire amount of
the note
receivable |
979,750 | 979,750 | | |||||||||
$ | 2,157,974 | $ | 979,750 | $ | 1,178,224 | |||||||
Investments in Notes receivable consist of the following as of December 31, 2009:
As of December 31, 2009 | ||||||||||||
Allowance | Balance, net of | |||||||||||
Balance | for loan losses | allowance | ||||||||||
The Company
acquired a note
receivable secured
by residential
property |
$ | 900,000 | $ | | $ | 900,000 | ||||||
Note receivable to
a related party
(our controlling
shareholder)
bearing interest at
6%, unsecured with
the entire unpaid
balance of
principal and
interest due upon
demand |
171,488 | | 171,488 | |||||||||
The Company
acquired from a
related party a
discounted
unsecured loan
portfolio. As of
12/31/09 the loan
was considered
non-performing
(i.e., based on
current information
and events, it is
probable that we
will be unable to
collect all amounts
due according to
the contractual
terms of the loan
agreement or when
the payment of
interest is 90 days
past due). We will
recognize a gain
under the cost
recovery method |
300,000 | | 300,000 | |||||||||
The Company
acquired from a
related party a
discounted loan
portfolio bearing
an interest rate of
23.25% , secured by
personal property
with interest and
principal payable
in monthly
installments of
$15,000, with a
maturity date of
February 13, 2010 |
50,000 | | 50,000 | |||||||||
The Company issued
secured notes
receivable to RES.
The notes were
secured by real
estate in Northern
California. RES is
controlled by
former directors of
True North. As of
December 31, 2009,
this note was the
subject of
litigation and was
delinquent.
Accordingly, we
have reserved the
entire amount of
the note
receivable |
979,750 | 979,750 | | |||||||||
$ | 2,404,239 | $ | 979,750 | $ | 1,421,489 | |||||||
15
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NOTE 4 Investment in Real Estate Loans
The Company has two investments in real estate loans as of March 31, 2010 and December 31,
2009. The borrower has defaulted on these loans and the company is pursuing action to acquire the
two properties through foreclosure. Accordingly, the Company has not accrued interest income on
these loans. The book value is equal to fair value of the real estate secured by these loans.
Investments in Real Estate Loans consist of the following as of March 31, 2010 and December
31, 2009:
Allowance for loan | Balance, net of | |||||||||||
Balance | losses | allowance | ||||||||||
Gulf Lakes (Florida) |
$ | 5,600,000 | | $ | 5,600,000 | |||||||
SLP of Spring Lake Garden (Minnesota) |
826,000 | | 826,000 | |||||||||
$ | 6,426,000 | | $ | 6,426,000 | ||||||||
There were no changes in Investment in Real Estate Loans during the three months ended March
31, 2010.
16
Table of Contents
NOTE 5 Real Estate Held for Sale
At March 31, 2010 and December 31, 2009, we held 8 properties with a total carrying value of
approximately $39.5 million and recorded as investments in real estate held for sale. Our
investments in real estate held for sale are accounted for at the lower of cost or fair value less
costs to sell with fair value based on appraisals and knowledge of local market conditions. It is
our intent to hold the marina property and maximize our investment. However, it is not our intent
to invest in or own real estate as a long term investment. We seek to sell our properties held for
sale as quickly as possible taking into account current economic conditions. Set forth below is a
summary of investments in real estate held for sale. There were no changes in real estate held for
sale during the three months ended March 31, 2010.
Assets Acquired | 2009 Impairment | Balance as of | ||||||||||||||
in June 30, 2009 | on Real Estate Held | December 31, 2009 | Senior Debt | |||||||||||||
Acquisition | for Sale | and March 31, 2010 | Balance | |||||||||||||
(1) Marina at Cape Haze, LLC |
$ | 46,000,000 | $ | (18,800,000 | ) | $ | 27,200,000 | * | $ | 15,660,115 | ||||||
(2) Village of Lloyd Harbor |
4,000,000 | | 4,000,000 | * | 4,000,000 | |||||||||||
(3) Hidden Canyon |
7,000,000 | | 7,000,000 | * | 7,000,000 | |||||||||||
(4) Oak Vista LLC |
1,530,000 | (1,530,000 | ) | | | |||||||||||
(5) SLP of Spring Lake Garden, LLC |
1,050,000 | | 1,050,000 | | ||||||||||||
(6) Reserve at Royal Oaks, LLC |
250,000 | (125,000 | ) | 125,000 | | |||||||||||
(7) Wrights Crossing, LLC |
200,000 | (35,000 | ) | 165,000 | | |||||||||||
(8) The Wave |
5,000,000 | (5,000,000 | ) | | | |||||||||||
$ | 65,030,000 | $ | (25,490,000 | ) | $ | 39,540,000 | $ | 26,660,115 | ||||||||
* | These properties are subject to senior debt which is currently delinquent. The Company is at risk of losing these properties to foreclosure if the senior debt is not brought current. M&I Bank, the senior lender on the Marina at Cape Haze property has begun foreclosure proceedings. We are working with M&I Bank to avoid the continuation of the foreclosure. | |
(1) | Marina at Cape Haze LLC An operating marina located on an overall area of approximately 37.75 acres of property. The property is divided into two sub-tracts. Sub-tract A has a boat storage building which contains 30,340 square feet of gross building area. The Cabana/Recreational hall contains 1,493 square feet of gross building area. The sub-tract contains 106 wet slips and 200 dry slips. Subtract B has a shell building which is a commercial sales office building containing 1,560 square feet of gross building area. As of 3/31/10 we have evaluated the carrying value of the property based on an updated appraisal obtained January 25, 2010. It is our intention to hold this property and develop it in order to maximize our investment. See Note 11 regarding pending litigation in connection with this property. | |
(2) | Village of Lloyd Harbor Approximately 17.6 acres of vacant land. The parcel contains roughly 700 feet of water frontage on Long Island Sound. The property is currently in the platting process to be subdivided into two separate lots to take advantage of its prime beachfront location. As of 3/31/10 we have evaluated the carrying value of the property based on an updated appraisal obtained January 26, 2010. | |
(3) | Hidden Canyon A 53 lot residential subdivision in Cave Creek, AZ. In April 2010, this property transferred to the lienholder in full payment of the amount owed. Accordingly, the book value as of March 31, 2010 was equal to the liability at March 31, 2010 of $7,291,667. | |
(4) | Oak Vista Property Approximately 2.34 acres of vacant land intended to be held for future development. As of 3/31/10 we have evaluated the carrying value of the property based on an updated appraisal obtained February 4, 2010. See Note 11 regarding pending litigation in connection with this property. | |
(5) | SLP of Spring Lake Garden, LLC Approximately 130,796 square feet or 3 acres of property located in Spring Lake Park Minnesota. The lot is zoned with a provision for the elderly and handicapped and is available for future development. As of 3/31/10 we have evaluated the carrying value of the property based on an updated appraisal obtained May 6, 2009. | |
(6) | Reserve at Royal Oaks, LLC Approximately 1,094 acres or 2 blocks of property containing 20 townhome sites. As of 3/31/10 we have evaluated the carrying value of the property based on an updated appraisal obtained January 26, 2010. | |
(7) | Wrights Crossing, LLC Approximately 12.2 acres of vacant land located in the City of Big Lake Minnesota. As of 3/31/10 we have evaluated the carrying value of the property to be $165,000 based on our evaluation of the property and negotiations of a recent purchase involving the property. |
17
Table of Contents
NOTE 6 Notes Payable
The Companys notes payable as of March 31, 2010 are summarized as follows:
As of December | As of March 31, | Interest | ||||||||||||||
Description | 31, 2009 | 2010 | Matures | Rate | ||||||||||||
Five Year Notes-Series A issued in 2006,
2007, and 2008 (unsecured) interest paid
monthly |
$ | 9,930,000 | $ | 9,930,000 | 2011 - 2013 | 10 | % | |||||||||
Notes-Series A, related party |
628,000 | 2,168,000 | 2013 | 12.5 | % | |||||||||||
Series 1 Four Year Notes issued in 2009
(unsecured) interest paid monthly |
30,630,101 | 30,630,101 | 2013 | 12 | %* | |||||||||||
Note Payable issued in 2009 secured by
Arizona real estate, interest paid monthly |
7,000,000 | 7,000,000 | 2013 | 10 | %* | |||||||||||
Note Payable issued in 2009 secured by New
York real estate, interest paid monthly |
4,000,000 | 4,000,000 | 2012 | 15 | %* | |||||||||||
Senior Debt secured by real estate foreclosed
in 2008, interest paid monthly or quarterly |
15,660,115 | 15,660,115 | 2011 -2013 | 15% - 18 | %* | |||||||||||
Notes Payable (Gulf Lakes and Spring Lake
Gardens) |
4,792,007 | 4,792,007 | 2010-2013 | 15% - 18 | %* | |||||||||||
Total Notes Payable |
$ | 72,640,223 | $ | 74,180,223 | ||||||||||||
The Company is currently delinquent on all notes payable except for the Five Year Series A
Notes and the Notes Series A, related party. The Company has accrued interest at the default
rate and reflected the notes payable as current liabilities for all delinquent notes payable.
* | Reflects the default rate for notes that are delinquent. |
18
Table of Contents
NOTE 7 Related Parties
The Companys related party transactions can be summarized as follows:
Notes Receivable The Company held a note receivable from Transactional Finance (our controlling
shareholder) in the amount of $218,224 $171,489 as of March 31, 2010 and December 31, 2009
respectively.
Notes Payable The Company had notes payable to related parties as follows:
March 31, 2010 | December 31, 2009 | |||||||
Note offering (Friends & Family controlled by officers directors) |
$ | 2,168,000 | $ | 628,000 | ||||
Notes payable to Officers of the company |
1,300,000 | 1,300,000 | ||||||
Total |
$ | 3,468,000 | $ | 1,928,000 | ||||
Current Payables The Company had the following current payables to related parties:
March 31, 2010 | December 31, 2009 | |||||||
Due to Capital Solutions Management (for pre-acquisition fees) |
$ | 200,885 | $ | 200,885 | ||||
Accrued interest on notes payable to officers |
97,500 | 58,500 | ||||||
Accrued interest on Friends & Family notes payable |
11,292 | 2,486 | ||||||
Amounts due to limited partners |
276,913 | 276,913 | ||||||
Total |
$ | 586,590 | $ | 538,784 | ||||
Related party accounts payable $113,600 and $59,464 was due to officers of the Company as of
March 31, 2010 December 31, 2009 respectively.
Interest income The Company reported $2,981 and $0 of interest income from Transactional Finance
for the three months period ended March 31, 2010 and March 31, 2009 respectively.
Interest expense The Company recognized interest expense of $50,291 and $0 on the related party
notes payable described above for the three months period ended March 31, 2010 and March 31, 2009
respectively.
Other expense The Company recognized other expenses of $375,065 and $0 paid to Transactional
Finance for advisory fees for the three months period ended March 31, 2010 and March 31, 2009
respectively.
NOTE 10 Stockholders Deficit
Preferred Stock
On June 30, 2009 the Board of Directors authorized the issuance of 40,000 shares of preferred
stock, stated value $1,000 per share to Capital Solutions Monthly Income Fund, L.P.
Common Stock
In June of 2009 the Company increased the authorized shares of common stock (referred to as Series
B) from 70,000,000 to 150,000,000 and issued 36,331,993 to Transactional Finance, LLC in connection
with the Merger. Total shares issued and outstanding of the Series B common stock is 67,354,092 as
of December 31, 2009.
In June of 2009 the authorized and issued 1,000,000 shares of Series A common stock to
Transactional Finance, LLC in connection with the Merger. The Series A common stock has a priority
voting position. As a result of the issuance of the Series B and Series A common stock in June of
2009, Transactional Finance, LLC has voting control of 70% of the Company. For periods prior to
the Merger, to determine the weighted average number of shares outstanding, the number of True
North Finance Corporation common shares issued for outstanding CS Fund General Partner, LLC member
shares was equated to member shares issued and outstanding during prior periods.
Stock Options
On August 1, 2009, Christopher Clouser received 11,476,094 stock options of which 50% vested
immediately and 50% vesting when the Company raises $200,000,000 in new capital.
19
Table of Contents
NOTE 11 Commitments and Contingencies
Except as stated below, currently we are not party to any legal proceedings. We may initiate
legal proceedings, from time to time, when borrowers breach their lending agreements. From time to
time, we may be subject to legal actions, initiated by borrowers, governmental authorities or
others that arise from the running of our business.
The Securities and Exchange Commissions anticipated filing of a civil injunctive action against us
may have a material adverse effect on our business.
On January 28, 2010, the Company received a notice from the Chicago regional office staff (the
Staff) of the U.S. Securities and Exchange Commission (the SEC). The notice informed the
Company of the Staffs intention to recommend to the Commission that the SEC bring a civil action
alleging that previous management engaged in transactions in violation of Section 17(a) of the
Securities Act of 1933 (Securities Act) and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of
the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12b-20, 13a-1, and 13a-13
thereunder. The notice was issued in connection with an investigation into possible violations of
federal securities laws stemming from (1) the accrual of income on subsequently written-off real
estate loans in 2008, and (2) disclosure issues in connection with Capital Solutions Monthly Income
Fund (The Fund) in 2008. The alleged violations occurred prior to the June 30, 2009 Merger.
Previous management of the Fund and Company believe they acted appropriately and the Company
intends to work with the SEC to resolve the matter.
The Companys affiliates, Windwalker Marina at Cape Haze, LLC and Marina at Cape Haze, LLC have
been joined as defendants in an action seeking to foreclose on certain junior mortgages on a marina
and upland parcel owned by the Companys affiliates commonly known as the Cape Haze Marina parcel.
The suit, filed in the Circuit Court in and for Charlotte County, Florida, seeks to foreclosure of
a mortgage having a principal balance in excess of $14 million according to the allegations in, and
expected to be raised, plaintiffs complaint. The Companys affiliates are defending the action
based upon the provisions of the promissory note and mortgage relating to the maturity of the
promissory note and various setoffs against the principal and interest. Following a confidential
mediation, a Mediation Settlement Agreement was entered into by the parties which will, if certain
pre-conditions are met, result in the resolution of the foreclosure. The Company has accrued
$1,287,000 to cover this contingency. These same affiliates were joined as defendants in a
separate action seeking to foreclose the senior mortgage on the marina. The suit, also filed in
the Circuit Court in and for Charlotte County, Florida, seeks to foreclose a mortgage having a
principal in excess of $14 million according to the allegations in plaintiffs complaint. The
Companys affiliates have entered into an agreement with the senior lender whereby the lender has
agreed to allow the Company six months in which to negotiate a resolution of this matter.
The Companys affiliates, Heritage Development of Central Florida, LLC and Hennessey Funding, LLC,
have been named as defendants in an action seeking to foreclose on certain mortgages on undeveloped
land commonly referred to as Oak Vistas. The suit, filed in the Circuit Court in and for Sarasota
County, Florida, seeks to foreclose a mortgage having a principal balance of $3,673,786 according
to the allegations in the Complaint. After an initial foreclosure, the foreclosing bank discovered
that a parcel of commercial property had been omitted from an amended mortgage. The Company
reported this property on its financial statements at its fair value on June 30, 2009, at
$1,530,000. Subsequently, the bank successfully obtained permission from the court to reopen its
foreclosure in order to foreclose its interest in the remaining parcels. The Companys affiliates
have been actively defending the foreclosure. However, due to these events, the Company has
recorded an impairment for the full value of the property. The carrying value on the Companys
books at December 31, 2009, is $0. If the foreclosure is successful, the Company will abandon the
property.
The Companys affiliate, Spring Lake Garden of Spring Lake Park, LLC has been named as a defendant
in an action seeking damages arising from the alleged breach of a promissory note in the original
principal amount of $550,000. The affiliate has answered the complaint and denied liability under
the note. If the case is not resolved, the affiliate or related entities will assert claims
against the plaintiff.
The Company entered into a lease for office space in Minnesota. The lease obligates the
Company to the following annual lease payments:
2010 |
$ | 108,394 | ||
2011 |
112,563 | |||
2012 |
112,563 | |||
2013 |
116,732 | |||
2014 |
119,859 | |||
$ | 570,111 | |||
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NOTE 12 Subsequent Events
Events Subsequent to March 31, 2010
On April 30, 2010, the Company agreed to transfer real estate held in Arizona (Hidden Canyon) in
full payment for the liability due on the property. The Company took this action primarily due to
the significant decline in value on the property over the past year. As a result of this
transaction, the Company impaired the value of this property equal to outstanding liability as of
December 31, 2009.
On April 23, 1020 Transactional Finance, LLC made a loan to the company in the principal amount of
$1,250,000. The loan is guaranteed by certain officers of the company and amortizes in 12 equal
monthly installments, bears interest at the rate of 15.5% per annum and is secured by a priority
lien on all Company assets. The proceeds of the loan were used to satisfy judgment creditors of
the Fund. As a condition precedent to the loan, the Fund agreed to pre-pay 50% of the annual
advisory fee to Transactional Finance Fund Management, LLC and the Company agreed to execute an
amended employment agreement with Christopher Clouser. Under the amended agreement, Clouser agreed
to lower his base compensation for twelve months and the Company agreed to release certain non
competition restrictions and lower the vesting threshold of certain stock options from $200,000,000
of capital raised to $50,000,000 capital raised.
21
Table of Contents
Item 2. | Managements Discussion and Analysis or Plan of Operation. |
Some of the statements in this Quarterly Report on Form 10-Q, including, but not limited to this
Managements Discussion and Analysis or Plan of Operation, contain forward-looking statements
regarding the Companys business, financial condition, and results of operations and prospects that
are based on the Companys current expectations, estimates and projections. In addition, other
written or oral statements which constitute forward-looking statements may be made by the Company
or on the Companys behalf. Words such as expects, anticipates, intends, plans, believes,
seeks, estimates, may, would or variations of such words and similar expressions are
intended to identify such forward-looking statements. You can also identify forward-looking
statements by discussions of strategy, plans or intentions. These statements are not guarantees of
future performance, and are inherently subject to risks and uncertainties that are difficult to
predict. As a result, actual outcomes and results may differ materially from the outcomes and
results discussed in or anticipated by the forward-looking statements. All such statements are
therefore qualified in their entirety by reference to the factors specifically addressed in the
section entitled Factors That May Affect Future Results of Operations in the Companys Annual
Report on Form 10-K. New risks can arise and it is not possible for management to predict all such
risks, nor can management assess the impact of all such risks to the Companys business or the
extent to which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking statements as a
prediction of actual results. All forward-looking statements speak only as of the date of this
Quarterly Report on Form 10-Q. The Company undertakes no obligation to revise or update publicly
any forward-looking statements in order to reflect any event or circumstance that may arise after
the date of this Quarterly Report on Form 10-Q, other than as required by law.
Overview
We have recently modified our mission as follows: the mission of the Company is to ethically source
safe, high yielding investments by utilizing custom financing structures, performing extensive due
diligence and maintaining a broad referral network. After much consideration, we have elected to
pursue our mission by creating numerous new investment pods which will be individually managed
and initially focus on real estate finance, distressed sellers, bridge finance and trade finance.
The primarily objective of these investment pods is to source and service investments that provide
current yields between 400 to 800 basis points above our cost of funds.
Due to the lack of competition in the credit market and other factors, we continue to see an
abundance of excellent, and perhaps historical, high yield finance opportunities. With the demand
for our capital clearly established, we continue to attempt to structure, and restructure, the
Company to attract investment capital. We are also seeking a secured credit facility and have
identified numerous investment prospects. This secured credit facility, if received, would only be
available for investments and not working capital. In addition, principals of the Company recently
loaned the Company $1,250,000 on a secured basis.
In addition to preparing for our capital campaign, we will also continue the process of
interviewing and recruiting members of our board and investment committee. To the extent we are
able to raise investable capital, our investment committee will assume the primary responsibility
of approving pod level investments and identifying and correlating new pod investment strategies.
Our existing investment pod strategies were chosen, in part, due to their attractive correlation
and historical track record of providing consistent consolidated long term positive returns. We
expect the investment committee to maintain market awareness and fund our investment pods
accordingly. We have also spent considerable effort on a process to establish clear, performance
orientated and ethical investment protocols for our investment pod managers. The launch of the
investment pods will be aligned with the progress of our capital campaign. In addition, we have
recently identified our first investment pod manager.
We maintain a website at www.truenorthfinance.com. We are not including the information contained
in our website as part of, nor incorporating it by reference into, this Form 10-Q. We will make
available on our website free of charge our future Quarterly Reports on Form 10-Q, Annual Reports
on Form 10-K, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonable
practical after we electronically file such material with, or furnish such material to, the
Securities and Exchange Commission.
We have had net losses since inception. We had an accumulated deficit as of March 31, 2010 of
$50,115,505, which primarily reflects loss on the value of our real estate and expenditures
including professional fees and services necessary for the start of our operations, as compared to
an accumulated deficit as of December 31, 2000, of $46,951,058. The increase of the accumulated
deficit as of March 31, 2010, as compared to December 31, 2009, as principally the result of
interest expense and current operating expenses.
We believe our ability to continue as a going concern depends in large part on our ability to
immediately raise sufficient capital to enable us to make loans and receive revenue from our
lending activities in excess of our debt obligations and our operating expenses. If we are unable
to raise such additional capital in the short term, we may be forced to discontinue our business.
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Liquidity
We currently have only nominal revenue. We anticipate investments by principals of the Company,
loan repayments and asset sales of approximately $1,000,000 anticipated to be received by the end
2nd quarter of 2010 will provide adequate liquidity to fund the Companys operations
over the 2nd quarter of 2010. We are seeking, but have not secured, additional sources
of liquidity beyond the 2nd quarter. Thereafter, to the extent we are successful in
raising investable capital, and historically we have not been, we expect that the primary source of
our liquidity will come from interest and fees earned on our loans and other investments made with
the proceeds from new investments. Nevertheless, some short-term liquidity will be provided by the
net proceeds from any new capital received.
Capital Resources and Results of Operation
As we have yet to raise sufficient capital to pursue our business strategy, we have limited
operations to discuss. Our current capital resources have been provided primarily through debt
financing. To date, our material commitments include payments to existing creditors and
administrative personnel. These expenses will be paid from cash flow from asset sales or from the
net proceeds of the financings. We believe we have identified prospects to purchase several
investments sufficient to meet these obligations for the 2nd quarter of 2010. We are
still seeking additional capital to better capitalize our business and will endeavor to commence a
debt offering, which, in turn, will generate cash to fund our finance operations thereby producing
net income and additional revenue. We currently have limited revenue from operations and in all
likelihood will be required to make future expenditures in connection with our distribution efforts
along with general and administrative expenses before we will earn any material revenue.
Capital Raising Challenges
Our funding has considerably been below our expectations. We continue to encounter significant
practical and regulatory challenges in successfully commencing an offering sufficient to make
significant investments.
Concentration Restrictions
We expect to establish formal concentration restrictions that will require the investment committee
or boards approval for any investment. As we increase our portfolio of investments, our
concentration restrictions will evolve.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, as defined in Item 303(a)(4) of
Regulation S-K promulgated under the Securities Act.
Critical Accounting Estimates
Revenue Recognition
Interest on our investments in notes receivable is recognized as revenue when earned according to
the terms of the loans, using the effective interest method. We do not accrue interest income on
loans once they are determined to be non-performing. A loan is considered non-performing: (1)
when, based on current information and events, it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement; or (2) when the payment of
interest is 90 days past due.
Cash receipts will be allocated to interest income, except when such payments are specifically
designated by the terms of the loan as principal reduction or when management does not believe our
investment in the loan is fully recoverable.
Investments in Real Estate Loans
We may from time to time acquire or sell investments from or to our manager or other related
parties without a premium. The primary purpose is to either free up capital to provide liquidity
for various reasons, such as loan diversification, or place excess capital in investments to
maximize the use of our capital. Selling or buying loans allows us to diversify our loan portfolio
within these parameters. Due to the short-term nature of the loans we make and the similarity of
interest rates in loans we normally would invest in, the fair value of a loan typically
approximates its carrying value. Accordingly, discounts or premiums typically do not apply upon
sales of loans and therefore, generally no gain or loss is recorded on these transactions,
regardless of whether to a related or unrelated party.
Investments in real estate loans are generally secured by deeds of trust or mortgages. Generally,
our real estate loans require interest only payments with a balloon payment of the principal at
maturity. We have also made loans that defer interest and principal until maturity. We have both
the intent and ability to hold real estate loans until maturity and therefore, real estate loans
are classified and
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accounted for as held for investment and are carried at amortized cost. Loans sold to or purchased
from affiliates are accounted for at the principal balance and no gain or loss is recognized by us
or any affiliate.
Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and
are updated, when new appraisals are received, to reflect subsequent changes in value estimates.
Such appraisals are generally dated within 12 months of the date of loan origination and may be
commissioned by the borrower.
The Company considers a loan to be impaired when, based upon current information and events, it
believes it is probable that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The Companys impaired loans include troubled debt
restructuring, and performing and non-performing loans in which full payment of principal or
interest is not expected. The Company calculates an allowance required for impaired loans based on
the present value of expected future cash flows discounted at the loans effective interest rate,
or at the loans observable market price of the fair value of its collateral.
Loans that have been modified from their original terms are evaluated to determine if the loan
meets the definition of a Troubled Debt Restructuring (TDR). When the Company modifies the terms
of an existing loan that is considered a TDR, it is considered performing as long as it is in
compliance with the modified terms of the loan agreement. If the modification calls for deferred
interest, it is recorded as interest income as cash is collected.
Allowance for Loan Losses
We maintain an allowance for loan losses on our investments in real estate loans for estimated
credit impairment. Managements estimate of losses is based on a number of factors including the
types and dollar amounts of loans in the portfolio, adverse situations that may affect the
borrowers ability to repay, prevailing economic conditions and the underlying collateral securing
the loan. Additions to the allowance are provided through a charge to earnings and are based on an
assessment of certain factors, which may indicate estimated losses on the loans. Actual losses on
loans are recorded as a charge-off or a reduction to the allowance for loan losses. Generally,
subsequent recoveries of amounts previously charged off are added back to the allowance and
included as income.
Estimating allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency and cooperation of
the related borrower and specific legal issues that affect loan collections or taking possession of
the property.
Additional facts and circumstances may be discovered as we continue our efforts in the collection
and foreclosure processes. This additional information often causes management to reassess its
estimates. Circumstances that may cause significant changes in our estimated allowance include,
but are not limited to:
| Changes in the level and trends relating to non-performing receivables including past due interest payments and past due principal payments; | ||
| Declines in real estate market conditions, which can cause a decrease in expected market value; | ||
| Discovery of undisclosed lines (including but not limited to, community improvement bonds, easements and delinquent property taxes); | ||
| Lack of progress on real estate developments after we advance funds. We will customarily monitor progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances; | ||
| Unanticipated legal or business issues that may arise subsequent to loan origination or loan advances or upon the sale of foreclosed property; or | ||
| Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the current value of the property. |
The Company considers a loan to be impaired when based on current information and events, it is
probable that Company will be unable to collect all amounts due according to the contractual terms
of the loan agreement or when the payment of interest or principal is 90 days past due.
Real Estate Held for Sale
Real estate held for sale includes real estate acquired through purchases and foreclosure and will
be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the
propertys estimated fair value, less estimated costs to sell, with fair value based upon
appraisals and knowledge of local market conditions. The carrying values of real estate held for
sale are assessed on
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a regular basis from updated appraisals, comparable sales values or purchase
offers. Third party appraisals are obtained annually. Impairment losses are recorded if the third
party appraisals are less than the net recorded value.
Management classifies real estate held for sale when the following criteria are met:
| Management commits to a plan to sell the properties; | ||
| The property is available for immediate sale in its present condition subject only to the terms that are usual and customary; | ||
| An active program to locate a buyer and other actions required to complete a sale have been initiated; | ||
| The sale of the property is probable; | ||
| The property is being actively marketed for sale at a reasonable price; | ||
| Withdrawal or significant modification of the sale is not likely. |
Directors and Officers Insurance
On November 15, 2007, November 15, 2008 and November 15, 2009, the Company renewed an insurance
policy which covers its officers and directors in the event they are sued in connection with the
performance of their duties as they relate to the company. The premiums for such insurance policy
have been financed by a third party.
Employees
The Company expects to hire up to an additional 2 employees during calendar year 2010.
Contractual Commitments
The table below summarizes our contractual obligations as of March 31, 2010. Amounts relating to
our Notes reflect the principal due to Notes investors and do not include interest payments on the
Notes.
Contractual Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Notes (Company)1 |
12,098,000 | 225,000 | 11,873,000 | |||||||||||||||||
Series I Preferred Notes (Fund)2 |
30,630,101 | 30,630,101 | ||||||||||||||||||
Purchase Obligations (Fund)3 |
16,667,474 | 16,667,474 | ||||||||||||||||||
Senior Asset Lenders (Fund)4 |
30,902,122 | 1,713,094 | 29,189,028 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Disclosure not required as a result of the Companys status as a smaller reporting company.
1 | Represents the obligation of the Company for Notes previously sold. | |
2 | Although not the legal responsibility of the Company because the Fund is the sole obligor on its debts, represents the obligation of the Fund to purchasers of its Series I Notes. To the extent the Company wants to protect its investment in the Fund, the Company may need to contribute capital to the Fund to support this obligation. | |
3 | Although not the legal responsibility of the Company because the Fund is the sole obligor on its debts, represents the contractual obligation of the Fund to purchase senior mortgages on a large majority of the Funds real estate assets. To the extent the Company wants to protect its investment in the Fund, the Company may need to contribute capital to the Fund to support this obligation. | |
4 | Represents obligations to senior lenders on real estate assets owned by the Company. |
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Item 4. | Controls and Procedures. |
Evaluation of disclosure controls and procedures
As of March 31, 2010, the Company carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act.
This evaluation was done under the supervision and with the participation of the Companys
Principal Executive Officer and Principal Financial Officer. Based upon that evaluation, the
Companys Principal Executive Officer and Principal Financial Officer concluded that the Companys
disclosure controls and procedures were not effective in gathering, analyzing and disclosing
information needed to satisfy our disclosure obligations under the Exchange Act because of material
weakness in internal controls over financial reporting discussed below.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls that materially affected or are reasonably likely to
materially affect the Companys internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
Except as stated below, currently we are not party to any legal proceedings. We may initiate legal
proceedings, from time to time, when borrowers breach their lending agreements. From time to time,
we may be subject to legal actions, initiated by borrowers, governmental authorities or others that
arise from the running of our business.
The Securities and Exchange Commissions anticipated filing of a civil injunctive action against us
may have a material adverse effect on our business.
On January 28, 2010, the Company received a notice from the Chicago regional office staff (the
Staff) of the U.S. Securities and Exchange Commission (the SEC). The notice informed the
Company of the Staffs intention to recommend to the Commission that the SEC bring a civil action
alleging that previous management engaged in transactions in violation of Section 17(a) of the
Securities Act of 1933 (Securities Act) and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of
the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12b-20, 13a-1, and 13a-13
thereunder. The notice was issued in connection with an investigation into possible violations of
federal securities laws stemming from (1) the accrual of income on subsequently written-off real
estate loans in 2008, and (2) disclosure issues in connection with Capital Solutions Monthly Income
Fund (The Fund) in 2008. The alleged violations occurred prior to the June 30, 2009 Merger.
Previous management of the Fund and Company believe they acted appropriately and the Company
intends to work with the SEC to resolve the matter.
The Companys affiliates, Windwalker Marina at Cape Haze, LLC and Marina at Cape Haze, LLC have
been joined as defendants in an action seeking to foreclose on certain junior mortgages on a marina
and upland parcel owned by the Companys affiliates commonly known as the Cape Haze Marina parcel.
The suit, filed in the Circuit Court in and for Charlotte County, Florida, seeks to foreclosure of
a mortgage having a principal balance in excess of $14 million according to the allegations in, and
expected to be raised, plaintiffs complaint. The Companys affiliates are defending the action
based upon the provisions of the promissory note and mortgage relating to the maturity of the
promissory note and various setoffs against the principal and interest. Following a confidential
mediation, a Mediation Settlement Agreement was entered into by the parties which will, if certain
pre-conditions are met, result in the resolution of the foreclosure. The Company has accrued
$1,287,000 to cover this contingency. These same affiliates were joined as defendants in a
separate action seeking to foreclose the senior mortgage on the marina. The suit, also filed in
the Circuit Court in and for Charlotte County, Florida, seeks to foreclose a mortgage having a
principal in excess of $14 million according to the allegations in plaintiffs complaint. The
Companys affiliates have entered into an agreement with the senior lender whereby the lender has
agreed to allow the Company six months in which to negotiate a resolution of this matter.
The Companys affiliates, Heritage Development of Central Florida, LLC and Hennessey Funding, LLC,
have been named as defendants in an action seeking to foreclose on certain mortgages on undeveloped
land commonly referred to as Oak Vistas. The suit, filed in the Circuit Court in and for Sarasota
County, Florida, seeks to foreclose a mortgage having a principal balance of $3,673,786 according
to the allegations in the Complaint. After an initial foreclosure, the foreclosing bank discovered
that a parcel of commercial property had been omitted from an amended mortgage. The Company
reported this property on its financial statements at its fair value on June 30, 2009, at
$1,530,000. Subsequently, the bank successfully obtained permission from the court to reopen its
foreclosure in order to foreclose its interest in the remaining parcels. The Companys affiliates
have been actively defending the
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foreclosure. However, due to these events, the Company has recorded an impairment for the full
value of the property. The carrying value on the Companys books at December 31, 2009, is $0. If
the foreclosure is successful, the Company will abandon the property.
The Companys affiliate, Spring Lake Garden of Spring Lake Park, LLC has been named as a defendant
in an action seeking damages arising from the alleged breach of a promissory note in the original
principal amount of $550,000. The affiliate has answered the complaint and denied liability under
the note. If the case is not resolved, the affiliate or related entities will assert claims
against the plaintiff.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. None |
Item 3. | Defaults Upon Senior Securities. None |
Item 4. | Submission of Matters to a Vote of Security Holders. None |
Item 5. | Other Information. None |
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Item 6. | Exhibits. |
Index to Exhibits
Exhibit | ||||
Number | Exhibit | Method of Filing | ||
31.1
|
Rule 13a-14(a)/15d-14(a) Certifications: Certification of Chief Executive Officer pursuant to Rule 15d. | Filed herewith. | ||
31.2
|
Rule 13a-14(a)/15d-14(a) Certifications: Certification of Chief Financial Officer pursuant to Rule 15d. | Filed herewith. | ||
32.1
|
Section 1350 Certifications of Chapter 63 of Title 18 of the United States Code. | Filed herewith. | ||
32.2
|
Section 1350 Certifications of Chapter 63 of Title 18 of the United States Code. | Filed herewith. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
By:
|
/s/ Todd A. Duckson
|
|||
Todd A. Duckson | ||||
Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Dated: June 18, 2010 | ||||
By:
|
/s/ Mark Williams
|
|||
Mark Williams | ||||
Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) | ||||
Dated: June 18, 2010 |
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