Attached files
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EX-31 - CERTIFICATION - GENESIS FINANCIAL INC | ex312.htm |
EX-32 - CERTIFICATION - GENESIS FINANCIAL INC | ex322.htm |
EX-32 - CERTIFICATION - GENESIS FINANCIAL INC | ex321.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 June 30, 2012
[ ] 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)
Washington | 03-0377717 |
(State of Incorporation) | (IRS Employer Identification No.) |
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3773 West Fifth Avenue, Suite 301 Post Falls, ID. | 83854 |
(Address of principal executive offices) | (Zip Code) |
Issuers 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 July 15, 2012 there were 8,219,608 shares of common stock issued and outstanding.
1
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Footnotes
Item 2. Managements 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 I FINANCIAL INFORMATION
Item 1. Financial Statements and Footnotes
GENESIS FINANCIAL, INC. | ||||
Balance Sheets | ||||
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| (Unaudited) |
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| June 30, |
| December 31, |
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| 2012 |
| 2011 |
ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents | $ | 14,423 | $ | 22,117 |
Interest and other receivables |
| 109,327 |
| 185,678 |
Related party receivable |
| 8,444 |
| 9,654 |
Loans held for sale |
| 589,184 |
| 598,251 |
Real estate owned |
| 792,562 |
| 1,095,393 |
Total current assets |
| 1,513,940 |
| 1,911,093 |
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NON-CURRENT ASSETS: |
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Long-term investments, at cost |
| 1,750,000 |
| 1,750,000 |
Office equipment, net of accumulated depreciation of $1,133 and $451 |
| 6,800 |
| 7,481 |
Total non-current assets |
| 1,756,800 |
| 1,757,481 |
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Total assets | $ | 3,270,740 | $ | 3,668,574 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Line of credit, affiliated company | $ | 1,480,000 | $ | 1,510,000 |
Line of credit, bank |
| 167,107 |
| 187,107 |
Other current liabilities |
| 21,782 |
| 27,120 |
Total current liabilities |
| 1,668,889 |
| 1,724,227 |
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LONG-TERM LIABILITIES |
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Convertible note payable to officer, net of discount of $30,864 and $62,610, respectively |
| 219,136 |
| 187,389 |
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COMMITMENTS AND CONTINGENCIES |
| - |
| - |
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STOCKHOLDERS EQUITY: |
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Series B Preferred stock, $1.00 par value: 2,000,000 authorized 1,815,000 and 1,957,500 issued and outstanding, respectively |
| 1,815,000 |
| 1,957,500 |
Common stock, $.001 par value, 100,000,000 authorized, 8,219,608 and 7,863,358 issued and outstanding, respectively |
| 8,152 |
| 7,863 |
Additional paid-in capital |
| 4,554,662 |
| 4,412,451 |
Accumulated deficit |
| (4,995,100) |
| (4,620,856) |
Total stockholders equity |
| 1,382,715 |
| 1,756,958 |
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Total liabilities and stockholders' equity | $ | 3,270,740 | $ | 3,668,574 |
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See accompanying notes to financial statements. |
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3
GENESIS FINANCIAL, INC. | |||||||||
Statements of Operations | |||||||||
(Unaudited) | |||||||||
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| Three Months Ended June 30, |
| Six Months Ended June 30, | |||||
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| 2012 |
| 2011 |
| 2012 |
| 2011 | |
REVENUE: |
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Interest, processing fees and other income | $ | 22,742 | $ | 18,866 | $ | 40,643 | $ | 45,297 | |
Write-off of interest receivable |
| - |
| (120,855) |
| - |
| (120,497) | |
Net revenues |
| 22,742 |
| 6,781 |
| 40,643 |
| (75,200) | |
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EXPENSES: |
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Fair value adjustment |
| 215,000 |
| (32,715) |
| 215,000 |
| (35,191) | |
Write-off of receivable |
| 81,600 |
| - |
| 81,600 |
| - | |
Salaries |
| 11,250 |
| 11,250 |
| 22,500 |
| 22,500 | |
Management fee - affiliate |
| - |
| 4,500 |
| - |
| 9,000 | |
Interest expense, related party |
| 15,873 |
| 10,065 |
| 31,746 |
| 31,746 | |
Interest expense, other |
| 4,216 |
| 7,894 |
| 7,077 |
| 12,283 | |
Depreciation |
| 282 |
| - |
| 682 |
| - | |
Office occupancy and other |
| 28,060 |
| 23,453 |
| 56,282 |
| 44,312 | |
Total operating expenses |
| 356,281 |
| 24,447 |
| 414,887 |
| 84,650 | |
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NET INCOME (LOSS) | $ | (333,539) | $ | (17,666) | $ | (374,244) | $ | (159,850) | |
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BASIC AND DILUTED EARNINGS (LOSS) PER SHARE | $ | (0.04) | $ | (0.00) | $ | (0.05) | $ | (0.02) | |
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WEIGHTED AVERAGE SHARE OUTSTANDING BASIC AND DILUTED |
| 8,041,586 |
| 7,757,108 |
| 8,041,586 |
| 7,757,108 | |
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See accompanying notes to financial statements. |
4
GENESIS FINANCIAL, INC. | ||||
Statement of Cash Flows | ||||
(Unaudited) | ||||
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| Six Months Ended June 30, | ||
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| 2012 |
| 2011 |
CASH FLOWS FROM OPERATING ACTIVITIES | $ | 42,306 | $ | (55,861) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
| - |
| (300,000) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Sales of preferred stock in private placement |
| - |
| 1,149,500 |
Borrowings (repayment) line of credit with affiliate, net |
| (30,000) |
| (210,845) |
Borrowings (repayment) from line of credit from bank, net |
| (20,000) |
| (94,157) |
Note payable, Flyback Energy, Inc. |
| - |
| (560,000) |
Net cash provided by financing activities |
| (50,000) |
| 284,498 |
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NET DECREASE IN CASH AND CASH EQUIVALENT |
| (7,694) |
| (71,363) |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 22,117 |
| 117,455 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 14,423 | $ | 46,092 |
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NONCASH TRANSACTIONS |
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Preferred stock converted to common stock | $ | 142,500 | $ | - |
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See accompanying notes to financial statements. |
5
Genesis Financial, Inc.
Notes to Financial Statements
June 30, 2012
(Unaudited)
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization:
Genesis Financial, Inc. (the Company or Genesis) was incorporated in Washington State on January 24, 2002. 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.
The unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, as well as the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Companys management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the interim financial statements have been included. Operating results for the six month period ended June 30, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012.
For further information refer to the financial statements and footnotes thereto in the Companys Annual Report on Form 10-K for year ended December 31, 2011.
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 managements 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.
Summary of Significant Accounting Policies:
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;
6
Genesis Financial, Inc.
Notes to Financial Statements
June 30, 2012
(Unaudited)
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.
Long term investments Investments not readily marketable are recorded at cost when purchased. The investments in equity securities of privately held companies in which the Company holds less than 20% voting interest and on which the Company does not have the ability to exercise significant influence are accounted for using the cost method. Under the cost method, these investments are carried at the lower of cost or fair value, determined using Level 3 inputs. The Company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. In making this determination, the Company reviews several factors to determine whether the losses are other-than-temporary, including but not limited to: (i) the length of time the investment was in an unrealized loss position, (ii) the extent to which fair value was less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) the Company's intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
Loans held for sale
Loans held for sale are initially recorded at the lower of cost or fair value. Loans held for sale are 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. Until the loan is sold, origination fees received from borrowers are deferred and amortized into income over the established average life of related loan under a method which approximates the effective interest rate method.
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 (Brokers 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.
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. The dilutive effect of convertible debt and outstanding securities, in periods of future income, would be as follows as of June 30, 2012 and December 31, 2011;
| June 30, | |
| 2012 | 2011 |
Stock options | 1,000,000 | 1,000,000 |
Convertible preferred stock | 4,537,500 | 5,000,000 |
Convertible debt | 625,000 | 625,000 |
Total possible dilution | 6,162,500 | 6,625,000 |
7
Genesis Financial, Inc.
Notes to Financial Statements
June 30, 2012
(Unaudited)
NOTE 2 LOANS HELD FOR SALE:
The Company's fair value of loans held for sale consisted of the following:
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| June 30, 2012 |
| December 31, 2011 |
Residential | $ | 112,403 | $ | 116,931 |
Land |
| 93,025 |
| 93,715 |
Commercial |
| 336,261 |
| 331,302 |
Other |
| 47,495 |
| 56,303 |
Total | $ | 589,184 | $ | 598,251 |
The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the quarter ended June, 2012:
|
| June 30, 2012 |
Beginning Balance | $ | 598,251 |
New loans |
| - |
Principal payments |
| 2,691 |
Fair value adjustments |
| - |
Sales of loans |
| (25,000) |
Ending Balance | $ | 589,184 |
NOTE 3- REAL ESTATE OWNED:
The Company's fair value of REO consisted of the following:
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| June 30, 2012 |
| December 31, 2011 |
Residential | $ | - | $ | 81,956 |
Land |
| 541,887 |
| 763,437 |
Commercial |
| 250,675 |
| 250,000 |
Total | $ | 792,562 | $ | 1,095,393 |
The following table presents the change in balance sheet carrying values associated with REO for the quarter ended June 30, 2012:
|
| June 30, 2012 |
Beginning Balance | $ | 1,095,393 |
Proceeds from sales of REO |
| (81,955) |
Fair value adjustment |
| (215,000) |
Net change in holding costs |
| (5,876) |
Ending Balance | $ | 792,562 |
8
Genesis Financial, Inc.
Notes to Financial Statements
June 30, 2012
(Unaudited)
NOTE 4 INVESTMENTS:
Long term investments:
Flyback Energy, Inc.:
On November 23, 2010, the Company closed the purchase of an equity interest in Flyback Energy, Inc., for $1,200,000. The purchase was for $1,200,000 of Series B Preferred Stock and Common Stock Purchase Warrants from Flyback Energy, Inc., a closely held Washington corporation payable on an installment basis. At November 23, 2010, the purchase represented a ten percent equity interest in Flyback Energy, Inc. assuming the warrants were exercised and Series "B" Preferred Shares converted into 2,666,666 shares of common stock. At June 30, 2012 and December 31, 2011, the purchases represented an eight percent equity interest in Flyback Energy Inc.
The Company paid $500,000 down with the balance of $700,000 payable on a promissory note at $140,000 monthly commencing December 23, 2010. The $700,000 note was paid in full during the second quarter of 2011. On April 25, 2011, the Company purchased $50,000 of Series C Preferred Stock that is convertible at $.60 per share or 83,333 shares of common stock and bears a 5% dividend rate.
The Flyback Series "B" Preferred shares are convertible into Flyback common shares at on a one for one (1:) basis and the conversion pricing is subject to adjustments for certain diluting issues of common stock, subdivisions or combinations of common stock, reclassifications, exchanges and, or substitutions of stock.
Flyback Energy, Inc. is a privately-held company that has developed a unique and proprietary electronic switch design that offers control over electrical power and magnetic fields.
AWG International Water Corporation:
The Company purchased 109,906 shares of the AWG International Water Corporation common stock for $500,000 ($250,000 each in 2010 and 2011) which represented a nine percent equity interest in AWG International Water Corporation at June 30, 2012. The 109,906 shares were converted into 7,380,433 shares of AWGI: AWG International Water Corporation (formerly MSOL: MIP Solutions, Inc.) on July 16, 2012.
At June 30, 2012 AWG International Water Corp is a company that designs and builds proprietary systems Air-to-Water machines for residential and commercial applications.
NOTE 5 LINES OF CREDIT:
On May 16, 2011, Genesis entered into a $250,000 line of credit, bearing six percent interest with Riverbank. At June 30, 2012 the balance owing is $167,107. The line has a term of 12 months, and an origination fee of 1/2%, or $1,250. The payments are due monthly on the 1st on all accrued unpaid interest. The Riverbank line of credit is senior to the CFC line of credit, and is collateralized by the assets of Genesis. The loan was extended to June 27, 2012 at which time the loan renewed at a five percent rate with a origination fee of ½%, or $1250. 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 Line of Credit Agreement with the Coghlan Family Corporation, Inc. (CFC), with a balance owing of $1,480,000 at June 30, 2012 and $1,510,000 at December 31, 2011. CFC is an affiliated company controlled by a John R. Coghlan. If the Company defaults on the agreement, the default interest rate will be 12%. Interest is payable monthly. 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 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 has agreed to waive the interest starting October 1, 2010 and has also agreed to waive the 3.0 debt to equity ratio requirement as well as the 12% default rate.
9
Genesis Financial, Inc.
Notes to Financial Statements
June 30, 2012
(Unaudited)
NOTE 6 CONVERTIBLE NOTE PAYABLE TO OFFICER
On December 15, 2010, the Company entered into a convertible note agreement with John R. Coghlan, a related party (see Note 8). The note accrues interest at 8% per annum with interest and balance due on December 15, 2012. The note is convertible at any time by Mr. Coghlan into one share of the Companys 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 is being amortized into earnings over the term of the note. The note is collateralized by 290,000 shares of the Companys Series B Preferred stock.
NOTE 7 SERIES B PREFERRED STOCK
During the six month period ending June 30, 2012, holders of 142,500 shares of Series B preferred stock converted their shares into 356,250 share of common stock.
NOTE 8 RELATED-PARTY TRANSACTIONS:
Affiliates and related parties are defined as Officers, Directors, and/or those Shareholders owning or controlling more than 5% of the common stock of Genesis, 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 Genesis.
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). Genesis Holdings, Inc. is a Washington Corporation, which is managed by John R. Coghlan. Mr. Coghlan is the President and Director of Genesis Holdings, Inc. Genesis Holdings II, Inc. is a Washington Corporation, which is managed by Michael Kirk. Mr. Kirk is the President and Director of Genesis Holdings II, Inc. JM Growth Enterprises, LLC is a company owned and controlled by Michael Kirk and John R. Coghlan.
Genesis Financial, Inc. had the following related party transactions for the six months ended June 30, 2012 and 2011.
Michael Kirk and Genesis Finance Corporation
On January 1, 2009, the Company entered into a Management and Servicing Agreement with Genesis Finance Corporation, a Washington Corporation. Mike Kirk, Genesis Financial, Inc.s president is the president Genesis Finance Corporation. The Company agrees to pay Genesis Finance Corporation a monthly fee of $6,000 per the Management and Servicing Agreement. As of January 1, 2011, the Company had down-sized enough to manage a sizable portion of its own affairs, and renegotiated its outsourcing agreement with Genesis Finance Corporation, lowering the monthly fee to $1,500. As of January 1, 2012 the monthly fee was removed and the outsourcing services were offset by general offices expenses paid by the Company on behalf of Genesis Finance Corporation.
John R. Coghlan
There was no activity for the six months ended June 30, 2012 and 2011.
Coghlan Family Corporation CFC
On January 1, 2008, the Company entered into a Line of Credit Agreement Promissory Note Agreement with Coghlan Family Corporation. (See Note 5)
On February 15, 2011, Coghlan Family Corporation purchased from the Company a $95,000 interest in a contract secured by land.
During the six months ended June 30, 2011, CFC purchased an additional 219,000 shares of Series B Preferred being offered by the Company.
10
Genesis Financial, Inc.
Notes to Financial Statements
June 30, 2012
(Unaudited)
There was no additional activity for the six months ended June 30, 2012.
Coghlan, LLC
There was no activity for the six months ended March 31, 2012 and 2011.
West 3773 Fifth, LLC
There was no activity for the six months ended June 30, 2011.
On January 13, 2012, West 3773 Fifth, LLC purchased $25,000 interest in a loan held for sale by the Company. No gain or loss was recognized on this sale because it was sold at its carrying value.
Genesis Holdings, Inc.
There was no activity for the six months ended June 30, 2012 and 2011. See Note 9: Subsequent Events.
Genesis Holdings II, Inc.
There was no activity for the six months ended June 30, 2012 and 2011. See Note 9: Subsequent Events
JM Growth Enterprises, LLC
There was no activity for the six months ended June 30, 2012 and 2011.
NOTE 9: SUBSEQUENT EVENTS
On July 19, 2012, Genesis Financial, Inc. acquired fifteen (15) loans from Genesis Holdings, Inc., a related party. The consideration paid by the Company was 2,032,000 shares of our common stock.
On July 19, 2012, Genesis Financial, Inc. acquired seven (7) loans from Genesis Holdings II, Inc., a related party. The consideration paid by the Company was 320,000 shares of our common stock
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Item 2. Managements 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 contracts ("contracts"), and originating commercial real estate hard money loans. We purchase contracts at a discount and hold them in inventory for a relatively short period to provide seasoning and value appreciation. After the holding period, we sell the contracts. We expect to derive operating revenues from resales of contracts at a profit, and from interest income derived from contracts during the holding period. We originate commercial real estate loans and sell the loans, or participations in those loans, to accredited private investors. From time to time, we also consider other forms of cash flow instruments when warranted.
As of the third quarter of 2008, management felt the real estate and financial markets were going to continue to decline, and made the decision that some major adjustments in the way the Company operated going forward was necessary. The decision was made to reduce overhead expense by outsourcing the day-to-day operations of the Company, to focus on reducing the Companys debt through a re-structuring of terms with our credit facilitators, to pursue the sale of Company assets, to continue acquisitions and originations only on deals that have been pre-sold, to focus on salvaging delinquent accounts through increased collection activity and workouts, and to increase the focus on maintenance and resale of repossessions. This plan was implemented January 1, 2009.
Additional details about our business are set forth in our Annual Report on Form 10-K for the year ending December 31, 2011. 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 Companys 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.
Genesis Financial, Inc. will continue to develop our operations along the lines of our growth since inception, but will also concentrate on reducing overhead expense, and resolving delinquencies and repossession situations. We are not capitalized at a level that allows holding of significant amounts of contracts and loans for investment and as a result, we will continue to work toward short term inventory turnover. We originally anticipated holding most of our contracts and loans between three and six months, and then selling them in the secondary markets. Through the first six months of 2003, we were averaging one pool sale every two months. That trend has declined to the point that, as of the end of 2007, we were not actively pursuing pool sales, due to the slow-down and turmoil in the secondary markets, and that trend continues. We are either holding these contracts in inventory, or selling them individually as opportunities arise. We expect that the number and dollar volume of all sales will continue to decline over the next twelve months, and longer, especially if financial market conditions continue to deteriorate. Until conditions improve, we will continue to focus our efforts towards developing relationships with investors who are interested in the individual contracts and loans, versus the pools. In order to achieve our targeted growth, we will require additional investors and capital. If additional investors and capital are not available, our growth plans will be delayed further and profitability will continue to be negatively impacted.
Over the past three years, we have seen a dramatic increase in delinquencies, resulting in increased costs of collection and litigation. The increase in delinquencies has also resulted in a dramatic increase in repossessions. These repossessions tie up capital until the collateral properties can be resold, and require additional capital to maintain the properties during the holding period until a sale can be achieved. In addition, if property values continue to decline, our ability to recoup our investment
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through a resale of the property will be adversely affected. If real estate market values continue to decline, our growth plans will be delayed further and profitability will continue to be negatively impacted.
RESULTS OF OPERATIONS
Quarter ended June 30, 2012 compared to quarter ended June 30, 2011.
Revenues
Total revenues for the quarter ending June 30, 2012 were $22,742 compared to $18,866 for the same quarter ending June 30, 2011. The majority of the revenue for the quarter ended June 30, 2012 and the quarter ended June 30, 2011 was from interest and broker fee income. The quarter ended June 30, 2011 included write-offs of previously accrued interest receivable.
Net income (loss) from operations was $(333,539) and $(17,666), respectively, for the quarters ending June 30, 2012 and 2011.
Of the loans held for sale at June 30, 2012 loans held for sale with carrying value of $305,361 were in payment default. We believe the defaults and repossessions are directly related to the national real estate market collapse.
General and Administrative Expenses
General and administrative expenses (G&A) for the quarters ended June 30, 2012 and 2011, were $39,310 and $39,203, respectively. G&A primarily consists of management and professional fees for legal and auditing. The changes for the fiscal quarters ended June 30, 2012 and 2011 were $107 and $(86,156) respectively. The primary reason for the decrease for the quarter ended June 30, 2011 was the decrease in professional fees incurred in bringing the required audits and filings current.
Interest Expense
For the quarters ending June 30, 2012 and 2011, interest expense amounted to $20,089 and $17,959, 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 an interest rate 5%. The line of credit also included a one-half percent origination fee. The line of credit was extended to July 1, 2013.
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.
We consider the terms of the lines of credit to be acceptable. As of June 30, 2012 and December 31, 2011, the balances on the lines of credit were $1,647,107 and $1,697,107 respectively. Interest expense on the line of credit will fluctuate in future periods with inventory levels.
Six months ended June 30, 2012 compared to six months ended June 30, 2011.
Revenues
Total revenues for the six months ending June 30, 2012 were $40,643 compared to $(75,200) for the same quarter ending June 30, 2011. The majority of the revenue for the six months ended June 30, 2012 and June 30, 2011 was from interest and broker fee income. The six months ended June 30, 2011 included write-offs of previously accrued interest receivable.
Net income (loss) from operations was $(374,244) and $(159,850), respectively, for the six months ending June 30, 2012 and 2011. The increase in the loss was due a fair value adjustment of $215,000 and a write-off of a receivable of $81,600 in the second quarter of 2012.
General and Administrative Expenses
General and administrative expenses (G&A) for the six months ended June 30, 2012 and 2011, were $78,282 and $75,811, respectively. G&A primarily consists of management and professional fees for legal and auditing. The changes for the fiscal
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quarters ended June 30, 2012 and 2011 were $2,471 and $(84,031) respectively. The primary reason for the decrease for the quarter ended June 30, 2011 was the decrease in professional fees incurred in bringing the required audits and filings current.
Interest Expense
For the six months ending June 30, 2012 and 2011, interest expense amounted to $38,823 and $44,029, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Companys principal sources of cash are from 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.
At June 30, 2012 and December 31, 2011, we had cash available of $14,423 and $22,117, respectively, and $82,893 was available under our lines 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 interest rate of 5%. The line of credit also included a one-half percent origination fee. The line of credit expires July 1, 2013. The line is payable on demand and is personally guaranteed by John and Wendy Coghlan.
At June 30, 2012, the Company had a $2,500,000 Line of Credit Agreement with the Coghlan Family Corporation, Inc. (CFC) with a balance of $1,480,000. 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 economic conditions, CFC has agreed to waive all interest beginning October 1, 2010 and the 3.0 debt to equity ratio, as well as the 12% default rate, are waived.
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 June 30, 2012 and June 30, 2011, our net cash flows provided (used) by operating activities were $42,306 and $(55,861), respectively. The reason for the decrease was the six months ended June 30, 2011 included a write-off of previously accrued interest revenues.
For the period ended June 30, 2011 1,149,500 shares of preferred stock were sold with proceeds of $1,149,500.
During these periods our net cash provided by (used by) financing activities was $(50,000) and $284,498, respectively. The reason for the decrease for the period ended June 30, 2012 was the decrease in the Riverbank line of credit while the increase for the period ended June 30, 2011 was the sale of preferred stock in excess of debt-related payments.
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
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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 June 30, 2012 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.
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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
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.
At June 30, 2012 we had 142,500 shares of Series B Preferred stock had converted to 356,250 shares of Common stock.
Item 6. Exhibits
(a) Exhibits
Exhibit No.
Description
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 June 30, 2012 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. |
* to be filed by amendment
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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: August 13, 2012
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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