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EXCEL - IDEA: XBRL DOCUMENT - GENESIS FINANCIAL INC | Financial_Report.xls |
EX-32 - CERTIFICATION - GENESIS FINANCIAL INC | ex322.htm |
EX-31 - CERTIFICATION - GENESIS FINANCIAL INC | ex311.htm |
EX-31 - CERTIFICATION - GENESIS FINANCIAL INC | ex312.htm |
EX-32 - CERTIFICATION - GENESIS FINANCIAL INC | ex321.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 September 30, 2013
[ ] 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.) |
|
|
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 September 30, 2013 there were 11,348,780 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. |
| |||||
| Condensed Balance Sheets |
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| (Unaudited) | ||||||
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| September 30, |
| December 31, |
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| 2013 |
| 2012 |
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| ASSETS |
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| CURRENT ASSETS: |
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| |
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| Cash and cash equivalents | $ | 42,292 | $ | 153,887 |
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| Interest and other receivables |
| 113,875 |
| 93,849 |
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| Investment in real estate companies |
| 424,465 |
| 436,155 |
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| Loans held for sale |
| 1,115,839 |
| 1,279,074 |
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| Real estate owned |
| 564,045 |
| 450,877 |
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| Total current assets |
| 2,260,516 |
| 2,413,842 |
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| NON-CURRENT ASSETS: |
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| |
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| Long-term investments, at cost |
| 1,250,000 |
| 1,250,000 |
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| Investments in available for sale securities, at fair value |
| 533,130 |
| 1,018,500 |
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| Real estate leasehold interest |
| 619,250 |
| - |
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| Office equipment, net |
| 5,095 |
| 6,118 |
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| Total non-current assets |
| 2,407,475 |
| 2,274,618 |
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| Total assets | $ | 4,667,991 | $ | 4,688,460 |
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| LIABILITIES AND STOCKHOLDERS EQUITY |
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| CURRENT LIABILITIES: |
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| Line of credit, affiliated company | $ | 1,420,000 | $ | 1,450,000 |
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| Line of credit, bank |
| 235,000 |
| - |
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| Related party payable |
| 5,041 |
| - |
|
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| Other current liabilities |
| 21,898 |
| 11,243 |
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| Total current liabilities |
| 1,681,939 |
| 1,461,243 |
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| LONG-TERM LIABILITIES |
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| |
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| Convertible note payable to officer |
| 250,000 |
| 250,000 |
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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: 2,290,000 authorized |
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| 1,740,000 and 1,815,000 issued and outstanding, respectively |
| 1,740,000 |
| 1,815,000 |
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| Common stock, $.001 par value, 100,000,000 authorized, |
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| 11,348,780 and 10,571,608 issued and outstanding, respectively |
| 11,349 |
| 10,571 |
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| Additional paid-in capital |
| 6,366,024 |
| 6,005,420 |
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| Accumulated deficit |
| (5,404,451) |
| (5,372,274) |
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| Accumulated other comprehensive income |
| 23,130 |
| 518,500 |
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| Total stockholders equity |
| 2,736,052 |
| 2,977,217 |
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| Total liabilities and stockholders' equity | $ | 4,667,991 | $ | 4,688,460 |
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| See accompanying notes to these condensed financial statements. |
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3
GENESIS FINANCIAL, INC. | ||||||||
Condensed Statements of Operations and Comprehensive Income (Loss) | ||||||||
(Unaudited) | ||||||||
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| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||
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| 2013 |
| 2012 |
| 2013 |
| 2012 |
REVENUE: |
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Interest, processing fees and other income | $ | 69,557 | $ | 66,107 | $ | 165,093 | $ | 106,750 |
Net revenues |
| 69,557 |
| 66,107 |
| 165,093 |
| 106,750 |
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EXPENSES: |
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Fair value adjustment |
| - |
| - |
| - |
| 215,000 |
Write-off of receivable |
| - |
| 18,298 |
| - |
| 99,898 |
Loss (income) on investment in real estate LLC |
| 4,815 |
| - |
| 32,999 |
| - |
Salaries |
| 12,750 |
| 11,250 |
| 38,250 |
| 33,750 |
Interest expense, related party |
| 5,041 |
| 30,887 |
| 15,123 |
| 62,633 |
Interest expense, other |
| 2,934 |
| 1,170 |
| 5,861 |
| 8,247 |
Depreciation |
| 341 |
| 341 |
| 1,023 |
| 1,023 |
Office occupancy and other |
| 25,065 |
| 54,378 |
| 104,014 |
| 110,660 |
Total operating expenses |
| 50,946 |
| 116,324 |
| 197,270 |
| 531,211 |
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NET INCOME (LOSS) |
| 18,611 |
| (50,217) |
| (32,177) |
| (424,461) |
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COMPREHESIVE INCOME (LOSS): |
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Unrealized gain (loss) on investments in available for sale securities |
| (505,830) |
| 311,848 |
| (495,370) |
| 311,848 |
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COMPREHESIVE INCOME (LOSS) | $ | (487,219) | $ | 261,631 | $ | (527,547) | $ | (112,613) |
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BASIC AND DILUTED EARNINGS (LOSS) PER SHARE | $ | 0.00 | $ | (0.01) | $ | (0.00) | $ | (0.05) |
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WEIGHTED AVERAGE SHARES OUTSTANDING BASIC AND DILUTED |
| 11,348,780 |
| 9,729,619 |
| 10,963,837 |
| 8,727,988 |
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See accompanying notes to condensed financial statements. |
4
| GENESIS FINANCIAL, INC. | |||||
| Condensed Statements of Cash Flows | |||||
| (Unaudited) | |||||
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| Nine Months Ended September 30, | |||
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| 2013 |
| 2012 | |
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CASH FLOWS FROM OPERATING ACTIVITIES | $ | (316,595) | $ | 165,393 | ||
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CASH FLOWS FROM INVESTING ACTIVITIES |
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| Acquisition of cash from purchase of GHI and GHII |
| - |
| 97,571 | |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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| Borrowings (repayment) line of credit with affiliate, net |
| (30,000) |
| (45,000) | |
| Borrowings (repayment) from line of credit from bank, net |
| 235,000 |
| (187,107) | |
| Net cash provided (used) by financing activities |
| 205,000 |
| (232,107) | |
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NET DECREASE IN CASH AND CASH EQUIVALENT |
| (111,595) |
| 30,857 | ||
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 153,887 |
| 22,117 | ||
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CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 42,292 | $ | 52,974 | ||
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NONCASH INVESTING AND FINANCING ACTIVITIES: |
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| Purchase of loans held for sale with common stock |
| - | $ | 958,944 | |
| Purchase of Investment in LLC's with common stock |
| - | $ | 225,000 | |
| Purchase of real estate with common stock |
| - | $ | 129,685 | |
| Preferred stock converted to common stock | $ | 75,000 | $ | 142,500 | |
| Contract converted to real estate leasehold interest | $ | 353,857 |
| - | |
| Common stock issued for real estate leasehold interest | $ | 265,393 |
| - | |
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| See accompanying notes to condensed financial statements. |
5
Genesis Financial, Inc.
Notes to Financial Statements
September 30, 2013
(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 three month and nine month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013.
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, 2012.
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.
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.
6
Genesis Financial, Inc.
Notes to Financial Statements
September 30, 2013
(Unaudited)
Investments available for sale - The cost of marketable equity securities sold is determined by the specific identification method. Net unrealized holding gains and losses based upon the fair value of the securities, determined using Level 1 inputs, are reported as accumulated other comprehensive income, a separate component of stockholders equity. Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary result in a write-down of the individual security to its fair market value; write-downs are reflected in earnings as a realized loss on available-for-sale securities. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or that management would not have the intent or ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value.
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.
Investment in real estate limited liability companies Investments in real estate companies are recorded as cost when initially acquired. For investment in real estate limited liability companies in which the Company does not have joint control or significant influence, the cost method is used. Under the cost method, these investments are carried at the lower of cost or fair value. For investment in real estate companies in which there is joint control between the parties, the equity method is utilized whereby the Companys share of the underlying real estate limited liability companies earnings and losses is included in the statement of operations. For investments in real estate limited liability companies where the Company holds more than 50% of the voting interest and has significant influence, the real estate company is consolidated with the presentation of non-controlling interest. In determining whether significant influence exists, the Company considers its participation in policy-making decisions and its representation on the companys board of directors. The Company recognizes an impairment charge when a decline in the fair value of its investments below the carrying amount is judged to be other-than-temporary.
Real estate leasehold interest
Leasehold interests in real estate are stated at cost unless circumstances indicate that cost cannot be recovered, in which case, an adjustment to the carrying value of the property is made to reduce it to its estimated fair value. Project costs clearly associated with the development of the leasehold interest are capitalized. Rental income received on the interests is recognized in the period earned.
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. 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.
7
Genesis Financial, Inc.
Notes to Financial Statements
September 30, 2013
(Unaudited)
Loan sales Loans are considered sold when the Company surrenders control over the loan to the investors, with standard representations and warranties, and when the risks and rewards inherent in owning the loans have been transferred to the buyer.
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 September 30, 2013 and September 30, 2012;
| September 30, | ||
| 2013 |
| 2012 |
Stock options | 1,261,000 |
| 1,261,000 |
Convertible preferred stock | 4,350,000 |
| 4,537,500 |
Convertible debt | 625,000 |
| 625,000 |
Total possible dilution | 6,236,000 |
| 6,423,500 |
Reclassifications Certain reclassifications have been made to conform prior periods data to the current presentation. These reclassifications have no effect on the results of reported operations or stockholders equity.
NOTE 2 LOANS HELD FOR SALE:
The Company's fair value of loans held for sale consisted of the following:
|
| September 30, 2013 |
| December 31, 2012 |
Residential | $ | 437,950 | $ | 507,145 |
Land |
| 51,947 |
| 84,942 |
Commercial |
| 625,942 |
| 656,987 |
Other |
| - |
| 30,000 |
Total | $ | 1,115,839 | $ | 1,279,074 |
The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2013 and 2012:
|
| September 30, | ||
|
| 2013 |
| 2012 |
Beginning Balance | $ | 1,279,074 | $ | 598,251 |
New loans |
| 378,857 |
| 30,000 |
Purchased from GHI and GHII |
| - |
| 958,944 |
Principal payments |
| (47,657) |
| (201,555) |
Sale of loans |
| (159,442) |
| (33,617) |
Converted to REO |
| (39,127) |
| - |
Converted to long term investment |
| (353,857) |
| - |
Repossession expenses |
| 57,991 |
| 35,795 |
Ending Balance | $ | 1,115,839 | $ | 1,387,818 |
8
Genesis Financial, Inc.
Notes to Financial Statements
September 30, 2013
(Unaudited)
NOTE 3- REAL ESTATE OWNED:
The Company's fair value of REO consisted of the following:
|
| September 30, 2013 |
| December 31, 2012 |
Land | $ | 563,781 | $ | 450,613 |
Commercial |
| 264 |
| 264 |
Total | $ | 564,045 | $ | 450,877 |
The following table presents the change in balance sheet carrying values associated with REO for the nine months ended September 30, 2013 and 2012:
|
| September 30, | ||
|
| 2013 |
| 2012 |
Beginning Balance | $ | 450,877 | $ | 1,095,393 |
REO additions |
| 39,127 |
| 129,686 |
Proceeds from sales of REO |
| - |
| (92,548) |
Fair value adjustment |
| - |
| (215,000) |
Net change in holding costs |
| 74,041 |
| (34,055) |
Ending Balance | $ | 564,045 | $ | 883,476 |
NOTE 4 OTHER ASSETS:
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. 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 on a one for one (1:1) 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.
Investments in Available for Sale Securities:
AWG International Water Corporation:
The Company purchased 109,906 shares of the AWG International, Inc., (AWGI) common stock for $500,000 ($250,000 each in 2010 and 2011). In July 2012, AWGI was acquired by MIP Solutions, Inc. in a share exchange transaction (the "Acquisition"). In connection with this Acquisition, the Companys 109,906 shares of AWGI common stock were converted into 7,380,433 shares of AWG International Water Corporation (formerly MIP Solutions, Inc.). MIP Solutions, Inc. changed its name to AWG International Water Corporation and its common stock quoted on the OTC Electronic Bulletin Board. Prior to the Acquisition, the Company accounted for its investment in AWGI as a long term investment because AWGIs capital stock was not publicly traded. Once the Acquisition occurred and the shares were tradable publicly, the Company changed the method of accounting for this investment to an investment in a marketable equity security. Under this accounting, the investment is presented at fair value on the balance sheet and the resulting unrealized gain or loss is recognized as other comprehensive income.
9
Genesis Financial, Inc.
Notes to Financial Statements
September 30, 2013
(Unaudited)
At September 30, 2013 the quoted market value of AWGI was $0.07 per share or $516,630 resulting in an unrealized loss of $516,630 for the quarter and an unrealized loss of $501,869 for the nine months ended September 30, 2013. Total unrealized gain at September 30, 2013 is $16,630. The investment is measured using Level 1 fair value inputs.
Gambit Energy Inc.:
On February 4, 2013, the Company received 10,000 restricted common shares of Gambit Energy, Inc., a Nevada corporation ("GMEI") quoted on the OTC Markets. The shares were issued as additional consideration for extending the due date of a loan held for sale relating to GMEI promissory note. On the date of the transaction, the fair value of GMEI shares was $10,000 which was recognized as loan fee income during the quarter ended March 31, 2013.
At September 30, 2013, the quoted market value of the GMEI shares was $1.65 per share or $16,500 resulting in an unrealized gain of $10,800 for the three months ended September 30, 2013. Total unrealized gain at September 30, 2013 is $6,500. The investment was measured using Level 1 fair value inputs.
Investments in Real Estate Limited Liability Companies:
The Company acquired investments in two Washington state real estate limited liability companies in 2012. During the nine months ended September 30, 2013, the Company recorded a loss of $32,999 which represents its portion of the real estate companys loss for the same period. During the nine month ended September 30, 2013, the Company invested $53,809 for its share of property taxes and interest owing.
Real Estate Leasehold Interest:
On May 31, 2013, the Company completed the acquisition of a real property leasehold interest in approximately 63 acres located in Dunn County, North Dakota, (the "Halliday Project"). The leasehold was acquired by assignment of a lease between Mr. Clint L. Lohman (Lohman), Lessee and the Lessors. The Halliday Project, as presently developed, consist of fifty (50) developed residential lots and undeveloped land. Mr. Lohman was elected as a director of Genesis at the October 22, 2013 annual shareholder meeting.
Lohman initially acquired the property in September 2012 and commenced development of fifty (50) RV/residential lots. Lohman invested $353,857 into the Project. The Company loaned Lohman an additional $353,857 which was used for project development.
In exchange for Lohman's interest in the project, the Company issued 589,762 common shares valued at $0.45 per share for a value of $265,393. The Company also cancelled Lohmans outstanding loan balance of $353,857. Total consideration for the leasehold interest was $619,250. The Company owns the Halliday Project and intends to complete the development as it deems prudent. The Company may place recreational vehicles, mobile homes, or construct cabins on the lots and offer them for rent to oil field workers. For the three month and nine month periods ended September 30, 2013, the Company had rental income of $14,560.
The lease consists of approximately 63 acres in the Dunn County, North Dakota. The lease term is fifteen (15) years and commenced on September 15, 2012. The Company has an option to renew the lease for an additional 15 year term. The monthly rent on the lease is Fifty ($50.00) Dollars for each occupied and rented trailer, cabin or lot. The Company is obligated to pay any and all real and personal property taxes, general taxes, special assessments and other charges levied against the property and its improvements. During the lease term, the Company will own title to all of the improvements and personal property. At the expiration of the lease or termination, all improvements and personal property located on the premises will remain the property of the Lessors.
NOTE 5 LINES OF CREDIT:
On June 27, 2012, Genesis renewed a $250,000 line of credit, bearing five percent interest with Riverbank. At September 30, 2013 the balance owing is $235,000. 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. On June 14, 2013 the loan was extended to July 1, 2014 at which time the loan renewed at a four and a half percent rate with a origination fee of ½%, or $1,250. The Riverbank line requires that the CFC line may not be paid down lower than the amount owing to Riverbank at any time during the term of the loan. The line is payable on demand and is personally guaranteed by John R. and Wendy Coghlan, related parties of the Company.
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Genesis Financial, Inc.
Notes to Financial Statements
September 30, 2013
(Unaudited)
The Company has a $2,500,000 Line of Credit Agreement with the Coghlan Family Corporation, Inc. (CFC), with a balance owing of $1,420,000 at September 30, 2013 and $1,450,000 at December 31, 2012. 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.
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 initially due on December 15, 2012. The note is convertible at any time by Mr. Coghlan into one (1) 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 was amortized into earnings over the initial term of the note and was fully amortized at December 31, 2012. The note is collateralized by 290,000 shares of the Companys Series B Preferred stock. On October 16, 2012, the Company and Coghlan agreed to extend the due date of the note to December 15, 2015.
NOTE 7 SERIES B PREFERRED STOCK
During the nine month period ending September 30, 2012, holders of 142,500 shares of Series B preferred stock converted their shares into 356,250 shares of common stock.
During the nine month period ending September 30, 2013, holders of 75,000 shares of Series B preferred stock converted their shares into 187,500 shares of common stock.
NOTE 8 RELATED-PARTY TRANSACTIONS:
Related parties are defined as Officers, Directors, and/or those Shareholders owning or controlling more than 5% of the common stock of 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, JM Growth Enterprises, 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. JM Growth Enterprises, LLC is a company owned and controlled 100% by John R. Coghlan. 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. Genesis Holdings, Inc and Genesis Holding II, Inc. are inactive and the assets are liquidated.
In addition to transactions described in Notes 4, 5 and 6, Genesis Financial, Inc. had the following related party transactions for the quarter and nine months ended September 30, 2013 and the year ended December 31, 2012.
John R. Coghlan
One June 27, 2012, John R Coghlan personally guaranteed our Riverbank line of credit.
One June 14, 2013, John R Coghlan personally guaranteed our Riverbank line of credit.
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Genesis Financial, Inc.
Notes to Financial Statements
September 30, 2013
(Unaudited)
Coghlan Family Corporation CFC
There was no activity for the year ending December 31, 2012.
On June 24, 2013, Coghlan Family Corporation purchased $52,221 interest in two loans held for sale by the Company. No gain or loss was recognized on this sale because it was sold at its carrying value.
Coghlan, LLC
There was no activity for the nine months ended September 30, 2013 and 2012.
West 3773 Fifth, LLC
There was no activity for the nine months ended September 30, 2013.
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.
The assets of Genesis Holding, Inc valued at $1,219,200 were acquired by Genesis Financial, Inc. in the year ended December 31, 2012 for 2,032,000 shares of common stock.
The Company charged Genesis Holdings, Inc. $11,220 in management fees and $5,617 in servicing fees during the year ended December 31, 2012.
Genesis Holdings II, Inc.
The assets of Genesis Holding II, Inc valued at $192,000 were acquired by Genesis Financial, Inc. in the year ended December 31, 2012 for 320,000 shares of common stock.
The Company charged Genesis Holdings II, Inc. $1,940 in management fees and $971 in servicing fees during the year ended December 31, 2012.
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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 loans ("loans"), and originating commercial real estate hard money loans. We purchase loans at a discount and hold them for sale for a relatively short period to provide seasoning and value appreciation. After the holding period, we sell the loans. We expect to derive operating revenues from resales of loans at a profit, and from interest income derived from loans during the holding period. We originate commercial real estate loans and sell the loan, or participations in those loans, to accredited private investors. From time to time, we also consider other forms of cash flow instruments when warranted. Genesis has also invested in two private companies with a view toward diversifying its investment portfolio.
Additional details about our business are set forth in our Annual Report on Form 10-K for the year ending December 31, 2012. 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.
Over the course of the next twelve months, we will continue to concentrate on resolving delinquencies and repossession situations, raising capital to acquire income producing real estate, and make new short term bridge loans in the real estate industry. We are not capitalized at a level that allows holding of significant amounts of loans and as a result, we will continue to work toward short term turnover.
It is the goal of the company to grow its capital base where the overhead related to our Securities and Exchange Commission ("SEC") periodic reporting obligations does not represent such a large percentage of operating cash flow from invested assets.
RESULTS OF OPERATIONS
Quarter ended September 30, 2013 compared to quarter ended September 30, 2012.
Revenues
Total revenues for the quarter ending September 30, 2013 were $69,557 compared to $66,107 for the same quarter ending September 30, 2012. The majority of the revenue for the quarter ended September 30, 2013 was from rental, interest and broker fee income and the quarter ended September 30, 2012 was from interest and broker fee income
Net income (loss) from operations was $18,611 and $(50,217), respectively, for the quarters ending September 30, 2013 and 2012.
Of the loans held for sale at September 30, 2013 loans held for sale with carrying value of $750,297 were in payment default. We believe the defaults and repossessions are directly related to the national real estate market collapse.
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General and Administrative Expenses
General and administrative expenses (G&A) for the quarters ended September 30, 2013 and 2012, were $37,815 and $65,628, respectively. G&A primarily consists of management and professional fees for legal and auditing. The changes for the fiscal quarters ended September 30, 2013 and 2012 were $17,813 and $34,721, respectively. The primary reason for the decrease for the quarter ended September 30, 2013 was the decrease in legal and professional expenses.
Interest Expense
For the quarters ending September 30, 2013 and 2012, interest expense amounted to $7,975 and $32,057, 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 4.5%. The line of credit also included a one-half percent origination fee. The line of credit was extended to July 1, 2014.
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 September 30, 2013 and December 31, 2012, the balances on the lines of credit were $1,655,000 and $1,450,000, respectively. Interest expense on the line of credit will fluctuate in future periods with inventory levels.
Nine months ended September 30, 2013 compared to nine months ended September 30, 2012.
Revenues
Total revenues for the nine months ending September 30, 2013 were $165,093 compared to $106,750 for the same quarter ending September 30, 2012. The majority of the revenue for the nine months ended September 30, 2013 was from rental, interest and broker fee income and the nine month ended September 30, 2012 was from interest and broker fee income.
Net income (loss) from operations was $(32,177) and $(424,461), respectively, for the nine months ending September 30, 2013 and 2012. The decrease 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 nine months ended September 30, 2013 and 2012, were $142,264 and $144,410, respectively. G&A primarily consists of management and professional fees for legal and auditing. The changes for the fiscal quarters ended September 30, 2013 and 2012 were $2,146 and $35,691, respectively.
Interest Expense
For the nine months ending September 30, 2013 and 2012, interest expense amounted to $20,984 and $70,880, respectively. The primary reason for the decrease for the quarter ended September 30, 2013 was the decrease in related party interest expense from the convertible note.
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.
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At September 30, 2013 and December 31, 2012, we had cash available of $42,292 and $153,887, respectively, and $15,000 and $250,000 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 an interest rate of 4.5%. The line of credit also included a one-half percent origination fee. The line of credit expires July 1, 2014. The line is payable on demand and is personally guaranteed by John and Wendy Coghlan.
At September 30, 2013, the Company had a $2,500,000 Line of Credit Agreement with the Coghlan Family Corporation, Inc. (CFC) with a balance of $1,420,000. 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 September 30, 2013 and September 30, 2012, our net cash flows provided (used) by operating activities were $(316,595) and $165,393, respectively.
During these periods our net cash provided by (used by) financing activities was $205,000 and $(232,107), respectively. The reason for the increase for the period ended September 30, 2013 was the increase in the Riverbank line of credit.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable to Smaller Reporting Companies
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the SEC), and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Principal Financial Officer (Chairman of the Board), of the effectiveness of the design and operation of our disclosure controls and procedures.
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Based upon that evaluation, management concluded that our disclosure controls and procedures are effective as of September 30, 2013 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Presently, we are not subject to any material legal proceedings. In the normal course of business, Genesis is the initiator of legal proceedings associated with judicial foreclosures related to our loan portfolio.
Item 1A. Risk Factors
Not Applicable to Smaller Reporting Companies.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
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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 September 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flow, and (iv) Notes to consolidated Financial Statements. |
* In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 5, 2013
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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