GENESIS FINANCIAL INC - FORM 10-Q

Attached files

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EX-32 - CERTIFICATION - GENESIS FINANCIAL INC	ex322.htm
EX-32 - CERTIFICATION - GENESIS FINANCIAL INC	ex321.htm
EX-31 - CERTIFICATION - GENESIS FINANCIAL INC	ex312.htm
EX-31 - CERTIFICATION - GENESIS FINANCIAL INC	ex311.htm
EX-10 - AMENDMENT TO LINE OF CREDIT PROMISSORY NOTE - GENESIS FINANCIAL INC	ex10.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, 2016

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to_____

Commission file number: 333-103331

Genesis Financial, Inc.

(Exact Name of Registrant as Specified in Its Charter)



Wyoming	03-0377717
(State of Incorporation)	(IRS Employer Identification No.)

3773 West Fifth Avenue, Suite 301 Post Falls, ID.	83854
(Address of principal executive offices)	(Zip Code)

Issuer’s telephone number: (208) 457-9442

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ ] No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ], Accelerated filer [ ], Non-accelerated filer [ ], Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

APPLICABLE ON TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act subsequent to the distribution of securities under a plan confirmed by the court. Yes [ ] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of October 17, 2016 there were 17,135,295 shares of common stock issued and outstanding.

Genesis Financial, Inc.

Notes to Financial Statements

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.

Item 3. Defaults upon Senior Securities.

Item 4. Mine Safety Disclosures.

Item 5. Other Information.

Item 6. Exhibits

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements


GENESIS FINANCIAL, INC.
Condensed Balance Sheets
			September 30,		December 31,
			2016		2015
	ASSETS		(Unaudited)
CURRENT ASSETS:
	Cash and cash equivalents	$	15,272	$	31,301
	Interest and other receivables		36,353		70,909
	Investments in real estate limited liability companies		96,792		270,303
	Loans held for sale		463,520		503,890
	Real estate owned		25,391		27,451
	Total current assets		637,328		903,854
NON-CURRENT ASSETS:
	Long-term investments		362,619		362,619
	Investments - available for sale		-		26,570
	Real estate leasehold interest, net of accumulated amortization of $65,367 and $49,885, respectively		209,583		225,065
	Rental property, net of accumulated depreciation of $6,341 and $4,733, respectively		123,121		79,729
	Office equipment, net of accumulated depreciation of $6,928 and $5,905, respectively		1,004		2,027
	Total non-current assets		696,327		696,010

	Total assets	$	1,333,655	$	1,599,864

	LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Line of credit, related party	$	950,000	$	1,260,000
	Line of credit, bank		134,714		170,000
	Note payable		30,758		30,034
	Other current liabilities		953		13,040
	Total current liabilities		1,116,425		1,473,074
LONG-TERM LIABILITIES
	Convertible note payable to officer		-		250,000
COMMITMENT AND CONTINGENCIES (Note 6)			-		-
STOCKHOLDERS’ EQUITY:
	Series B Preferred stock, $1.00 par value: 2,290,000 authorized,
	none issued and outstanding, respectively		-		-
	Common stock, $.001 par value, 100,000,000 authorized,
	17,135,295 and 16,198,870 issued and outstanding, respectively		17,135		16,199
	Additional paid-in capital		8,589,331		8,264,137
	Accumulated deficit		(8,389,236)		(7,930,116)
	Accumulated other comprehensive (loss)		-		(473,430)
	Total stockholders’ equity		217,230		(123,210)

	Total liabilities and stockholders' equity	$	1,333,655	$	1,599,864

See accompanying notes to condensed financial statements.

Genesis Financial, Inc.

Notes to Financial Statements


GENESIS FINANCIAL, INC. Condensed Statements of Operations and Comprehensive Income (Loss) (Unaudited)
			Three Month Ended September 30,				Nine Month Ended September 30,
			2016		2015		2016		2015
REVENUE:
	Interest, processing fees and other income	$	11,673	$	13,694	$	34,526	$	48,639
	Rental income		6,000		20,410		16,528		63,360
	Net revenues		17,673		34,104		51,054		111,999

EXPENSES:
	Fair value adjustment		44,761		67,893		44,761		67,893
	Loss (income) on investment in real estate LLC		4,097		(813)		(265,638)		1,089
	Loss on sale of available for sale security		-		-		497,787		-
	(Gain) on sale of loan		-		-		(21,258)		-
	Salaries		10,250		12,750		35,750		38,250
	Interest expense, related party		6,142		5,041		8,297		15,123
	Interest expense, other		83		3,269		2,452		7,517
	Financing expense, related party		-		-		29,000		-
	Depreciation		877		877		2,630		2,630
	Amortization		5,161		5,161		15,482		15,482
	Rental property expense		2,437		6,232		13,508		27,183
	Office occupancy and other		43,032		39,176		147,404		125,236
	Total operating expenses		116,839		139,587		510,175		300,403

NET LOSS			(99,166)		(105,482)		(459,120)		(188,403)

COMPREHESIVE INCOME (LOSS):
	Unrealized loss on available for sale securities		-		-		(24,357)		(73,804)
	Reclassification of unrealized loss on available for sale security		-		-		497,787
	Total other comprehensive income (loss)		-		-		473,430		(73,804)

COMPREHESIVE INCOME (LOSS)		$	(96,147)	$	(105,482)	$	14,310	$	(262,207)

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE		$	(0.01)	$	(0.01)	$	(0.03)	$	(0.01)

WEIGHTED AVERAGE SHARES:
	BASIC AND DILUTED		17,067,003		16,198,870		16,897,568		14,381,898

See accompanying notes to condensed financial statements.

Genesis Financial, Inc.

Notes to Financial Statements


GENESIS FINANCIAL, INC. Condensed Statements of Cash Flows (Unaudited)

			Nine Months Ended September 30,
			2016		2015

CASH FLOWS FROM OPERATING ACTIVITIES		$	(373,614)	$	(66,933)

CASH FLOWS FROM INVESTING ACTIVITIES
	Investment in real estate limited liability companies		389,934		(32,039)
	Proceeds from sale of investment in available for sale security		2,213		-
	Net cash provided (used) by investing activities		392,147		(32,039)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Borrowings (repayment) of line of credit with related party, net		-		(20,000)
	Borrowings (repayment) from line of credit from bank, net		(35,286)		144,887
	(Repayment) of note payable		724		(4,943)
	Net cash provided (used) by financing activities		(34,562)		119,944

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT			(16,029)		20,972

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			31,301		64,493

CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	15,272	$	85,465

NONCASH TRANSACTIONS
	Preferred stock converted to common stock	$	-	$	1,649,500
	Convertible note payable to officer converted to common stock		250,000		-
	Convertible note receivable settled with long term investment		-		150,000
	Loans held for sale converted to REO		88,117		-
	Investment in real estate limited liability company exchanged for reduction of line of credit with related party		300,000		-
	Loans held for sale exchanged for reduction in line of credit with related party		10,000		-
	REO converted to rental property	$	69,761	$	-

See accompanying notes to condensed financial statements.

Genesis Financial, Inc.

Notes to Financial Statements

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization:

Genesis Financial, Inc. (“the Company” or “GFI”) was incorporated in Washington State on January 24, 2002 and on January 26, 2016 we moved our corporate domicile to the State of Wyoming. The Company is primarily engaged in the business of purchasing and selling real estate receivable loans and periodically providing bridge capital funding. Loans consist of real estate loans and mortgage notes collateralized by primarily first position liens on residential and commercial real estate. The loans collateralized by real estate are typically non-conventional either because they are originated as a result of seller financing, or the underlying property is non-conventional.

The Company invests in loans using investor funds, equity funds and funds generated from external borrowings including a line of credit facility from a related party.

The financial statements of GFI, presented in this Form 10Q are unaudited and reflect, in the opinion of Management, a fair presentation of operations for the three and nine month periods ended September 30, 2016 and September 30, 2015. All adjustments of a normal recurring nature and necessary for a fair presentation of the results for the periods covered have been made. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Form 10K for the year ended December 31, 2015 as filed with Securities and Exchange Commission.

The results of operations for the three and nine months ended September 30, 2016, are not necessarily indicative of the results expected for the full fiscal year or for any other fiscal period.

Summary of Significant Accounting Policies:

Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates used herein include those relating to management’s estimate of fair value of loans held for sales, real estate owned, and long-term investments. It is reasonably possible that actual results could differ from those and other estimates used in preparing these financial statements and such differences could be material.

Fair value measurements - The following information for each class of assets and liabilities that are measured at fair value is disclosed:

the fair value measurement;

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);

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:

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;

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;

purchases, sales, issuances, and settlements (net); and

transfers into and/or out of Level 3.

Genesis Financial, Inc.

Notes to Financial Statements

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

in annual periods only, the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period.

Real estate leasehold interest – Leasehold interests in real estate are stated at cost unless circumstances indicate that cost cannot be recovered, in which case, an adjustment to the carrying value of the property is made to reduce it to its estimated fair value. Project costs clearly associated with the development of the leasehold interest are capitalized. As portions of the leasehold interest are rented, depreciation expense is recognized over the term of the leasehold interest. Rental income received on the interests is recognized in the period earned.

Loans held for sale – Loans held for sale are initially recorded at the lower of cost or fair value. Loans held for sale are re-measured at fair value on a recurring basis. Fair value for these loans is determined by assessing the probability of borrower default using historical payment performance and available cash flows to the borrower, then projecting the amount and timing of cash flows, including collateral liquidation if repayment weaknesses exist. The Company considers any valuation inputs related to loans held for sale to be Level 3 inputs. Interest on loans held for sale is included in interest income during the period held for sale. Typically, the Company attempts to sell loans three to twelve months after acquisition. It is the policy of the Company not to hold any loans for investment purposes.

Real estate owned – Real estate owned (“REO”) (acquired through a loan default) is recorded at fair value on a non-recurring basis. Upon transfer of a loan held for sale to REO, properties are recorded at amounts which are equal to fair value of the properties based on the following inputs: (1) appraisal provided by a certified appraiser, (2) BPO (Broker’s Pricing Opinion) provided by a qualified real estate broker, (3) site inspection by qualified management of the Company, or (4) a combination of all of the above. Periodically, non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on the same inputs. The Company considers any valuation inputs related to REO to be Level 3 inputs. The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations.

Income tax – Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets, subject to a valuation allowance, are recognized for future benefits of net operating losses being carried forward. The Company effective tax rate for 2016 is expected to be 0%.

Earnings per share – Basic earnings per common share have been computed on the basis of the weighted-average number of common shares outstanding during the period presented. Diluted earnings per common share are computed on the basis of the number of shares that are currently outstanding plus the number of shares that would be issued pursuant to outstanding warrants, stock options and common stock issuable on conversion of preferred stock unless such shares are deemed to be anti-dilutive such as when a net loss is present. The dilutive effect of convertible debt and outstanding securities, in periods of future income, would be as follows as of September 30, 2016 and September 30, 2015;


	September 30,
	2016	2015
Stock options	261,000	261,000
Convertible debt	-	625,000
Total possible dilution	261,000	886,000

Reclassifications – Certain reclassifications have been made to conform prior periods’ data to the current presentation. These reclassifications have no effect on the reported results of operations or stockholders’ equity.

Genesis Financial, Inc.

Notes to Financial Statements

NOTE 2 — LOANS HELD FOR SALE:

The Company's fair value of loans held for sale consisted of the following:


		September 30, 2016		December 31, 2015
Residential	$	118,456	$	253,853
Land		31,366		240,037
Commercial		313,698		10,000
Loans held for sale - Total	$	463,520	$	503,890

The following table presents a reconciliation of loans held for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2016 and 2015:


		September 30,
		2016		2015
Beginning Balance	$	503,890	$	611,400
New loans		166,079		15,000
Principal payments received		(14,355)		(10,806)
Proceeds on sale of loans		(120,000)		(25,337)
Gain on sale of loans		21,258		-
Converted to rental property		(88,117)		-
Loan exchanged for reduction in line of credit, related party		(10,000)		-
Fair value adjustment		-		(67,893)
Repossession expenses		4,765		5,367
Ending Balance	$	463,520	$	527,731

During the nine months ended September 30, 2016, the Company funded two loans for $166,079, sold two loans with a basis of $103,742 for $125,000. The Company also exchanged one loan with a basis of $10,000 to a related party to reduce the line of credit by $10,000.

NOTE 3- REAL ESTATE OWNED:

The Company's fair value of REO consisted of the following:


		September 30, 2016		December 31, 2015
Residential	$	7,710	$	-
Land		16,382		23,441
Commercial		1,299		4,010
Total	$	25,391	$	27,451

The following table presents the change in balance sheet carrying values associated with REO for the nine months ended September 30, 2016 and 2015:


		September 30,
		2016		2015
Beginning Balance	$	27,451	$	44,392
REO transferred from loans held for sale		88,117		-
Proceeds from sales of REO		-		-
REO converted to rental property		(69,761)		-
Fair value adjustment		(20,000)		-
Net change in holding costs		(416)		-
Ending Balance	$	25,391	$	44,392

Genesis Financial, Inc.

Notes to Financial Statements

During the nine months ended September 30, 2016, the Company converted one REO to Rental property. We transferred two loan held for sale to REO for $88,117. The company also adjusted fair value on one REO totaling $(20,000).

NOTE 4 — OTHER ASSETS:

Long term investments:

Flyback Energy, Inc.:

In December 2015, the Company reduced the carrying value of its Flyback Energy common shares to $0.067 per share, or $212,619, and recorded an impairment change of $1,037,381 based on the last known common share sale. Flyback Energy, Inc. is a development stage company being financed by outside sources of capital. At this time, Flyback is currently negotiating future financing capital.

The Company has accounted for the investment using the cost method. At the time the impairment with the measurement of the loss was recognized in earnings. Any recoveries to the impairment cannot be recognized and shall not be adjusted for subsequent recoveries in fair value.

Digi Outdoor Media, Inc.:

In 2014, the Company loaned Placer Creek Mining Company (“Placer”) $150,000. The loan bore interest at a rate of 5.0% and the Company had an option to convert any or all of the amount due into an equity private placement of Placer. The Placer transaction is treated as a related party transaction. (see Note 8:Michael Lavigne)

On February, 24, 2015, the Company converted the note into 300,000 shares of common stock of Digi Outdoor Media, Inc. (“Digi”), the successor in interest to Placer. The Company determined that the fair value of the shares received on the conversion to be $150,000 based upon the note receivable balance of $150,000 because Digi is not publicly traded. The fair value was determined using Level 2 inputs under the fair value hierarchy.

Digi Outdoor Media, Inc. is a startup company in the business of building and leasing outdoor advertising signs.

Investments in Available for Sale Securities:

Ambient Water Corporation (Formerly AWG International Water Corp.):

The Company purchased 109,906 shares of the AWG International Water Corp, a Nevada corporation, (“AWGI”) common stock for $500,000 ($250,000 each in 2010 and 2011). In July 2012, AWGI was acquired by MIP Solutions, Inc. in a share exchange transaction (the "Acquisition"). In connection with the Acquisition, the Company’s 109,906 shares of AWGI common stock were converted into 7,380,433 shares of AWG International Water Corp (formerly MIP Solutions, Inc.).

On May 19, 2016, by board action the Company sold its interest in Ambient Water Corporation to John R. Coghlan (see Note 8) for $.0003 per share, the fair value of the stock on the day of sale for proceeds of $2,213, resulting in a recognized loss of $497,787.

Investments in Real Estate Limited Liability Companies:

At the end of 2012, the Company acquired investments in two Washington state real estate limited liability companies. In 2013, the Company contributed its investment in one real estate owned property with a basis of $51,600 to a newly formed limited liability company in exchange for a 12.9% interest in the new company. In 2014, the Company contributed its investment in one real estate owned property with a basis of $47,925 to a newly formed limited liability company in exchange for 31.95% interest in the new company. These companies are 100% controlled and managed by Genesis Finance Corporation and John Coghlan, related parties. (See Note 8)

Genesis Financial, Inc.

Notes to Financial Statements

Investments are accounted for using the equity method. During the three months ended September 30, 2016 and 2015, the Company recorded a (income) loss of $4,097 and ($813), respectively, and for the nine months ended September 30, 2016 and 2015, the Company recorded a (income) loss of ($265,638) and $1,089, respectively. During the nine months ended September 30, 2016 and 2015, the Company advanced $-0- and $22,039 for property taxes and interest owing. During the quarter ended March 31, 2016, one limited liability company was sold for $399,934, resulting in a gain of $139,821.

On May 18, 2016, by board action the Company exchanged its 9.1756% interest in Wenatchee Riverview, LLC to Coghlan Family Corporation “CFC” (see Note 8) for $300,000, resulting in a gain on sale of real estate limited liability company of $131,625. The transaction was made by reducing the balance payable to Coghlan Family Corporation’s revolving line of credit. As required by the operating agreement of Wenatchee, LLC operating agreement the offer was shown to all other members to participate or bid higher for the interest. No members made an offer and the Board of Directors of the Company approved the sale.

Rental Property:

At the end of 2013, the Company foreclosed on a loan previously held for sale in Lebanon, Oregon through the bankruptcy courts, the property is being operated as Duffy’s Bar. The bar was subsequently leased on a three (3) year lease agreement for $1,500 per month. During the three and nine months ended September 30, 2016 and 2015, the Company recognized $4,500 and $13,500 in rental income. This is a commercial building being depreciated over thirty-nine (39) years. Depreciation accrues at $179 per month. The Company recorded depreciation of $877 and $2,630 for the three and nine months ended September 30, 2016 and 2015.

In September 2016, the Company foreclosed on a loan previously held for sale in Lewiston, Idaho through the bankruptcy courts, the property is being operated as Emperor of Indian restaurant. The property was placed into real estate owned during the six month ended June 30, 2016. It was held at a net carrying value of $69,761. The restaurant was subsequently leased on a two year lease agreement for $1,200 per month with an option to purchase for $45,000. During the three month ended September 31, 2016 the company recognized $1,500 in rental income. Fair value of the property was determined to be $45,000 on the date of transfer based on appraisal and contract terms of the lease.

Real Estate Leasehold Interest:

On May 31, 2013, the Company completed the acquisition of a real property leasehold interest in approximately 63 acres with fifty (50) RV/residential lots located in Dunn County, North Dakota, (the "Halliday Project"). Total consideration for the leasehold interest was $619,250. The Company may place recreational vehicles, mobile homes, or construct cabins on the lots and offer them for rent or lease. For the three months ended September 30, 2016 and 2015, the Company recorded amortization of $5,161, respectively and had four and fourteen lots leased with rental income of $-0- and $15,910, respectively. For the nine months ended September 30, 2016 and 2015, the Company recorded amortization of $15,482, respectively and had four and seventeen lots leased and had rental income of $1,528 and $49,860, respectively.

At December 31, 2015, the Company decided to adjust the carrying value of the property to a fair value estimated of $195,065 (not including travel trailers), based on management’s estimate of discounted cash flows received from the property.

NOTE 5 — LINES OF CREDIT:

GFI has a $250,000 line of credit with Riverbank. At September 30, 2016 and December 31, 2015 the balance owing is $134,714 and $170,000. Accrued interest is paid monthly. The Riverbank line of credit is senior to the Coghlan Family Corporation, Inc. (“CFC”) line of credit and is collateralized by the assets of GFI. On October 7, 2016 the line of credit was extended to December 1, 2016 at which time the loan renewed at a four and a half (4.5%) percent interest rate with a renewal fee of ½%, or $1,250. The Riverbank line requires that the CFC line may not be paid down lower than the amount owing to Riverbank at any time during the term of the loan. The line is payable on demand and is personally guaranteed by John R. and Wendy Coghlan, related parties of the Company.

Genesis Financial, Inc.

Notes to Financial Statements

The Company has a $2,500,000 Warehouse Line of Credit Promissory Note Agreement with the CFC. At September 30, 2016 and December 31, 2015 the balance owing was $950,000 and $1,260,000. CFC is an affiliated company controlled by John R. Coghlan. At the time the agreement was made the default interest rate was twelve (12%) percent. Interest was payable monthly. The line had a term of 12 months and an origination fee of 1/2% or $12,500. The credit line is collateralized by all of GFI’s assets and is subordinate to the Riverbank line of credit. The line of credit agreement requires that the Company maintain a debt to equity ratio of no greater than 3.0. Borrowings under the line are personally guaranteed by Michael A. Kirk, the Secretary of the Company. Because of the economic conditions, CFC agreed to waive the interest and origination fees starting October 1, 2010 and also agreed to waive the 3.0 debt to equity ratio requirement as well as the 12% default rate. (See 8-K filed February 8, 2016) Effective August 1, 2016, the company amended the Warehouse Line of Credit Promissory Note Agreement to four (4%) percent interest to be paid monthly in common stock. In addition, the Company issued 50,000 shares of its common stock valued at $5,000 as a loan renewal fee for the three months ended September 30, 2016. (See exhibit 10) Also 61,425 shares of the company common stock were issued for a value of $6,142 in interest for the three month ended September 30, 2016.

The Company by board action exchanged a loan held for sale with a basis of $10,000 and exchanged its 9.1756% interest in a limited liability company valued at $300,000 for a reduction in the line of credit of $310,000.

NOTE 6 — NOTES PAYABLE

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 eight (8%) percent per annum with interest and balance initially due on December 15, 2012. The note is convertible at any time by Mr. Coghlan into one (1) share of the Company’s Series “B” Preferred stock for every $1.00 outstanding of the note payable and related accrued interest. In connection with the issuance of this note, the Company recognized a beneficial conversion feature of $128,750 that resulted in a discount to the note payable. The discount was amortized into earnings over the initial term of the note and was fully amortized at December 31, 2012. The note is collateralized by the Company's agreement to issue 290,000 shares of the Company’s Series “B” Preferred stock.

On February 8, 2016, Mr. Coghlan elected to convert his note into shares of the Company’s common stock. The note was originally convertible into 250,000 shares of Series "B", or 625,000 shares of common stock equivalents, at the option of Mr. Coghlan. However, Mr. Coghlan agreed to accept 725,000 common shares in lieu of full payment. The 100,000 additional common shares represents a financing cost to the Company and as such, financing expense of $29,000 was recognized in the quarter ended March 31, 2016.

NOTE 7 — SERIES B PREFERRED STOCK

On May 18, 2015, the Company by majority consent of Preferred Shareholder agreed to convert all of the outstanding shares of Series B Preferred to common stock. On June 26, 2015, 1,649,500 shares of Series B Preferred were converted into 4,123,750 common shares.

As of September 30, 2016 and December 31, 2015, no shares of Series B Preferred Stock are issued, outstanding or obligated.

NOTE 8 — RELATED-PARTY TRANSACTIONS:

Related parties are defined as Officers, Directors, and/or those Shareholders owning or controlling more than 5% of the common stock of GFI, or any entities that are owned or controlled by Officers, Directors, and/or those Shareholders owning or controlling more than 5% of the common stock of GFI.

Coghlan Family Corporation, Coghlan, LLC and West 3773 Fifth, LLC are controlled by John R. Coghlan, a Company director, CFO and majority shareholder. Coghlan Family Corporation is owned 100% by Coghlan, LLC, which is owned by the Coghlan family members. John R. and Wendy Coghlan (husband and wife) collectively own 35.65% of Coghlan, LLC and are co-managers. West 3773 Fifth, LLC is owned 100% by John and Wendy Coghlan (husband and wife). JC Housing, LLC is owned 33.33% by John R. Coghlan and 33.33% by Clint Lohman. Mr. Lohman is a director of GFI. Genesis Financial Corporation is a company which is owned 100% by Michael Kirk,

Genesis Financial, Inc.

Notes to Financial Statements

who is a director and officer of GFI. GFI provides accounting, office services and supplies, and office space for his services provided to Genesis Financial Corporation. The services are valued at $1,500 per month. Genesis Finance Corporation and John R. Coghlan has managing agreement with the real estate limited liability companies. Michael Lavigne is an officer and director of Placer Creek Mining Company. Mr. Lavigne is a director of GFI.

In addition to transactions described in Notes 2, 3, 4, 5 and 6, the Company had the following related party transactions for the quarter and nine months ended September 30, 2016 and year ended December 31, 2015.

John R. Coghlan, Officer and Director

On October 7, 2016, John R. and Wendy Coghlan personally guaranteed our Riverbank line of credit.

On May 19, 2016, by board action the Company sold 7,380,433 common shares of Ambient Water Corporation for $2,213 or $0.0003 per share the fair value on that date to John R Coghlan.

As of September 30, 2016, the Company continues a managing agreement for the investment in real estate limited liability companies. The agreement is stated in the operating agreement of each limited liability companies.

On February 8, 2016, John R. Coghlan converted his $250,000 note for 725,000 shares of common stock. The note was originally convertible into 250,000 shares of Series "B", or 625,000 shares of common stock equivalents, at the option of Mr. Coghlan. However, Mr. Coghlan agreed to accept 725,000 common shares in lieu of full payment. The 100,000 additional common shares represents a financing cost to the Company and as such, financing expense of $29,000 was recognized in the quarter ended March 31, 2016.

For the year ended December 31, 2015, the Company purchased two travel trailer from JC Housing, LLC for $30,000.

Coghlan Family Corporation “CFC”

On September 30, 2016, CFC was issued 30,192 shares of common stock for a value of $3,019 in interest on the Warehouse Line of Credit.

On August 31, 2016, CFC was issued 31,233 shares of common stock for a value of $3,123 in interest on the Warehouse Line of Credit.

On August 1, 2016, CFC amended the Warehouse Line of Credit and 50,000 shares of common stock was issued. (See Note 5)

On May 18, 2016, by board action the Company exchanged its 9.1756% interest in Wenatchee Riverview, LLC to CFC for a $300,000 reduction in the line of credit with CFC, a gain of $131,625 was realized.

On May 19, 2016, by board action the Company exchanged a loan held for sale for a $10,000 reduction in the line of credit with CFC.

In February 2016, Coghlan Family Corporation amended the Warehouse Line of Credit. (See Note 5)

There was no activity for the year ended December 31, 2015.

Coghlan, LLC

There was no activity for the years ended December 31, 2015 and for the quarter ended September 30, 2016.

JC Housing, LLC

For the year ended December 31, 2015, the Company purchased two travel trailers from JC Housing, LLC for $30,000.

Genesis Financial, Inc.

Notes to Financial Statements

West 3773 Fifth, LLC

As of September 30, 2016, the Company continued a month-to-month tenancy with 3773 West Fifth, LLC, a company owned and controlled by John and Wendy Coghlan. The monthly rent is $1,250.

Genesis Finance Corporation “GFC”

Michael Lavigne, Director

There was no activity for the nine months ended September 30, 2016.

For the year ended December 31, 2015, the Company converted the Placer Creek Mining Company loan of $150,000 to 300,000 shares of Digi Outdoor Media, Inc., the successor to Placer Creek Mining Company (See Note 4).

Clint Lohman, Director

There was no activity for the nine months ended September 30, 2016.

For the year ended December 31, 2015, the Company purchased two travel trailer from JC Housing, LLC for $30,000.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

When used in this Form 10-Q and in our future filings with the Securities and Exchange Commission, the words or phrases will likely result, management expects, or we expect, will continue, is anticipated, estimated or similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. These statements are subject to risks and uncertainties, some of which are described below. Actual results may differ materially from historical earnings and those presently anticipated or projected. We have no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect anticipated events or circumstances occurring after the date of such statements.

Background

Genesis Financial, Inc. is engaged in the business of buying and selling seller financed real estate loans ("loans"), and originating commercial real estate hard money loans and providing startup capital funding. We purchase loans at a discount and hold them for sale for a relatively short period to provide seasoning and value appreciation. After the holding period, we sell the loans. We expect to derive operating revenues from resales of loans at a profit, and from interest income derived from loans during the holding period. We originate commercial real estate loans and sell the loan, or participations in those loans, to accredited private investors. From time to time, we also consider other forms of cash flow instruments when warranted. Genesis has also invested in two private companies with a view toward diversifying its investment portfolio.

Additional details about our business are set forth in our Annual Report on Form 10-K for the year ending December 31, 2015. The following discussion should be read in conjunction with the financial information included elsewhere in this Quarterly Report on Form 10-Q.

The purpose of this section is to discuss and analyze our financial condition, liquidity and capital resources and results of operations. You should read this analysis in conjunction with the financial statements and notes that appear elsewhere in this Quarterly Report on Form 10-Q. This section contains certain "forward-looking statements" within the meaning of federal securities laws that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. The Company’s actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under "Disclosure Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q.

PLAN OF OPERATIONS.

Over the course of the next twelve months, we will continue to concentrate on resolving delinquencies and repossession situations, raising capital to acquire income producing real estate, and make new short term bridge loans in the real estate industry. We are not capitalized at a level that allows holding of significant amounts of loans and as a result, we will continue to work toward short term turnover.

RESULTS OF OPERATIONS.

Quarter ended September 30, 2016 compared to quarter ended September 30, 2015.

Revenues

Total revenues for the quarter ending September 30, 2016 were $17,673 compared to $34,104 for the same quarter ending September 30, 2015. The majority of the revenue for the quarters ended September 30, 2015 and 2016 was from rental, interest and loan fee income. The decrease in revenue was the result of reduction rental income due to the decline in oil prices that impacted our rental property in North Dakota.

Net loss from operations was ($99,166) and ($105,482), respectively, for the quarters ending September 30, 2016 and 2015. The decrease in net operating loss was due to the company reducing it regular expenses in the quarter ended September 30, 2016.

Genesis Financial, Inc.

Notes to Financial Statements

Of the loans held for sale at September 30, 2016, $302,622 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 September 30, 2016 and 2015 were $53,282 and $51,926, respectively. G&A primarily consists of management and professional fees for legal and auditing. The changes for the fiscal quarters ended September 30, 2016 and 2015 were $1,356 and $13,464, respectively. The primary reason for the increase in 2015 was due to bad debts and public company expenses.

Interest Expense

For the quarters ending September 30, 2016 and 2015, interest expense amounted to $6,225 and $8,310, respectively. The reduction is the result of converting a note to common stock.

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, now converted and the Coghlan Family Corporation, an affiliated company.

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 December 1, 2016. As of September 30, 2016 and December 31, 2015, the balances were $134,714 and $170,000, respectively.

We also are currently operating under a secondary $2,500,000 line of credit with Coghlan Family Corporation, an affiliated company, with an interest rate of Four (4%) percent to be issued monthly in common stock. The line of credit also includes a 50,000 commons stock per year origination fee. On August 1, 2016 interest and commitment fees were amended and 50,000 shares of common stock issued for renewal fee. On August 31, 2016, 31,233 shares were issued and on September 30, 2016, 30,192 shares were issued for monthly interest.

We consider the terms of the lines of credit to be acceptable. As of September 30, 2016 and December 31, 2015, the balances on the lines of credit were $950,000 and $1,260,000, respectively. Interest expense on the line of credit will fluctuate in future periods with inventory levels.

Nine months ended September 30, 2016 compared to nine months ended September 30, 2015.

Revenues

Total revenues for the nine months ending September 30, 2016 were $51,054 compared to $111,999 for the same period ending September 30, 2015. The majority of the revenue for the nine months ended September 30, 2016 and 2015 was from rental, interest and loan fee income. The decrease in revenue was the result of reduction rental income due to the decline in oil prices that impacted our rental property in North Dakota.

Net loss from operations was ($459,120) and ($188,403), respectively, for the nine months ending September 30, 2016 and 2015. The increase was due to a realized loss on sale of available for sale security for $497,787 in 2016.

General and Administrative Expenses

General and administrative expenses (“G&A”) for the nine months ended September 30, 2016 and 2015 were $183,154 and $163,486, respectively. G&A primarily consists of management and professional fees for legal and auditing. The changes for the nine month ended September 30, 2016 and 2015 were $19,668 and $23,922, respectively.

Genesis Financial, Inc.

Notes to Financial Statements

Interest Expense

For the nine months ending September 30, 2016 and 2015, interest expense amounted to $8,322 and $22,640, respectively. The reason for the reduction is the note being converted to stock.

LIQUIDITY AND CAPITAL RESOURCES.

At September 30, 2016 and December 31, 2015, we had cash available of $15,272 and $31,301, respectively, and $115,286 and $80,000 were available under our bank line of credit. Management considers the capital resources to be adequate to meet the current operating needs of the Company for the next twelve months.

Genesis is currently operating under a primary $250,000 line of credit with Riverbank, an unaffiliated lender, with a variable interest rate equal to the prime rate index rate (as published in the Wall Street Journal) plus 1%, with a floor of four and one-half percent. The line of credit also included a one-half percent origination fee. The line of credit expires December 1, 2016. The line is payable on demand and is personally guaranteed by John and Wendy Coghlan. At September 30, 2016 the balance was $134,714.

At September 30, 2016, the Company had a $2,500,000 Line of Credit Agreement with the Coghlan Family Corporation, Inc. (“CFC”) with a balance of $950,000. CFC is an affiliated company controlled by a director and principal shareholder of the Company. The interest rate on the line is a variable interest rate equal to the prime rate index (as published in the Wall Street Journal) plus 1%. The line has a term of 12 months and an origination fee of 1/2% or $12,500. The credit line is collateralized by all of Genesis’ assets but is subordinate to the RiverBank line of credit. The line of credit agreement requires that the Company maintain a debt to equity ratio of no greater than 3.0. Borrowings under the line are personally guaranteed by an officer of the Company. Because of the weak economic conditions, effective January 1, 2012, CFC had agreed to (1) extend the due date to January 1, 2016, waive all interest beginning October 1, 2010, (2) waive the 12% default rate, (3) waive the financial covenants and (4) waive the commitment fee. In February 2016 the maturity date was extended and on August 1, 2016, , the company amended the Warehouse Line of Credit Promissory Note Agreement to four (4%) percent interest to be paid monthly in common stock. In addition, the Company issued 50,000 shares of its common stock valued at $5,000 as a loan renewal fee for the three months ended September 30, 2016. (See exhibit 10) Also 61,425 shares of the company common stock were issued for a value of $6,142 in interest for the three month ended September 30, 2016.

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 to grow the company, and become profitable.

For the quarters ending September 30, 2016 and 2015, our net cash flows provided by (used by) operating activities were ($373,614) and ($66,933), respectively. The reason for the decrease was the realized loss on available for sale security.

For the period ended September 30, 2016 and 2015 the cash flows used by investing activities was $392,147 and ($32,039), respectively. The reason for the increase in 2016 compared to 2015 was the sale of real estate limited liability company interest.

During these periods our net cash provided by (used by) financing activities was ($34,562) and $119,944, respectively. The reason for the increase for the period ended September 30, 2016 were advances on the Riverbank line of credit.

The Company’s principal sources of cash are from interest, loan fees, rental income, related party loans, unaffiliated party loans, funding agreements and common 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.

Genesis Financial, Inc.

Notes to Financial Statements

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable to Smaller Reporting Companies

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Principal Financial Officer (Chairman of the Board), of the effectiveness of the design and operation of our disclosure controls and procedures.

Based upon that evaluation, management concluded that our disclosure controls and procedures are effective as of September 30, 2016 to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer (Chairman of the Board), as appropriate, to allow timely decisions regarding required disclosure.

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

Genesis Financial, Inc.

Notes to Financial Statements

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, the Company is the initiator of legal proceedings associated with judicial real estate foreclosures related to our loan portfolio collateral interests.

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.

Item 6. Exhibits

(a)

Exhibits



Exhibit No.	Description

10.1	Amendment to Warehouse Line of Credit Promissory Note dated August 1, 2016

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, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flow, and (iv) Notes to consolidated Financial Statements.

Genesis Financial, Inc.

Notes to Financial Statements

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 1, 2016

Genesis Financial, Inc.

(Registrant)

/s/ John R. Coghlan

________________________

By: John R. Coghlan

Title: President, Chief Executive Officer

Chief Financial Officer (Principal Accounting Officer)

/s/ Virginia Walters

________________________

By: Virginia Walters

Title: Treasurer and Director

GENESIS FINANCIAL INC - FORM 10-Q - November 4, 2016

Attached files

GENESIS FINANCIAL INC Reports