ITEM 1. Business.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains many forward-looking statements, which involve risks and uncertainties, such as our plans, objective, expectations and intentions. You can identify these statements by our use of words such as "may," "expect," "believe," "anticipate," "intend," "could," "estimate," "continue," "plans," or other similar words or phrases. Some of these statements include discussions regarding our future business strategy and our ability to generate revenue, income, and cash flow. We wish to caution the reader that all forward-looking statements contained in this Form 10-K are only estimates and predictions. Our actual results could differ materially from those anticipated as a result of risk facing us or actual events differing from the assumptions underlying such forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this Annual Report on Form 10-K. We undertake no obligation to update any of these factors or to publicly announce any change to our forward-looking statements made herein, whether as a result of new information, future events, changes in expectations or otherwise.
OVERVIEW
New Developments
On September 8, 2017, Genesis Financial, Inc. (the "Company") entered into a Capital Stock Exchange Agreement (the “Exchange Agreement”) with EPOINT Payment Corp., a Delaware corporation ("EPOINT"). The anticipated target closing date is no later than February 15, 2018, or such earlier date as may be determined by the parties. During the first quarter of 2018, the Company will proceed to perform its obligations under the Exchange Agreement. For additional details please review the Exchange Agreement filed on our Current Report filed on September 11, 2017.
Following the acquisition of EPOINT and in accordance with the Exchange Agreement's provisions, the Company plans to immediately commence the disposal and discharge of its pre-acquisition assets and the majority of its liabilities. The combined companies will focus their business efforts on financial services delivering a range of products and services including but not limited to, micro credit advances, mobile phone device financing, money transfers, mobile wallet and prepaid debit cards, bill payments, mobile top up, check processing, insurance and travel.
On December 12, 2017, the Company implemented a twenty for one (20:1) reverse split. In this annual report unless otherwise noted, all references to share activity are retrospectively adjusted to post-split figures.
INTRODUCTION. Genesis Financial, Inc. ("GFI") was incorporated in the State of Washington on January 24, 2002 for the purpose of purchasing and reselling seller financed real estate loans (also referred to as "loans" or "real estate notes" or "portfolio"). On January 25, 2016, the Company moved its corporate domicile from Washington State to Wyoming State. All loans purchased or originated, are held for sale, and are carried on the financial statements at cost or fair value, whichever is less. We purchase seller financed real estate loans from sellers directly or from sellers who are introduced to GFI by brokers. When the owner of a real estate loan wishes to sell the loan, the owner may contact a broker or GFI directly. Seller financed real estate loans are originated by the selling owner of real property. This is an unconventional form of financing which does not involve banks or mortgage companies. When we commenced business, we initially focused on purchasing residential and commercial real estate loans and business notes from $25,000 to $250,000 in value, and the brokering of larger transactions. As the business grew, we expanded our services to include larger loans and other forms of cash flow investment instruments.
In 2007, the sub-prime real estate markets started to experience problems, and by mid-2008, the market was in a free-fall. The Company started to experience increased delinquencies, and the collapse of the financial markets eliminated any chance of our payors being able to refinance or sell their properties, which resulted in increased loan defaults and repossessions. Effective January 1, 2009, the Company out-sourced all its operations and servicing functions to reduce expenses during this downturn. Management tightened up the Company's underwriting parameters. Management focused its efforts on maintaining the performing portions of the portfolio, selling repossessed collateral properties, and reducing debt.
INDUSTRY BACKGROUND. Sellers have used real estate notes ever since men started claiming parcels of land as their own. Historically, no market existed for sale of real estate notes, so a holder of a note typically collected the payments from the borrower, and held the note to maturity. It is only in the last 25 years or so that an active market for selling real estate loans on a large scale has developed.
In the latter part of 2008, national economic conditions made any real estate lending very precarious, forcing the Company to againevaluate its business plan. Real estate loans again became our primary target. GFI has been forced to focus its business towards more commercial real estate lending.
COMPETITIVE ADVANTAGE. In this competitive environment, GFI sought to distinguish its offering from those of our competitors through excellent service, rapid customer response, and consistent and fair underwriting evaluations and procedures. We believed that our market focus on superb service and our existing contacts in the industry would provide a sustainable competitive advantage. We also believed that our ability to diversify into other related markets, such as commercial real estate lending, would give us a competitive advantage. From January 1, 2009 through December 31, 2011, the Company out-sourced all its operations and servicing functions to reduce expenses, and further tightened underwriting parameters, while management focused on selling repossessed collateral properties and reducing company debt. We outsourced portfolio management to Genesis Finance Corporation, a company owned and controlled by Mike Kirk, a former executive officer and director of Genesis Financial, Inc.
Since January 1, 2011 the Company has operated with one part time paid employee and outsourcing the portfolio management in exchange for office expenses incurred by Genesis Finance Corporation.
INVESTMENT POLICIES. We purchase seller financed real estate loans, originate commercial real estate loans, and pursue other forms of cash flow instruments that make sense. The real estate loans that we purchase are primarily in the sub-prime market, and may be secured by residential property, commercial property, and/or unimproved land. We will look at each individual loan as a unique opportunity. The principal balance of loans or interests in loans that we purchase is generally discounted to provide us with a target return of 12 - 15% interest per annum or more and will be secured by real properties. We will evaluate the adequacy of the underlying real property value which will serve as collateral for our purchase on a case by case basis.
This evaluation may include reviewing a property's title report, the loan documentation including payment histories and credit information, when available. We may conduct a physical inspection and may obtain an appraisal of the property's value. The primary factor utilized in the purchase of a seller financed real estate loan is the ratio between the property value and the investment amount that we pay the seller. Based on these factors, we will purchase the loan at a discount to the principal balance. It is management’s intent to hold loans for less than a year but due to the economic circumstances, loans many be held for longer periods.
In regard to our commercial lending, GFI focused on "hard money lending" which was typically a short term loan collateralized with non-conforming types of real property with a borrower who may have a compromised credit rating. GFI followed two general underwriting principles in its "hard money" lending, (1) only make a loan if you want to own the collateral and (2) never lend an amount of money which might exceed the price you would be willing to pay for the collateral as a purchaser. Hard money loans are normally equity based, not credit based. GFI originally targeted a 50% maximum loan-to-value ratio.
HISTORICAL INVESTMENT RETURNS. During the past four years our investment returns have been negative when factoring in the non-performing delinquent loans and real estate owned (“REO”: real estate acquired through a loan foreclosure). Until we are able to sell the REO's we will not be able to determine the actual rates of return. In some geographic regions real estate market values have flattened, or have begun to rise, but in most areas values continue to deflate and sales of REO's remains weak.
MARKETING. We will undertake to maintain our marketing presence through contacts, individual and corporate, made over the previous eleven years.
PRODUCTS. We invest in seller financed real estate loans, originate commercial real estate loans, and pursue other forms of cash flow instruments which we believe will support our investment guidelines.
We may purchase longer term loans (three to five year terms) with the intent to hold until maturity. We may also purchase long term loans or properties with the intent to hold for resale in the future. Should the secondary institutional markets open back up, we may also pursue sales into those markets.
BROKERED LOAN AND REFERRAL FEES. From time to time, we will be presented with residential and commercial financing requests that do not conform to our current investment policies. In these cases, we refer them to other financing sources which may fund the transaction. In such cases, we may earn referral or finder’s fees for simply referring the prospective transaction. In some cases, we may agree to prepare purchase documents and close the transaction in a "simultaneous closing" in which the funding source remits the purchase funds to the closing agent and pays us the referral fee that we earned on the transaction.
OTHER TYPES OF RESIDENTIAL REAL ESTATE LOANS. In most instances, our purchases of seller financed real estate loans involve the purchase of the entire loan balance. In some instances, this method may be modified in various ways to increase our return and/or mitigate our risk.
NON-REAL ESTATE CASH FLOWS. There are a number of cash flow products available to purchase which are not secured by real estate but are paid by credit worthy payors (e.g. annual lottery payments paid by state governments, structured settlements payable by large companies, insurance company annuities paid over time, etc.). Lucrative yields can be earned by purchasing these types of products. The secondary market for these products has been very limited in past years. However, the exodus of investors from the real estate markets has caused these products to become highly desirable, but this elevated competitive interest has driven profitability margins to such a low level that GFI cannot be competitive as a funder. GFI may take advantage of opportunities to broker such products on a case-by-case basis.
INTEREST ONLY AND BALLOON PAYMENT LOANS. From time to time, GFI may purchase loans calling for “interest only” payments for a stated number of installment periods. Interest only loans may be subject to greater degrees of risk than loans requiring principal and interest payments because the borrower in an interest only contract is not demonstrating a present ability to repay the principal. Similar risks exist in loans with balloon payment obligations. While the risk associated with investment in these types of loans may be higher, GFI believes that it is in a position to control the risk through the underwriting process. When higher risk loans are proposed, our underwriter will adjust pricing or review the collateral position to assess the repayment and collateral value risks. GFI is primarily a collateral based lender, so this type of risk assessment on interest only or balloon payment loans is very similar to the risk assessment undertaken on other seller financed real estate loans and with commercial real estate loans. In many instances, GFI may not have access to borrower credit reports, payment histories or other forms of information available to traditional lenders.
These loans were created through the sale of real estate property between private parties, where the property seller provides the sale financing, rather than the buyer acquiring financing through conventional channels. At some point in time, after the property sale, the seller then decides to sell the loan. The differences in this type of loan from a conventional loan in the secondary markets are:
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there is no standardization of documentation; these loans could be secured by a Note and Deed of Trust, Note and Mortgage, or a Real Estate Contract prepared by the seller or his/her attorney.
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there is no buyer credit qualifying documentation, as the seller normally did not require any at the time of sale.
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there is no appraisal, or other property information that would substantiate the sales price, because the buyer normally would not have required that information at the time of sale.
·
there is no payment history showing buyer performance, unless the seller has a third-party servicer collecting the payments.
By placing a higher degree of reliance on the collateral offered, the underwriters are able to match the pricing of the transaction and the targeted return with the risk of non-payment. In general, interest only loans will result in a lower loan to value percentage than comparable loans with principal and interest amortization schedules. In present market conditions, loans with balloon payments are viewed as very high risk if the balloon is due within a couple years, as the availability of refinancing is very limited, and many properties have mortgage debt exceeding the present value of the property securing the debt.
SUBMITTING BROKER’S QUALIFICATIONS. GFI will be very selective in choosing the brokers from whom it will accept real estate loan submissions. Due to limited personnel resources, and the volatile real estate values, GFI will not accept submissions from unknown or inexperienced brokers. Loan packages must be complete and accurate, and take into account present market conditions and property values. In our opinion, only experienced brokers are capable and reliable for meeting our investment policies. We use brokers who specialize in our type of contract loan products.
COMMERCIAL REAL ESTATE LENDING. GFI was a small scale commercial real estate lender prior to 2004, supplementing the Company’s seller financed loan acquisitions business. In the latter part of 2004, due to the competitiveness of the seller financed loan market, management decided to expand the Company’s efforts in the commercial lending market. Our broker network supplied us with potential borrowers. Since the management and staff of GFI had considerable previous experience with commercial lending, it was a natural and comfortable adjustment. As with any business venture, the Company looked throughout the commercial lending industry for a “niche”. We determined that GFI was best suited to do “Hard Money” commercial lending. Hard money lenders focus on those loans which are usually smaller in size, shorter terms (more of an interim financing), often collateralized by non-conforming property types, or the borrowers do not qualify for conventional financing due to credit history problems. Typically, hard money loans command a higher interest rate providing a smaller, high cost-of-funds lender like GFI with the opportunity to earn a favorable return on investment.
Although hard money loans carry a higher degree of risk due to the non-conforming nature of the loans, that risk is partially offset with the lower loan-to-value ratios, which seldom exceed 60%, providing a collateral cushion for the lender if the property were to be repossessed and resold. Throughout 2008, as real estate values throughout the nation continued to decline, it became apparent that loan to value ratios as low as even 50% - 60% were insufficient to provide that cushion for the lender, because values had dropped in some geographic areas as much as 50% - 70%. As of December 31, 2012 it appears that the market has stabilized.
COMPETITION. When GFI formally entered the hard money markets in the latter half of 2004, the market was very competitive and fragmented. Most hard money lenders operated on a local basis limiting their lending to borrowers and collateral properties located a short distance from their base of operations. They also marketed only to the retail market, ignoring brokers and dealing directly with the borrowers.
Beginning in late 2007, we noticed that some of the commercial lenders were cutting back and tightening their lending parameters. Some were even exiting the business, or closing operations due to high delinquencies and repossessions. By the end of 2010, a large percentage of the lenders had exited the business or suspended operations, and virtually every remaining commercial real estate lender had severely tightened their parameters. The Company expects this trend to continue.
MARKET ANALYSIS. The hard money market was quite strong in 2004, at the time of the Company’s increased focus in making these loans, and continued that way throughout 2006. Frequent foreclosure litigation and collateral repossessions are an expected part of the hard money industry, in contrast to the conventional markets. With the exception of those few transactions with unusual circumstances affecting the outcome, most problem loans were eventual settled and the Company experienced a loss.
In 2007, the Company started to experience increased delinquencies, primarily due to a slow-down in the borrower’s business, resulting in reduced cash flows. The prior workouts that resulted in a payoff before repossession declined dramatically. This appeared to be due to the fact that the borrowers could not refinance their collateral properties, nor could they sell their properties to pay off the loan. This resulted in more repossessions, and the Company learned that it could not sell those repossessed properties as easily or for their appraised values.
From December 31, 2007 through December 31, 2010 the real estate markets throughout the country were experiencing dramatic down-turns in values, and at the same time the lending markets were tightening up making refinancing very difficult, regardless of the property type. The Company was experiencing increasing delinquencies resulting in increased foreclosure litigation expense and eventual collateral repossession. In several cases, it was apparent that the value of the collateral had dropped below the principal loan balance which indicated the potential for significant future financial losses. The Company is currently concentrating on the collection and liquidation of prior loans and real estate and is making few new loans.
On January 1, 2009, management decided to make some major adjustments to the Company’s business plans. These adjustments included: overhead expense reduction by outsourcing the day-to-day operations of the Company, focus on reducing the Company’s debt through a restructuring of terms with our credit facilitators, to pursue the sale of Company assets, to continue acquisitions and originations only on pre-sold loans, focus on managing delinquent accounts through increased collection activity and workouts, increase the focus on maintenance and resale of REO assets, and diversify asset acquisitions into non-real estate assets.
As of January 1, 2011, the Company had down-sized enough to manage a sizable portion of its own affairs and renegotiated its outsourcing agreement with Genesis Finance Corporation by lowering the monthly fee. As of January 1, 2012 the monthly fee was terminated and the outsourcing services were offset by general office expenses paid by the Company on behalf of Genesis Finance Corporation, a company owned by Michael A. Kirk, an affiliate of Genesis Financial, Inc. On January 1, 2011, GFI hired one employee, Virginia Walters, to manage its affairs going forward.
As a result of the poor economic conditions and declining real estate values, GFI was compelled to seek out additional avenues to build shareholder value. Management believed that investments in local startup companies could prove to be a good investment for the Company and provide an avenue of diversification.
As part of the diversification plan the Company invested a portion of its assets in privately held companies as follows:
Flyback Energy, Inc.:
On November 23, 2010, the Company closed the purchase of an equity interest in Flyback Energy, Inc. (FEI), for $1,200,000. The purchase was for 2,666,667 shares of Series “B” Preferred Stock from Flyback Energy, Inc., a closely held Washington corporation payable on an installment basis. On April 25, 2011, the Company purchased 85,274 shares of Series “C” Preferred Stock for $50,000 which is convertible at $0.60 per share 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. The Company is due 421,480 shares of common stock because of the dilution provision.
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.
The founders of Flyback Energy, Inc. have solved an electromagnetic energy loss problem. They focused their research on totally controlling the rise and collapse of magnetic fields present in inductive circuits, equipment and processes. After years of methodical experimentation, the Flyback team has created and patented practical breakthrough magnetic energy recovery (MER) technology.
With this patented technology, Flyback Energy is actively developing reliable products to capture and recover magnetic energy losses and then insert that otherwise wasted energy back into the power circuit. The Flyback technology also mitigates problematic harmonic resonance, electromagnetic interference (EMI), excessive heat and other induction issues.
This technology provides control of induction and resistive devices, and power conversion processes between AC and DC electrical systems. Flyback solutions result in lower energy cost, cooler operating temperatures and longer useful life for lighting system components, transformers, motors and controllers.
Flyback’s Magnetic Energy Recovery technology creates value across a wide range of electromagnetic applications. Most electrical input supply can be cost effectively switched and controlled, including such traditional sources as AC grid power, fuel-fired and hydro-generated power, and DC sources such as solar cells, wind generation and battery arrays. Flyback is currently developing products to serve a special purpose - where energy savings and high electrical efficiency are valued.
Genesis Financial, Inc. reduced the carrying value of its Flyback Energy common shares to $0.067 per share, the last known arm’s length common share sale. Flyback Energy, Inc. is still a development stage company being financed by outside sources of capital. At this time, we believe the Flyback has some financing capital to develop certain defined products.
Digi Outdoor Media, Inc.
In 2014, the Company loaned Placer Creek Mining Company (“Placer”) $150,000. The loan interest rate was 5.0% and the Company has an option to convert any or all of the amount due into an equity private placement of Placer. The Placer transaction was a related party transaction. (see Note 11: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 and has had no recent cash sale of its common stock.
Digi Outdoor Media, Inc. is a startup company in the business of building and leasing outdoor advertising signs.
On December 31, 2017, the Company due to legal action concerning Digi Outdoor Media booked an impairment charge of $150,000 to reduce the carrying value to $-0-.
Ambient Water Corporation (Formerly AWG International Water Corp.):
The Ambient Water Corporation is located in Spokane, Washington. In 2010 and 2011, the Company purchased a total of 7,380,433 common shares of the Ambient Water Corporation common stock for $500,000, at that time the purchase represented approximately 10% of the total outstanding shares.
On May 19, 2016, by board action, the Company sold its interest in Ambient Water Corporation to John R. Coghlan (see Note 11) for $0.0003 per share, the fair value of the stock on the day of sale, $2,213, resulting in a recognized loss of $497,787.
Rental Properties:
At the end of 2013, the Company foreclosed a $85,534 loan held for sale in Lebanon, Oregon through the bankruptcy courts, the property is currently being operated as Duffy’s Bar. The bar was subsequently leased on a three (3) year lease agreement for $1500 per month, with the tenant paying all utilities and insurance. During the years ended December 31, 2016 and 2017, the company recognized $18,000 and $3,000 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 $2,143 and $-0- for the years ended December 31, 2016 and 2017. On March 8, 2017, by board action, the Company sold this property to Coghlan Family Corporation for $77,585, resulting in a gain on sale of $342.
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 year ended December 31, 2016 and 2017 the company recognized $2,175 and $8,925 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. This is a commercial building being depreciated over thirty-nine (39) years. The Company recorded depreciation of $692 and $577 for the year ended December 31, 2016 and 2017. On July 17, 2017, by board action, the Company sold this property to Coghlan Family Corporation for $30,000, resulting in a loss of ($17,670).
Real Estate Leasehold Interest:
Halliday, North Dakota: During 2013 the Company completed the acquisition of a real property leasehold interest that consists of approximately 63 acres in the city of Halliday, 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. Presently, the property consists of fifty (50) residential type lots. The monthly rent on the lease is Fifty ($50.00) Dollars for each occupied and rented trailer, cabin or lot. The Company is obligated to pay any and all real and personal property taxes, general taxes, special assessments and other charges levied against the property and its improvements. During the lease term, the Company will own title to all of the improvements and personal property. At the expiration of the lease or termination, all improvements and personal property located on the premises will revert to the Lessors.
Limited Liability Corporations:
In 2013, the Company formed Hermiston 353, LLC to hold real property interests resulting from a loan foreclosure with multiple note interest holders of which Genesis holds a 13.1% interest valued at $54,691 as of December 31, 2017. In 2014, the Company formed North Edwards 435, LLC, another REO purposed entity to hold the real property interests resulting from a loan foreclosure with multiple note interest holders. The Company's interest in North Edwards is 31.95% valued at $48,894 as of December 31, 2017. The LLC’s are passive investments which each hold a single real estate REO property for sale.
DEFAULT PROCEDURES. Loans will be sold after short holding periods and defaults going forward are expected to be minimal. Some defaults will occur, however and we will take steps after we become aware of the default to protect our interests. GFI operates under the policy that any loan payment over 90 days delinquent is a loan default. In a default situation, we will pursue one or more of the following alternatives: discussion with the submitting broker, if any, concerning ways to remedy the default; an offer to re-write or modify the loan for the borrower/buyer as a means to cure the default, provided good evidence is available that the modification will be honored by the borrower/buyer; sale of the loan with the delinquency disclosed (possibly at a loss); acceptance of a property deed in lieu of foreclosure; and/or foreclosure and REO property sale.
SECONDARY MARKET RESALES
OVERVIEW. Since inception, GFI has purchased loans and originated loans with the goal of resale to various secondary market and private investors. GFI attempts to resell the loans as soon as possible with a view toward optimizing gains on resale. With the elimination of the secondary market and the participating secondary market buyers, the primary buyers have been accredited private investors. The Company feels that these conditions will continue for the foreseeable future, but will continue to monitor the financial markets. We will continue to establish new relationships with any secondary market buyers as they become available.
GOVERNMENTAL REGULATION
Commercial real estate lending does not require special licensing and is not subject to governmental regulation. GFI does not originate residential loans and therefore is not subject to governmental regulation as a lender, bank, mortgage broker, or other regulated financial institution. Our business focuses on transactions that are not subject to governmental regulation and we intend to maintain this business focus for the foreseeable future.
EMPLOYEES
As of December 31, 2017 the Company had one part-time employee Virginia Walters.
REPORTS TO SECURITY HOLDERS. The Company voluntarily files periodic reports with the United States Securities and Exchange Commission in accordance with the requirements of Section 15(d) of the Securities Exchange Act of 1934. The Company files quarterly reports on Form 10-Q, annual reports on Form 10-K and current reports on Form 8-K. The Company is currently classified as a Smaller Reporting Company under applicable SEC regulations.
Copies of all materials that we file with the SEC may be inspected and read without charge at the Public Reference Room of the SEC, 100 “F” Street NE, Washington, D.C. 20549. Interested persons may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Copies of this material may be obtained at prescribed rates from the Public Reference Section of the Commission at 100 “F” Street NE, Washington, DC. 20549. The Securities and Exchange Commission also maintains a Web site (http://www.sec.gov) through which the information we file with the SEC can be retrieved.
ITEM 1A.
ITEM 1A. Risk Factors
Not applicable to Smaller Reporting Companies.
ITEM 1B.
ITEM 3. Legal Proceedings
Presently, we are not subject to any material legal proceedings which might have an adverse impact on our financial statements. In the normal course of business, the Company is the initiator of legal proceedings associated with judicial real estate foreclosures and title insurance matters related to our loan portfolio collateral interests.
ITEM 4.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5.
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market For Registrant's Common Equity And Related Stockholder Matters
Our common stock is quoted on the OTC Markets QB under the stock symbol GNFL. The following table sets forth the high and low bid prices of our “post-split” common stock for the quarters ending December 31, 2016 and 2017 and interim periods. The quotations set forth below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Table No. 1
Quarter Ended:
Fiscal 2016
High
Low
March 31
$5.80
$2.60
June 30
$4.00
$3.00
September 30
$3.01
$2.00
December 31
$3.60
$3.60
Fiscal 2017
High
Low
March 31
$2.40
$1.60
June 30
$2.00
$1.40
September 30
$3.40
$1.50
December 31
$4.00
$2.80
During the fourth quarter of 2017, the Company implemented a twenty for one (20:1) reverse stock split resulting in a higher share prices. The market prices reported above have be adjusted to give retroactive effect to the reverse split.
(a) Holders
As of December 31, 2017 our company had approximately 133 shareholders of record of its common stock holding 879,763 common shares.
(b) Dividends
There are no restrictions imposed on the Company, which limit its ability to declare or pay dividends on its common stock, except for corporate state law limitations. No cash dividends have been declared or paid to date and none are expected to be paid in the foreseeable future.
(c) Recent Sales of Unregistered Securities.
During the fourth quarter the Company did not offer or sell any equity securities.
(d) Securities Authorized for Issuance under Equity Compensation Plans
Equity Compensation Plan Information
None
ITEM 6.
ITEM 6. Selected Financial Data
Smaller Reporting Companies are not required to provide this data.
ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial information included elsewhere in this Annual Report on Form 10-K.
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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K.
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. GFI has also invested in two private companies with a view toward diversifying its investment portfolio.
PLAN OF OPERATIONS
On September 8, 2017, Genesis Financial, Inc. (the "Company") entered into a Capital Stock Exchange Agreement (the “Exchange Agreement”) with EPOINT Payment Corp., a Delaware corporation ("EPOINT"). The anticipated target closing date is no later than February 15, 2018, or such earlier date as may be determined by the parties. During the first quarter of 2018, the Company will proceed to perform its obligations under the Exchange Agreement. For additional details please review the Exchange Agreement filed on our Current Report filed on September 11, 2017.
Following the acquisition of EPOINT and in accordance with the Exchange Agreement's provisions, the Company plans to immediately commence the disposal and discharge of its pre-acquisition assets and the majority of its liabilities. The combined companies will focus their business efforts on financial services delivering a range of products and services including but not limited to, micro credit advances, mobile phone device financing, money transfers, mobile wallet and prepaid debit cards, bill payments, mobile top up, check processing, insurance and travel.
RESULTS OF OPERATIONS
Revenues
Fiscal Year ended December 31, 2017 compared to year ended December 31, 2016.
During the years ended December 31, 2017 and 2016, the Company recognized revenues of $48,911 and $87,023, respectively, comprised of interest, processing fees, rental income and other revenues. The decrease in 2017 was due to decreased rental and interest income.
Revenues were not sufficient to support our operations. Net loss from operations for the years ended December 31, 2017 and 2016 were ($523,036) and ($660,031), respectively. The primary reasons for the losses were on the sale of rental property, fair value adjustments, and legal and auditing expenses related to public company reporting requirements.
At December 31, 2017 and 2016, loans held for sale totaled $306,109 and $347,755, respectively. The decrease in 2017 was due to loans being paid down and fair value adjustments.
Of the loans held for sale at December 31, 2017 and 2016, 50% and 52% of loans, respectively, were in default. The default loan balance values were $159,292, at December 31, 2017 and $180,912, at December 31, 2016. At December 31, 2017 one of the six loans in default is the subject of a judicial proceeding where the Company seeks to foreclose upon the real property securing the defaulted loans.
At December 31, 2017 and 2016, real estate owned (REO) totaled $-0- and $14,999, respectively. The decrease in REO is the result of the sale of all of the REO properties. These properties were sold to Coghlan Family Corporation a related party (see Note 11).
In 2016 we foreclosed one commercial property and subsequently leased it on a two-year lease at $1,200 per month with granting the lessee an option to purchase the premises for $45,000. In 2017 we did not complete any loan foreclosures.
Generally in each instance of payment default, it is GFI’s policy to stop accruing interest income when delinquency status is reached. GFI also performs a review of the adequacy of collateral on each default and records a write-down to market value if the collateral value is less than the loan’s principal balance on an aggregate basis by loan type. For this purpose, GFI categorizes loans as residential, commercial, land, and other.
General and Administrative Expenses
General and administrative expenses (“G&A”) for fiscal years ended December 31, 2017 and 2016 were $225,567 and $228,912, respectively. G&A primarily consists of executive compensation, rent and professional fees for legal, accounting and public relations, utilities, depreciation and maintenance. The year over year increases and (decreases) for the fiscal years ended December 31, 2017 and 2016 were ($3,345) and $19,109, respectively. The primary reasons for the changes were as follows:
Fiscal year ended
December 31,
Increase
(decrease)
Primary reasons for change
($ 3,345)
Decrease due to reduction of depreciation and amortization expense
$ 19,109
Increase due to Insurance and Public Company expense
Interest Expense
For the years December 31, 2017 and 2016, interest expense amounted to $28,512 and $26,547, respectively. The reason for the increase in interest expense is due to borrowing from the RiverBank line of credit and the new loan with Coghlan Family Corporation.
Interest expense was associated with our lines of credit with (1) RiverBank, an unaffiliated lender, (2) our line of credit with Coghlan Family Corporation, a related party and (3) note payable to Coghlan Family Corporation, a related party.
Loan Portfolio Composition
For the years ended December 31, 2013 through 2017, the loan portfolio of purchased, sold and originated is as follows.
Table No. 3
Loan Types Purchased, Sold and Originated
Residential
Commercial
Land
Other
Originated
-
$0
$100,000
$10,400
$378,857
Purchased
-
$0
-
$0
-
$0
-
$0
Sold
$52,221
$288,368
-
$0
$408,857
Residential
Commercial
Land
Other
Originated
-
$0
-
$0
-
$0
-
$0
Purchased
-
$0
-
$0
-
$0
-
$0
Sold
$31,205
$239,437
$50,278
-
$0
Residential
Commercial
Land
Other
Originated
-
$0
-
$0
$15,000
$10,000
Purchased
-
$0
-
$0
-
$0
-
$0
Sold
$43,725
-
$0
$25,337
-
$0
Residential
Commercial
Land
Other
Originated
$40,000
-
$0
-
$0
$31,366
Purchased
-
$0
$134,714
-
$0
-
$0
Sold
$55,251
-
$0
-
$0
-
$0
Residential
Commercial
Land
Other
Originated
-
$0
-
$0
-
$0
-
$0
Purchased
-
$0
-
$0
-
$0
-
$0
Sold
-
$0
$5,440
$13,700
-
$0
LIQUIDITY AND CAPITAL RESOURCES
The Company’s principal sources of cash have been from loan sales, related party loans, unaffiliated party loans, funding agreements, rental and lease agreements and common and preferred stock private placements. The Company anticipates that its primary uses of cash will be adequate in order to meet the demands upon its current operations, and there will not be a need for additional funds to finance ongoing acquisitions of seller financed real estate loans and originations of commercial real estate hard money loans, and the expense of loan foreclosure and the maintenance and resale costs associated with REO properties.
At December 31, 2017 and December 31, 2016, we had cash available of $5,215 and $10,639, respectively, and $55,000 and $70,000, respectively was available under our bank line of credit for the same periods. Management considers the capital resources to be adequate to meet the current operating needs of the Company for the next twelve months.
GFI is currently operating under a primary $250,000 line of credit with Riverbank, an unaffiliated lender, with an variable interest rate of 5.50%. The line of credit also included a one-half percent origination fee. Coghlan Family Corporation advanced GFI $175,441.43 and discharged the Riverbank loan on February 1, 2018.
At December 31, 2017, the Company had a $2,500,000 Line of Credit Agreement with the Coghlan Family Corporation (“CFC”) with a balance of $930,000. CFC is an affiliated company controlled by an officer, director and principal beneficial shareholder of the Company. Originally, 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 GFI’s assets but is subordinate to the RiverBank line of credit loan agreement. 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. (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 2,500 “post-split” shares of its common stock valued at $5,000 as a loan renewal fee. Effective July 1, 2017, CFC has waived the interest and commitment fee.
In 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.
On November 13, 2017, the Company entered into a Promissory Note Loan Agreement with Coghlan Family Corporation, a related party (the "Lender"). The Loan Agreement is essentially a revolving line of credit with an initial advance of $25,000 with subsequent advances as requested by the Company. This indebtedness will survive the proposed Epoint Payment Corp. acquisition transaction. The loan bears interest at the rate of 6.0% interest and is due and payable on, or before May 15, 2018. As an inducement to the Lender, the Company agreed to grant one share of post-reverse split common stock for each $2.50 of aggregate principal amount loaned ("Bonus Shares"). The Bonus Shares are due at the loan's maturity date which is May 15, 2018. At December 31, 2017 the balance was $47,002.
Our capital resources have been adequate to fund our operations at a reasonable level during the year ended December 31, 2017 covered by this Annual Report. We have paid close attention to our loan portfolio and maintained our funding requirements within our available resources. We receive interest and principal reductions (typically monthly) on 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 increase revenue and create profitability.
For the years ending December 31, 2017 and 2016, our net cash flows used by operating activities were $140,973 and $167,827, respectively. The reason for decrease for the year ended December 31, 2017 was the sale rental properties.
For the period ended December 31, 2017 and 2016 the cash flows used by investing activities was $121,932 and $138,814, respectively. The reason for the decrease in 2017 compared to 2016 was the Company sold fewer assets in 2017.
For the years ending December 31, 2017 and 2016, our net cash provided by financing activities was $13,617 and $8,351, respectively. The reason for the increase for the period ended December 31, 2017 resulted from borrowing under a new loan payable.
We consider the terms of the lines of credit to be acceptable. As of December 31, 2017 and 2016, the total combined balances on the lines of credit were and $1,125,000 and $1,130,000, respectively. Interest expense on the lines of credit will fluctuate in future periods with loan reductions. The changes for the lines of credit for the years December 31, 2017 and 2016, were ($5,000) and ($300,000), respectively.
On December 15, 2010, the Company entered into a convertible note agreement with John R. Coghlan. The note accrues interest at 8% per annum with interest and balance due on December 15, 2012. The note is convertible at any time by Mr. Coghlan into one (1) share of the Company’s Series “B” Preferred Stock for every $1.00 Dollar outstanding of the note payable and related accrued interest. In connection with the issuance of this note, the Company recognized a beneficial conversion feature of $128,750 that resulted in a discount to the note payable. The discount is being amortized into earnings over the term of the note. The note is collateralized by 14,500 “post-split” shares of the Company’s Series “B” Preferred Stock. The beneficial conversion feature was based upon the difference between the fair value of the preferred stock into which the note is convertible at the date of issue ($378,750) less the face value of the note ($250,000). The fair value of the preferred stock at the date of issue was calculated based upon the fair value of the shares of common stock (2.5 shares of common stock for each single share of preferred stock or 31,250 “post-split” shares) into which the preferred stock was convertible at the date of issue. 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 12,500 “post-split” shares of Series "B", or 31,250 “post-split” shares of common stock equivalents, at the option of Mr. Coghlan. However, Mr. Coghlan agreed to accept 36,250 “post-split” common shares in lieu of full payment. The 5,000 additional “post-split” common shares represents a financing cost to the Company and as such, financing expense of $29,000 was recognized. (See 8-K filed February 8, 2016)
As discussed in detail in Item 13 concerning related party transactions, we entered into a variety of business transactions with John R. Coghlan, Coghlan Family Corporation, Coghlan, LLC, West 3773 Fifth, LLC and Genesis Finance Corporation. These transactions served two distinct and different cash generating business purposes. As a part of the Company's operations, it had sold loan interests from time to time to investors. Historically, Coghlan, LLC and Coghlan Family Corporation have acted as investors by purchasing loans from the Company. We believe that these loan sale transactions have been and will be offered to other investors in arms-length type transactions. Generally, all transactions between the Company and John Coghlan related parties represent transactions designed to generate liquidity for the Company's business operations including note payments to Riverbank. In the case of these Coghlan related transactions, prior to 2017, Michael Kirk had been solely responsible for setting the transaction values. In 2017, the board of directors performed this function.
The Company’s principal sources of cash are from loan sales, related party loans, unaffiliated third party loans, funding agreements, rental and lease agreements and common and preferred stock private placements. The Company anticipates that our primary sources of cash are adequate in order to meet the demands upon its current operations, as well as funds to finance ongoing acquisitions of seller financed real estate loans, the originations of commercial real estate hard money loans, the expense of litigating the delinquent loans and the maintenance and resale costs of repossessed properties.
The following table presents cash flow data for the periods indicated.
CASH FLOW DATA:
Net cash used by operating activities
$
(140,973)
$
(167,827)
Net cash provided by (used in) investing activities
$
121,932
$
138,814
Net cash provided by (used in) financing activities
$
13,617
$
8,351
The primary reasons for the changes in cash provided by (used in) operating activities were as follows:
Fiscal year
ended
December 31,
Increase
(decrease)
Primary reason for change
$ 26,854
Prior year impairment and loss on sales of real estate owned and rental property.
$ (150,903)
Impairment of available for sale security and loss on real estate limited liability company.
The primary reasons for the changes in cash provided by (used in) investing activities were as follows:
Fiscal year
ended
December 31,
Increase
(decrease)
Primary reason for change
$ (16,882)
Sale of rental property and real estate owned.
$ 212,075
Sale or transfer of our interest in limited liability companies.
The primary reasons for the changes in cash provided by (used in) financing activities were as follows:
Fiscal year
ended
December 31,
Increase
(decrease)
Primary reason for change
$ (5,266)
New loan payable and loan fees
$ 48,642
Decrease in credit line borrowing
Our capital resources have occasionally been strained, but were adequate to support our operations at a reasonable level during the fiscal year covered by this Annual Report. We have paid close attention to our loan portfolio and have managed our cash flow within our available financial resources. We were able to control our funding rate by adjusting our pricing, tightening our underwriting, and/or discontinuing certain product lines. The strains on our capital have been largely caused by increased foreclosure litigation expenses, as well as increased repossession maintenance, holding and resale costs, coupled with lower resale values. We received interest and principal reductions (typically monthly) on loans pending sale, and the interest rate spread between the cost of our lines of credit, or the participation sales to private investors, and our weighted average contract yield provided operating capital which sustained our operations during the reported periods. We would require an increase in cash, and an improvement in the real estate markets, in order to grow the company, and create profitability. Until such time as that happens, we believe that cash utilized to grow our asset base will continue to decline in both size and value, and capital resources will remain strained.
OFF-BALANCE SHEET ARRANGEMENTS.
The Company has no off-balance sheet arrangements.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS.
Please see Note 1 of our consolidated financial statements that describes the impact, if any, from the adoption of Recent Accounting Pronouncements.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable to small reporting companies.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data.
802 N Washington
Spokane, WA 99201
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Genesis Financial, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Genesis Financial, Inc. (the Company) as of December 31, 2017, and the related statements of operations and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for the year ended December 31, 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Fruci & Associates II, PLLC
We have served as the Company’s auditor since 2017.
Spokane, WA
February 14, 2018
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to 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, equity funds and funds generated from external borrowings including a line of credit facility from a related party.
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, investments in limited liability companies, stock based compensation, long-term investments and allowance for net operating losses. 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.
Cash and cash equivalents - Cash and cash equivalents consist of demand deposits, including interest-bearing accounts, held in a local bank. The Company maintains cash balances in various depository institutions that periodically exceed federally insured limits. Management periodically evaluates the creditworthiness of such institutions. The Company considers all highly liquid investments purchased, with an original maturity of three months or less, to be a cash equivalent.
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.
Genesis Financial, Inc.
Notes to Financial Statements
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 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 value; write-downs are reflected in earnings. Factors affecting the determination of whether an other-than-temporary impairment has occurred include 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 investment 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 Company’s 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, company is consolidated with the presentation of non-controlling interest if material to the financial statements. Otherwise, the investment is presented similar to the equity method whereby the Company’s share of the underlying earnings and losses is included in the statement of operations. In determining whether significant influence exists, the Company considers its participation in policy-making decisions and its representation on the company’s 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 and rental properties - Leasehold interests in real estate and rental properties 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. Costs clearly associated with the development of the leasehold interest and rental properties are capitalized. Amortization expense is recognized over the term of the leasehold interest and over 39 years for rental properties. Income received on the interests and rental properties 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 (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.
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.
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.
Genesis Financial, Inc.
Notes to Financial Statements
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 and stock options unless such shares are deemed to be anti-dilutive. The dilutive effect of outstanding securities, in periods of future income, would be as follows as of December 31, 2017 and December 31, 2016:
Share-Based Compensation - The Company periodically issues common shares or options to purchase shares of the Company’s common shares to its officers, directors or other parties. These issuances are valued at fair value. The Company uses a Black Scholes valuation model for determining fair value of options, and compensation expense is recognized ratably over the vesting periods on a straight line basis. Compensation expenses for grants that vest upon issue are recognized in the period of grant.
New Accounting Pronouncements - Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers creates a new, principal-based revenue recognition framework that will affect nearly every revue-generating entity. The guidance in ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016. Management has not determined the effect, if any; this new standard will have on its financial statements.
Accounting Standard Update (ASU) 2016-02 Leases (Topic 842) modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Management has not determined the effect, if any; this new standard will have on its financial statements.
Accounting Standard Update (ASU) 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments provides guidance on classification for cash receipts and payments related to eight specific issues. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We do not expect this update to have a material impact on our financial statements.
Accounting Standard Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments changes how entities will measure and disclose credit losses for most financial assets and certain other instruments that are not measured at fair value through net income and replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information in determining credit loss estimates. ASU 2016-13 also requires enhanced disclosures. ASU 2016-13 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018. The Company is currently evaluating the potential effect of this ASU.
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:
December 31, 2017
December 31, 2016
Residential
$
79,425
$
120,912
Commercial
226,684
226,843
Other
-
Total
$
306,109
$
347,755
Genesis Financial, Inc.
Notes to Financial Statements
The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2017 and 2016:
NOTE 3- REAL ESTATE OWNED
The Company's fair value of REO consisted of the following:
December 31,
December 31, 2016
Land
$
-
$
14,999
Commercial
-
-
Total
$
-
$
14,999
The following table presents the change in balance sheet carrying values associated with REO for the years ended December 31, 2016 and 2015:
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 85,274 shares of Series “C” Preferred Stock for $50,000 which is convertible at $0.60 per share 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.
Genesis Financial, Inc.
Notes to Financial Statements
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.
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 charge of $1,037,381 based on the last known common share sale. Flyback Energy, Inc. is still a development stage company being financed by outside sources of capital.
Digi Outdoor Media, Inc.:
In 2014, the Company loaned Placer Creek Mining Company (“Placer”) $150,000. The loan interest rate was 5.0% and the Company has an option to convert any or all of the amount due into an equity private placement of Placer. The Placer transaction was a related party transaction. (see Note 11: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 and has had no recent cash sale of its common stock. The fair value was determined using Level 2 inputs under the fair value hierarchy.
On December 31, 2017, the Company due to legal action concerning Digi Outdoor Media booked an impairment charge of $150,000 to reduce the carrying value to $-0-.
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 11) for $0.0003 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, on behalf of itself and note interest holders, through collateralized loan foreclosures, acquired two real property interests, one in Pennsylvania and the other in Washington. The Company formed two Washington limited liability companies, 21 Bay Street, LLC and Wenatchee Riverview, LLC for the purpose of holding these multiple property interests. The Company's collective interests were valued at $225,000.
In 2013, the Company, on behalf of itself and note interest holders, through collateralized loan foreclosure, acquired a real property interest in Hermiston, Oregon. The Company formed Hermiston 353, LLC to hold the property. The Company's 12.9% interest was valued at $51,600.
In 2014, the Company, on behalf of itself and note interest holders, through collateralized loan foreclosure, acquired a real property interest in Pennsylvania. The Company formed Tioga, LLC to hold the property. The Company's 31.95% interest was valued at $47,925.
These companies are 100% controlled and managed by John Coghlan, related party. (see Note 11)
The investments are accounted for using the equity method. During the years ended December 31, 2017 and 2016, the Company recorded loss (income) of $6,149 and ($271,238), respectively, which represent realized sales of interest and its portion of the real estate company’s loss (income) for the same periods. During the years ended December 31, 2017 and 2016, the Company advanced $4,793 and $37,626 for property taxes and interest owing on the underlying real estate owned by these limited liability companies.
Genesis Financial, Inc.
Notes to Financial Statements
During the year ended December 31, 2016, Wenatchee Riverview, LLC 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 11) for $300,000, resulting in a gain on sale of real estate limited liability company of $131,417. 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 Properties:
At the end of 2013, the Company foreclosed on a loan previously held for sale in Lebanon, Oregon through the bankruptcy courts, and is accounting for the company’s carrying value of $85,534 as a rental property. The property, being operated as Duffy's Bar, was subsequently leased on a three year lease agreement for $1,500 per month. During the years ended December 31, 2017 and 2016, the company recognized $3,000 and $18,000 per year in rental income. This is a commercial building being depreciated over thirty-nine (39) years. For the years ended December 31, 2017 and 2016, the company recorded depreciation of $-0- and $2,143. On March 8, 2017, by board action the Company sold this property to Coghlan Family Corporation (see Note 11) for $77,585, resulting in a gain on sale of $342. The purpose of the sale was to generate working capital for the Company.
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 India restaurant. The property was placed into real estate owned during the quarter 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 less a $400 monthly credit toward the option price. During the year ended December 31, 2017 and 2016 the company recognized $8,925 and $2,175 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. In July the Company sent out a notice of default and decided to sell the interest to a related party. On July 17, 2017, by board action, the Company sold a commercial rental property to Coghlan Family Corporation (see Note 11) for $30,000 resulting in a loss of ($17,670), respectively.
Real Estate Leasehold Interest:
On May 31, 2013, the Company completed the acquisition of a real property leasehold interest in approximately 63 acres with fifty (50) RV/residential lots located in Dunn County, North Dakota, (the "Halliday Project"). Total consideration for the leasehold interest was $619,250. The Company may place recreational vehicles, mobile homes, or construct cabins on the lots and offer them for rent or lease. In 2015 the Company purchased two travel trailers for $30,000 from JC Housing, LLC, a related party (see Note 11). The Company recorded amortization of $-0- and $20,642 for the years ended December 31, 2017 and 2016, respectively. The Company had 0 and 13 lots leased and had rental income of $-0- and $7,325 the years ended December 31, 2017 and 2016, respectively.
The lease consists of approximately 63 acres in the city of Halliday, North Dakota. The lease term is fifteen years and commenced on September 15, 2012. The Company has an option to renew the lease for an additional fifteen year term. The monthly rent on the lease is Fifty ($50.00) Dollars for each occupied and rented trailer, cabin or lot. The Company is obligated to pay any and all real and personal property taxes, general taxes, special assessments and other charges levied against the property and its improvements. During the lease term, the Company will own title to all of the improvements and personal property. At the expiration of the lease or termination, all improvements and personal property located on the premises will revert to the Lessors.
At December 31, 2017, the Company decided to adjust the carrying value of the property to a fair value estimated of $93,000, based on management’s estimate of discounted cash flows received from the property.
NOTE 5 - LINES OF CREDIT
GFI has renewed a $250,000 line of credit with Riverbank. At December 31, 2017 and 2016 the balance owing is $195,000 and $180,000, respectively. The line of credit had a term of twelve months, and an origination fee of 1/2%, or $1,250. Accrued interest is paid monthly. The Riverbank line of credit is senior to the Coghlan Family Corporation, Inc. (“CFC”) line of credit and is collateralized by the assets of GFI. On December 7, 2016 the line of credit was extended to February 1, 2018, 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. At December 31, 2017 the interest rate was 5.50%. The Riverbank line prohibits the CFC line from being paid down below the amount owed to Riverbank during the loan term. The line is payable on demand and is personally guaranteed by John R. and Wendy B. 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 December 31, 2017 and December 31, 2016 the balance owing was $930,000 and $950,000, respectively. CFC is an affiliated company controlled by John R. Coghlan and Wendy B. 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. 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.
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. In addition, the Company issued 50,000 shares of its common stock valued at $5,000 as a loan renewal fee. Effective July 1, 2017 CFC agreed to waive the interest and origination fees until December 31, 2017, or earlier if the Epoint Capital Stock Exchange Agreement fails to close.
In 2016, the Company, by board action authorization, exchanged two assets for a $310,000 principal reduction in the CFC Warehouse Line of Credit. The Company (1) exchanged a loan held for sale with a cost basis of $10,000 and (2) exchanged its 9.1756% interest in a limited liability company valued at $300,000.
For the year ended December 31, 2017 and December 31, 2016 the Company had issued 9,717 shares and 6,339 shares, respectively, of the Company common stock for a value of $18,219 and $15,407 in interest, respectively.
NOTE 6 - NOTES PAYABLE
Convertible Note Payable to Officer:
On December 15, 2010, the Company entered into a convertible note agreement for $250,000 with John R. Coghlan, a related party (see Note 11). The note accrued interest at eight (8%) percent per annum with interest and balance initially due on December 15, 2012. The note was 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. The note was collateralized by 14,500 shares of the Company’s Series “B” Preferred stock. On October 16, 2012, the Company and Coghlan agreed to extend the due date of the note to December 15, 2016.
On February 8, 2016, Mr. Coghlan elected to convert his note into shares of the Company’s common stock. The note was originally convertible into 12,500 “post-split” shares of Series "B", or 31,250 “post-split” shares of common stock equivalents, at the option of Mr. Coghlan. However, Mr. Coghlan agreed to accept 36,250 “post-split” common shares in lieu of full payment. The 5,000 additional “post-split” common shares represents a financing cost to the Company and as such, financing expense of $29,000 was recognized for the year ended December 31, 2016. The value was calculated by using the market price on the date of conversion.
Note Payable:
In 2013, the Company assumed a note payable totaling $62,699 relating to a loan it had made in 2005. When the Company funded the loan in 2005, it sold 100% of its interest to various investors. During 2013, the Company began foreclosure proceedings on behalf of the investors because the borrower was delinquent on payments. During the proceedings, it was determined that the Company had failed to obtain first position in the underlying property and that a separate creditor was in first position. To uphold its agreement with the investors, the Company assumed the balance of the note with the creditor and recognized a loss for the entire amount in 2013. The term of the assumed note is 9.5% until paid in full and monthly payments are $832. On August 30, 2017, the Company paid the note in full. At December 31, 2016 and 2017, the balance owing was $28,385 and $-0-, respectively.
Note Payable, related party:
On November 13, 2017, the Company entered into a Promissory Note Loan Agreement with Coghlan Family Corporation, a related party (the "Lender"). The Loan Agreement is essentially a revolving line of credit with an initial advance of $25,000 with subsequent advances as requested by the Company. This indebtedness will survive the proposed Epoint Payment Corp. acquisition transaction. The loan bears interest at the rate of 6.0% interest and is due and payable on, or before May 15, 2018. As an inducement to the Lender, the Company agreed to grant one share of post-reverse split common stock for each $2.50 of aggregate principal amount loaned ("Bonus Shares"). The Bonus Shares are not due until the loan's maturity date which is May 15, 2018. At December 31, 2017 the balance was $47,002.
Genesis Financial, Inc.
Notes to Financial Statements
NOTE 7 - EQUITY
Series B Preferred Stock
On November 11, 2010 the Company filed Articles of Amendment to the Amended and Restated Articles of Incorporation creating 2,290,000 “pre-split” shares of Series B Preferred Stock. The designated Series B Preferred Stock consists of 2,290,000 “pre-split” shares with a par value $1.00; is non-dividend bearing, convertible to Common Stock at $.40 per share subject to any recapitalization. The holders of the Preferred Stock will be entitled to receive, prior and in preference to any Distributions of any assets of the Corporation to the holders of the Common Stock. Each share of the Preferred Stock is convertible into two and one-half common stock shares at the option of the holder. Each share of Series B Preferred Stock can automatically converted immediately prior to the closing of a firm commitment underwritten initial public offering pursuant to an effective registration statement filed under the Securities Act of 1933 or upon the receipt by the Corporation of a written request for such request for such conversion from the holders of the majority of the Series B Preferred Stock holders.
On May 18, 2015, the Company by majority consent of Preferred Shareholder agreed to convert all of the outstanding shares of Series B Preferred to common stock. On June 26, 2015, 1,649,500 “pre-split” shares of Series B Preferred were converted into 4,123,750 “pre-split” common shares.
As of December 31, 2017 no shares of Series B convertible Preferred stock are issued and outstanding.
Common Stock
Effective August 1, 2016 the terms of the amended Warehouse Line of Credit changed to issuing stock for the interest due on the line of credit monthly. For the year ended December 31, 2016, 6,339 “post-split” shares of common stock were issued for interest and 2,500 “post-split” shares of common stock were issued for renewal fee for a value of $20,407, respectively. For the year ended December 31, 2017, 9,717 “post-split” shares of common stock were issued for interest for a value of $18,219, respectively. As of July 1, 2017 the interest and fee have been waived. (See Note 5)
On April 19, 2017, the Company issued 10,000 shares of common stock as director compensation valued at Two Dollars per share.
On December 12, 2017, the Company implemented a twenty for one (20:1) reverse stock split. This reverse split resulted in reducing the common stock in the amount of 16,715 as of December 31, 2017 with an offsetting increase to additional paid-in capital.
NOTE 8 - STOCK OPTIONS
On April 10, 2002, the Board of Directors approved the Genesis Financial, Inc. Stock Option Plan (the Plan), and the Plan was subsequently approved by the Shareholders of the Company on May 2, 2002. The plan allows for issuance of Incentive Stock Options (ISOs) and Non-statutory Stock Options (NSOs). The maximum number of shares that may be subject to option and exercised under the Plan is 65,000 “post-split” shares. The ISOs and NSOs expire 30 days after the recipient ceases to be an employee for the Company or one year after the recipient’s death. No options are available for future grants under the plan. No options were issued or exercised in 2017 or 2016.
Compensation expense relating to stock options granted was $-0- and $20,988 during the years ended December 31, 2017 and 2016, respectively, and is classified as ‘office occupancy and other expenses’.
On November 21, 2016, the outstanding stock options were terminated by all holders, the value of the remaining stock options were determined to be immaterial.
Transactions concerning stock options pursuant to our stock option plans are summarized as follows:
Shares Subject to
Options
Weighted
Average
Exercise Price
Weighted Average
Remaining Term
Outstanding at December 31, 2015
261,000
$0.28
2.9 years
Terminated, November 21, 2016
(261,000)
-
Outstanding at December 31, 2017 and 2016
$0.0
0 years
Exercisable at December 31, 2017 and 2016
$0.0
Genesis Financial, Inc.
Notes to Financial Statements
NOTE 9 - INCOME TAX:
Components of the Company’s deferred income tax assets are as follows:
Tax Rate Reconciliation are as follows:
The deferred tax assets were calculated assuming a 21% tax rate at December 31, 2017 and December 31, 2016.
The federal tax rates changed from 35% to 21%, resulting in a decrease in deferred taxes and related valuation allowance as of 12/31/16 and 12/31/17 in the amount of 676,000 and 744,000, respectively
At December 31, 2017, the Company had a federal net operating loss carry forward available for income tax purposes of approximately $5,100,000 expiring over the years 2029 through 2035. Because management does not believe it is more likely than not that the carry forward will be utilized, the deferred tax assets have been fully reserved.
The Company has analyzed its filing positions in all jurisdictions where it is required to file income tax returns and have recognized that certain tax positions taken in the 2014 through 2017 years could result in adjustments to the fair value adjustments for tax purposes. However, these adjustments would not result in a tax provision as they would result in revisions to the net operating loss carryforward amount.
Management has determined that the Company is subject to examination of income tax filings in the United States for the 2014 through 2017 tax years. In the event that the Company is assessed penalties and/or interest, penalties will be charged to other operating expense and interest will be charged to interest expense.
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents and lines of credit approximate fair value. The carrying values of the convertible note payable to officer and note payable approximate fair market value as it is based on market rates of interest. The fair value of the long-term investment at December 31, 2017 is approximately $213,000 based upon management’s estimate of the fair value of the common stock of the underlying investment.
The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Genesis Financial, Inc.
Notes to Financial Statements
The Company’s cash and cash equivalent instruments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.
The Company’s available for sale investments were valued using quoted market prices, and accordingly, is included in Level 1.
The fair value of the Company’s loans held for sale 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. See changes in the fair value of this Level 3 valuation in Note 2.
NOTE 11- 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 B. Coghlan (husband and wife) collectively own 35.65% of Coghlan, LLC and are co-managers. West 3773 Fifth, LLC is owned 100% by John and Wendy Coghlan (husband and wife). JC Housing, LLC is owned 33.33% by John R. Coghlan and 33.33% by Clint Lohman. Mr. Lohman is a director of GFI. Genesis Financial Corporation is a company which is owned 100% by Michael Kirk, who is a former 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. As of January 1, 2012 the management fee was removed and the outsourcing services were offset by general offices expenses paid by the Company on behalf of Genesis Finance Corporation. Genesis Finance Corporation and John R. Coghlan has managing agreement with the real estate limited liability companies. Michael Lavigne is an officer and director of Placer Creek Mining Company. Mr. Lavigne is a director of GFI.
In addition to transactions described in Notes 4, 5 and 6, Genesis Financial, Inc. had the following related party transactions for the year ended December 31, 2017 and 2016.
John R. Coghlan
As of December 31, 2017, the Company continues a managing agreement for the investment in real estate limited liability companies. The agreements are stated in the operating agreement of each limited liability companies.
On December 7, 2017, John R. Coghlan personally guaranteed our Riverbank line of credit.
On November 13, 2017, John R. Coghlan resigned as Chief Executive Officer and President of the Company.
On April 19, 2017, the Company issued 2,500 “post-split” shares of common stock for as director compensation valued at Two Dollars per share.
On November 21, 2016, John R. Coghlan terminated his stock options agreement with the Company.
Genesis Financial, Inc.
Notes to Financial Statements
On November 2, 2016, John R. Coghlan purchased 15,767 “post-split” common shares of Genesis Financial, Inc. from Michael Kirk, a former officer of the company.
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.
On February 8, 2016, John R. Coghlan converted his $250,000 note for 36,250 “post-split” shares of common stock. The note was originally convertible into 12,500 “post-split” shares of Series "B", or 31,250 “post-split” shares of common stock equivalents, at the option of Mr. Coghlan. However, Mr. Coghlan agreed to accept 36,250 “post-split” common shares in lieu of full payment. The 5,000 “post-split” additional common shares represent a financing cost to the Company and as such, financing expense of $29,000 was recognized in the year ended December 31, 2016. (see Note 6)
Coghlan Family Corporation “CFC”
On February 6, 2018, Coghlan Family Corporation entered into a Debt Forgiveness Agreement with Genesis Financial, Inc. and forgave the sum of $441,080.
On February 1, 2018, Coghlan Family Corporation advanced Genesis Financial, Inc. the sum of $175,441.43 by paying off the Riverbank loan balance in full.
On November 13, 2017, the Company entered into a Promissory Note Loan Agreement with Coghlan Family Corporation, a related party (the "Lender"). The Loan Agreement is essentially a revolving line of credit with an initial advance of $25,000 with subsequent advances as requested by the Company. This indebtedness will survive the proposed Epoint Payment Corp. acquisition transaction. The loan bears interest at the rate of 6.0% interest and is due and payable on, or before May 15, 2018. As an inducement to the Lender, the Company agreed to grant one share of post-reverse split common stock for each $2.50 of aggregate principal amount loaned ("Bonus Shares"). The Bonus Shares are due at the loan's maturity date which is May 15, 2018. At December 31, 2017 the balance was $47,002. (see Note 6)
July 17, 2017, by board action the Company sold a rental property for $30,000, resulting in a loss of ($17,670).
March 8, 2017, by board action the Company sold a rental property for $77,585, resulting in a gain on sale of $342. The Company also sold two REO with a basis of $14,999 for $19,140 for a gain of $4,141.
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 $131,417 was realized by the Company.
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.
Effective August 1, 2016 the terms of the amended Warehouse Line of Credit changed to issuing stock for the interest due on the line of credit monthly. The table below shows the issue dates, number of shares issued and amount of interest being paid. As of July 1, 2017 interest is waived. (see Note 5)
Issue date
Shares Issued “post-split”
Interest Amount
June 30, 2017
1,887
$3,019
May 31, 2017
1,952
$3,123
April 30, 2017
1,887
$3,019
March 31, 2017
1,952
$3,123
February 28, 2017
1,171
$2,811
January 31, 2017
$3,123
1st & 2nd Quarter 2017 Totals
9,717
$18,219
December 31, 2016
$3,123
November 30, 2016
$3,019
October 31, 2016
1,562
$3,123
September 30, 2016
1,509
$3,019
August 31, 2016
1,562
$3,123
2016 Total
6,339
$15,407
Genesis Financial, Inc.
Notes to Financial Statements
On August 1, 2016, CFC amended the Warehouse Line of Credit and 2,500 “post-split” shares of common stock were issued. (See Note 5)
Coghlan, LLC
There was no activity for the years ending December 31, 2017 and 2016.
JC Housing, LLC
There was no activity for the year ended December 31, 2017 and 2016.
For the year ended December 31, 2015, the Company purchased two travel trailers from JC Housing, LLC for $30,000.
West 3773 Fifth, LLC
As of December 31, 2017, the Company continued a month-to-month tenancy with West 3773 Fifth, LLC, a company owned and controlled by John and Wendy Coghlan. The monthly rent is $1,250. Other office expenses are shared by all of the tenants of which the Company’s portion is estimated at $2,500 per month.
Genesis Finance Corporation “GFC”
As of December 31, 2017, the Company continues a managing agreement for the investment in real estate limited liability companies. The agreements are stated in the operating agreement of each limited liability companies.
Michael Lavigne
On November 10, 2017, Michael Lavigne resigned as Executive Secretary and Director of the Company.
On April 19, 2017, the Company issued 2,500 “post-split” shares of common stock as director compensation valued at Two Dollars per share.
On March 1, 2017, the Board of Directors appointed Michael Lavigne to hold the Executive Officer position of Secretary and Company Director.
For the year ended December 31, 2015, the Company converted the Placer Creek Mining Company loan of $150,000 to 300,000 shares of Digi Outdoor Media, Inc., the successor to Placer Creek Mining Company. (See Note 4)
Clint Lohman, Director
On April 19, 2017, the Company issued 2,500 “post-split” shares of common stock as director compensation valued at Two Dollars per share.
There was no activity for the year ended December 31, 2016.
For the year ended December 31, 2015, the Company purchased two travel trailers from JC Housing, LLC for $30,000, which Mr. Lohman has a 33% interest in.
NOTE 12- SUBSEQUENT EVENTS
Genesis Financial Riverbank Loan:
On February 1, 2018, Coghlan Family Corporation advanced Genesis Financial, Inc. the sum of $175,441.43 by paying off the Riverbank loan balance in full.
Coghlan Family Corporation Warehouse Line of Credit:
On February 6, 2018, Coghlan Family Corporation entered into a Debt Forgiveness Agreement with Genesis Financial, Inc. and forgave the sum of $441,080.
ITEM 9.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
We have had no disagreements on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures with any of our accountants for the years ended December 31, 2017 and 2016, or any interim periods. We have not had any other changes in, nor have we had a disagreement, whether or not resolved, with our accountants on accounting and financial disclosures during our recent fiscal year or any later interim period.
ITEM 9A.
ITEM 9A. Controls and Procedures.
Disclosure Controls and Procedures
Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this Annual Report on Form 10-K (the "Evaluation Date"). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were not effective such that the information relating to us required to be disclosed in our Securities and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of and Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. With the participation of our Chief Executive and Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - (2013) Integrated Framework. Based upon such evaluation, our management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2017 based on the COSO framework criteria, as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee, (2) lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (3) inadequate segregation of duties consistent with control objectives; and (4) management dominated by a single individual without adequate compensating controls. The aforementioned material weaknesses were identified by our Chief Executive and Financial Officer in connection with the review of our financial statements as of December 31, 2017.
Management believes that the material weaknesses set forth above did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to an exemption for non-accelerated filers from the internal control audit requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the period ended December 31, 2017 that have materially affected or are 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 its 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.
ITEM 9B.
ITEM 9B. Other Information.
None.
PART III
ITEM 10.
ITEM 10. Directors, Executive Officers and Corporate Governance
Director Independence
The Board has determined that we do not have a majority of independent directors as that term is defined under Rule 4200(a) (15) of the NASDAQ Marketplace Rules, even though such definition does not currently apply to us, because we are not listed on NASDAQ.
The following sets forth information concerning our Management and key personnel:
DIRECTORS AND EXECUTIVE OFFICERS
As of December 31, 2017, the Directors and Executive officers were as follows:
Name
Age
Position
Term of Office
Roy Rose
President, CEO, Director
11/10/17-Present
John R. Coghlan
CFO, Chairman of the Board, Director
01/02/06-Present
Virginia Walters
Secretary*, Treasurer, Director
10/20/11-Present
Clint Lohman
Director
10/22/13-Present
* Ms. Walters became Secretary on November 13, 2017.
As of December 31, 2017, GFI operated with three Executive Officers and a four member Board of Directors. The following are brief biographical descriptions of the current Executive Officers and Directors of GFI.
ROY ROSE, Chief Executive Officer, President, Director, age 59. Mr. Rose joined the Company on November 10, 2017. He has over thirty years of experience in the private equity market as a financial professional. His experience includes leadership and expertise structuring and investing in leveraged buyouts, real estate, mergers and management buyouts since 1985. Mr. Rose is the Chief Executive Officer of Whitestone Investment Network, located in Lake Oswego, Oregon since 2014. Whitestone identifies small and mid-cap companies in which it can accumulate equity interests helping those companies improve shareholder equity. During 2013, Mr. Rose was an independent financial consultant. From 2009 to 2011 he was the cofounder, business development of Patron Company. From 2011-2012 he was the Chief Executive Officer of Patron Company. Patron was an online retail enterprise which provided funding to schools K-12. We believe that Mr. Rose's business skills and attributes qualify him to be a member of the Company's board of directors.
JOHN R. COGHLAN, Chief Financial Officer, Director and Chairman of the Board, age 75. Mr. Coghlan became a Director on January 2, 2006. Mr. Coghlan is a retired C.P.A. Mr. Coghlan became responsible for the overall management of operations on January 1, 2010. Prior to that time, he acted in an advisory capacity to the Board of Directors. Mr. Coghlan graduated from the University of Montana with a degree in Business Administration and has held the designation of Certified Public Accountant since 1966. Mr. Coghlan was a founder of Labor Ready, Inc., a New York Stock Exchange traded company, and served as Chief Financial Officer and Director of Labor Ready from 1987 through 1996, when he retired. Since his retirement, the Coghlan Family Corporation, a privately held family business that manages family investment accounts, has employed Mr. Coghlan. Coghlan Family Corporation is 100% owned by the Coghlan Family LLC. John and Wendy Coghlan, husband and wife, own minority interests in Coghlan, LLC and control both the LLC and the Corporation through the LLC management agreement. The remaining interests in the Coghlan, LLC are owned by Mr. Coghlan’s children and grandchildren.
VIRGINIA WALTERS, Secretary, Treasurer and Director, age 44. For the past six years, Ms. Walters has been an employee of Genesis Financial, Inc. She has acted in a variety of roles, including, accounting manager and custodian of the corporate records. Her role has included assisting company president and board of directors in the preparation of internal reports relating to the company’s real estate loans investment business. Ms. Walter’s skills and attributes demonstrated in these positions over the past six years qualify her for promotion to the office of Secretary, Treasurer and as a member of the board of directors.
CLINT LOHMAN, Director, age 55. Since 2000, Mr. Lohman has resided in Bozeman, Montana, where he owns and operates Rocky Mountain Gaming. Moreover Mr. Lohman has ownership in several businesses represented within Eastern Montana and Western North Dakota. Mr. Lohman has developed and maintains close relationships with farmers, business people and long-standing residents in the Williston Basin. The combination of Mr. Lohman’s business expertise and relationships specific to the Williston Basin provides the Company with significant advantages in conducting business operations in Montana - North Dakota area. Mr. Lohman attended and graduated from North Dakota College of Science. Mr. Lohman's wide range of business skills and attributes qualify him as a member of our Company's board of directors.
Involvement in Certain Legal Proceedings
To the Company's knowledge, none of the events described in Item 401(f) have occurred during the past ten (10) years and that are material to an evaluation of the ability or integrity of any director, person nominated to become a director or executive officer of the Company.
TRANSACTIONS WITH AFFILIATES AND CONFLICTS OF INTEREST.
In all transactions between the Company and an affiliated party, the transaction will be presented to the Board of Directors and may only be approved if (1) if the transaction is on terms that are no less favorable to the Company than those that can be obtained from unaffiliated third parties and, (2) all of the directors who do not have an interest in the transaction must unanimously approve of the action. We will pay for legal counsel to the independent directors if they want to consult with counsel on the matter. We believe that the requirement for approval of affiliated transactions by disinterested independent directors will assure that all activities of the Company are in the best interest of the Company and its shareholders.
We intend to consider investment in other businesses from time to time. When presented with an investment opportunity, we may decline the investment because of the timing, other commitments, size, suitability standards, or any number of other sound business reasons. In such circumstances, it is possible that some or all of our officers and directors may choose to make the investment from personal funds. In order to fulfill their fiduciary responsibilities to the Company and our shareholders, each officer and director is aware that he or she must make business opportunities that are consistent with our business plan available to the company first. If we decline to participate, the individual officers and directors may then participate individually. Beyond the obligation to present opportunities to the Company first, there are no restrictions on participation in business opportunities by our officers and directors.
CODE OF ETHICAL CONDUCT
Our board of directors adopted our Code of Ethical Conduct which applies to all of our employees and directors, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. We believe the adoption of our Code of Ethical Conduct is consistent with the requirements of the Sarbanes-Oxley Act of 2002.
ITEM 11.
ITEM 11. Executive Compensation
Compensation Discussion and Analysis
Compensation expenses for 2017 and 2016 were $36,000 and $44,750, respectively.
The following table set forth the compensation information on executive officers Roy Rose, John Coghlan and Virginia Walters for the fiscal years ending December 31, 2017 and 2016.
Name and Principal Position
Years
Salary
($)
Bonus
($)
Stock Awards
($)
Options Awards
($)(1)
Non-Equity Incentive Comp
($)
All Other Compensation
($)
Totals
Roy Rose
$ -0-
$ -0-
John Coghlan
$ -0-
$ -0-
President
$ -0-
$ -0-
Virginia Walters
$44,750
$44,750
Secretary
$36,000
$36,000
(1)
Represents vesting value of outstanding options during each fiscal year. Options were terminated November 21, 2016.
Our board of directors has responsibility for approving the compensation arrangements for our executives. We do not have a standing compensation committee so our board acts in the capacity of a compensation committee. The principal responsibilities of the board of directors in the area of compensation are to establish policies and periodically determine matters involving executive compensation, recommend changes in employee benefit programs, grant or recommend the grant of stock options and stock awards under our individual compensation agreements with employees and provide counsel regarding key personnel selection.
GFI has no employment agreements in place with any employee, including executive officers. All employment is “at will”.
Director fees for 2017 and 2016 were $20,000 and $-0-, respectively.
The following table set forth the compensation information on directors John Coghlan, Virginia Walters, Clint Lohman and Michael Lavigne for the fiscal years ending December 31, 2017 and 2016.
Name
Years
Salary
($)
Bonus
($)
Stock Awards
($)
Non-Equity Incentive Comp
($)
All Other Compensation
($)
Totals
John Coghlan
$ -0-
Director
$ -0-
$5,000
$5,000
Virginia Walters
$ -0-
Director
$ -0-
$5,000
$5,000
Clint Lohman
$ -0-
Director
$ -0-
$5,000
$5,000
Michael Lavigne (1)
$ -0-
Director
$ -0-
$5,000
$5,000
(1)
Michael Lavigne resigned as Director on November 10, 2017.
Grants of Plan-Based Awards
There were not equity grants outstanding at December 31, 2017.
There was no compensation to any Director during the fiscal year ended December 31, 2016.
Outstanding Equity Awards at Fiscal Year-End
There were no outstanding equity awards to any Executive Officer at the end of the fiscal year ended December 31, 2017.
Director Compensation
During the year ended December 31, 2017 we compensated each of our directors with 2,500 “post-split” common shares valued at $2.00 per share.
Meetings and Committees of the Board of Directors
We presently have no formal independent Board committees. Until further determination, the full Board of Directors will undertake the duties of the audit committee, compensation committee and nominating and governance committee. The members of the Board of Directors performing these functions as of December 31, 2017, are Roy Rose, John R. Coghlan, Virginia Walters and Clint Lohman.
Compensation Committee
The board of directors, in its Compensation Committee role, has discontinued all compensation for the Officers and Directors for the foreseeable future, with the exception of its Treasurer, Virginia Walters.
Audit Committee
The Board of Directors, in its Audit Committee’s role, will be responsible for selecting the Company’s independent auditors, approve the scope of audit and related fees, and review financial reports, audit results, internal accounting procedures, related-party transactions, when appropriate, and programs to comply with applicable requirements relating to financial accountability. The Audit Committee’s function will include the development of policies and procedures for compliance by the Company and its officers and directors with applicable laws and regulations. The audit committee has reviewed and discussed the attached audited financial statements with management. The audit committee has received written disclosures from the independent accountant required by Independence Standard Board Standard No. 1, as amended, as adopted by the PCAOB in Rule 3600T and has discussed the independence of the company’s certifying accountant. Based on this review and discussion, the Board of Directors, in its audit committee role, recommended that the audited financial statements be included in this Annual Report.
Nomination and Governance Committee
The Board of Directors, in its Nomination and Governance Committee role, will be responsible for recommendations to the Board of Directors respecting corporate governance principles; prospective nominees for Director; Board member performance and composition; function, composition and performance of Board committees; succession planning; Director and Officer liability insurance coverage; and Director’s responsibilities.
Audit Committee Financial Expert
John R. Coghlan, a former Certified Public Accountant, is the Company’s audit committee financial expert.
Shareholder Communications
The Company does not currently have a process for security holders to send communications to the Board.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following tables set forth the ownership of our common stock by each person known by us to be the beneficial owner of more than 5% of our outstanding common stock, our directors, and our executive officers and directors as a group. To the best of our knowledge, the persons named have sole voting and investment power with respect to such shares, except as otherwise noted. There are not any pending arrangements that may cause a change in control. However, it is anticipated that there will be one or more changes of control, including adding members of management, possibly involving the private sale or redemption of our principal shareholder's securities or our issuance of additional securities, at or prior to the closing of a business combination.
The information presented below regarding beneficial ownership of our voting securities has been presented in accordance with the rules of the U.S. Securities and Exchange Commission and is not necessarily indicative of ownership for any other purpose. Under these rules, a person is deemed to be a "beneficial owner" of a security if that person has or shares the power to vote or direct the voting of the security or the power to dispose or direct the disposition of the security. A person is deemed to own beneficially any security as to which such person has the right to acquire sole or shared voting or investment power within 60 days through the conversion or exercise of any convertible security, warrant, option or other right. More than one person may be deemed to be a beneficial owner of the same securities. The percentage of beneficial ownership by any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such person has the right to acquire voting or investment power within 60 days, by the sum of the number of shares outstanding as of such date plus the number of shares as to which such person has the right to acquire voting or investment power within 60 days. Consequently, the denominator used for calculating such percentage may be different for each beneficial owner. Except as otherwise indicated below, we believe that the beneficial owners of our common stock listed below have sole voting and investment power with respect to the shares shown.
This table is based upon information derived from our stock records. We believe that each of the shareholders named in this table has sole or shared voting and investment power with respect to the shares indicated as beneficially owned; except as set forth above. Applicable percentages are based upon 879,763 “post-split” shares of common stock outstanding as of December 31, 2017, except as modified by Rule 13d-3(d)(1)(i). In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to conversion of preferred stock and options held by that person that are currently exercisable or exercisable within 60 days of December 31, 2017. We did not deem those shares outstanding, however, for the purpose of computing the percentage ownership of any other person. It should be noted that the Company implemented a twenty for one (20:1) reverse stock split on December 12, 2017.
(a) Security Ownership of Certain Beneficial Owners
Our stock ownership records do not indicate that the Company has any beneficial owners owing 5% or more of our securities, except for management as set forth below.
(b) Security Ownership of Management.
Common Stock “post-split”
Title of Class
Name and address of beneficial owner
Amount and nature of beneficial ownership “post-split” (1)
Percent of Class(3)
Common
Roy Rose (2)
0%
Common
John R. Coghlan (2)
390,898(4)
44.43%
Common
Virginia Walters (2)
9,050 (5)
1.03%
Common
Clint Lohman (2)
49,013 (6)
5.57%
Directors and Officers as Group
448,961
51.03%
(1) All ownership is direct unless stated otherwise in these footnotes.
(2) Address is 3773 West 5th Avenue, Suite 301, Post Falls, ID 83854
(3) Pursuant to Rule 13d-3(d)(1)(i) the percentage calculations use different totals of outstanding securities for the purpose of determining ownership. Any securities not outstanding which are subject to such options, warrants, rights or conversion privileges shall be deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person but shall not be deemed to be outstanding for the purpose of computing the percentage of the class by any other person.
(4) Represents 104,530 owned by Coghlan Family Corporation, 20,216 owned by Coghlan, LLC, 650 owned by West 3773 Fifth, LLC, 265,502 owned by John R. Coghlan. Mr. Coghlan has voting control over Coghlan Family Corporation, Coghlan LLC, and West 3773 Fifth LLC.
(5) Represents 9,050 common shares owned by Ms. Walters.
(6) Represent 49,013 common shares owned by Mr. Lohman.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions and Director Independence
Affiliates and 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 affiliate 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 100% owned 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. See Financial Statement footnote 11.
Genesis Finance Corporation is a company which is owned 100% by Michael Kirk, who is a former director and officer of GFI.
Placer Creek Mining Company is an Idaho Corporation, which Michael Lavigne is President. Mr. Lavigne was a Director of GFI until his resignation on November 10, 2017.
Genesis Financial, Inc. had the following related party transactions for the years ended December 31, 2016 and 2017.
It should be noted that the Company implemented a twenty for one (20:1) reverse stock split on December 12, 2017 and the shares set forth below are post-split share totals.
Years Ended December 31, 2017 and 2016:
Michael Kirk and Genesis Finance Corporation
On January 1, 2009, the Company entered into a Management and Servicing Agreement with Genesis Finance Corporation, a Washington Corporation. Mike Kirk is the president of Genesis Finance Corporation. As of January 1, 2011, the Company had down-sized enough to manage a sizable portion of its own affairs, and renegotiated its outsourcing agreement with Genesis Finance Corporation, lowering the management fee to $1,500. As of January 1, 2012 the management fee was removed and the outsourcing services were offset by general offices expenses paid by the Company on behalf of Genesis Finance Corporation.
As of December 31, 2017 Genesis Finance Corporation continues a management agreement with the real estate limited liability companies. These agreement are state in the operating agreement of each company and may vary.
John R. Coghlan
As of December 31, 2017, the Company continues a managing agreement for the investment in real estate limited liability companies. The agreement are stated in the operating agreement of each limited liability companies.
On December 7, 2017, John R. Coghlan personally guaranteed our Riverbank line of credit.
On November 13, 2017, John R. Coghlan resigned as Chief Executive Officer and President of the Company.
On April 19, 2017, the Company issued 2,500 shares of common stock for as director compensation valued at Two Dollars per share.
On November 21, 2016, John R. Coghlan terminated his stock options agreement with the Company.
On November 2, 2016, John R. Coghlan purchased 15,767 common shares of Genesis Financial Inc. from Michael Kirk, a former officer of the company.
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.
On February 8, 2016, John R. Coghlan converted his $250,000 note for 36,250 shares of common stock. The note was originally convertible into 12,500 shares of Series "B", or 31,250 shares of common stock equivalents, at the option of Mr. Coghlan. However, Mr. Coghlan agreed to accept 36,250 common shares in lieu of full payment. The 5,000 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.
Coghlan Family Corporation “CFC”
On November 13, 2017, the Company entered into a Promissory Note Loan Agreement with Coghlan Family Corporation, a related party (the "Lender"). The Loan Agreement is essentially a revolving line of credit with an initial advance of $25,000 with subsequent advances as requested by the Company. This indebtedness will survive the proposed Epoint Payment Corp. acquisition transaction. The loan bears interest at the rate of 6.0% interest and is due and payable on, or before May 15, 2018. As an inducement to the Lender, the Company agreed to grant one share of post-reverse split common stock for each $2.50 of aggregate principal amount loaned ("Bonus Shares") The Bonus shares will be payable at the loan's maturity date May 15, 2018. At December 31, 2017 the balance was $47,002. (see Note 6)
July 17, 2017, by board action the Company sold a rental property for $30,000, resulting in a loss of ($17,670).
March 8, 2017, by board action the Company sold a rental property for $77,585, resulting in a gain on sale of $342. The Company also sold two REO with a basis of $14,999 for $19,140 for a gain of $4,141.
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 $131,417 was realized by the Company.
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.
Effective August 1, 2016 the terms of the amended Warehouse Line of Credit changed to issuing stock for the interest due on the line of credit monthly. The table below shows the issue dates, number of shares issued and amount of interest being paid. As of July 1, 2017 interest is waived. (See Note 5)
Issue date
Shares Issued “post-split”
Interest Amount
June 30, 2017
1,887
$3,019
May 31, 2017
1,952
$3,123
April 30, 2017
1,887
$3,019
March 31, 2017
1,952
$3,123
February 28, 2017
1,171
$2,811
January 31, 2017
$3,123
1st & 2nd Quarter 2017 Totals
9,717
$18,219
December 31, 2016
$3,123
November 30, 2016
$3,019
October 31, 2016
1,562
$3,123
September 30, 2016
1,509
$3,019
August 31, 2016
1,562
$3,123
2016 Total
6,339
$15,407
On August 1, 2016, CFC amended the Warehouse Line of Credit and 2,500 shares of common stock were issued. (See Note 5)
Coghlan, LLC
There was no activity for the years ending December 31, 2017 and 2016.
JC Housing, LLC
There was no activity for the years ending December 31, 2017 and 2016.
For the year ended December 31, 2015, the Company purchased two travel trailers from JC Housing, LLC for $30,000.
West 3773 Fifth, LLC
As of December 31, 2017, the Company continued a month-to-month tenancy with West 3773 Fifth, LLC, a company owned and controlled by John and Wendy Coghlan. The monthly rent is 1,250. Other office expenses are shared by all of the tenants of which the Company’s portion is estimated at $2,500 per month.
Genesis Finance Corporation “GFC”
As of December 31, 2017, the Company continues a managing agreement for the investment in real estate limited liability companies. The agreement are stated in the operating agreement of each limited liability companies.
Michael Lavigne
On November 10, 2017, Michael Lavigne resigned as Executive Secretary and Director of the Company.
On April 19, 2017, the Company issued 2,500 shares of common stock as director compensation valued at Two Dollars per share.
On March 1, 2017, the Board of Directors appointed Michael Lavigne to hold the Executive Officer position of Sectary and Company Director.
There was no activity for the year ended December 31, 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
On April 19, 2017, the Company issued 2,500 shares of common stock for as director compensation valued at Two Dollars per share.
There was no activity for the year ended December 31, 2016.
For the year ended December 31, 2015, the Company purchased two travel trailers from JC Housing, LLC for $30,000.
Director Independence
The Board has determined that we do not have a majority of independent directors as that term is defined under Rule 4200(a) (15) of the NASDAQ Marketplace Rules, even though such definition does not currently apply to us, because we are not listed on NASDAQ.
ITEM 14.
ITEM 14. Principal Accounting Fees and Services.
Fruci & Associates II, PLLC serve as our registered independent accountant and has audited our financial statements for the years ending December 31, 2017. DeCoria, Maichel &Teague, P.S. serves as our registered independent accountant and has audited our financial statements for the years ending December 31, 2016.
The following table presents fees for professional audit services rendered by Fruci & Associates II, PLLC and DeCoria, Maichel &Teague, P.S. for the audit or review of GFI’ financial statements for the years ended December 31, 2017 and 2016, and fees billed for other services rendered.
Fiscal Year
Audit Fees
$ 24,500
$ 32,400
Audit Related
-
-
Tax Fees
-
-
All other Fees
-
-
Total Fees
$ 24,500
$ 32,400
(1)Audit fees include fees for services rendered for the audit of our annual financial statements and reviews of our quarterly financial statements. Above fees are estimates and may vary.
The Board of Directors acts as the Audit Committee.
PART IV
ITEM 15.
ITEM 15. Exhibits and Financial Statement Schedules
(a) List Financial Statements filed as a part of this Annual Report
Description Page No.
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations and Comprehensive Income (Loss)
Statements of Cash Flows
Statement of Changes in Stockholders’ Equity
Notes to Financial Statements
21-32
List all Exhibits Required by Item 601
Exhibit
Number
Description
Location of Exhibit
2.1
Capital Stock Exchange Agreement dated September 8, 2017
8-K filed September 11, 2017
3.1
Articles of Incorporation
SB-2 filed February 20, 2003
3.2
Amended and Restated Articles of Incorporation
SB-2 filed February 20, 2003
3.3
Articles of Amendment Creating Series A Cumulative Preferred Stock
SB-2 Amendment No. 3 filed July 3, 2003
3.4
Articles of Amendment Creating Series B Preferred Stock
8-K filed December 8, 2010
3.5
Bylaws
SB-2 filed February 20, 2003
3.6
Articles of Amendment November 13, 2017
8-K filed November 21, 2017
3.7
Articles of Domestication
8-K filed February 16, 2016
10.1
Management and Loan Servicing Agreement with Genesis Holdings, Inc. dated April 16, 2004
10-K filed April 23, 2010
10.2
Management and Loan Servicing Agreement with Genesis Holdings II, Inc. dated July 15, 2008
10-K filed August 11, 2010
10.3
Promissory Note with American West Bank dated October 14, 2004
10-K filed April 23, 2010
10.4
Warehousing Line of Credit Promissory Note Agreement with Coghlan Family Corporation dated April 18, 2006
10-K filed April 23, 2010
10.5
Promissory Note with Riverbank dated June 29, 2009
10-K filed August 11, 2010
10.6
Form of Flyback Energy, Inc. Series B Preferred Stock Purchase Agreement including Stock Warrant
10-K filed April 13, 2012
10.7
Form of Flyback Energy, Inc. Amended and Restated Investor Rights Agreement
10-K filed April 13, 2012
10.8
Form of Promissory Note relating to Flyback Energy, Inc.
10-K filed April 13, 2012
10.9
Form of Purchase Agreement with AWG International, Inc. dba AWG International Water Corp
10-K filed April 13, 2012
10.10
Form of Common Stock Purchase Warrant AWG International, Inc. dba AWG International Water Corp
10-K filed April 13, 2012
10.11
Warehousing Line of Credit Agreement with Coghlan Family Corporation dated January 1, 2010
10-K filed August 11, 2010
10.12
Warehousing Line of Credit Agreement with Coghlan Family Corporation dated January 1, 2008
10-K filed August 11, 2010
10.13
Management and Servicing Agreement titled Corporate Restructuring Agreement with Genesis Financial Corporation dated December 27, 2008, effective January 1, 2009
10-K filed August 11, 2010
10.14
Form of $250,000 Convertible Note Agreement between John R. Coghlan and Genesis Financial dated December 15, 2010
10-K filed April 13, 2012
10.15
Form of $250,000 Convertible Note Subscription Agreement between John R. Coghlan and Genesis Financial dated December 15, 2010
10-K filed April 13, 2012
10.16
Form of Security Agreement related to $250,000 Convertible Promissory Note Agreement with John R. Coghlan dated December 15, 2010
10-K filed April 13, 2012
10.17
September 29, 2010 documentation regarding the assignment of certain properties and the business note to Coghlan Family Corporation
10-K filed April 13, 2012
10.18
First Amendment to Warehouse Line of Credit Promissory Note
10-K filed March 24, 2014
10.19
$50,000 Promissory Note with Placer Creek
10-K filed March 24, 2014
10.20
$100,000 Promissory Note with Placer Creek
10-K filed March 24, 2014
10.21
Amendment to Warehouse Line of Credit
8-K filed February 16, 2016
10.22
Loan Agreement and Promissory Note November 13, 2017
Filed herewith
Code of Ethical Conduct
10-K filed April 23, 2010
31.1
CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Filed herewith
31.2
CFO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Filed herewith
32.1
CEO Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002
Filed herewith
32.2
CFO Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002
Filed herewith
The following materials from Genesis Financial, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2017 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) Statement of Stockholders' Deficit, (iv) the Statements of Cash Flow, and (iv) Notes to Financial Statements.
Filed herewith
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: February 14, 2018
Genesis Financial, Inc.
(Registrant)
/s/ Roy Rose
________________________
By: Roy Rose
Title: President, Chief Executive Officer
(Principal Executive Officer)
/s/ John R. Coghlan
________________________
By: John R. Coghlan
Title: Chief Financial Officer (Principal Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Dated: February 14, 2018
/s/ Roy Rose
________________________
By: Roy Rose, Director
/s/ John R. Coghlan
________________________
By: John R. Coghlan
Title: Director
/s/ Virginia Walters
________________________
By: Virginia Walters
Title: Director