Filing summary
Entity discrepancy: The supplied filing is REO Plus, Inc.’s Form 10-K, not a filing for BOSTON OMAHA Corp. It covers the fiscal year ended December 31, 2012; figures below describe REO Plus and, where noted, its 40%-owned affiliate, Ananda Investments, LLC.
Business context and reporting period
REO Plus is an early-stage real estate investment company with one significant asset: a 40% interest in Ananda, which owns a leased building in Houston. REO Plus became publicly held in November 2012 after shares were distributed by its parent. Its common stock had no established trading market. The company had no employees; Richard J. Church was its sole director and officer and beneficially owned about 95% of its shares.
Financial performance and position
- REO Plus results: 2012 net loss was $95,283, or $0.05 per share, compared with a $67,320 loss, or $0.04 per share, in 2011. Professional fees rose to $88,645 from $58,916, mainly for public-company registration, accounting, legal and filing work. Equity-method income from Ananda was $13,138, versus $4,896; interest expense was $19,776, versus $13,300.
- Cash flow and liquidity: Operating cash outflow was $99,338, compared with $66,704 in 2011. Financing provided $105,000, largely through stockholder notes. Year-end cash was $6,315, compared with $653. Current assets were $8,690 and current liabilities $406,655, a working-capital deficit of $397,965.
- Balance sheet: Total assets were $75,612, liabilities $406,655, and stockholders’ deficit $331,043. Accumulated deficit was $386,043. The affiliate investment was carried at $66,922; management cited supporting analysis indicating an estimated fair value of approximately $225,000, which is not the balance-sheet carrying value.
- Debt and related-party funding: REO Plus reported a $190,000 note payable to Church and $190,960 in stockholder notes at year-end, plus $9,720 accrued stockholder interest. The notes are related-party obligations; the filing’s balance-sheet classification and note details should be reviewed together. Ananda had $413,965 of bank debt at 6.25%, secured by its property, with a balloon maturity in September 2014.
- Ananda operations (affiliate, not consolidated): 2012 rental revenue was $105,122, up from $84,179; net income was $32,845, up from $12,241. Operating cash flow was $58,516, compared with $40,601. Year-end cash was $95,515 and total liabilities were $426,778.
Material changes versus 2011
- REO Plus’s net loss increased by $27,963 as professional and interest expenses grew, partly offset by higher equity-method income.
- Ananda’s revenue and net income increased; management attributed the revenue growth to tenant expense reimbursements and collection of deferred rents. Its operating expenses remained broadly stable.
- REO Plus’s cash increased, but only after $105,000 of financing; operating cash use worsened. The company remained dependent on shareholder financing.
Outlook, risks and unusual items
- Management provided no quantified revenue, earnings or acquisition guidance. It intends to seek additional properties, likely funded by private equity and seller or third-party financing, but had no binding financing commitments or specific acquisition under consideration.
- The auditor reported substantial doubt about REO Plus’s ability to continue as a going concern, citing accumulated losses and lack of operating earnings. Management said Church intended to cover excess expenses for the next 12 months, but he was not legally obligated to do so.
- The company’s only property interest was acquired from Church for 934,500 shares and a $190,000 note. The filing identifies related-party and non-arm’s-length risks; the investment was recorded at the transferor’s cost basis and included a deemed dividend.
- Management identified a material weakness in internal control over financial reporting, including lack of segregation of accounting duties, no independent audit committee and insufficient independent directors. It said it could not immediately remediate the weaknesses due to limited resources. The auditor did not attest to internal controls.
- Other significant risks include dependence on Church, concentration in one property interest, refinancing risk at Ananda, inability to raise capital, possible dilution, environmental and property compliance costs, tenant and leasing risks, and illiquidity. No legal proceedings or off-balance-sheet arrangements were reported.
- REO Plus elected the JOBS Act extended transition period for adopting certain accounting standards, which may reduce comparability with companies using public-company adoption dates. No dividends had been paid, and none were planned for the foreseeable future.
Important facts for investors to verify
- Confirm the issuer identity: the supplied metadata names BOSTON OMAHA Corp, while the filing is for REO Plus, Inc.
- Review the full audited statements and notes, especially the classification, maturity and subsequent amendments of REO Plus’s stockholder debt.
- Assess whether REO Plus can meet operating needs and fund acquisitions without legally committed financing or continued support from Church.
- Verify the basis and assumptions for the stated approximately $225,000 estimated fair value of the Ananda interest versus its $66,922 carrying value.
- Evaluate Ananda’s ability to refinance or repay its September 2014 balloon debt and sustain occupancy and rental cash flow.
- Consider the governance and reporting implications of Church’s approximately 95% ownership, related-party transactions and disclosed internal-control material weakness.