Filing summary
Important identity discrepancy: The supplied filing is REO Plus, Inc.’s Form 10-Q for the quarter ended September 30, 2014, not a Boston Omaha Corp. filing. Confirm the issuer before relying on this summary.
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2014, with comparisons to 2013. REO Plus reports a 40% investment in Ananda Investments, LLC, which owns a Houston commercial property, and consulting revenue from one related-party client. The company reported 1,869,000 common shares outstanding as of November 12, 2014.
Key financial metrics
| Metric | Q3 2014 | Nine months 2014 | Comparison |
|---|---|---|---|
| Consulting revenue | $11,583 | $23,549 | Q3 2013: $9,773; nine months 2013: $9,773 |
| Operating loss | $3,309 | $30,429 | Q3 2013: $640; nine months 2013: $50,210 |
| Net loss | $15,053 | $66,589 | Q3 2013: $11,577; nine months 2013: $69,521 |
| Loss per share | $0.01 | $0.04 | Same reported loss per share in comparable 2013 periods |
At September 30, 2014, REO Plus had cash of $347, total assets of $48,133, and current liabilities of $515,323, including $490,960 in stockholder notes and $16,071 in accrued stockholder interest. Stockholders’ deficit was $467,190. Nine-month operating cash outflow was $47,465; financing provided $20,000, leaving cash down $27,465 from year-end 2013. Interest paid was $21,828. The filing does not provide a meaningful company-level operating margin given the small consulting business and reported losses.
Changes and affiliate performance
Nine-month consulting revenue rose from $9,773 to $23,549, while professional fees fell from $59,840 to $53,978; the operating loss narrowed. The improvement was largely offset by equity-method losses from Ananda of $15,282, versus equity-method income of $185 in the prior-year period, and higher REO Plus interest expense of $20,878 versus $19,126.
Ananda’s nine-month revenue fell to $24,900 from $56,135, and its net loss widened to $38,205 from $463. Management attributed the revenue decline to losing its primary tenant in Q3 2013; a primary tenant was obtained in Q3 2014. Ananda had cash of $71,438 and mortgage debt of $387,464 at September 30, 2014. The mortgage bears 5.49% interest, is secured by the property, and matures in June 2028.
Outlook, risks, and notable disclosures
- Management states that accumulated deficits and the absence of operating earnings raise substantial doubt about REO Plus’s ability to continue as a going concern. It expects to seek private equity funding, but provides no assurance the plan will succeed.
- Management says the controlling shareholder intends to continue lending for expenses over the next 12 months, but has no legal obligation to do so. The company reports no binding commitments or readily available sources of additional financing.
- Management’s acquisition strategy is to pursue real estate opportunities, initially targeting Houston and Texas, but it has no specific property acquisition under written offer and no definitive acquisition or merger agreements. No quantified financial guidance is provided.
- Consulting revenue comes from one related-party client and services are provided by the CEO. Most REO Plus stockholder borrowing is also related to the controlling shareholder; note rates are 5% or 7%, with principal due between 2017 and 2020.
- Disclosure controls have a reported material weakness due to lack of segregation of accounting duties arising from limited personnel. No corrective actions were reported.
- The filing discusses potential real estate market and financing trends but cautions that economic conditions, rents, occupancy, and financing availability may change. It reports no off-balance-sheet arrangements.
Investor verification priorities
- Verify that REO Plus, Inc.—rather than Boston Omaha Corp.—is the intended issuer and that the filing period is correct.
- Review the going-concern disclosure, near-zero cash, current liabilities, and dependence on shareholder loans or new equity financing.
- Assess Ananda’s tenant occupancy and rental prospects, given the sharp year-to-date revenue decline and increased losses.
- Confirm the terms, balances, and related-party nature of stockholder notes and the company’s consulting arrangement.
- Review remediation of the disclosed material weakness and any subsequent financing, acquisition, or business developments.