Boston Omaha Corporation (formerly REO Plus, Inc.) — Q1 2015 Form 10-Q
Reporting period: Unaudited three months ended March 31, 2015; comparative period is Q1 2014. The company’s business consisted primarily of a 40% interest in Ananda Investments, which owns a Houston commercial property, and consulting services provided to one related-party client.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Consulting revenue | $9,700 | $6,499 |
| Operating expenses | $72,421 | $29,268 |
| Operating loss | $62,721 | $22,769 |
| Equity income (loss) from Ananda | $3,772 | $(2,887) |
| Interest expense | $8,294 | $6,693 |
| Net loss | $67,243; $0.04 per share | $32,349; $0.02 per share |
| Operating cash flow | $(14,839) | $(32,399) |
| Cash at period end | $3,330 | $1,461 at Dec. 31, 2014 |
| Total assets | $54,365 | $48,724 at Dec. 31, 2014 |
| Current liabilities | $587,779 | $516,103 at Dec. 31, 2014 |
| Stockholders’ deficit | $(533,414) | $(467,379) at Dec. 31, 2014 |
Financing activities provided $16,708 in cash; cash increased by $1,869 during the quarter. The company reported no income-tax provision or payments. Gross margin is not a meaningful disclosed measure because revenue is consulting fees and the filing does not present cost of revenue separately. No explicit debt-to-equity or liquidity ratio is provided.
Material changes and unusual items
- Professional fees rose to $72,371, primarily due to the Delaware reincorporation, contributing to the higher operating and net losses.
- Ananda’s Q1 revenue increased to $28,800 from $9,900, and it reported net income of $9,431 versus a $7,217 loss. Management attributed the revenue increase to securing a primary tenant in Q3 2014. Boston Omaha’s 40% share of Ananda’s income was $3,772.
- In February, former controlling stockholder Richard Church sold his shares and resigned as CEO and director. Boulderado Partners and Magnolia Capital Fund acquired equal interests in approximately 95% of the company’s common stock. The company also changed its name and converted from Texas to Delaware in March.
- Company notes were restructured: $398,224 was transferred to the new stockholders and a $135,494 note remained payable to Mr. Church. The latter bears 5.76% interest, is due February 12, 2016, and is secured by the Ananda interest; the note can be satisfied by transferring that interest under specified terms.
- At March 31, stockholder notes totaled $398,224. The company also had a joint-and-several guarantee of Ananda’s $377,851 mortgage, secured by Ananda’s property and maturing in June 2028. The former controlling stockholder separately guaranteed the debt to the company; the company could nonetheless be liable if Ananda defaults.
Outlook, risks and controls
- The filing reports substantial doubt about the company’s ability to continue as a going concern: it has an accumulated deficit of $589,622 and has not produced earnings from operations. Management expects to seek additional debt or equity financing, but success is not assured.
- On April 10, 2015, Boulderado and Magnolia each lent the company $100,000. These 5% notes are due March 31, 2016 and may convert, subject to a $1 million equity-financing threshold, at 80% of the price paid by investors in that financing. Management said the lenders intend to continue funding expenses exceeding revenue for the next 12 months, but they have no obligation to do so.
- The company was evaluating acquisition opportunities but had no definitive acquisition or merger agreements and no binding commitment for future financing. It warned that failure to secure capital could prevent acquisitions and potentially threaten continued operations.
- Management identified lack of segregation of accounting duties due to limited personnel as a material weakness. No corrective actions had been taken as of the filing.
- No formal financial guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Assess the company’s ability to fund operations beyond the April $200,000 borrowing, including whether the two major stockholders continue providing support.
- Review the terms, maturity, conversion triggers and related-party status of outstanding notes, and the potential consequences of transferring the Ananda interest to satisfy the $135,494 note.
- Evaluate exposure under the guarantee of Ananda’s mortgage and confirm the scope and enforceability of the former controlling stockholder’s separate guaranty.
- Verify Ananda’s tenant, rental income, property-level debt service and cash generation, as Boston Omaha’s investment depends on this single property interest.
- Track remediation of the material weakness in accounting controls and the company’s progress toward profitable operations and any acquisition plans.