Filing summary
Entity note: The supplied filing is REO Plus, Inc.’s Form 10-Q, not a Boston Omaha Corp filing. It covers the quarter ended March 31, 2014; the financial statements are unaudited.
Business context and financial results
REO Plus was formed to invest in real estate and held a 40% interest in Ananda Investments, LLC, which owns a Houston rental property. REO Plus also began providing consulting services in 2013; during this quarter the services were provided by its sole executive to one client, a company in which he holds an ownership interest and serves as a director.
- Revenue: $6,499, all consulting fees, versus none in Q1 2013. Professional fees were $29,268, down from $36,065.
- Profitability: Operating loss was $22,769 versus $36,065; net loss was $32,349, or $0.02 per share, versus $39,182, also $0.02 per share.
- Affiliate contribution: REO Plus recorded a $2,887 equity-method loss from Ananda, compared with $2,814 of income a year earlier. Ananda’s rental revenue fell to $9,900 from $24,741, and it reported a $7,217 net loss versus $7,035 net income.
- Cash flow: Operating cash used was $32,399 versus $39,163. Financing provided $10,000 net, including $30,000 of shareholder-note proceeds and $20,000 of repayments. Cash declined from $27,812 to $5,413; cash at March 31, 2013 was $17,152.
- Liquidity and balance sheet: Current assets were $9,156, including $5,413 cash, against current liabilities of $502,287. Total assets were $69,337 and stockholders’ deficit was $432,950; accumulated deficit was $487,950.
- Debt and interest: REO Plus reported $480,960 of notes payable to stockholders, classified as current, plus $1,886 of accrued shareholder interest. One $290,960 shareholder note was consolidated in February 2014, bears 5% interest, and is due in 2017; the separate $190,000 note bears 7% interest. Interest expense was $6,693. Interest paid was $21,828, including $5,541 of accrued interest paid at consolidation.
Changes, outlook, and risks
- Compared with Q1 2013, the company’s net loss narrowed by $6,833, reflecting new consulting revenue and lower professional fees, partly offset by the affiliate loss and higher interest expense.
- Ananda’s rental revenue fell after the loss of its primary tenant in Q3 2013. Its operating result swung from $13,454 income to a $1,762 loss; interest expense remained significant.
- Management disclosed substantial doubt about REO Plus’s ability to continue as a going concern. It expects to seek private equity financing and says the controlling shareholder intends to continue lending for expenses for the next 12 months, but he has no legal obligation to do so. No additional financing is committed, and management gives no assurance its plans will succeed.
- The company has no specific property acquisition under consideration with a written offer and has no acquisition or merger agreement. Management describes a strategy of pursuing real estate opportunities, likely initially in Houston and elsewhere in Texas, but says funding constraints have prevented acquisitions.
- Management cited improving real estate conditions as a possible opportunity, while noting rents and occupancy could weaken if the economy softens. The filing provides no quantified financial guidance.
- Disclosure controls have a reported material weakness due to inadequate segregation of accounting duties arising from limited personnel. Management reported no corrective actions or material changes in internal control during the quarter.
Important facts for investors to verify
- Confirm the filing entity: the source is REO Plus, Inc., despite the request metadata naming Boston Omaha Corp.
- Assess near-term funding needs against $5,413 of cash and $502,287 of current liabilities, and verify whether shareholder support or outside financing is actually available.
- Review the affiliate’s tenant status and rental outlook, given the sharp revenue decline and Q1 loss.
- Examine the terms, classification, and related-party nature of shareholder debt, as well as consulting revenue from the executive-connected client.
- Consider the going-concern warning and the disclosed material weakness in financial controls.