City struggles to interpret Wicked Broadband’s finances as it considers $300k loan guarantee

When a small business owner goes into a bank for a loan, some of the first words out of the banker’s mouth are “show me the books.”

But as the city of Lawrence considers lending money to a small business, city officials are struggling with how to pry into the financial records of a private company.

City commissioners at their Tuesday evening meeting again will consider providing a $300,000 loan guarantee to Lawrence-based Wicked Broadband for a pilot project to bring super-fast Internet service to downtown. City officials conceded recently that they have not seen basic financial information such as the company’s income statements, balance sheets or how much debt the company is carrying.

City officials haven’t had access to the records in part because Wicked officials have noted that turning the financial records over to City Hall would make them public documents. Joshua Montgomery, an owner of Wicked, said he didn’t think the review was necessary anyway.

“The city doesn’t need to be deep into my books to know whether I’m creditworthy,” Montgomery said. “The measure of our credit worthiness is we’re still here. We are in a business that is very, very difficult. We are one of maybe a dozen independent Internet providers in the country, and nine years later we’re still here.”

Providing a loan guarantee would be a first for the city. It provides financial incentives to companies, but they’re often in the form of a rebate on taxes a company otherwise would be required to pay the city. The request from Wicked is more like a traditional loan. The city would agree to pay Wicked’s lender if the company defaults on the $300,000 loan. That calls into question whether the city should look at the finances of the company much like a lender would.

“I think that type of information is relevant,” City Commissioner Mike Dever said of financial records such as income statements, balance sheets and debt levels.

City officials have tried to get at some of that information without triggering the requirement that the documents be made public. The city hired an outside consultant to review Wicked’s books. The consultant reviewed the books in 2013, when the company was asking for an outright $500,000 economic development grant. Later, Wicked changed its request to a $1 million loan guarantee. In recent weeks, the size of the pilot project was reduced, and the current request is for a $300,000 loan guarantee.

The consultant, Springsted Inc., gave commissioners a summary of several aspects of the company’s finances, but didn’t include numbers. That, at times, created questions about the company’s financial position. For example, it said the company has “negative net income,” but noted its net income has shown growth over the past three years. Nothing in the report gives any indication of how much money the company is losing on an annual basis.

The report also notes the company “keeps very little cash on hand.” The report further notes that the company has about 7 cents in cash for every dollar it has in debt. But the report does not state how much debt or cash the company actually had.

Overall, the report provided a mixed picture of the company’s finances. The consultants noted Wicked scored reasonably well in a Dun & Bradstreet corporate credit report. For example, it said it received a 2 rating on a scale of 1 to 5 for its credit score, with 1 being the highest rating.

Complicated case

City Commissioner Terry Riordan said the incomplete financial picture is one of the aspects that have made the proposed deal so complicated for commissioners to consider. The city has been considering various proposals from Wicked for more than a year. Commissioners have expressed a strong interest in bringing gigabit Internet service to Lawrence, in part to keep up with the Google Fiber project underway in Kansas City.

Commissioners have expressed unease in providing direct financial assistance to Wicked, especially since there are other Internet service providers operating in the city. The issue has become more complicated as another firm, Baldwin City-based RG Fiber, has said it wants to offer gigabit service in Lawrence, but won’t do so if the city provides a subsidy to its competitor.

Riordan said he wasn’t sure whether the company should be required to make its books public to receive the loan guarantee. He said he does want a clear picture of the company’s health, but said he doesn’t expect it to be perfect.

“I guess I would say that if the company’s finances were real good they wouldn’t need us to back a loan,” Riordan said.

In a recent interview, Montgomery said disclosing his balance sheet and other such financial statements to the public could put him at a competitive disadvantage.

Montgomery said since the consultant’s report was prepared for the city, the company has become profitable, but he did not provide specific numbers. He also declined to provide specific numbers about the company’s debt levels.

Montgomery did not rule out providing his financial statements to the city if it appears the city is serious about a deal. But he said the company’s finances also should be viewed through the lens of a nontraditional company.

“We are Internet activists who happen to manage an ISP,” said Montgomery, who long has proclaimed the benefits of free Internet service and does provide multiple free accounts to nonprofits and low-income residents. “We are not business people. That is not our focus. We are very business-oriented in making sure money is coming in and that we pay people. But our focus is not on getting the most profit we can.”

Legal history

City Hall officials also confirmed that they were unaware of some lawsuits and tax liens related to the company.

The Kansas Department of Revenue in 2011 and 2012 filed a pair of tax liens against Lawrence Freenet, the name under which Wicked previously operated. In total, the liens involved about $6,000 in unpaid sales taxes. Both lien amounts were paid by the company in January 2013.

Montgomery said he didn’t have any specific recollection of what led to those tax liens, but said they should cause no concern to the city.

“Every business has a mix up with tax authorities,” Montgomery said. “They have been satisfied.”

Douglas County court records also indicate Wicked’s parent company, Community Wireless Inc., was involved in a lawsuit with its landlord on Ponderosa Drive in 2012. Community Wireless was the plaintiff in the suit, and had to seek action to get the landlord to unlock the doors to the business so that the company could access its equipment and other assets. The case eventually was settled out of court.

Montgomery said the dispute involved a disagreement between the company and the landlord over what improvements the company was allowed to make to the space. Montgomery said the company was renovating the space to serve as a low-cost space for start-up companies, and a dispute ensued over whether that was allowed in the lease.

District court records also show the company in 2008 was involved in a dispute with its landlord along Wakarusa Drive. Community Wireless was the defendant in the case, and ultimately was ordered by the court to make about $42,000 worth of payments to its former landlord for rent that the court deemed was due.

Montgomery said the case simply involved he and his landlord not agreeing on what was expected as part of the lease. He said the case is far enough in the past that it is not material today.

City officials said a review of the company’s past dealings should be part of the city’s due diligence on the company, but some members said the wanted to keep the cases in perspective.

“I think you need to consider the entire record, and all of that would be part of it,” Dever said. “I think I would look more at the recent past, rather than numbers that might be skewed by the economic downturn.”

Montgomery said business was particularly rough for the company in 2008, as the economy began its nosedive. He said the company laid off most of its workforce in 2008, and he and his wife, Lawrence school board member Kris Adair, worked to keep the company going.

He said business has been better since 2008, after he negotiated a deal to take over the company from a group of California-based investors.

“The turnaround was when we booted the outside investors out and took it over for ourselves,” Montgomery said. “Prior to that, I was spending half my time just chasing board meetings.”

Since then, the company has become a larger player in providing bulk Internet service to fraternity houses, sorority houses, apartment complexes, and other larger users of Internet service in Lawrence. The company’s number of individual residential accounts has shrunk in recent years as the other segments of its business have grown significantly.

The proposed pilot project would have a strong emphasis on providing super-fast Internet service to Lawrence homes. The plan has shrunk in recent weeks, but Wicked is now proposing to provide gigabit service to 300 households or businesses in downtown and parts of East Lawrence. Montgomery said if the pilot project is successful it would give the company the ability to raise money to extend the service to the rest of the community.