Boston Omaha Corporation — Q1 2017 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2017, with comparisons to Q1 2016. Boston Omaha operates outdoor advertising, surety insurance and brokerage, and minority real estate investments. The comparison is affected by acquisitions: Warnock and United Casualty and Surety (UC&S) contributed to 2017 results but not Q1 2016, and billboard acquisitions also expanded the business.
Financial performance and condition
- Revenue: $1.870 million, versus $513,544, an increase of about 264%. Billboard rentals were $1.014 million (+97.5%); premiums earned were $492,542; insurance commissions were $333,168; and investment and other income was $29,725.
- Profitability: Operating loss was $1.100 million versus $793,935; net loss was $1.110 million versus $839,838. Basic and diluted loss per share improved to $0.16 from $0.19, while weighted-average shares rose to 6.897 million from 4.456 million. Operating loss was 58.8% of revenue, compared with 154.6% in Q1 2016. Segment gross profit was $1.192 million.
- Costs and margins: Total expenses were $2.970 million, or 158.8% of revenue, versus $1.307 million, or 254.6%. Billboard direct costs were 48.4% of billboard revenue, up from 37.1%, principally reflecting lease costs on acquired assets. Depreciation and amortization totaled $596,693.
- Cash flow: Operating cash outflow was $585,240, compared with $211,046 outflow. Investing cash outflow was $4.816 million, mainly reflecting acquisitions and investment purchases, versus $7.425 million. There was no financing cash flow in Q1 2017; Q1 2016 included $25.143 million of stock issuance proceeds. Cash declined $5.402 million to $24.163 million.
- Liquidity and debt: Current assets were $27.070 million and current liabilities were $3.138 million, implying working capital of approximately $23.932 million. Total liabilities were $3.393 million. The company reported no outstanding debt at March 31, 2017.
- Balance sheet changes: Total assets were $64.472 million, down from $65.652 million at December 31, 2016. Goodwill was $19.316 million and net intangible assets were $4.895 million. Stockholders’ equity was $61.079 million.
Material changes and acquisitions
Q1 2017 revenue growth principally reflects expanded billboard operations and the inclusion of insurance businesses acquired in 2016. In January 2017, the company acquired 37 Georgia billboard structures and related assets from Clear Channel Outdoor for $2.983 million, and 91 Wisconsin structures and related assets from Hartlind Outdoor for $2.817 million. The acquisitions contributed $208,094 of revenue and a combined loss of $3,066 after acquisition dates during the quarter. Purchase price allocations were preliminary and subject to revision following appraisals.
Management said higher employee costs, operating expenses, acquisition-related reporting costs, insurance expansion expenses, and state licensing applications contributed to the larger operating loss in dollars. Professional fees included approximately $66,307 in licensing application costs. The company reported $22,282 in acquisition costs for the two January acquisitions.
Outlook, risks and unusual items
- Management expects to continue pursuing billboard and insurance acquisitions and to expand UC&S’s surety authority. As of May 8, UC&S was authorized in 23 states; the company was working toward broader authorization.
- The company had filed a registration statement for a proposed public offering seeking $75 million in gross proceeds; completion was not assured. Management stated that cash and anticipated offering proceeds were expected to cover working capital and anticipated capital expenditures for the next 12 months. If the offering did not occur, it intended to seek funds from existing stockholders and other investors.
- Management cited acquisition execution, operating costs, economic conditions and advertising rates, insurance licensing and capital requirements, and future financing availability as relevant uncertainties. The company noted that actual results may differ materially from forward-looking statements and undertook no duty to update them.
- On May 1, 2017, the company agreed to acquire billboard assets from Tinsley Media for $900,000. The filing’s MD&A also describes a May expenditure for two billboard faces and one structure; the precise description of the assets is not fully consistent in the supplied text.
- Financial reporting controls: Management identified a material weakness related to the lack of a formal risk assessment process and monitoring structure and said internal control over financial reporting may not be effective. Remediation efforts included hiring a controller and assessing controls.
- The company disclosed no legal proceedings and no significant derivative or foreign-currency market risk. It reported that it had no material off-balance-sheet arrangements other than normal operating leases.
Important facts for investors to verify
- Whether the proposed $75 million equity offering was completed, on what terms, and how proceeds were used.
- Whether acquisition purchase price allocations were finalized and whether the acquired billboard and insurance businesses met performance expectations.
- UC&S’s subsequent state licensing progress, statutory capital needs, underwriting results, and claims experience.
- Progress and effectiveness of remediation of the disclosed material weakness in internal controls.
- The exact assets acquired in the May 2017 Tinsley transaction and the resulting cash expenditure.
- The effect of potential dilution and concentrated voting control: management reported that Magnolia and Boulderado collectively controlled approximately 93.0% of votes, assuming exercise of currently exercisable warrants.