Boston Omaha Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results. Boston Omaha operates outdoor advertising, surety insurance and brokerage, and minority investments; its reported operating segments are billboards and insurance.
Financial performance and position
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Revenue | $2.99 million | $5.81 million |
| Operating loss | $2.50 million | $5.25 million |
| Net loss attributable to common stockholders | $1.60 million; $0.08 per share | $3.67 million; $0.21 per share |
| Operating cash flow | $(2.47) million |
- Revenue increased 49.9% for the quarter and 50.4% for the six-month period versus 2017. Billboard rental revenue rose 39.8% and 45.7%, respectively; insurance commissions increased substantially following brokerage acquisitions. Earned premiums declined 4.6% in Q2 and 3.9% for the half year.
- Costs and expenses exceeded revenue: operating loss equaled 83.7% of Q2 revenue and 90.3% of first-half revenue. Higher staffing, general and administrative costs, and amortization were significant factors.
- Other income partly offset operating losses. Q2 included $648,223 interest income, $206,306 unrealized securities gains, and $101,429 equity-method income; the first half included $1.09 million interest income and $385,091 equity-method income.
- Cash used in investing was $90.65 million, largely reflecting purchases of investments; financing provided $174.57 million, mainly from stock issuance. Cash, cash equivalents and restricted cash were $88.67 million at June 30.
- Total assets were $324.44 million, stockholders’ equity $318.05 million, and total liabilities $5.20 million. Current assets were $246.96 million versus current liabilities of $4.97 million. The filing reports no material borrowings; interest expense was $1,804 for the first half.
- At June 30, the company reported $88.17 million unrestricted cash and approximately $155.20 million primarily in short-term Treasuries and other short-term investments. It disclosed approximately $85.7 million of deposits above federally insured limits.
Changes from the prior comparable period
- Operating losses widened: Q2 operating loss increased from $1.39 million in 2017 to $2.50 million in 2018; first-half operating loss increased from $2.49 million to $5.25 million. Net loss attributable to common stockholders rose in dollars, while loss per share narrowed, reflecting a much larger weighted-average share count.
- Management cautions that comparisons are not necessarily meaningful because 2018 includes billboard and insurance businesses acquired in 2017. No business acquisitions were completed in the first half of 2018.
- First-half employee costs increased 110.5% and general and administrative expense increased 102.9%. Amortization also rose materially, principally from acquired businesses. Billboard revenue growth reflected acquisitions and improved rental and occupancy rates.
- In 2018, the company raised approximately $150 million through a private placement and $26.09 million gross through its at-the-market offering. These issuances increased the Class A share count and funded the expanded investment portfolio.
Outlook, risks and notable items
- Management expects existing cash and investments, offering proceeds and potential remaining ATM proceeds to fund working capital, anticipated capital expenditures, and its strategy for at least the next 12 months. It plans to pursue billboard and insurance acquisitions and expand insurance operations; no quantified earnings or revenue guidance is provided.
- Management said UC&S had authority to issue surety bonds in 48 states and the District of Columbia as of August 10, 2018, and hopes to complete licensing in all 50 states during 2018. Premium revenue is recognized over policy terms, so increased new business may take time to appear in reported revenue.
- After quarter-end, Boston Omaha acquired Tammy Lynn Outdoor on July 31, 2018, adding billboard assets in Virginia and West Virginia; the seller received 85,170 Class A shares as partial consideration. The ATM offering also generated additional net proceeds in July.
- Management concluded disclosure controls were ineffective because of an unresolved material weakness involving IT general controls and subsidiary-level transaction controls, primarily revenue recognition and expenditures. Remediation work was ongoing; management expected it to be substantially completed by September 30, 2018.
- Following a change in voting control, the company no longer qualified for Nasdaq’s controlled-company exemption and said it needed an additional independent director by June 30, 2019 to achieve a majority-independent board.
- Other risks include acquisition execution and integration, growth-related expenses, insurance licensing and underwriting, and market uncertainty. The filing reports routine litigation that management did not expect to have a material adverse effect. The company was assessing the effect of lease-accounting standards effective in 2019.
Key facts for investors to verify
- Whether billboard utilization and insurance commission growth can translate into improved operating results as staffing and overhead expand.
- Performance of the large Treasury and private-company investment portfolio, including the CB&T and Dream Finders investments, and the concentration of uninsured bank deposits.
- Progress and effectiveness of internal-control remediation, and compliance with Nasdaq board-independence requirements.
- Share dilution and remaining capacity under the ATM program, alongside the use of proceeds and any future acquisition funding or debt plans.
- Integration and valuation risks for acquired businesses, including the July 2018 Tammy Lynn acquisition, and the timing of any anticipated insurance premium growth.