Boston Omaha Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The unaudited company operates outdoor advertising, surety insurance and related brokerage businesses, and holds minority investments in real estate and real estate-services companies. The company cautions that interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1.995 million | $0.994 million | $3.865 million | $1.508 million |
| Operating loss | $1.389 million | $0.657 million | $2.489 million | $1.451 million |
| Net loss | $1.368 million | $0.640 million | $2.478 million | $1.479 million |
| Basic and diluted loss per share | $0.18 | $0.11 | $0.34 | $0.29 |
- Q2 revenue rose 100.6% year over year; first-half revenue rose 156.3%. Comparisons are affected by acquisitions and are not necessarily like-for-like.
- Billboard rentals were $1.215 million in Q2 and $2.230 million in the first half. The first-half total included $1.024 million of earned premiums from UC&S and $0.543 million of insurance commissions.
- Segment gross profit was $1.308 million in Q2 and $2.500 million in the first half. That equates to approximate segment gross margins of 65.5% and 64.7%, respectively. Total costs and expenses were 169.7% of revenue in Q2 and 164.4% in the first half.
- Cash from operating activities was negative $1.643 million for the first half, versus negative $0.758 million a year earlier. Investing activities used $13.429 million; financing activities provided $87.225 million, principally from the June stock offering.
- At June 30, cash was $101.718 million, restricted cash $0.405 million, and total current assets $105.978 million. Total liabilities were $4.167 million, including $4.046 million current liabilities; the balance sheet reports no material conventional borrowings. Stockholders’ equity was $146.937 million.
- Cash increased from $29.565 million at year-end 2016, primarily reflecting equity issuance. The company raised $87.225 million net in the June offering and reported a further $4.254 million net proceeds from an over-allotment sale in July.
Changes, acquisitions and unusual items
- During the first half, the company completed five billboard-business or asset acquisitions. The acquisitions added $12.891 million of assets, including $4.815 million of goodwill. Acquisition accounting allocations were preliminary and subject to revision.
- Revenue growth also reflected the December 2016 UC&S acquisition and the inclusion of Warnock for more of the period than in 2016. UC&S expanded its authority to sell surety insurance from nine states at year-end 2016 to 36 states plus the District of Columbia by June 30, 2017.
- A $228,431 Q2 loss on disposition related to three digital billboards replaced ahead of schedule and equipment acquired from JAG. Management said that excluding this item, Q2 costs and expenses would have been 158.2% of revenue and operating loss 58.2% of revenue.
- The June public offering issued 7,113,462 Class A shares in its initial closing for $87.225 million net proceeds. Entities controlled by two directors bought 3,653,846 shares; officers and directors, directly or through controlled entities, bought additional shares. Shares outstanding at June 30 were 12,955,277 Class A and 1,055,560 Class B.
- Ground and office lease commitments totaled $13.829 million in future minimum rents. Some billboard leases are cancelable with little or no penalty; acquired lease terms range from month-to-month to 705 months.
Outlook, risks and controls
- Management intends to continue acquiring billboard assets and insurance businesses, expand UC&S licensing and make further real estate-services investments. It expects additional UC&S revenue as expanded state authorizations are used. No quantified earnings or revenue guidance is provided.
- Management stated that cash and offering proceeds should cover working capital and anticipated capital expenditures for the next 12 months and support its acquisition and insurance-expansion strategy. Future acquisitions may be funded with cash, seller or third-party financing, or equity; the company has no governing-document limit on debt and no board-adopted debt cap.
- Acquisition execution and integration, realization of anticipated benefits, operating costs, and the ability to expand insurance sales are key uncertainties. The company had nonbinding letters of intent for two businesses, with no assurance that the transactions would close.
- Approximately $100.6 million held at one financial institution exceeded federal deposit-insurance limits. The company also disclosed that disclosure controls and internal control over financial reporting were ineffective at June 30 due to a material weakness: lack of a formal risk-assessment process and monitoring structure. Management said remediation work was underway and anticipated addressing the deficiency before year-end 2017.
- Subsequent to quarter-end, the company agreed to acquire an insurance brokerage for $450,000 and billboard assets for $623,596. It also completed the additional July stock sale described above.
Investor verification priorities
- Check whether the acquired billboards improve occupancy and revenue, especially the assets whose prior owner had curtailed sales activity.
- Track UC&S premium growth and underwriting costs as the company expands into newly authorized states.
- Review cash use, acquisition returns, future equity issuance, and any debt taken on after the reporting date.
- Confirm progress in remediating the disclosed material weakness and whether controls were subsequently assessed as effective.
- Review bank-deposit concentration, lease obligations, and final purchase-price allocations for recent acquisitions.