Boston Omaha Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited consolidated financial statements. The company was shifting toward outdoor advertising, alongside surety-insurance activities and minority real-estate investments. Its 2015 comparison predates entry into outdoor advertising, so year-over-year comparisons are not directly comparable.
Financial performance and position
- Revenue: $513,544, all reported as billboard rentals, versus $9,700 of consulting revenue in Q1 2015. The 2016 figure included $133,168 from the February Jag acquisition. The company reported no consulting revenue in Q1 2016.
- Expenses and profit: Total costs and expenses were $1,307,479, including $345,520 of professional fees, $217,435 of leased-employee costs, and $317,460 of depreciation and amortization. Operating loss was $793,935; net loss was $839,838, or $0.19 per share, versus a $67,243 net loss, or $0.25 per share, a year earlier. No income-tax provision or benefit was reported.
- Cash flow: Operating cash use was $211,046; investing cash use was $7,425,072, chiefly for acquisitions; and financing provided $25,142,516, primarily from stock issuance. Cash increased $17,506,398 to $30,695,464.
- Liquidity and debt: Current assets were $31,116,184 and current liabilities were $403,310 at quarter-end. The filing reports no debt at March 31; stockholder notes and accrued interest were converted into shares during the quarter.
- Assets and equity: Total assets were $48,307,521, up from $23,785,496 at December 31, 2015; stockholders’ equity was $47,904,211. The company raised $25,142,516 in cash through common-stock issuance during the quarter, according to the financial statements.
Material changes and notable items
- The company acquired Jag, Inc.’s Wisconsin outdoor-advertising assets, including 422 billboard displays, for a stated cash purchase price of $6,954,246, with $687,500 placed in escrow and post-closing adjustments possible. It also reported a smaller Rose City acquisition.
- Goodwill increased to $6,547,923 and net intangible assets to $2,238,064. The Jag purchase-price allocation was provisional pending an independent appraisal. The acquisitions added operating assets but also depreciation and amortization costs.
- The company’s reported equity-method loss from unconsolidated affiliates was $44,161, compared with $3,772 of income in Q1 2015. Bad-debt expense was $27,405; the allowance for doubtful accounts was also $27,405 at quarter-end, up from $2,111 at year-end.
- On February 29, controlling stockholders converted notes and accrued interest totaling $106,018 into common shares. The filing also describes substantial purchases by controlling-stockholder-related entities in the 2016 equity financing.
- After quarter-end, General Indemnity Group acquired The Warnock Agency, a surety-insurance brokerage. The company also reported an additional $4,415,250 of stock proceeds from April 1 through May 16, 2016.
Outlook, risks, and contingencies
Management intends to pursue billboard, insurance, and other acquisitions, using cash and potentially seller, third-party, or equity financing. It said quarter-end cash could fund a limited number of acquisitions; further significant acquisitions would require additional capital, and there were no binding commitments for financing beyond the offering. The company gave no quantified earnings or revenue guidance and cautioned that interim results may not indicate full-year results.
Management cited potential exposure to weaker economic conditions and advertising rates, operating-cost inflation, replacement needs for digital billboard faces, and difficulty obtaining additional financing or making profitable acquisitions. Billboard-location operating leases had future minimum rents of $4,272,359 as disclosed in the filing. No legal proceedings or off-balance-sheet arrangements were reported.
Controls and governance: Management concluded internal control over financial reporting was ineffective at March 31, 2016 because of material weaknesses, including no independent audit committee, limited financial-reporting staff and supervision, inadequate segregation of bookkeeping duties, and insufficient independent directors. Management said it was seeking personnel and directors to address these issues. Magnolia and Boulderado together held substantial voting influence; the filing states they controlled 94.6% of combined common and Class A voting power based on its described assumptions.
Important facts to verify
- Equity-offering figures: The cash-flow statement reports $25,142,516 of stock proceeds, and Note 6 reports 2,477,094 shares issued for that amount. Part II, Item 2 instead reports 2,812,540 shares sold for $28,547,282.93 during the quarter. Reconcile the different figures, periods, and share counts.
- Acquisition economics: Verify the final Jag purchase-price allocation, escrow release, post-closing adjustments, and the acquired businesses’ ongoing revenue, costs, and cash generation.
- Control remediation and reporting reliability: Track whether management remedied the disclosed material weaknesses and established independent audit oversight.
- Capital needs and ownership: Verify subsequent financing totals and terms, related-party participation, dilution, and the company’s ability to fund further acquisitions.
- Lease and asset risks: Assess the duration and economics of billboard ground leases, future rent obligations, and the recoverability and useful lives of acquired goodwill and intangible assets.