Business context and reporting period
Boston Omaha Corporation’s Form 10-K reports the fiscal year ended December 31, 2017, with 2016 as the principal comparison. The company operates outdoor billboard advertising and surety insurance and brokerage businesses, and holds minority investments in real estate-related businesses and a homebuilder. Its operations expanded through acquisitions; accordingly, management cautions that year-over-year comparisons may not be meaningful.
Financial results and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $9.01 million | $3.84 million |
| Operating loss | $6.77 million | $3.14 million |
| Net loss attributable to common stockholders | $6.47 million | $3.17 million |
| Basic and diluted loss per share | $0.60 | $0.53 |
| Cash used in operating activities | $3.25 million | $1.48 million |
| Cash used in investing activities | $110.91 million | $23.90 million |
| Cash provided by financing activities | $91.43 million | $41.76 million |
Revenue increased 134.5%, largely reflecting acquisitions and longer periods of ownership of acquired businesses. Billboard rentals were $5.27 million; earned premiums were $2.03 million; insurance commissions were $1.59 million. Total segment gross profit was $5.58 million, or approximately 61.9% of revenue. Both operating segments remained loss-making: billboard operations reported a $2.45 million operating loss and insurance operations a $2.65 million operating loss.
At year-end, total assets were $153.48 million, total liabilities $5.09 million, and stockholders’ equity $147.15 million. Cash was $6.84 million; the company also reported $84.76 million in short-term treasuries and certificates of deposit in its liquidity discussion. The balance sheet reported $83.10 million of trading securities and $1.66 million of short-term investments. No significant borrowing debt was reported. Management expected available funds to cover working capital, anticipated capital expenditures, and operations for at least 12 months.
Operating cash outflow increased as operating expenses and working-capital needs rose. Investing cash outflow primarily reflected purchases of investments, as well as acquisitions and equipment. The company raised $91.43 million net from its June 2017 public offering. It invested $10 million in a homebuilder in December 2017. No cash dividends have been paid, and management said it did not expect to pay dividends in the foreseeable future.
Material changes versus 2016
- Billboard rental revenue rose 66.5% to $5.27 million, while billboard ground rent increased to $1.41 million from $0.55 million. Acquired displays, including some temporarily underused after existing advertising contracts ended, weighed on segment results.
- Insurance revenue expanded substantially as UC&S contributed a full year of operations and brokerage acquisitions were added. Insurance employee, professional, and amortization expenses also increased materially.
- Total costs and expenses rose to $15.79 million from $6.98 million. The operating loss widened in dollars, although it declined as a proportion of revenue, to 75.1% from 81.7%.
- Net loss attributable to common stockholders increased to $6.47 million from $3.17 million. Weighted-average shares rose to 10.82 million from 6.04 million, reflecting the 2017 public offering.
- At year-end, goodwill was $24.69 million versus $17.21 million in 2016, and net intangible assets were $9.35 million versus $3.55 million, reflecting acquisitions.
Outlook, commentary, risks, and unusual items
Management plans to pursue further billboard acquisitions, expand UC&S’s surety authority, and consider additional investments or businesses. UC&S was authorized in 46 states and the District of Columbia as of March 2018; applications and approvals for additional states remained outstanding. The company provided no earnings guidance.
After year-end, the company completed the first tranche of a private placement to entities managed by its controlling investors: 3.3 million Class A shares for $76.89 million gross proceeds. A further 3.14 million shares for approximately $73.11 million was subject to regulatory and stockholder approvals. A separate at-the-market program authorized up to $50 million of Class A stock; by March 16, 2018, 521,690 shares had generated $11.22 million net proceeds. These financings provide capital but dilute existing shareholders.
Key risks include continued losses, acquisition and integration execution, billboard regulation and site leases, insurance underwriting and reserve estimates, reinsurance availability, and dependence on capital raises. The filing reports a material weakness in internal control over financial reporting, involving IT general controls and transaction-level controls, including revenue and expenditure processes. Management stated remediation was underway and expected significant completion by September 30, 2018; the independent auditor did not attest to internal controls. The financial statement audit opinion was unqualified.
Unusual or notable items include $362,575 of losses on retired assets, including early replacement of three digital billboards; $132,191 of unrealized securities gains; and acquisition accounting for SCS that remained incomplete at year-end, including provisional valuations and a seller put option over the remaining 30% interest. Related-party and governance risks are significant: Magnolia- and Boulderado-managed entities control the voting power, and the company relies on controlled-company governance exemptions.
Important facts for investors to verify
- Whether acquired billboard inventory is being occupied and generating revenue sufficient to cover lease, operating, and amortization costs.
- Whether insurance growth can produce underwriting profitability while maintaining claims reserves, reinsurance protection, and UC&S’s A.M. Best A- rating.
- Progress in remediating the disclosed material weakness and whether subsequent filings report effective controls.
- Completion and terms of the private-placement second tranche, at-the-market sales, and any further share issuances; assess resulting dilution and control effects.
- Final purchase-price accounting for acquisitions, including SCS’s put option, and the recoverability of goodwill and intangible assets.
- Liquidity composition and availability, including restrictions on insurance-subsidiary funds and the distinction between cash, short-term investments, and trading securities.