BOSTON OMAHA Corp quarterly report, Q2 FY2019

Boston Omaha Corporation — Q2 2019 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019; unaudited. Boston Omaha operates outdoor advertising and surety insurance businesses and holds minority investments. Year-over-year comparisons are substantially affected by the July–August 2018 billboard acquisitions of Tammy Lynn, Key and Waitt.

Financial results and liquidity

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Revenue	$10.14 million	$2.99 million	$19.25 million	$5.81 million
Operating loss	$3.20 million	$2.50 million	$7.99 million	$5.25 million
Net loss attributable to common stockholders	$2.11 million	$1.60 million	$6.19 million	$3.67 million
Loss per share	$0.09	$0.08	$0.28	$0.21
Operating cash flow	Not separately presented for the quarter	$2.90 million	$(2.47) million

Q2 revenue increased 239%; first-half revenue increased 231%. Billboard rentals drove much of the increase, rising to $7.15 million in Q2 and $13.93 million for the first half. Earned insurance premiums were $2.49 million and $4.37 million, respectively.
Operating loss margins improved to 31.6% of revenue in Q2 and 41.5% in the first half, versus 83.7% and 90.3% in the prior-year periods. However, operating losses increased in dollars, largely reflecting acquisition-related depreciation and amortization. Q2 amortization was $2.86 million; first-half amortization was $5.71 million.
Billboard segment gross margin was 61.3% in Q2 and 60.7% for the first half, versus 50.4% and 51.8%. Insurance segment gross margin was 52.1% in Q2 and 48.9% for the first half, down from 79.5% and 81.4%; insurance operations continued to report operating losses.
At June 30, cash and cash equivalents were $11.66 million, restricted cash $0.71 million, and U.S. Treasury securities available for sale $85.02 million. Management described approximately $97 million as available in unrestricted cash and Treasuries. Current assets were $121.14 million and current liabilities $18.21 million.
Total assets were $390.16 million and stockholders’ equity $322.91 million. Lease liabilities totaled $48.86 million, including $3.39 million current; the filing reported no interest expense for the first half of 2019 and no conventional borrowing balance. A proposed credit facility remained under negotiation.
Cash, cash equivalents and restricted cash declined $5.78 million in the first half. Investing cash outflow was $22.83 million, including a $12 million purchase of Dream Finders Holdings preferred units. Financing cash inflow was $14.16 million, net of offering costs.

Material changes and management commentary

The 2018 billboard acquisitions increased operations to approximately 2,900 billboards and 5,400 advertising faces as of August 1, 2019. Management attributed higher billboard revenue both to the acquired assets and improved rental and occupancy rates.
Surety insurer UCS became licensed in all 50 states and the District of Columbia. Earned premiums increased, while brokerage commissions declined as more bond business was placed through UCS rather than other carriers. Management noted increased loss-reserve estimates as premium volume grew and the business entered new markets.
Share count and dilution increased: weighted-average shares were 22.45 million in Q2, versus 19.17 million a year earlier. The company raised $14.61 million gross through its at-the-market offering in the first half. It sold another 334,751 shares after quarter-end through July 31, generating $7.56 million net; only $356,027 remained available under that offering.
In May 2019, the company invested $12 million in Dream Finders preferred units carrying a mandatory preferred return of at least 14% annually, with specified conversion and enhanced-return terms. The company reported no impairment to its investments at June 30.
Adoption of lease accounting standard ASC 842 added $50.31 million of right-of-use assets and $48.86 million of lease liabilities at June 30. Management said the adoption did not significantly affect results or cash flows.

Outlook, risks and contingencies

No quantified earnings or revenue guidance was provided. Management intends to pursue billboard and insurance acquisitions and other investments, and expects existing liquidity and operating cash flows to cover working capital and anticipated capital expenditures for the next 12 months.
Management was negotiating a potential Link subsidiary term-loan and revolver facility of up to $40 million, secured by Link and subsidiary assets but not guaranteed by Boston Omaha Corporation. Terms and completion were not assured; any facility could impose financial covenants and operating restrictions.
Future acquisitions may require additional debt or equity, and the company cautioned that financing may not be available on favorable terms or at all. Public equity investments are exposed to market-value losses; investment gains contributed to reported other income in 2019.
Disclosure controls and procedures were concluded to be ineffective due to material weaknesses in journal-entry and expenditure controls. Remediation was underway but had not operated long enough for management to conclude it was effective. The acquired Waitt and Key businesses were excluded from the controls assessment under the stated acquisition guidance.
The company reported approximately $9.2 million in deposits above federally insured limits. Routine litigation and claims were described as not expected to have a material adverse effect. No material off-balance-sheet arrangements were reported other than normal operating leases.
After June 30, the company invested approximately $29 million in a marketable equity security using proceeds from maturing Treasury investments.

Important facts for investors to verify

How much of revenue growth and future operating performance reflects acquired billboard capacity versus organic rental and occupancy improvements.
Whether billboard and insurance segments can achieve operating profitability as acquisition-related amortization, staffing and insurance loss costs evolve.
UCS loss-reserve adequacy, reinsurance arrangements and loss experience as underwriting expands geographically.
Use, terms and potential dilution associated with further equity issuance, and whether the proposed credit facility is completed and on what covenants.
Progress in remediating internal-control material weaknesses, including controls at acquired businesses.
Valuation and performance of the Dream Finders investment and marketable securities, including the post-quarter $29 million investment.