Boston Omaha Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited, consolidated results. Boston Omaha operates outdoor advertising, surety insurance and brokerage, and minority investments, primarily in real estate and homebuilding.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $2.823 million | $1.870 million; up 51.0% |
| Operating loss | $2.742 million | $1.100 million |
| Net loss attributable to common stockholders | $2.069 million; $0.13 per share | $1.110 million; $0.16 per share |
| Operating cash flow | $(1.118) million | $(0.585) million |
| Investing cash flow | $(32.886) million | $(4.786) million |
| Financing cash flow | $87.454 million | No financing cash flow |
Billboard rental revenue rose 52.8% to $1.550 million, while insurance commissions increased 129.7% to $0.765 million, largely reflecting 2017 acquisitions. Earned premiums declined 3.1% to $0.477 million. Segment gross profit was $1.887 million, or about 66.9% of revenue, versus $1.192 million, or about 63.8%, a year earlier. Operating loss widened as operating expenses grew faster than revenue.
Employee costs rose to $1.842 million from $0.831 million; professional fees increased to $0.844 million from $0.454 million; and general and administrative expense increased to $0.851 million from $0.411 million. Management attributed much of the increase to expanded staffing, infrastructure, and overhead for growing billboard and insurance operations. Higher interest income ($0.444 million) and equity-method income ($0.284 million) partly offset the operating loss; securities generated a reported unrealized loss of $0.093 million.
At March 31, cash and cash equivalents were $60.171 million; current trading and available-for-sale Treasury securities totaled $115.121 million. Total assets were $238.994 million, stockholders’ equity $232.538 million, and total liabilities $5.262 million. The balance sheet reports no interest-bearing borrowings. The company reported $11.584 million of future minimum lease payments. Operating cash use increased year over year; investing outflows primarily reflected purchases of securities.
Material changes and financing
- The company raised $76.890 million gross in the first tranche of a private placement, issuing 3.3 million Class A shares to related-party-managed partnerships, and received $11.570 million gross from its at-the-market offering. Financing cash flow was net of $1.006 million of offering costs.
- The remaining private-placement tranche was approximately $73.110 million gross and expected to close in May 2018, subject to approvals; shareholders approved the authorized-share increase on May 4. The filing also reports subsequent April ATM proceeds of $8.767 million net.
- Class A shares outstanding increased to 17.129 million at quarter-end from 13.307 million at year-end 2017. Weighted-average shares rose to 15.400 million from 6.897 million, helping reduce per-share loss despite a larger total net loss.
- No business acquisitions were completed during Q1 2018. Comparisons with Q1 2017 are affected by billboard and insurance acquisitions completed during 2017.
- Cash, cash equivalents, and restricted cash ended the quarter at $60.680 million, up $53.449 million, principally because of equity financing. Management said available cash and investments were expected to fund working capital, capital expenditures, and planned growth for at least 12 months.
Outlook, risks, and unusual items
Management intends to pursue billboard and insurance acquisitions, expand surety operations, and continue real estate-related investments. It described broader licensing, added personnel and systems, and expanded reinsurance arrangements as investments in longer-term insurance growth; it cautioned that premium revenue is recognized over policy terms and may lag new business. No numerical earnings or revenue guidance was provided.
- Controls: Management concluded disclosure controls were ineffective because of a material weakness in internal control over financial reporting. Remediation was underway, with substantial completion expected by September 30, 2018; management nevertheless stated the financial statements fairly present the company’s position and results in all material respects.
- Liquidity and investment risk: Approximately $58.025 million held at financial institutions exceeded federally insured limits. The company’s strategy relies on acquisitions and equity financing; future acquisition benefits and availability are uncertain. Its governing documents do not cap potential debt.
- Related-party and dilution considerations: The private placement involved entities managed by groups associated with the transaction; it was approved by an independent board committee and accompanied by a fairness opinion. Further share issuance could dilute existing holders.
- Other items: A seller of a 70%-owned insurance brokerage may put its remaining 30% interest to the company; the related redeemable noncontrolling interest was $1.195 million. Routine litigation was disclosed, with management not expecting a material adverse effect. A post-quarter $2.117 million short-term loan carried 15% interest and was guaranteed, including by a pledged 4.9% ownership interest in the borrower.
- The company adopted ASC 606 in 2018 without an opening accumulated-deficit adjustment. It was assessing the impact of the lease-accounting standard scheduled for adoption in 2019.
Key facts for investors to verify
- Whether the expected second private-placement tranche closed, and the resulting share count, proceeds, and dilution.
- Whether revenue growth and billboard utilization improve operating results enough to offset elevated staffing, overhead, and amortization costs.
- Progress against management’s internal-control remediation plan and the material weakness identified in this filing.
- The quality, liquidity, and concentration of Treasury and other investments, including cash deposits above insured limits.
- Future surety premium growth, reinsurance arrangements, the SCS put option, and the company’s acquisition and capital-allocation plans.