Boston Omaha Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. Formerly REO Plus, Inc., the company reincorporated in Delaware and changed its name in March. It entered outdoor advertising on June 19 with its acquisition of 38 Alabama billboards. The quarter’s reported results largely reflect a pre-revenue transition into that business.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $0 | $5,467 | $9,700 | $11,966 |
| Total expenses | $176,178 | $9,818 | $248,599 | $39,086 |
| Net loss | $179,545 | $19,187 | $246,788 | $51,536 |
| Loss per share | $0.44 | $0.07 | $0.73 | $0.19 |
- Revenue was consulting income; the company says it discontinued these services. It reported no revenue from its billboard business in Q2. Six-month operating loss was $238,899, versus $27,120 a year earlier. Higher professional fees—associated with acquisitions and corporate reorganization—were the main expense increase. No operating margin is meaningful given the lack of reported Q2 revenue.
- Equity income from the 40%-owned Ananda affiliate was $4,642 for Q2 and $8,414 for six months, compared with losses of $7,769 and $10,656, respectively, in 2014. Ananda’s rental income increased; its own six-month net income was $21,036.
- Operating cash use was $153,203 for the first half, versus $46,013. Investing cash use was $6,384,604, primarily for the billboard asset purchase. Financing provided $10,220,663, including $10 million from stock issuance. Ending cash was $3,684,317, compared with $1,461 at year-end 2014.
- At June 30, total assets were $10,409,226, current liabilities $613,076, and stockholders’ equity $9,796,150. Company notes payable totaled $235,494: $100,000 to stockholders and $135,494 to a related party. The company also guaranteed Ananda’s $373,030 mortgage; this affiliate debt is not included in the company’s reported liabilities.
Material changes, outlook, and risks
- Alabama acquisition: On June 19, the company acquired 38 billboards and related assets for a stated purchase price of $6,684,604. The provisional allocation included $3,192,692 for structures and displays and $3,491,912 for intangibles; the allocation remained subject to an independent appraisal. The company reported $15,396 of post-acquisition net earnings credited as a purchase-price adjustment, but no post-acquisition revenue or earnings in consolidated results. Lease commitments for the acquired locations totaled $1,608,349.
- Capital and ownership: In June, the company issued 1,000,000 Class A shares for $10 million and converted $505,154 of notes and accrued interest into equity and warrants. Class A shares carry ten votes per share, compared with one vote for common shares. The two controlling stockholders held approximately 95% of common shares, according to the filing.
- Subsequent events: On July 22, controlling stockholders purchased common shares for $14.5 million in gross proceeds. On July 23, a subsidiary acquired Florida billboard assets for approximately $1.945 million. These events occurred after quarter-end and are not reflected in June 30 cash or results. Management said it expected the proceeds to fund a limited number of further acquisitions and anticipated a rights offering; it gave no earnings or revenue guidance.
- Management intends to pursue additional billboard acquisitions and selected cash-generative businesses, potentially using cash, seller or third-party financing, and equity. It cautioned that future capital needs depend on acquisition scope, that no binding commitments for further financing existed, and that financing may not be available on acceptable terms.
- The filing identifies substantial doubt about the company’s ability to continue as a going concern: it had an accumulated deficit of $769,167 and had not yet produced operating earnings. Management cited the July financing and anticipated billboard profitability as support for its plan, but stated success was not assured.
- Other risks and obligations include the company’s guarantee of Ananda’s mortgage (with recourse potentially up to the unpaid balance), a related-party note secured by its Ananda interest, and a transition-services agreement with Bell Media at $11,000 per month, terminable on 15 days’ notice. Management noted economic weakness could reduce billboard pricing and rising electricity costs could affect digital billboards.
- Disclosure controls had a material weakness due to insufficient segregation of accounting duties from limited personnel. Management reported no corrective actions during the period. The filing also states there were no off-balance-sheet arrangements.
Most important facts to verify
- Whether the provisional Alabama purchase-price allocation, acquired-asset performance, and billboard lease economics changed after quarter-end.
- How the $14.5 million July financing was used, the Florida transaction’s final accounting, and the actual terms and outcome of the anticipated rights offering.
- Whether the company can generate sustainable operating cash flow and secure additional financing after the July proceeds are spent.
- The status and terms of the related-party note, Ananda collateral and proxy arrangements, and the company’s exposure under its mortgage guarantee.
- Whether management addressed the disclosed material weakness in accounting controls.