BOSTON OMAHA Corp - Quarter Report: 2016 September (Form 10-Q)

---

---

PART 1.  FINANCIAL INFORMATION

 

 

Consolidated Balance Sheets
Unaudited
ASSETS
		September 30,				December 31,
		2016				2015
Current Assets:
Cash		$	42,375,758			$	13,189,066
Restricted cash			227,943				-
Accounts receivable, net			469,796				276,750
Prepaid expense			377,091				70,484
Total Current Assets			43,450,588				13,536,300
Property and Equipment:
Structures and displays			9,289,542				4,548,473
Vehicles, equipment and furniture			112,063				2,633
Accumulated depreciation			(961,492	)			(307,367	)
Total Property and Equipment, net			8,440,113				4,243,739
Other Assets:
Goodwill			7,917,853				4,389,664
Intangible assets, net			2,887,800				958,265
Investment in unconsolidated affiliates			866,221				657,528
Convertible note receivable			100,000				-
Total Other Assets			11,771,874				6,005,457
Total Assets		$	63,662,575			$	23,785,496

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses		$	342,505			$	152,672
Accounts payable, stockholder			-				2,721
Notes payable, stockholders			-				100,000
Accrued interest, stockholders			-				4,384
Deferred revenue			101,536				30,204
Total Current Liabilities			444,041				289,981
Long-term payable for acquisition			126,500				-
Total Liabilities			570,541				289,981
Stockholders' Equity:
Preferred stock, $.001 par value, 1,000,000 shares
authorized, 0 shares issued and outstanding			-				-
Common stock, $.001 par value, 11,000,000 shares
authorized, 5,841,815 and 1,716,954 shares
issued and outstanding, respectively			5,842				1,717
Class A common stock, $.001 par value, 1,161,161 shares
authorized, 1,055,560 shares issued and outstanding			1,056				1,056
Additional paid-in capital			66,925,766				25,062,544
Accumulated deficit			(3,840,630	)			(1,569,802	)
Total Stockholders' Equity			63,092,034				23,495,515
Total Liabilities and Stockholders' Equity		$	63,662,575			$	23,785,496

See accompanying notes to the unaudited financial statements.

 

Consolidated Statements of Operations
Unaudited
		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
Revenues:
Billboard rentals		$	959,148			$	349,161			$	2,273,210			$	349,161
Insurance commissions			83,089				-				276,850				-
Consulting fees			-				-				-				9,700
Total Revenues			1,042,237				349,161				2,550,060				358,861
Costs and Expenses:
Cost of billboard revenues (exclusive
of depreciation and amortization)			379,913				166,902				874,174				166,902
Leased employees			504,117				70,729				1,140,009				77,391
Professional fees			281,719				335,322				974,214				547,867
Depreciation			245,787				154,427				654,125				160,842
Amortization			255,295				34,904				596,601				50,462
General and administrative			159,930				36,877				517,885				44,296
Bad debt expense			-				-				28,682				-
Total Costs and Expenses			1,826,761				799,161				4,785,690				1,047,760
Net Loss from Operations			(784,524	)			(450,000	)			(2,235,630	)			(688,899	)
Other Income (Expense):
Equity in income (loss) of
unconsolidated affiliate			(6,623	)			4,151				(32,958	)			12,565
Interest expense			(182	)			(3,442	)			(2,240	)			(19,745	)
Net Loss before Income Tax			(791,329	)			(449,291	)			(2,270,828	)			(696,079	)
Income Tax (Provision) Benefit			-				-				-				-
Net Loss		$	(791,329	)		$	(449,291	)		$	(2,270,828	)		$	(696,079	)
Basic and Diluted Net Loss per Share		$	(0.11	)		$	(0.18	)		$	(0.40	)		$	(0.67	)
Basic and Diluted Weighted Average
Shares Outstanding			6,896,923				2,441,536				5,744,898				1,046,178

 

See accompanying notes to the unaudited financial statements.

Consolidated Statements of Cash Flows
Unaudited
		For the Nine Months Ended
		September 30,
		2016				2015
Cash Flows from Operating Activities:
Net Loss		$	(2,270,828	)		$	(696,079	)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization			1,250,726				211,304
Bad debt expense			28,682				-
Equity in loss (income) of unconsolidated affiliates			32,958				(12,565	)
Changes in operating assets and liabilities:
Accounts receivable			(93,503	)			(226,112	)
Prepaid expenses			(306,607	)			(57,181	)
Accounts payable and accrued expenses			187,112				214,116
Accrued interest			1,644				17,475
Deferred revenue			71,332				6,000
Net Cash Used in Operating Activities			(1,098,484	)			(543,042	)
Cash Flows from Investing Activities:
Deposits to restricted cash			(227,943	)			-
Purchase of equipment			(504,597	)			-
Business acquisitions, net of cash acquired			(10,401,952	)			(9,924,565	)
Acquisition of investment in unconsolidated affiliate			(258,166	)			-
Distributions from unconsolidated affiliates			16,515				-
Purchase of convertible note receivable			(100,000	)			-
Net Cash Used in Investing Activities			(11,476,143	)			(9,924,565	)
Cash Flows from Financing Activities:
Proceeds from notes payable to stockholders			-				219,000
Payments on notes payable to stockholders			-				(3,500	)
Proceeds from issuance of stock			41,761,319				24,500,000
Contribution of capital			-				5,163
Net Cash Provided by Financing Activities			41,761,319				24,720,663
Net Increase in Cash			29,186,692				14,253,056
Cash, Beginning of Period			13,189,066				1,461
Cash, End of Period		$	42,375,758			$	14,254,517
Interest Paid in Cash		$	596			$	2,270
Income Taxes Paid in Cash		$	-			$	-

 

See accompanying notes to the unaudited financial statements.

Consolidated Statements of Cash Flows (Continued)
Supplemental Schedules of Non-cash Financing Activities
Unaudited
		For the Nine Months Ended
		September 30,
		2016				2015
Restructure of notes payable, stockholders		$	-			$	398,224
Restructure of note payable, former stockholder			-				135,494
Payables due on acquisitions			126,500				-
Notes payable and accrued interest converted
to common stock			106,028				505,154
Distribution from unconsolidated
affiliate applied to note payable,
former stockholder			-				32,000

 

See accompanying notes to the unaudited financial statements.

 

 

Item 2.         Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  We have based these forward-looking statements on our current expectations and projections about future events.  These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as "may," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "continue," or the negative of such terms or other similar expressions.  Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other Securities and Exchange Commission filings.  The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report. Any of the forward-looking statements that we make in this quarterly report on Form 10-Q and in other public reports and statements we make may turn out to be inaccurate as a result of our beliefs and assumptions we make in connection with the factors set forth above or because of other unidentified and unpredictable factors. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. These risks could cause our actual results for 2016 and beyond to differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect the Company's financial condition, liquidity and operating and stock price performance.

 

Overview

 

Boston Omaha Corporation was originally incorporated as REO Plus, Inc. on August 10, 2009 under the laws of the State of Texas.  On March 18, 2015, we reincorporated as a Delaware corporation and changed our name to Boston Omaha Corporation.   Our principal address is 292 Newbury Street, Suite 333, Boston, Massachusetts 02115 and our telephone number is 857-256-0079.

 

We currently operate several lines of business, including outdoor billboards and related advertising services, a surety insurance brokerage firm, and maintain minority ownership positions in several real estate ventures.  Since June 2015, we have acquired six different outdoor billboard businesses located in Alabama, Florida, Georgia and Wisconsin, which own and operate over 590 billboard signs.  In April 2016, we also completed an acquisition of a surety bond business, thus expanding our operations in insurance.

 

Acquisitions.

 

In April 2016, we acquired The Warnock Agency, Inc., a broker of surety insurance policies.  On May 19, 2016, General Indemnity Group, LLC, our wholly-owned subsidiary, entered into a stock purchase agreement with the shareholders of United Casualty and Surety Insurance Company ("UC&S"), pursuant to which General Indemnity Group, LLC will purchase all of the outstanding capital stock of UC&S.  The purchase price for the acquired stock will be $13,000,000, to be paid to the selling stockholders at closing.  UC&S is an insurance company headquartered in Quincy, Massachusetts, specializing in providing surety bonds.  UC&S is authorized to conduct business in Massachusetts, Rhode Island, New Hampshire, Maine, New York, New Jersey, Connecticut, Pennsylvania and Florida.  The closing of the acquisition is contingent upon certain closing conditions, including the approval by the Massachusetts Division of Insurance. A hearing by the Massachusetts Division of Insurance on our application is currently scheduled to occur on November 15, 2016.

 

 

 Our business objective is to grow intrinsic value per share at an attractive rate by retaining capital to reinvest in the productive capabilities of our current subsidiaries, make opportunistic investments, and/or invest in new, other potentially durable earnings streams. 

 

We were formed by a Delaware corporation then known as Akashic Ventures, Inc. ("Akashic") for purposes of acquiring financially attractive real estate properties.  Until December 31, 2015 we owned a 40% membership interest in Ananda Investments, LLC ("Ananda"), a Texas limited liability company that owns a particular real estate property near and west of downtown Houston, Texas.  On December 31, 2015, we sold this interest to Richard Church, our former principal stockholder, in exchange for cancellation of a promissory note we issued to Mr. Church in the original principal amount of $135,494.  

 

Financing Activities:

 

In January 2016, we commenced an offering of shares of our common stock to accredited investors (the "2016 Financing") at a price of $10.15 per share.  We raised $41,761,319 in gross proceeds, issuing an additional 4,114,415 shares of our Common Stock.  Magnolia and Boulderado acquired approximately 62.3% and 8.4%, respectively, of the Common Stock sold in the 2016 Financing.  In addition, other directors and officers directly or indirectly acquired beneficial ownership of approximately an additional 2.3% of the Common Stock sold in the 2016 financing.

 

 

We became a publicly held corporation in November 2012 when Akashic distributed to certain of its shareholders a total of 132,927 shares of our Common Stock held by it under a registration statement declared effective by the Securities and Exchange Commission.  On November 9, 2016, we registered as a reporting company under the Securities Exchange Act of 1934, as amended, and our Common Stock trades on the OTCQX Exchange under the trading symbol "BOMN."

 

 

 

Present management took over operations in February 2015.  Since June 2015, we have acquired outdoor billboard assets in Alabama, Florida, Georgia and Wisconsin and expect to continue to seek additional acquisitions in billboard advertising.  We have also acquired an insurance brokerage firm specializing in surety insurance and have entered into an agreement to acquire UC&S, an insurance company specializing in providing surety bonds. We believe these businesses offer the potential to provide a durable and growing cash flow stream over time.  In addition, we believe that in the outdoor billboard business, multiple opportunities could exist in time for the industry at large including but not limited to: supply limitations, demand growth, opportunity to convert static billboard faces to digital applications when the economics are favorable, and a growing use of billboard advertising by customers who previously ignored or underutilized the medium due to the general inflexibility of static board contracts.  We source acquisitions both internally via phone calls or mailings and also by receipt of target acquisition opportunities from a number of brokers and other professionals.  

 

 

In addition to these completed and pending acquisitions, we are also seeking opportunities to acquire other businesses or a significant interest in existing businesses.  We look to acquire businesses in their entirety that have consistently demonstrated earnings power over time, with attractive pretax historical returns on tangible equity capital, while utilizing minimal to no debt, and that are available at a reasonable price.  However, we may consider minority positions.  In certain circumstances, we may enter lines of business directly when the opportunities and economics of doing so are favorable in comparison to acquisitions.

 

From June 19, 2015 through September 30, 2016, we have raised $66,872,500 through the sale of our equity securities, which includes the conversion of $611,181 in principal and interest under certain loans to equity.  We have also extinguished the remaining $135,494 in debt through the exchange of our minority interest in a real estate venture for the cancellation of this debt.  As a result, and after payment for the acquisitions described above, as of September 30, 2016, we had $42,375,758 in unrestricted cash and no debt.  This figure excludes our obligation to pay approximately $13,000,000 to the stockholders of UC&S if and when the UC&S transaction is consummated.

 

 

 

 

Expenses.  During the third quarter of 2016, we had expenses in the amount of $1,826,761, primarily from the cost of employees, cost of billboard revenues excluding depreciation and amortization expenses, and general and administrative expenses, which combined totaled $1,043,960.  Non-cash expenses included $245,787 in depreciation and $255,295 in amortization expenses associated with our acquisitions in 2015 and 2016 or on a combined basis, 27.4% of costs and expenses during the third quarter of 2016.  We also incurred $281,719 in professional fees, associated primarily with legal and accounting expenses incurred in connection with completing certain audits associated with prior acquisitions, costs associated with our 2016 Financing, as well as our costs incurred in listing on the OTCQX and other costs associated in operating a public company.  During the third quarter of 2015, we had costs and expenses of $799,161, as our billboard operations were more limited in 2015 and we had just begun to incur costs associated with our surety insurance business.

 

 

Expenses increased 10.6% in the third quarter of 2016 to $1,826,761 from $1,651,450 during the second quarter of 2016 as a result of increased billboard operations, the additional costs of certain billboards acquired late in the second quarter of 2016, and increased depreciation and amortization expenses associated with the acquisitions we completed.  Compared to the second quarter of 2016, general and administrative expenses increased by 7.3% in the third quarter of 2016 and professional fees decreased by 18.8% to $281,719 from $346,975 during the second quarter of 2016 when we completed several acquisitions and negotiated and signed the agreement to acquire all of the shares of UC&S.

 

Net Loss.   We had a net loss before income taxes of $791,329 during the third quarter of 2016, compared to a net loss before income taxes of $449,291 during the third quarter of 2015 and a net loss of $639,661 during the second quarter of 2016, or a per-share loss of $0.11 during each of the third quarter of 2016 and the second quarter of 2016, a decrease from the net loss per share of $.18 for the third quarter of 2015.  Although the net loss increased between the second and third quarters of 2016, the net loss per share remained the same because the shares sold in the 2016 financing increased the number of weighted average shares outstanding from 5,945,267 at June 30, 2016 to 6,896,923 at September 30, 2016.  Our net loss during the third quarter of 2015 was based on 2,441,536 weighted average shares outstanding.

 

 

Revenues.  We realized revenues of $2,550,060 during the nine months ended September 30, 2016.  $2,273,210 of these revenues were from billboard rentals.  We completed three billboard business acquisitions at various times during this nine month period.  Revenues during the first nine months ended September 30, 2016 also included $276,850 in revenues from The Warnock Agency, Inc. which we acquired during the second quarter of 2016.   During the first nine months of 2015, we had revenues in the amount of $349,161 from billboard revenues as we acquired billboards late in the second quarter and during the third quarter of 2015.  We no longer provide the real estate consulting services from which we derived revenues of $9,700 during the first nine months of 2015.

 

 

 

 Net loss.   We had a net loss in the amount of $2,270,828 during the first nine months of 2016, or a per-share loss of $0.40, based on 5,744,898 weighted average shares outstanding.  This compared to a net loss in the amount of $696,079 during the first nine months of 2015, or a per-share loss of $0.67, based on 1,046,178 weighted average shares outstanding.

 

Liquidity and Capital Requirements

 

Currently, we own billboards in Alabama, Florida, Georgia and Wisconsin, a surety insurance brokerage firm we acquired in April 2016, and have minority investments in several real estate entities.  We also have a pending acquisition of UC&S with a purchase price of $13,000,000.  Our strategy is to continue to acquire other billboard locations and insurance businesses as well as acquire other businesses which we would expect to generate positive cash flows.  We currently expect to finance any future acquisition with cash and seller or third party financing.  In the future, we may satisfy a portion of the purchase price for a property with the Company's equity securities.  At September 30, 2016, we had $42,375,758 in unrestricted cash.  As a result, we have adequate resources to complete the UC&S acquisition and a certain limited number of potential future acquisitions with these proceeds.  If and when we exhaust the funds from the 2016 Financing, we may choose to raise additional funding to complete potential future acquisitions that are available at a reasonable price.

 

We continue to explore both the type and scope of acquisitions and business lines that we wish to pursue.  The amount of capital that we will need will depend on the scope of the acquisitions and business lines that we ultimately decide to pursue, which is uncertain at this time.  However, for us to acquire significant additional businesses, we may need to undertake certain financing activities once we exhaust the funding raised in the 2016 Financing.  The sources for financing would initially most likely be institutional investors or accredited individuals although we may also consider raising additional funds through the public markets.  We currently do not have any binding commitments for additional financing.  We cannot assure anyone that additional financing will be available to us when needed or, if available, that such financing can be obtained on commercially reasonably terms.  If we do not obtain additional financing, it may limit the acquisitions we can complete.   We cannot assure anyone that we will be successful in obtaining necessary capital in our acquisition activities or that any acquisition will achieve or maintain profitability.

 

 

Seasonal Effects and Effects of Inflation

 

Management believes that its business interests in real estate and outdoor billboard advertising are not subject to significant seasonal variations, although certain of our billboard operations in Wisconsin may realize increased revenues during the summer months due to their locations in regions with a large number of summer visitors.  Management further believes that the service nature of the businesses we operate may not be as impacted by inflation as more capital intensive businesses, since materials are not anticipated to be a significant component of our costs, and we currently possess businesses with relatively minimal capital expenditure needs.  However, management also believes inflation can affect all businesses.  Our labor, electricity usage, insurance, and other costs may be subject to inflationary pressures.  It should also be understood that we own digital billboards within our billboard assets, which must be replaced over time to maintain revenue levels and remain competitive, therefore depreciating faster than static billboards.  Historically, the cost of digital billboard faces has declined while useful lives have increased as the technology advanced, thus proving somewhat deflationary.  There is no guarantee that this will continue though, and the cost of digital billboard faces may increase.  In addition, significant decreases in general economic conditions may reduce outdoor advertising rates and adversely impact the real estate market.  Currently, we do not anticipate raising significant debt financing; therefore, we do not anticipate that operating results will be adversely affected by increased interest rates.  In the future though, we may seek to raise additional capital through debt or convertible debt financings, and in such an event, increased interest rates may increase the cost of any future borrowing.

 

Off-balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 4. Controls and Procedures.

 

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management has employed a framework consistent with Exchange Act Rule 13a-15(c), to evaluate our internal control over financial reporting described below. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

 

 

As defined by Auditing Standard No. 5, "An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements and Related Independence Rule and Conforming Amendments," established by the Public Company Accounting Oversight Board ("PCAOB"), a material weakness is a deficiency or combination of deficiencies that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected.

 

 

Our management believes that the lack of a formal risk assessment process and monitoring structure raises a reasonable possibility that a material misstatement of our annual or interim financial statements may not be timely prevented or detected and should therefore be considered a material weakness in our internal control over financial reporting.  Because of this material weakness, our management believes that as of September 30, 2016, our company's internal controls over financial reporting may not be effective.  

 

Despite our current view that internal controls over financial reporting may not be effective, we have taken a number of steps to address this potential area of risk.  In June 2016, we hired a full-time controller.  The controller is working on a risk assessment, currently analyzing existing internal controls and coordinating our efforts to remediate any potential deficiencies in our internal controls over financial reporting.  In addition, earlier this year, we appointed our first independent member of our board of directors and we recently added Robert Slezak as an additional independent director.  Mr. Slezak has significant financial experience as the chief financial officer of the company now known as TD Ameritrade, having served as its chief financial officer before it became a public company and for a period when it was a public company.  Notwithstanding the assessment that our internal control over financial reporting may not be effective and that there were material weaknesses as identified in this report, based on our recent actions and the post-closing procedures performed, we believe that our financial statements contained in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, fairly present our financial position, results of operations and cash flows for the periods covered thereby in all material respects.

 

 

Our management, including our principal executive officers and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

 

Other than as disclosed above, there have not been any changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the period of this report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

---

 

PART II - OTHER INFORMATION

 

 

Item 1. Legal Proceedings.

 

None.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the quarter ended September 30, 2016, we sold 1,398 shares of our Common Stock at a purchase price of $10.15 per share to accredited investors in an offering under Rule 506 of Regulation D, for total proceeds of $14,190.  There were no commissions paid in connection with the offering. 

 

 

None.

 

Item 4. Mine Safety Disclosures.

 

 

Item 5. Other Information.

 

None.

 

Item 6.  Exhibits.

 

(a)           The following exhibits are filed with this Quarterly Report or are incorporated herein by reference:

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

(Registrant)

 

By: /s/ Alex B. Rozek                                     

Alex B. Rozek,

President (Principal Executive Officer)

 

November 14, 2016

 

By: /s/ Joshua Weisenburger 

Joshua Weisenburger 

Controller  (Chief Accounting Officer)

 

November 14, 2016