BOSTON OMAHA Corp - Quarter Report: 2019 March (Form 10-Q)

 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

 

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(MARK ONE)

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

 

Commission file number 001-38113

 

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BOSTON OMAHA CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

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Delaware		27-0788438
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

1411 Harney St., Suite 200, Omaha, Nebraska 68102

(Address of principal executive offices, Zip Code)

 

(857) 256-0079

(Registrant’s telephone number, including area code)

 

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒   No ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller reporting company		☒
				Emerging growth company		☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

Securities registered under Section 12(b) of the Exchange Act:

 

Title of Class	Trading Symbol	Name of Exchange on Which Registered
Class A common stock, $0.001 par value per share	BOMN	The Nasdaq Stock Market LLC (NASDAQ Capital Market)

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 21,359,259 shares of Class A common stock and 1,055,560 shares of Class B common stock as of May 6, 2019.

 

 

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BOSTON OMAHA CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED MARCH 31, 2019

TABLE OF CONTENTS

 

	Page
Part I – Financial Information	3
Item 1. Consolidated Financial Statements.	3
Consolidated Balance Sheets – March 31, 2019 and December 31, 2018 (unaudited)	4
Consolidated Statements of Operations – Three Months Ended March 31, 2019 and March 31, 2018 (unaudited)	6
Consolidated Statements of Changes in Stockholders’ Equity – March 31, 2018 and March 31, 2019 (unaudited)	7
Consolidated Statements of Cash Flows – Three Months Ended March 31, 2019 and March 31, 2018 (unaudited)	8
Notes to Unaudited Consolidated Financial Statements For the Three Months Ended March 31, 2019 and 2018	11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	28
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	39
Item 4. Controls and Procedures.	39
Part II – Other Information	41
Item 1. Legal Proceedings.	41
Item 1A. Risk Factors.	41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	41
Item 3. Defaults Upon Senior Securities.	41
Item 4. Mine Safety Disclosures.	41
Item 5. Other Information.	41
Item 6. Exhibits.	41
Exhibit Index	42
Signatures	43

 

References in this Quarterly Report on Form 10-Q to “the Company,” “our Company,” “we,” “us,” ”our” and “Boston Omaha” refer to Boston Omaha Corporation and its consolidated subsidiaries, unless otherwise noted.

 

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		March 31,				December 31,
		2019				2018
Current Assets:
Cash and cash equivalents		$	10,157,438			$	17,105,072
Restricted cash			692,275				1,038,767
Accounts receivable, net			4,507,924				4,464,444
Interest receivable			39,698				33,552
Short-term investments			9,162,641				6,251,064
Marketable equity securities			5,477,223				-
U. S. Treasury securities available for sale			87,513,353				86,845,386
Prepaid expenses			1,146,779				2,823,654
Total Current Assets			118,697,331				118,561,939
Property and Equipment, net			41,366,909				41,702,155
Other Assets:
Goodwill			98,685,795				98,685,795
Intangible assets, net			33,698,798				37,032,534
Investments			32,692,006				32,381,686
Investments in unconsolidated affiliates			578,436				568,713
Funds held as collateral assets			1,222,915				973,674
Deferred policy acquisition costs			1,478,856				1,412,248
Right of use assets			50,810,187				-
Other			861,776				875,777
Total Other Assets			220,028,769				171,930,427
Total Assets		$	380,093,009			$	332,194,521

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		March 31,				December 31,
		2019				2018
Current Liabilities:
Accounts payable and accrued expenses		$	3,941,556			$	3,550,856
Short-term payables for business acquisitions			935,620				2,000,610
Lease liabilities			3,345,046				-
Funds held as collateral			1,222,915				973,674
Unearned premiums			5,434,699				4,935,310
Deferred revenue			1,004,849				975,690
Total Current Liabilities			15,884,685				12,436,140
Long-term Liabilities:
Asset retirement obligations			1,858,491				1,824,419
Lease liabilities			46,081,211				-
Other long-term liabilties			-				1,316,000
Deferred tax liability			57,000				57,000
Total Liabilities			63,881,387				15,633,559
Redeemable Noncontrolling Interest			1,470,969				1,345,578
Stockholders' Equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, 0 shares issued and outstanding			-				-
Class A common stock, $.001 par value, 38,838,884 shares authorized, 21,183,327 and 21,029,324 shares issued and outstanding, respectively			21,183				21,029
Class B common stock, $.001 par value, 1,161,116 shares authorized, 1,055,560 shares issued and outstanding			1,056				1,056
Additional paid-in capital			339,121,824				335,518,323
Accumulated deficit			(24,403,410	)			(20,325,024	)
Total Stockholders' Equity			314,740,653				315,215,384
Total Liabilities, Redeemable Noncontrolling Interest, and Stockholders' Equity		$	380,093,009			$	332,194,521

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		For the Three Months Ended
		March 31,
		2019				2018
Revenues:
Billboard rentals, net		$	6,780,390			$	1,550,190
Premiums earned			1,882,342				477,304
Insurance commissions			355,147				765,184
Investment and other income			92,846				30,266
Total Revenues			9,110,725				2,822,944
Costs and Expenses:
Cost of billboard revenues (exclusive of depreciation and amortization)			2,711,397				722,834
Cost of insurance revenues (exclusive of depreciation and amortization)			1,285,722				212,864
Employee costs			2,878,019				1,842,366
Professional fees			1,419,146				843,914
General and administrative			1,816,621				851,273
Amortization			2,848,552				760,335
Depreciation			843,283				328,693
Gain on disposition of assets			(17,721	)			-
Bad debt expense			80,878				-
Accretion			32,778				3,056
Total Costs and Expenses			13,898,675				5,565,335
Net Loss from Operations			(4,787,950	)			(2,742,391	)
Other Income (Expense):
Interest income			559,442				443,723
Equity in income of unconsolidated affiliates			94,753				283,662
Unrealized (loss) on securities			(76,105	)			(93,003	)
Gain on disposition of investments			120,382				-
Interest expense			-				(1,540	)
Net Loss Before Income Taxes			(4,089,478	)			(2,109,549	)
Income Tax (Provision) Benefit			-				-
Net Loss			(4,089,478	)			(2,109,549	)
Noncontrolling interest in subsidiary loss			11,092				40,167
Net Loss Attributable to Common Stockholders		$	(4,078,386	)		$	(2,069,382	)
Basic and Diluted Net Loss per Share		$	(0.18	)		$	(0.13	)
Basic and Diluted Weighted Average Class A and Class B Common Shares Outstanding			22,186,219				15,399,625

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		No. of shares
		Class A Common Stock				Class B Common Stock				Class A Common Stock				Class B Common Stock				Additional Paid-in Capital				Accumulated Deficit				Total
Beginning balance, December 31, 2017			13,307,157				1,055,560			$	13,307			$	1,056			$	158,350,410			$	(11,211,087	)		$	147,153,686
Stock issued for cash			521,690				-				522				-				11,569,463				-				11,569,985
Stock issued to related parties for cash			3,300,000				-				3,300				-				76,886,700				-				76,890,000
Offering costs			-				-				-				-				(1,006,206	)			-				(1,006,206	)
Net loss attributable to common stockholders, March 31, 2018			-				-				-				-				-				(2,069,382	)			(2,069,382	)
Ending balance, March 31, 2018			17,128,847				1,055,560			$	17,129			$	1,056			$	245,800,367			$	(13,280,469	)		$	232,538,083
Beginning balance, December 31, 2018			21,029,324				1,055,560			$	21,029			$	1,056			$	335,518,323			$	(20,325,024	)		$	315,215,384
Stock issued for cash			154,003				-				154				-				3,864,547				-				3,864,701
Offering costs			-				-				-				-				(124,563	)			-				(124,563	)
Increase in redeemable noncontrolling interest			-				-				-				-				(136,483	)			-				(136,483	)
Net loss attributable to common stockholders, March 31, 2019			-				-				-				-				-				(4,078,386	)			(4,078,386	)
Ending balance, March 31, 2019			21,183,327				1,055,560			$	21,183			$	1,056			$	339,121,824			$	(24,403,410	)		$	314,740,653

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		For the Three Months Ended
		March 31,
		2019				2018
Cash Flows from Operating Activities:
Net Loss		$	(4,089,478	)		$	(2,109,549	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Amortization of right of use assets			882,275				-
Depreciation, amortization, and accretion			3,724,613				1,092,084
Gain on disposition of assets			(17,721	)			-
Bad debt expense			80,878				-
Equity in earnings of unconsolidated affiliates			(94,753	)			(283,662	)
Unrealized loss on securities			76,105				93,003
Gain on disposition of investments			(120,382	)			-
Changes in operating assets and liabilities:
Accounts receivable			(124,358	)			(34,267	)
Interest receivable			(6,146	)			(201,445	)
Prepaid expenses			(268,937	)			(12,337	)
Distributions from unconsolidated affiliates			85,030				51,000
Deferred policy acquisition costs			(66,608	)			-
Other assets			14,001				(66,197	)
Accounts payable and accrued expenses			390,700				390,999
Lease liabilities			(756,460	)			-
Unearned premiums			499,389				13,206
Deferred revenue			29,159				-
Net Cash Provided by (Used in) Operating Activities			237,307				(1,067,165	)
Cash Flows from Investing Activities:
Payments on short-term payables for business acquisitions			(1,064,990	)			(360,000	)
Proceeds from disposition of assets			38,729				-
Purchases of equipment and related assets			(883,538	)			(584,815	)
Proceeds from sales of investments			257,823,370				164,980,390
Purchase of investments			(267,185,142	)			(196,972,936	)
Net Cash Used in Investing Activities			(11,271,571	)			(32,937,361	)

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		For the Three Months Ended
		March 31,
		2019				2018
Cash Flows from Financing Activities:
Proceeds from issuance of stock			3,864,701				11,569,985
Proceeds from issuance of stock to related parties			-				76,890,000
Offering costs			(124,563	)			(1,006,206	)
Net Cash Provided by Financing Activities			3,740,138				87,453,779
Net (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash			(7,294,126	)			53,449,253
Cash, Cash Equivalents, and Restricted Cash, Beginning of Period			18,143,839				7,230,570
Cash, Cash Equivalents, and Restricted Cash, End of Period		$	10,849,713			$	60,679,823
Interest Paid in Cash		$	-			$	1,540
Income Taxes Paid in Cash		$	-			$	-

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		For the Three Months Ended
		March 31,
		2019				2018
Asset retirement obligations		$	1,294			$	173,977
Note receivable exchanged for preferred stock			-				104,019
Increase in redeemable noncontrolling interest			136,483				-

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NOTE 1.     ORGANIZATION AND BACKGROUND

 

Boston Omaha was organized on August 11, 2009 with present management taking over operations in February 2015. Our operations include (i) our outdoor advertising business with multiple billboards across Alabama, Florida, Georgia, Illinois, Iowa, Kansas, Missouri, Nebraska, Virginia, West Virginia, and Wisconsin; (ii) our insurance business that specializes in surety bond underwriting and brokerage, and (iii) minority investments primarily in real estate services, homebuilding, and banking. Our billboard operations are conducted through our subsidiary, Link Media Holdings, LLC, and our insurance operations are conducted through our subsidiary, General Indemnity Group, LLC.

 

We completed an acquisition of an outdoor advertising business and entered the outdoor advertising industry on June 19, 2015. During 2015, 2016, 2017 and 2018, we completed fourteen additional acquisitions of outdoor advertising businesses.

 

On April 20, 2016, we completed an acquisition of a surety bond brokerage business. On December 7, 2016, we acquired a fidelity and surety bond insurance company. From July through November 2017 we completed the acquisition of two surety brokerage businesses and acquired a majority stake in a third surety brokerage business, thus expanding our operations in insurance.

 

In our opinion, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of unaudited consolidated financial position and the unaudited consolidated results of operations for interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the interim unaudited consolidated financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the years ended December 31, 2018 and 2017 as reported in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, which we refer to as the “SEC,” on March 18, 2019, have been omitted.

 

 

NOTE 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Consolidation Policy

 

The financial statements of Boston Omaha Corporation include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, as follows:

 

Link Media Holdings, LLC which we refer to as “LMH”

Link Media Alabama, LLC which we refer to as “LMA”

Link Media Florida, LLC which we refer to as “LMF”

Link Media Wisconsin, LLC which we refer to as “LMW”

Link Media Georgia, LLC which we refer to as “LMG”

Link Media Midwest, LLC which we refer to as “LMM”

Link Media Omaha, LLC which we refer to as “LMO”

Link Media Southeast, LLC which we refer to as “LMSE”

Link Media Services, LLC which we refer to as “LMS”

Tammy Lynn Outdoor, LLC which we refer to as “Tammy Lynn”

General Indemnity Group, LLC which we refer to as “GIG”

General Indemnity Insurance Company PCC, LLC which we refer to as “GIIC”

General Indemnity Direct Insurance Services, LLC which we refer to as “GIDIS”

The Warnock Agency, Inc. which we refer to as “Warnock”

United Casualty and Surety Insurance Company which we refer to as “UCS”

Surety Support Services, Inc. which we refer to as “SSS”

South Coast Surety Insurance Services, LLC which we refer to as “SCS”

Boston Omaha Investments, LLC which we refer to as “BOIC”

Boston Omaha Asset Management, LLC which we refer to as “BOAM”

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

NOTE 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Consolidation Policy (Continued)

 

All significant intercompany profits, losses, transactions and balances have been eliminated in consolidation.

 

Reclassifications

 

Certain accounts in the prior year financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements.

 

Revenues

 

A majority of our billboard contracts had been accounted for under Financial Accounting Standards Board, which we refer to as the “FASB,” Accounting Standards Codification, which we refer to as “ASC,” 840. Contracts which began prior to January 1, 2019 and are accounted for under ASC 840 will continue to be accounted for as a lease until the contract ends or is modified. Contracts beginning or modified on or after January 1, 2019 which do not meet the criteria of a lease under ASC 842 are accounted for under ASC 606, Revenue from Contracts with Customers. The majority of our advertising space contracts do not meet the definition of a lease under ASC 842.

 

Revenue Recognition

 

Billboard Rentals

 

We generate revenue from outdoor advertising through the leasing of advertising space on billboards. The terms of the operating leases generally range from less than one month to three years and are generally billed monthly. Revenue for advertising space rental is recognized on a straight-line basis over the term of the contract. Advertising revenue is reported net of agency commissions. Agency commissions are calculated based on a stated percentage applied to gross billing revenue for operations. Payments received in advance of being earned are recorded as deferred revenue. Another component of billboard rentals consists of production services which include creating and printing advertising copy. Contract revenues for production services are accounted for under ASC 606. Revenues are recognized at a point in time upon satisfaction of the contract, which is typically less than one week. Production services revenue recognized for the three months ended March 31, 2019 and 2018 was $262,381 and $77,142, respectively.

 

Deferred Revenues

 

We record deferred revenues when cash payments are received in advance of being earned. The term between invoicing and when a payment is due is generally not significant. For certain services we require payment before the product or services are delivered to the customer. The balance of deferred revenue is considered short-term and will be recognized in revenue within twelve months.

 

Barter Transactions

 

We engage in barter transactions wherein we trade advertising space for goods and services. We recognize revenues and expenses from barter transactions at fair value, which is determined based on our own historical practice of receiving cash for similar advertising space from buyers unrelated to the party in the barter transaction. Revenues and expenses for barter transactions are generally insignificant.

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

NOTE 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition (Continued)

 

Premiums and Unearned Premium Reserves

 

Premiums written are recognized as revenues based on a pro-rata daily calculation over the respective terms of the policies in-force. The cost of reinsurance ceded is initially written as prepaid reinsurance premiums and is amortized over the reinsurance contract period in proportion to the amount of insurance protection provided. Premiums ceded are netted against premiums written.

 

Commissions

 

We generate revenue from commissions on surety bond sales through third party carriers and account for commissions under ASC 606. Insurance commissions are earned from various insurance companies based upon our agency agreements with them. We arrange with various insurance companies for the provision of a surety bond for entities that require a surety bond. The insurance company sets the price of the bond. The contract with the insurance company is fulfilled when the bond is issued by the insurance agency on behalf of the insurance company. The insurance commissions are calculated based upon a stated percentage applied to the gross premiums on bonds. Commissions are recognized at a point in time, on a bond-by-bond basis as of the policy effective date and are generally nonrefundable.

 

Practical Expedients and Exemptions

 

In connection with our transition to ASC 606 from ASC 840, we utilized the following practical expedients and exemptions from ASC 606. We expense sales commissions when incurred because the amortization period is one year or less. These costs are recorded within cost of billboard revenues (exclusive of depreciation and amortization). We do not disclose the value of unsatisfied performance obligations as the majority of our contracts with customers have an original expected length of less than one year. We have used the practical expedient and not adjusted the amount of consideration for the effects of a significant financing component for deferred revenues where the period between our performance and our customers’ payments is less than one year. For contracts with customers which exceed one year the future amount to be invoiced to the customer corresponds directly with the value to be received by the customer.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (Topic 842), Leases, which we refer to as “Topic 842.” Topic 842 supersedes the lease requirements in ASC Topic 840, Leases, which we refer to as “Topic 840.” Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating.

 

We adopted Topic 842 effective January 1, 2019, using the modified retrospective transition approach. Additionally, we adopted the package of practical expedients, which permitted us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs. We also adopted the use of hindsight and the practical expedient pertaining to land easements. The most significant effects of Topic 842 were the recognition of $49,066,289 of operating lease assets and liabilities and the de-recognition of $811,709 of favorable lease assets, $1,945,820 of prepaid land lease assets and $1,316,000 of accrued rent liabilities. We applied Topic 842 to all leases as of January 1, 2019 with comparative periods continuing to be reported under Topic 840. In the adoption of Topic 842, we carried forward the assessment from Topic 840 of whether our contracts contain or are leases, the classification of our leases, and remaining lease terms. We do not have any finance leases. The standard does not have a significant effect on our consolidated results of operations or cash flows. Note 12 contains further details.

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

 

NOTE 3.     RESTRICTED CASH

 

Restricted cash consists of the following:

 

 

The following table sets forth a reconciliation of cash, cash equivalents, and restricted cash reported in the consolidated statements of cash flows that agrees to the total of those amounts as presented in the consolidated statements of cash flows.

 

 

 

NOTE 4.     ACCOUNTS RECEIVABLE

 

Accounts receivable consist of the following:

 

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

 

NOTE 5.     PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following:

 

 

Depreciation expenses for the three months ended March 31, 2019 and 2018 were $843,283 and $328,693, respectively. For the three months ended March 31, 2019 and 2018, we realized gains on the disposition of assets in the amount of $17,721 and $0, respectively.

 

 

NOTE 6.     BUSINESS ACQUISITIONS

 

There were no business acquisitions for the three months ended March 31, 2019 and 2018.

 

2018 Acquisitions

 

During the year ended December 31, 2018, we completed three acquisitions of billboards and related assets. These acquisitions were accounted for as business combinations under the provisions of ASC 805. A summary of the acquisitions is provided below.

 

Billboard Acquisitions

 

Tammy Lynn Outdoor, LLC

 

On July 31, 2018, our subsidiary, LMSE, entered into a purchase agreement with Tammy Lynn Outdoor, LLC, which we refer to as “Tammy Lynn,” based in Bluefield, West Virginia. The assets acquired are primarily located in West Virginia with additional acquired assets located in Virginia. The purchase price consisted of $14,763,261 in cash, net of adjustments, and 85,170 shares of our Class A common stock. The acquisition was completed for the purpose of expanding our presence in the outdoor advertising market in the Southeastern United States. The provisional purchase price allocation is based on internal information derived from our previous acquisitions in the Southeastern United States and will be revised when we have completed our evaluation. Due to the timing of the transaction, the initial accounting for the business acquisition is incomplete. We are still in the process of obtaining and assessing documentation of the contracts for customer relationships, and detailed reports for structures, permits, and easements; also, we are reviewing lease contracts for potentially favorable leases.

 

Finite-lived intangible assets consist of customer relationships, permits, favorable leases, and a five year noncompetition agreement. We amortize the noncompetition agreement according to the terms of the asset purchase agreement. For other finite-lived assets, amortization is computed over the average period of expected benefit determined from internal information.

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

NOTE 6.     BUSINESS ACQUISITIONS (Continued)

 

2018 Acquisitions (Continued)

 

Billboard Acquisitions (Continued)

 

Key Outdoor, Inc.

 

On August 22, 2018, our subsidiary, LMM entered into a purchase agreement with Key Outdoor, Inc., which we refer to as “Key,” Angela K. Dahl, and Robert A. Dahl, by which LMM acquired over 700 billboard structures and related assets from Key. The billboards and related assets are located in Illinois, Iowa and Missouri.

 

The purchase price for the acquired assets was $38,000,000, subject to certain post-closing adjustments, which totaled $233,894, and are still open for adjustments. A portion of the purchase price equal to $1,900,000 was held back by LMM and will be disbursed, subject to any claims for indemnification, over a 12 month period. Another $329,467 is being held back as required consent holdback. Both holdbacks, net of 2018 payments, are included in the caption “Short-term payables for business acquisitions” on our consolidated balance sheet as of December 31, 2018. Each of Key and Angela K. Dahl and Robert A. Dahl, Key’s principals, have also entered into five year noncompetition and nonsolicitation agreements in connection with the acquisition. Total cash paid at closing was $36,004,427. As of March 31, 2019, we made payments of $1,293,847 on the short-term payable for business acquisitions.

 

The provisional purchase price allocation is based on internal information derived from our previous acquisitions in the Midwestern United States and will be revised when an independent appraisal has been completed. Due to the timing of the transaction, the initial accounting for the business combination is incomplete. We are still in the process of obtaining and assessing the documentation of the contracts for customer relationships and detailed reports for structures and permits; also, we are reviewing lease contracts for potentially favorable leases and asset retirement obligations. Additionally, we are still in the process of verifying items in connection with the post closing adjustments which remain open.

 

Finite-lived intangible assets consist of customer relationships, permits, and five year noncompetition and nonsolicitation agreements. We amortize the noncompetition and nonsolicitation agreements according to the terms of the asset purchase agreement. For other finite-lived assets, amortization is computed over the average period of expected benefit determined from internal information.

 

Waitt Outdoor, LLC

 

On August 31, 2018, our subsidiary, LMO entered into a purchase agreement with Waitt Outdoor, LLC, which we refer to as “Waitt,” by which LMO acquired over 1,600 billboard structures and related assets from Waitt. The billboards and related assets are located in Kansas, Illinois, Iowa, Missouri and Nebraska.

 

The purchase price for the acquired assets was $82,000,000, subject to certain post-closing adjustments, which totaled $2,031,262, resulting in a total purchase price of $84,031,262. Cash paid at closing was $84,031,262 of which $4,102,500 is held in escrow, subject to any claims for indemnification. Waitt, WaittCorp Investments, LLC, and Mr. Michael J. Delich, the principal of Waitt, have also entered into five year noncompetition and nonsolicitation agreements in connection with the acquisition.

 

The provisional purchase price allocation is based on internal information derived from our previous acquisitions in the Midwestern United States and will be revised when an independent appraisal has been completed. Due to the timing of the transaction, the initial accounting for the business combination is incomplete. Finite-lived intangible assets consist of customer relationships, permits, and noncompetition and nonsolicitation agreements. We are still in the process of obtaining and assessing the documentation of the contracts for customer relationships and detailed reports for structures, permits, easements, and accounts receivable; also, we are reviewing lease contracts for potentially favorable leases, asset retirement obligations, and other long-term liabilities.

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

NOTE 6.     BUSINESS ACQUISITIONS (Continued)

 

2018 Acquisitions (Continued)

 

Billboard Acquisitions (Continued)

 

Waitt Outdoor, LLC (Continued)

 

We amortize the noncompetition and nonsolicitation agreements according to the terms of the asset purchase agreement. For other finite-lived assets, amortization is computed over the average period of expected benefit determined from internal information. We also acquired 17 easements. The easements are permanent easements which grant us the right to use real property not owned by us. Since the easements are perpetual, they are not amortized.

 

Pro Forma Information

 

The following is the unaudited pro forma information assuming all business acquisitions occurred on January 1, 2018. For all of the business acquisitions depreciation and amortization have been included in the calculation of the pro forma information provided below, based upon the actual acquisition costs. Depreciation is computed on the straight-line method over the estimated remaining economic lives of the assets, ranging from two years to fifteen years. Amortization is computed on the straight-line method over the estimated useful lives of the assets ranging from two to fifty years.

 

 

The information included in the pro forma amounts is derived from historical information obtained from the sellers of the businesses. The pro forma amounts above for basic and diluted weighted average shares outstanding have been adjusted to include the stock issued in connection with the acquisition of Tammy Lynn. 

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

 

NOTE 7.     INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

 

 

The future amortization associated with the intangible assets is as follows:

 

 

Amortization expense for the three months ended March 31, 2019 and 2018 was $2,848,552 and $760,335, respectively.

 

Future Amortization

 

The weighted average amortization period, in months, for intangible assets is as follows:

 

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

 

NOTE 8.     INVESTMENTS, INCLUDING INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD

 

Short-term Investments

 

Short-term investments consist of certificates of deposit having maturity dates of less than twelve months and are carried at cost, U.S. Treasury securities and a corporate bond that are held to maturity and mature in less than twelve months. The certificates of deposit are held to maturity and mature in the upcoming year. The U.S. Treasury notes, the corporate bond, and the certificates of deposit are held primarily by UCS. For the three months ended March 31, 2019, losses on redemptions of U.S. Treasury notes held to maturity were $202.

 

 

Marketable Equity Securities

 

During the three months ended March 31, 2019, we began investing in marketable equity securities. Our marketable equity securities are publicly traded stocks, and are measured at fair value and classified within Level 1 in the fair value hierarchy because we use quoted prices for identical assets in active markets. Our marketable equity securities are held by UCS.

 

Marketable equity securities as of March 31, 2019 are as follows:

 

 

U.S. Treasury Securities Available for Sale

 

We classify our investments in debt securities that we intend to hold for indefinite periods of time as “available for sale.” Our securities available for sale are carried at fair value in the balance sheet. Because we have elected the fair value option for these securities, unrealized holding gains and losses during the period are included in earnings. Interest income is recognized at the coupon rate. Securities available for sale are as follows:

 

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

NOTE 8.     INVESTMENTS, INCLUDING INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD (Continued)

 

Long-term Investments

 

Long-term investments consist of certificates of deposit having maturity dates in excess of twelve months and U.S. Treasury securities. The certificates of deposit and U.S. Treasury securities have maturity dates ranging from 2020 through 2023. We have the intent and the ability to hold the certificates of deposit and U.S. Treasury securities to maturity. Certificates of deposit and U.S. Treasury securities are stated at carrying value which approximates fair value and are held by UCS.

 

Long-term investments consist of the following:

 

 

Equity Investments

 

On May 31, 2018, we invested $19,058,485 in voting common stock of CB&T Holding Corporation, which we refer to as “CB&T,” the privately held parent company of Crescent Bank & Trust. Our investment represents 14.99% of CB&T’s outstanding common stock. CB&T is a closely held corporation, whose majority ownership rests with one family.

 

During late December 2017, we invested $10,000,000 in non-voting common units of Dream Finders Holdings, LLC, a national homebuilder. Excluding their non-convertible preferred equity, our investment represents an approximately 5% ownership stake in the company.

 

During January 2018, we exchanged our convertible note receivable from Breezeway Homes, Inc., which we refer to as “Breezeway,” for 31,227 shares of preferred stock. The preferred stock is noncumulative and has a dividend rate of $.2665 per share, should dividends be declared. The preferred stock has one vote per share and is convertible into whole shares of common stock, determined according to the conversion formula contained in Breezeway’s amended and restated articles of incorporation.

 

We reviewed our investments as of March 31, 2019 and concluded that no impairment to the carrying value was required.

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

NOTE 8.     INVESTMENTS, INCLUDING INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD (Continued)

 

Investment in Unconsolidated Affiliates

 

We have various investments in equity method affiliates, whose businesses are in real estate and real estate services. Our interest in these affiliates ranges from 7.15% to 30%. Two of the investments in affiliates, Logic Real Estate Companies, LLC and 24^th Street Holding Company, LLC, having a combined carrying amount of $350,133 on March 31, 2019, are managed by a member of our board of directors.

 

The following table is a reconciliation of our investments in equity affiliates as presented in investments in unconsolidated affiliates on our consolidated balance sheets:

 

 

The loss on investment in affiliate is related to the wind-down of TAG SW 1, LLC, which occurred during 2018.

 

 

NOTE 9.     FAIR VALUE

 

At March 31, 2019 and December 31, 2018, our financial instruments included cash, cash equivalents, restricted cash, receivables, marketable equity securities, certain investments, and accounts payable. The fair values of cash, cash equivalents, restricted cash, receivables, and accounts payable approximated carrying values because of the short-term nature of these instruments. Marketable equity securities and U.S. Treasury securities available for sale are reported at fair values. Fair values for equity investments in private companies are not readily available, but are estimated to approximate fair value. Substantially all of the fair value is determined using observed prices of publicly traded securities, level 1 in the fair value hierarchy.

 

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

 

NOTE 10.     ASSET RETIREMENT OBLIGATIONS

 

Our asset retirement obligations include the costs associated with the removal of structures, resurfacing of the land and retirement cost, if applicable, related to our outdoor advertising assets. The following table reflects information related to our asset retirement obligations:

 

 

 

NOTE 11.     CAPITAL STOCK

 

On February 22, 2018, we entered into a Class A Common Stock Purchase Agreement, pursuant to which we agreed to issue and sell to three limited partnerships up to an aggregate of $150,000,000 in unregistered shares of Class A common stock at a price of $23.30, a slight premium to the closing price of shares of Class A common stock of $23.29 on the NASDAQ Capital Market, as reported by NASDAQ on the date of the Class A Common Stock Purchase Agreement. Two of the three limited partnerships are entities managed by The Magnolia Group, LLC, and the third limited partnership is an entity managed by Boulderado Group, LLC. The Class A Common Stock Purchase Agreement was approved by an independent special committee of our board of directors with the advice of independent legal counsel and an independent investment banking firm which provided a fairness opinion to the special committee. The closing of the first tranche of shares sold under the agreement occurred on March 6, 2018, consisting of a total of 3,300,000 shares resulting in total gross proceeds of $76,890,000. The closing of the second tranche of shares sold under the agreement occurred on May 15, 2018, consisting of the sale of 3,137,768 shares resulting in gross proceeds of approximately $73,110,000 and in aggregate gross proceeds from the private placement of approximately $150,000,000 in total.

 

Also in February 2018, we filed a shelf registration statement with the SEC allowing us to sell up to $200,000,000 of our securities. This registration statement was declared effective by the SEC on February 9, 2018. We subsequently entered into a Sales Agreement with Cowen and Company, LLC, which we refer to as “Cowen,” relating to the sale of shares of our Class A common stock to be offered. In accordance with the terms of the Sales Agreement, we may offer and sell from time to time up to $50,000,000 of shares of our Class A common stock through Cowen acting as our agent. Cowen is not required to sell any specific amount of securities, but will act as our sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between Cowen and us. The compensation to Cowen for sales of Class A common stock sold pursuant to the Sales Agreement will be an amount equal to 3% of the gross proceeds of any shares of Class A common stock sold under the Sales Agreement. From March 2018 through March 31, 2019, Cowen sold an aggregate of 1,353,232 shares of our Class A common stock under this “at the market” offering, resulting in gross proceeds to us of $31,110,383. For the three months ended March 31, 2019, Cowen sold 154,003 shares of our Class A common stock under the at-the-market offering, resulting in gross proceeds to us of $3,864,701 and net proceeds of $3,740,138 after offering costs of $124,563.

 

On May 4, 2018, we filed an amendment to our second amended and restated certificate of incorporation which increased our authorized shares of common stock. Our authorized capital stock now consists of 40,000,000 shares of common stock, of which 38,838,884 shares are designated as Class A common stock and 1,161,116 shares are designated as Class B common stock, and 1,000,000 shares of undesignated preferred stock.

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

NOTE 11.     CAPITAL STOCK (Continued)

 

As of March 31, 2019 there were 104,772 outstanding warrants for our Class B common stock and 784 outstanding warrants for our Class A common stock. On August 3, 2018, Boulderado Partners, LLC distributed 784 warrants for our Class B common stock, which converted to Class A common stock warrants upon distribution, in connection with a distribution in-kind to one of its withdrawing members. A summary of warrant activity for the three months ended March 31, 2019 is presented in the following table.

 

 

 

NOTE 12.     LEASES

 

We enter into operating lease contracts primarily for land and office space. Arrangements are evaluated at inception to determine whether such arrangements contain a lease. Operating leases include land lease contracts and contracts for the use of office space. In accordance with the transition guidance of ASC 842, such arrangements are included in our balance sheet as of January 1, 2019.

 

Right of use assets, which we refer to as “ROU assets,” represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the respective lease term. Lease expense is recognized on a straight-line basis over the lease term.

 

Certain of our operating lease agreements include rental payments based on a percentage of revenue and others include rental payments adjusted periodically for inflationary changes. Percentage rent contracts, in which lease expense is calculated as a percentage of advertising revenue, and payments due to changes in inflationary adjustments are included within variable rent expense, which is accounted for separately from periodic straight-line lease expense.

 

Many operating lease contracts expire; however, we may continue to operate the leased assets after the rights and obligations of the lease agreements have expired. Such contracts, once expired, are considered to be leases and future expected payments are included in operating lease liabilities or ROU assets, using a 10 year extension period. Many of our leases entered into in connection with land provide options to extend the terms of the agreements. Generally, renewal periods are included in minimum lease payments when calculating the lease liabilities as, for most leases, we consider exercise of such options to be reasonably certain. As a result, optional terms and payments are included within the lease liability. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

The implicit rate within our lease agreements is generally not determinable. As such, we use the incremental borrowing rate, which we refer to as "IBR," to determine the present value of lease payments at the commencement of the lease. The IBR, as defined in ASC 842, is "the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment."

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

NOTE 12.     LEASES (Continued)

 

Operating Lease Cost

 

Operating lease cost for the three months ended March 31, 2019 are as follows:

 

 

Supplemental cash flow information related to operating leases was as follows:

 

  

Operating Lease Assets and Liabilities

 

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

NOTE 12.      LEASES (Continued)

 

Maturity of Operating Lease Liabilities

 

 

As of March 31, 2019, our operating leases have a weighted-average remaining lease term of 17.07 years and a weighted-average discount rate of 4.88%.

 

The future minimum obligations under operating leases in effect as of December 31, 2018 having a noncancellable term in excess of one year as determined prior to the adoption of ASC 842 are as follows:

 

 

 

NOTE 13.     INDUSTRY SEGMENTS

 

This summary presents our current segments, as described below.

 

General Indemnity Group, LLC

 

GIG conducts our insurance operations through its subsidiaries, Warnock, SSS, SCS, UCS, GIIC, and GIDIS. SSS clients are multi-state and UCS, SCS, and Warnock clients are nationwide. Revenue consists of surety bond sales and insurance commissions. Currently, GIG’s corporate resources are used to support Warnock, SSS, SCS, UCS, GIIC, and GIDIS and to make additional business acquisitions in the insurance industry.

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

NOTE 13.     INDUSTRY SEGMENTS (Continued)

 

Link Media Holdings, LLC

 

LMH conducts our billboard rental operations. LMH advertisers are located in Alabama, Florida, Georgia, Illinois, Iowa, Kansas, Missouri, Nebraska, Virginia, West Virginia, and Wisconsin.

 

 

 

 

 

 

BOSTON OMAHA CORPORATION

and SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

For the Three Months Ended March 31, 2019 and 2018

 

 

 

NOTE 14.     CUSTODIAL RISK

 

As of March 31, 2019, we had approximately $6,325,000 in excess of federally insured limits on deposit with financial institutions.

 

 

NOTE 15.     SUBSEQUENT EVENTS

 

Subsequent to March 31, 2019 through April 30, 2019, Cowen sold an additional 175,932 shares of our Class A common stock, under the “at the market” Sales Agreement, resulting in net proceeds to us of $4,244,798 (See Note 11).

  

 

 

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