UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
☒
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-38113
BOSTON OMAHA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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)
(857) 256-0079
(Registrant’s telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 13,307,157 shares of Class A common stock and 1,055,560 shares of Class B common stock as of November 10, 2017.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2017
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets – September 30, 2017 and December 31, 2016 (unaudited)
1
Consolidated Statements of Operations – three and nine months ended September 30, 2017 and September 30, 2016 (unaudited)
3
Consolidated Statement of Changes in Stockholders’ Equity – September 30, 2017 (unaudited)
4
Consolidated Statements of Cash Flows – nine months ended September 30, 2017 and September 30, 2016 (unaudited)
5
Notes to Unaudited Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
35
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
Item 6.
Exhibits
37
Signatures
References in this Form 10-Q to the “Company” and “Boston Omaha” refer to Boston Omaha Corporation and its consolidated subsidiaries, unless otherwise noted.
and SUBSIDIARIES
Consolidated Financial Statements
Unaudited
For the Three and Nine Months Ended September 30, 2017 and 2016
Consolidated Balance Sheets
ASSETS
September 30,
December 31,
2017
2016
Current Assets:
Cash
Restricted cash
Accounts receivable, net
Investments, short-term
Prepaid expenses
Total Current Assets
Property and Equipment, net
Other Assets:
Goodwill
Intangible assets, net
Investments
Investments in unconsolidated affiliates
Funds held as collateral assets
Deposit on business acquisition
Other
Total Other Assets
Total Assets
See accompanying notes to the unaudited consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses
Short-term payables for acquisitions
Funds held as collateral
Unearned premiums and deferred revenue
Total Current Liabilities
Long-term Liabilities:
Long-term payable for acquisition
Deferred tax liability
Total Liabilities
Stockholders' Equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized, 0 shares issued and outstanding
Class A common stock, $.001 par value, 18,838,884 shares authorized,13,307,157 and 5,841,815 shares issued and outstanding
Class B common stock, $.001 par value, 1,161,116 shares authorized, 1,055,560 shares issued and outstanding
Additional paid-in capital
Accumulated deficit
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
Consolidated Statements of Operations
For the Three Months Ended
For the Nine Months Ended
Revenues:
Billboard rentals
Premiums earned
Insurance commissions
Investment and other income
Total Revenues
Costs and Expenses:
Cost of billboard revenues (exclusive of depreciation and amortization)
Cost of insurance revenues
Employee costs
Professional fees
General and administrative
Amortization
Depreciation
Loss on disposition of assets
Bad debt expense
Total Costs and Expenses
Net Loss from Operations
Other Income (Expense):
Equity in income (loss) of unconsolidated affiliates
Interest expense
Net Loss Before Income Tax
Income Tax (Provision) Benefit
Net Loss
Basic and Diluted Net Loss per Share
Basic and Diluted Weighted Average Shares Outstanding
Consolidated Statement of Changes in Stockholders' Equity
No. of shares
Class ACommonStock
Class BCommonStock
AdditionalPaid-inCapital
AccumulatedDeficit
Total
Stockholders' equity December 31, 2016
Stock issued for cash, June 2017
Stock issued to related parties for cash, June 2017
Stock issued for cash, July 2017
Offering costs
Net loss September 30, 2017
Stockholders' equity September 30, 2017
Consolidated Statements of Cash Flows
Cash Flows from Operating Activities:
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization
Equity in (earnings) loss of unconsolidated affiliates
Changes in operating assets and liabilities:
Accounts receivable
Other assets
Accrued interest
Deferred tax liabilities
Net Cash Used in Operating Activities
Cash Flows from Investing Activities:
Deposits to restricted cash
Proceeds from disposition of asset
Purchases of equipment and related assets
Business acquisitions
Acquisition of investment in unconsolidated affiliate
Distributions from unconsolidated affiliate
Proceeds from sales of investments
Purchase of investments
Net Cash Used in Investing Activities
Cash Flows from Financing Activities:
Proceeds from issuance of stock
Proceeds from issuance of stock to related parties
Net Cash Provided by Financing Activities
Net Increase in Cash
Cash, Beginning of Period
Cash, End of Period
Interest Paid in Cash
Income Taxes Paid in Cash
Consolidated Statements of Cash Flows (Continued)
Supplemental Schedules of Non-cash Investing and Financing Activities
Equipment exchanged for note receivable
Deposit on business acquisition applied to purchase
Payable due on acquisition
Notes payable and accrued interest converted to common stock
And SUBSIDIARIES
For the Three and Nine Months Ended September 30, 2017
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, and Wisconsin; (ii) our insurance business that specializes in surety bond underwriting and brokerage, and (iii) equity method investments in several real estate and real estate service companies. 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 and 2016, we completed five additional acquisitions of outdoor advertising businesses. From January through September 2017, we completed six more 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 business; and, on July 11, 2017, we completed an acquisition of another 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 consolidated financial position and the consolidated results of operations for the 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 consolidated financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the years ended December 31, 2016 and 2015 as reported in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 24, 2017, 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 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”
General Indemnity Group, LLC which we refer to as “GIG”
General Indemnity Direct Insurance Services, LLC which we refer to as “GIDIS”
General Indemnity Insurance Company PCC, LLC which we refer to as “GIIC”
The Warnock Agency, Inc. which we refer to as “Warnock”
United Casualty and Surety Insurance Company which we refer to as “UC&S”
Surety Support Services, Inc. which we refer to as “SSS”
All significant intercompany profits, losses, transactions and balances have been eliminated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain accounts in the prior period financial statements have been reclassified for comparative purposes to conform with the presentation in the current period financial statements.
NOTE 3. RESTRICTED CASH
Restricted cash consists of the following:
Insurance premium escrow
Billboard replacement reserve
Total Restricted Cash
At December 31, 2016, deposit on business acquisition consists of $2,950,000 deposited to the seller’s escrow account for the acquisition of billboard structures and related assets from Clear Channel Outdoor, Inc. (See Note 6.)
NOTE 4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
Trade accounts, net
Premiums
Anticipated salvage and subrogation
Total Accounts Receivable, net
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Structures and displays
Vehicles and equipment
Office furniture and equipment
Accumulated depreciation
Total Property and Equipment, net
NOTE 5. PROPERTY AND EQUIPMENT (Continued)
Through the third quarter of 2017, our subsidiary, LMH recorded a $361,326 loss on the disposition of assets. The loss on disposition was in relation to the replacement of three digital billboards which required replacement ahead of schedule, the removal of three billboard structures, and the sale of vehicles and equipment which were from JAG, for a $38,000 note receivable.
NOTE 6. BUSINESS ACQUISITIONS
2017 Acquisitions
During the nine months ended September 2017, we completed six business acquisitions of billboards and related assets and one insurance company acquisition. These acquisitions were accounted for as business combinations under the provisions of ASC 805. A summary of the acquisitions and revenues and earnings of each since the acquisition dates included in the consolidated statements of operations for the three months and nine months ended September 30, 2017 is provided in the table below.
Clear Channel Outdoor, Inc.
On January 9, 2017, our subsidiary, LMG entered into a purchase agreement with Clear Channel Outdoor, Inc., which we refer to as “CCO” for the purchase of thirty-seven billboard structures and related assets. The assets acquired are located in Georgia. The cash purchase price for the acquired business was $2,983,444, of which $2,950,000 had been deposited into the seller’s escrow account in November 2016 and was subsequently applied to the purchase price. The assets were acquired for the purpose of expanding our presence in the outdoor advertising market. The preliminary purchase price allocation is based on internal information and will be revised when an independent appraisal has been completed. Finite-lived intangible assets consist of customer relationships and permits. Amortization is computed over the average period of expected benefit, determined from internal information.
Hartlind Outdoor, LLC
On January 31, 2017, our subsidiary, LMW entered into a purchase agreement with Hartlind Outdoor, LLC, which we refer to as “Hartlind” for the purchase of ninety-one billboard structures and related assets. The assets acquired are located in Wisconsin. The cash purchase price for the acquired business was $2,817,000. The assets were acquired for the purpose of expanding our presence in the outdoor advertising market. The preliminary purchase price allocation is based on internal information and will be revised when an independent appraisal has been completed. Finite-lived intangible assets consist of customer relationships, permits, and a noncompetition agreement. We amortize the noncompetition agreement according to the terms of the asset purchase agreement. Amortization of the other finite-lived intangible assets is computed over the average period of expected benefit, determined from internal information. We also acquired six easements. The easements are permanent easements which grant us the right to use real property not owned by us. Since these rights are perpetual, they are not amortized.
Southeastern United States
Subsequent to the CCO business acquisition, we made additional business acquisitions in the Southeastern United States as presented below.
NOTE 6. BUSINESS ACQUISITIONS (Continued)
2017 Acquisitions (Continued)
Corey Companies, Inc.
On June 8, 2017, our subsidiaries, LMG and LMA entered into a purchase agreement with Corey Companies, Inc., which we refer to as “Corey,” for the purchase of thirty billboard structures, a fifty percent interest in three billboard structures, and related assets. The assets acquired are located in Georgia and Alabama. The cash purchase price for the acquired business was $2,991,314. The assets were acquired for the purpose of expanding our presence in the outdoor advertising market. The preliminary purchase price allocation is based on internal information and will be revised when an independent appraisal has been completed. Finite-lived intangible assets consist of customer relationships and permits. Amortization of the finite-lived intangible assets is computed over the average period of expected benefit, determined from internal information.
Vision Outdoor Media, LLC
On June 16, 2017, our subsidiary, LMG entered into a purchase agreement with Vision Outdoor Media, LLC, which we refer to as “Vision,” for the purchase of three billboard structures and related assets. The assets acquired are located in Georgia. The assets were acquired for the purpose of expanding our presence in the outdoor advertising market. The cash purchase price for the acquired business was $3,199,036. The preliminary purchase price allocation is based on internal information and will be revised when an independent appraisal has been completed. Finite-lived intangible assets consist of customer relationships and permits. Amortization of the finite-lived intangible assets is computed over the average period of expected benefit, determined from internal information.
View Media, LLC
On July 11, 2017, our subsidiary, LMG entered into a purchase agreement for the purchase of certain billboard assets. The cash purchase price of the acquisition was $623,596. The assets were acquired for the purpose of expanding our presence in the outdoor advertising market in the Southeastern United States. The preliminary purchase price allocation is based on internal information and will be revised when an independent appraisal has been completed. Finite-lived intangible assets consist of customer relationships and permits. Amortization of the finite-lived intangible assets is computed over the average period of expected benefit, determined from internal information.
In addition, we also made a small acquisition for a cash purchase price of $900,000.
Insurance Acquisition
Surety Support Services, Inc.
On July 11, 2017, our subsidiary, GIG entered into a purchase agreement for the purchase of 100% of the stock of an insurance brokerage company. The purchase price of the stock was $450,000, of which $22,500 was paid at closing, with $427,500 due in 2018. The stock was acquired for the purpose of expanding our presence in the insurance market in the United States. The purchase price allocation is based on internal information.
Finite-lived intangible assets consist of customer relationships and a non-competition agreement. We amortize the non-competition 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.
The following tables present the 2017 business acquisitions for the nine months ended September 30, 2017, amortization of finite intangible assets, revenues and earnings included in consolidated net loss for the three months and nine months ended September 30, 2017, and the costs of acquisition included in professional fees on our consolidated statement of operations for the three months and nine months ended September 30, 2017.
Billboards
CCO
Hartlind
Southeastern US
Subtotal
Assets Acquired
Property and Equipment:
Intangible Assets:
Customer relationships
Permits, licenses and lease acquisition costs
Easements
Noncompetition and nonsolicitation agreements
Total Intangible Assets
Total Assets Acquired
2017 Acquisitions (continued)
Insurance
SSS
Intangible assets:
Permits, licenses, and lease acquisition costs
Noncompetition agreement
Other assets:
Liabilities Assumed
Liabilities assumed in connection with the SSS acquisition are as follows:
Deferred revenue
Total Liabilities Assumed
Amortization of intangible assets acquired for the three months ended September 30, 2017
Revenues since the acquisition date included in the consolidated statement of operations for the three months ended September 30, 2017
Earnings since the acquisition date included in the consolidated statement of operations for the three months ended September 30, 2017
Costs of acquisition included in professional fees in the consolidated statement of operations for the three months ended September 30, 2017
Amortization of intangible assets acquired for the nine months ended September 30, 2017
Revenues since the acquisition date included in the consolidated statement of operations for the nine months ended September 30, 2017
Earnings since the acquisition date included in the consolidated statement of operations for the nine months ended September 30, 2017
Costs of acquisition included in professional fees in the consolidated statement of operations for the nine months ended September 30, 2017
2016 Acquisitions
During the year ended December 31, 2016, we completed four large business acquisitions and one small acquisition. All of the acquisitions were accounted for as business combinations under the provisions of ASC 805. A summary of the acquisitions and revenues and earnings of each since the acquisition dates included in the consolidated statements of operations for the three months and nine months ended September 30, 2016 is provided in the table below.
Jag, Inc.
On February 16, 2016, our subsidiary, LMW entered into a purchase agreement with Jag, Inc., which we refer to as “JAG,” for the purchase of 339 billboard structures, directional signs, equipment and related assets from Jag, Inc. The assets acquired are located in Wisconsin. The cash purchase price for the acquired business was $6,954,246 of which $687,500 was escrowed. The assets were acquired for the purpose of expanding our presence in the outdoor advertising market. The purchase price allocation is based on an appraisal by an independent third party valuation firm. Finite-lived intangible assets consist of permits and lease acquisition costs, and customer relationships. Amortization is computed over the average period of expected benefit, determined from internal information. We also acquired easements. The easements are permanent easements which grant us the right to use real property not owned by us. Since these rights are perpetual, they are not amortized.
Rose City Outdoor, LLC
On February 16, 2016, we made a small acquisition, Rose City Outdoor, LLC and Rose City of Florida, LLC, which we refer to as “Rose City,” for a cash purchase price of $287,320.
Kelley Outdoor Media, LLC
On June 15, 2016, our subsidiary, LMA entered into a purchase agreement for the purchase of ten billboard structures and related assets from Kelley Outdoor Media, LLC and ArtRod Displays, Inc., which we refer to as “Kelley.” The assets acquired are located in Georgia. The cash purchase price for the acquired business was $2,021,885. The assets were acquired for the purpose of expanding our presence in the outdoor advertising market. The purchase price allocation is based on an appraisal by an independent third party valuation firm. We amortize the noncompetition agreement according to the terms of the asset purchase agreement. Other finite-lived intangible assets consist of customer relationships and permits. Amortization is computed over the average period of expected benefit, determined from internal information.
The Warnock Agency, Inc.
On April 20, 2016, our subsidiary, GIG, acquired the stock of Warnock. The cash purchase price was $1,345,000, of which $126,500 is not payable until eighteen months after closing and is included in the consolidated balance sheet at December 31, 2016 under the caption long-term liabilities. Warnock was acquired for the purpose of expanding our presence in the insurance market. The purchase price allocation is based on an appraisal by an independent third party valuation firm.
2016 Acquisitions (Continued)
The Warnock Agency, Inc. (Continued)
Finite–lived intangible assets consist of customer relationships, trade names and trademarks, technology, and a non-competition agreement. We amortize the non-competition 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.
United Casualty and Surety Insurance Company
On December 7, 2016, our subsidiary, GIG, acquired the stock of UC&S. The cash purchase price was $13,000,000. UC&S was acquired for the purpose of expanding our presence in the insurance market.
The provisional allocation of the purchase price is based on internal information 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 identifying additional intangible assets and are obtaining and assessing documentation of the contracts and relationships.
As of December 31, 2016, identifiable intangible assets consist of state insurance licenses and are amortized over the average period of expected benefit determined from internal information.
The following tables present the 2016 business acquisitions, amortization of finite-lived intangible assets, revenues and earnings included in consolidated net loss for the three months and nine months ended September 30, 2016, and the costs of acquisition included in professional fees on our consolidated statements of operations for the three months and nine months ended September 30, 2016.
2016 Acquisitions (continued)
JAG
Rose City
Kelley
Amortization of intangible assets acquired during the three months ended September 30, 2016
Revenues since the acquisition date included in the consolidated statement of operations for the three months ended September 30, 2016
Earnings since the acquisition date included in the consolidated statement of operations for the three months ended September 30, 2016
Costs of acquisition included in professional fees in the consolidated statement of operations for the three months ended ended September 30, 2016
Warnock
Revenues since the acquisition date included in the consolidated statement of operations during the three months ended September 30, 2016
Earnings since the acquisition date included in the consolidated statement of operations during the three months ended September 30, 2016
Costs of acquisition included in professional fees in the consolidated statement of operations during the three months ended September 30, 2016
Amortization of intangible assets acquired during the nine months ended September 30, 2016
Revenues since the acquisition date included in the consolidated statement of operations for the nine months ended September 30, 2016
Earnings since the acquisition date included in the consolidated statement of operations for the nine months ended September 30, 2016
Costs of acquisition included in professional fees in the consolidated statement of operations for the nine months ended ended September 30, 2016
Costs of acquisition included in professional fees in the consolidated statement of operations for the nine months ended September 30, 2016
Pro Forma Information
The following is the unaudited pro forma information assuming all business acquisitions occurred on January 1, 2016. For all of the business acquisitions depreciation and amortization have been included in the calculation of the below pro forma information 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.
Three Months Ended
Nine Months Ended
Revenue
Basic and Diluted Loss per Share
Basic and Diluted Weighted Average Class A and Class B Common Shares Outstanding
The information included in the pro forma amounts is derived from historical information obtained from the sellers of the businesses. With respect to CCO, Corey, Vision, View, and Kelley, the above pro forma does not contain allocation of management overhead and other shared expenses for lines of business under common ownership, that were not acquired.
NOTE 7. INTANGIBLE ASSETS
Intangible assets consist of the following:
September 30, 2017
December 31, 2016
Accumulated
Cost
Balance
Permits, licenses, and lease acquistion costs
Site location
Noncompetition agreements
Trade names and trademarks
Technology
Nonsolicitation agreement
The future amortization associated with the intangible assets is as follows:
2018
2019
2020
2021
2022
Thereafter
NOTE 7.
INTANGIBLE ASSETS (Continued)
Future Amortization
The weighted average amortization period, in months, for intangible assets is as follows:
NOTE 8.
INVESTMENTS, INCLUDING INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD
Certificates of Deposit and U.S. Treasury Securities
Short-term investments consist of certificates of deposit having maturity dates of less than twelve months.
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 have maturity dates ranging from 2018 through 2021. We have the intent and the ability to hold the investments to maturity. Certificates of deposit and U.S. Treasury securities are stated at carrying value which approximates fair value.
Long-term investments consist of the following:
U.S. Treasury securities
Certificates of deposit
Convertible Note Receivable
On September 13, 2016, we purchased an unsecured convertible note receivable from Breezeway Homes, Inc. (“Breezeway”) for the principal sum of $100,000. The note bears interest at three percent (3%) per annum. Principal and accrued interest are payable on demand at the earlier of December 31, 2018 or the closing of Breezeway’s next equity financing. The conversion provisions will be determined by the amount, date, and terms of Breezeway’s next equity financing. At September 30, 2017 and December 31, 2016, the balance of the note plus accrued interest was $103,146 and $100,896, respectively.
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, with a carrying amount of $433,594 on September 30, 2017, are managed by a member of the Company’s board of directors.
The following table is a reconciliation of the Company’s investments in equity affiliates as presented in investments in unconsolidated affiliates on the consolidated balance sheet:
Beginning of period
Additional investments in unconsolidated affiliates
Distributions received
Equity in earnings (loss) of unconsolidated affiliates
End of period
NOTE 9.
CAPITAL STOCK
On May 25, 2017, we filed our second amended and restated certificate of incorporation which (i) increased our authorized shares of common stock, (ii) designated as Class B common stock all authorized shares that had been previously designated as Class A common stock; and, (iii) designated as Class A common stock all authorized shares of our common stock that had been previously designated as common stock.
Our authorized capital stock now consists of 20,000,000 shares of common stock of which 18,838,884 shares are designated as Class A common stock and 1,161,116 shares are designated as Class B common stock.
In connection with the filing of the second amended and restated certificate of incorporation, we entered into an amended and restated voting and first refusal agreement that amended and restated our original voting and first refusal agreement to reflect the renaming of our classes of common stock.
On June 15, 2017, our registration statement authorizing the sale of 6,538,462 shares of our Class A common stock for $13 per share, was declared effective by the U.S. Securities and Exchange Commission. The registration statement also granted the underwriters an option to purchase up to 980,769 shares of our Class A common stock.
From June 21 through June 22, 2017, we issued a total of 7,113,462 shares of our Class A common stock for gross proceeds, net of underwriting discounts, of $88,139,834. The 7,113,462 shares represents the 6,538,462 shares offered and 575,000 shares of the underwriter’s overallotment option. Of that amount, entities controlled by two of our directors, which together own a majority of our Class A common stock and all of our Class B common stock, purchased, for cash, 3,653,846 shares for a total cash consideration, net of underwriting discounts, of $46,312,498.
NOTE 9. CAPITAL STOCK (Continued)
As a group, the Company’s officers and directors, either directly or through entities they control, also purchased an additional 509,085 shares for a total cash consideration, net of underwriting discounts, of $6,154,838.
On July 18, 2017, we sold an additional 351,880 shares of the underwriter’s option of our Class A common stock resulting in a total of 926,880 option shares sold. The 351,880 shares were sold to entities unrelated to our officers and directors. The net proceeds from the sale of the 351,880 shares of Class A common stock were $4,254,229.
Offering costs were $960,972, resulting in net proceeds to us of $91,433,091.
As of September 30, 2017, there were 105,556 outstanding warrants for our Class B common stock. A summary of warrant activity for the nine months ended September 30, 2017 is presented in the following table.
SharesUnderWarrants
WeightedAverageExercisePrice
Weighted
AverageRemainingContractualLife
(in years)
AggregateIntrinsicValue ofVestedWarrants
Outstanding as of December 31, 2016
8.5
Issued
Exercised
Expired
Outstanding as of September 30, 2017
7.75
NOTE 10. FUTURE MINIMUM LEASE PAYMENTS
In connection with the business acquisitions (See Note 6.), we acquired the leases for 512 billboard locations. Some of the leases are non-cancelable operating leases having remaining terms ranging from month-to-month to 705 months. In many instances, the Company can cancel the lease with little or no penalty. Ground rents for the three months and nine months ended September 30, 2017 were $468,940 and $1,106,864 respectively; and for the three months and nine months ended September 30, 2016 were $163,169 and $366,987, respectively. Contingent rents included in ground rents for the three months and nine months ended September 30, 2017 were $51,519 and $71,753, respectively; and for the three months and nine months ended September 30, 2016 were $6,591 and $36,989, respectively.
The Company leases office space under leases expiring between 2019 and 2022. Rent expense included in general and administrative expense for the three and nine months ended September 30, 2017 was $57,825 and $153,088, respectively; and, for the three months and nine months ended September 30, 2016 was $12,907 and $32,366, respectively.
NOTE 10. FUTURE MINIMUM LEASE PAYMENTS (Continued)
Future minimum rents are as follows for the twelve months ending September 30:
NOTE 11. INDUSTRY SEGMENTS
This summary presents the Company’s current segments, as described below.
General Indemnity Group, LLC
GIG conducts our insurance operations through its subsidiaries, Warnock, SSS, UC&S, and GIIC. Warnock and SSS clients are nationwide and UC&S clients are multi-state. Revenue consists of surety bond sales and insurance commissions. Currently, GIG’s corporate resources are used to support Warnock, SSS, UC&S, and GIIC and to make additional business acquisitions in the insurance industry.
Link Media Holdings, LLC
LMH conducts our billboard rental operations. LMH advertisers are located in Alabama, Florida, Georgia, and Wisconsin.
NOTE 11. INDUSTRY SEGMENTS (Continued)
Three Months Ended September 30, 2017
GIG
LMH
Unallocated
Consolidated
Segment gross profit
Segment loss from operations
Capital expenditures
Three Months Ended September 30, 2016
Nine Months Ended September 30, 2017
Nine Months Ended September 30, 2016
As of September 30, 2017
Total assets
As of September 30, 2016
NOTE 12. CUSTODIAL RISK
At September 30, 2017, we had approximately $101,600,000 in excess of federally insured limits on deposit with financial institutions.
NOTE 13. SUBSEQUENT EVENTS
On October 10, 2017, we expanded our cash management strategy and invested $88,000,000 of available cash in short-term U.S. Treasury securities.
On November 1, 2017, our subsidiary GIG entered into a purchase agreement for the purchase of 70% of the membership units of an insurance brokerage company. The purchase price of the membership units was $2,908,581. The membership units were acquired for the purpose of expanding our presence in the insurance business in the United States. At any time following the purchase, the seller has the option, but not the obligation, to sell us the 30% of the remaining membership units. Should the seller exercise the option, we would be obligated to purchase the units. Should the holder of the 30% membership units become unable to fulfill his duties to us, we have the option, but not the obligation, to purchase the remaining 30% of the membership units. Should we exercise this option, the holder of the 30% of the membership units would be obligated to sell the units to us. The purchase price of the units is based upon a measure of income plus a contingency amount, increased or decreased by a working capital adjustment.
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. We undertake 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 2017 and beyond to differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect our financial condition, liquidity and operating and stock price performance.
Overview
We are currently engaged in three areas of business: outdoor billboards, surety insurance and related brokerage activities, and investing in real estate management businesses. We commenced our current billboard business operations in June 2015, our surety insurance business in April 2016 and have made a series of investments in the real estate management and related services business commencing in September 2015. In December 2016, we completed the acquisition of UC&S, a surety insurance company, which at that time was licensed to conduct business in nine states. We expect to continue to acquire additional billboard assets through acquisitions of existing billboard businesses in the United States and to expand the licensing of the UC&S business beyond the 40 states and the District of Columbia in which it is currently authorized to issue surety insurance. In addition, we expect to continue to acquire insurance agencies selling surety insurance. We completed in November 2017 the acquisition of South Coast Surety, Inc., an agency offering surety bonds in all 50 states. We also expect to continue to make additional investments in real estate management service businesses. In the future, we expect to expand the range of services we provide in each of these sectors and to possibly consider acquisitions of other businesses in different sectors. Our decision to expand outside of these current business sectors we serve will be based on the opportunity to acquire businesses which we believe provide the opportunity for sustainable earnings at an attractive level relative to capital employed.
In each of our businesses, we hope to expand our geographic reach and to develop a brand name for our services which we hope will be a differentiating factor for customers. Our insurance market primarily services small contractors, businesses and individuals required to provide surety bonds in connection with their work for government agencies and others, and to meet regulatory licensing and other needs. Our plan is to expand our insurance offerings and underwriting in all 50 states and the District of Columbia. In outdoor billboards, our plan is to continue to grow this business through acquisitions of billboard companies.
Although several large companies control a majority of the outdoor billboard market, industry reports estimate that there are a large number of other smaller independent companies servicing the remainder of the market. In the surety industry, total industry direct-written premiums are estimated to have reached $5.88 billion in 2016. While the top 10 surety insurance companies were estimated to write approximately 64% of all premiums, there were approximately 200 insurers issuing surety bonds in 2016.
We seek to enter markets where we believe demand for our services will grow in the coming years due to certain barriers to entry and to anticipated long-term demand for these services. In the outdoor billboard business, government restrictions often limit the number of additional billboards that may be constructed. At the same time, advances in billboard technology provide the opportunity to improve revenues through the use of digital display technologies and other new technologies. In the surety insurance business, new insurance companies must be licensed by state agencies that impose capital, management and other strict requirements on these insurers. These hurdles are at the individual state level, with statutes often providing wide latitude to regulators to impose judgmental requirements upon new entrants. In addition, new distribution channels in certain areas of surety may provide a new opportunity. In the real estate management services market, we believe the continued growth of commercial real estate in many sections of the United States will provide opportunities for management services for the foreseeable future.
How We Generate Our Revenues and Evaluate Our Business
We currently generate revenues through billboard advertising and related services and from the sale of surety insurance and related brokerage activities. Revenue for outdoor advertising space rental is recognized on a straight-line basis over the term of the contract and advertising revenue is reported net of agency commissions. Payments received in advance of being earned are recorded as deferred revenue. In our surety insurance business, premiums written are recognized as revenues based on a pro rata daily calculation over the respective terms of the policies in-force. Unearned premiums represent the portion of premiums written applicable to the unexpired term of the policies in-force. In connection with our surety agency business, insurance commissions are earned on the policy effective date and are not subject to recapture. In the real estate management services market, our current model is to make investments in existing management services businesses to provide them with the needed capital to expand the breadth and scope of the services they provide. These real estate management services companies are typically established as partnerships for tax purposes and offer the potential to distribute earnings to us on a quarterly basis.
Segment gross profit is a key metric that we use to evaluate segment operating performance and to determine resource allocation between segments. We define segment gross profit as segment revenues less segment direct cost of services. In our billboard business, direct cost of services includes land leases, utilities, repairs and maintenance of equipment, sales commissions, contract services, and other billboard level expenses. In our surety business, direct cost of services includes commissions, premium excise taxes, and losses and loss adjustment expenses.
Results of Operations
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2017
The following is a comparison of our results of operations for the three months ended September 30, 2016, which we refer to as the “third quarter of fiscal 2016,” compared to the three months ended September 30, 2017, which we refer to as the “third quarter of fiscal 2017.” Our results for the third quarter of fiscal 2017 include the financial and operating results of UC&S, which we acquired in December 2016. In addition, we completed two billboard acquisitions in January 2017 and four more billboard acquisitions in May, June, and July 2017. We also acquired SSS, a surety insurance brokerage firm, in July 2017. As a result, the results of operations for the third quarter of fiscal 2016 do not reflect results from any of these newly acquired businesses. Therefore, comparisons of our results for the third quarter of fiscal 2016 to the third quarter of fiscal 2017 may not be meaningful.
Revenues. For the third quarter of fiscal 2016 and the third quarter of fiscal 2017, our revenues in dollars and as a percentage of total revenues were as follows:
For the Three Months Ended September 30,(unaudited)
Amount
As a % ofTotalRevenues
%
We realized revenues of $2,384,981 during the third quarter of fiscal 2017, a 128.8% increase over revenues of $1,042,237 during the third quarter of fiscal 2016, and a 19.6% increase over revenues of $1,994,883 during the three months ended June 30, 2017, which we refer to as the “second quarter of fiscal 2017.”
•
During the third quarter of fiscal 2017, we realized revenues from billboard rentals of $1,451,843, an increase of 51.3% over revenues of $959,148 for billboard rentals during the third quarter of fiscal 2016. Billboard revenues also increased 19.5% from revenues from billboard rentals of $1,215,318 during the second quarter of fiscal 2017. The increase in revenues reflected the completion of several acquisitions of billboard assets in 2016 and 2017 and improving rentals of billboards which we had acquired during the first quarter of fiscal 2017. This billboard acquisition completed in January 2017 was for a business being divested by the prior owner as part of its activities in seeking federal regulatory approval to acquire a larger billboard operator with activities in the same region. As a result, the prior owner had ceased much of its sales activities for the billboards sold to us, resulting in temporarily lower revenues during the second quarter as we focused on improving the occupancy rates on acquired billboards.
Revenues during the third quarter of fiscal 2017 included $550,778 in net premiums earned from UC&S, which we acquired in December 2016. Revenues from UC&S during the third quarter of fiscal 2017 increased 3.6% from revenues of $531,557 during the second quarter of fiscal 2017. During the first nine months of fiscal 2017, UC&S focused significant efforts in increasing the number of states in which it may sell surety insurance products, with the number of states in which it is authorized to sell insurance increasing from nine at the end of 2016 to 40 and the District of Columbia at September 30, 2017. These additional license authorizations were primarily received during the second and third quarters of fiscal 2017 and we anticipate we will begin to see additional increased revenues from our UC&S operations later this year as a result of our authority to now sell surety insurance in these additional states. We have also added additional senior personnel to our UC&S operations to help sales activities.
Revenues from insurance commissions generated by Warnock and SSS were $349,480 during the third quarter of fiscal 2017, an increase from commission revenue of $83,089 during the third quarter of fiscal 2016, all of which were from Warnock. As a result of increased revenues from Warnock and the addition of SSS, revenues from our commissions business increased 66.7% from $209,598 during the second quarter of fiscal 2017.
Investment and other income during the third quarter of fiscal 2017 was $32,880, representing investment income on certain investments in certificates of deposits and treasury notes held by UC&S. There was no investment income in the third quarter of fiscal 2016 as we did not complete the acquisition of UC&S until December 2016.
Expenses. For the third quarter of fiscal 2016 and the third quarter of fiscal 2017, our expenses in dollars and as a percentage of total revenues were as follows:
For the Three Months Ended September 30, (unaudited)
2016 vs 2017
$Variance
Cost of billboard revenues
During the third quarter of fiscal 2017, we had expenses of $3,943,618, primarily from employee costs, cost of billboard revenues, depreciation and amortization expenses, professional fees and general and administrative expenses. Total costs and expenses for the third quarter of fiscal 2017 increased by $2,116,857, an increase of 115.9% from the third quarter of fiscal 2016. However, total costs and expenses as a percentage of revenues decreased from 175.3% during the third quarter of fiscal 2016 to 165.4% during the third quarter of fiscal 2017.
During the third quarter of fiscal 2017:
Billboard expenses as a percentage of billboard revenues increased from 39.6% from the third quarter of fiscal 2016 to 52.1%, primarily due to an increase in lease expenses from newly acquired billboard assets.
Cost of insurance revenues consisted primarily of commissions paid by Warnock and UC&S as well as premium excise taxes paid by UC&S.
Total employee costs increased from $504,117 from the third quarter of fiscal 2016 to $1,105,933, reflecting increased headcount in our billboard operations, increased headcount at Warnock and the acquisitions of UC&S and SSS insurance operations, all of which occurred subsequent to the third quarter of fiscal 2016. Personnel costs as a percentage of revenues decreased slightly from 48.4% of revenues in the third quarter of fiscal 2016 to 46.4% of revenues in the third quarter of fiscal 2017, reflecting the positive impact of increased revenues from both business units.
Professional fees in the third quarter of fiscal 2017 were $465,870, or 19.5% of total revenues, compared to $281,719, or 27.0% of total revenues, for the third quarter of fiscal 2016. Professional fees in the third quarter of fiscal 2017 were primarily associated with accounting costs for Boston Omaha Corporation, legal and accounting expenses associated with acquisitions, costs associated with applying for authority to sell surety insurance in all 50 states and the District of Columbia, and other costs incurred as a public company.
Non-cash expenses in the third quarter of fiscal 2017 included $274,707 in depreciation and $517,176 in amortization expenses associated with our acquisitions since June 2015, or a combined 33.2% of total revenues, compared to $245,787 in depreciation and $255,295 of amortization expenses associated with our acquisitions, or a combined 48.1% of total revenues, during the third quarter of fiscal 2016. This higher depreciation and amortization expense relates primarily to certain billboard acquisitions completed in fiscal 2017.
General and administrative expenses increased from $159,930 to $464,532, an increase of 190.5%, reflecting a full quarter of operations from UC&S, the addition of SSS, as well as the continued expansion of our billboard business. As a percentage of total revenues, general and administrative expenses increased from 15.3% in the third quarter of fiscal 2016 to 19.5% in the third quarter of fiscal 2017.
Net Loss from Operations. Net loss from operations for the third quarter of fiscal 2017 was $1,558,637, or 65.4% of total revenues, as compared to net loss from operations of $784,524, or 75.3% of total revenues, in the third quarter of fiscal 2016. The decrease in net loss from operations as a percentage of total revenues was primarily due to decreases in professional fees and depreciation and amortization expenses as a percentage of total revenues. Net loss from operations was also impacted by an increase in direct costs as we increased our personnel, general and administrative expenses associated with the expansion of our billboard and insurance operations, and certain one-time application fee expenses associated with expanding UC&S’s authority to issue surety insurance in all 50 states and the District of Columbia.
Other Income (Expense). During the third quarter of fiscal 2017, we had $48,513 in equity in income from our investments in real estate management businesses. . During the third quarter of fiscal 2016, we had a net loss in equity in income of $6,623 related to our real estate ventures.
Net Loss. We had a net loss in the amount of $1,511,956 during the third quarter of fiscal 2017, or a loss per share of $0.11, based on 14,293,871 weighted average shares outstanding. This compared to a net loss in the amount of $791,329 during the third quarter of fiscal 2016, or a loss per share of $0.11 based on 6,896,923 weighted average shares outstanding. We completed the initial closing of our 2017 public offering, which we refer to as the “2017 public offering,” in June 2017. At the end of September 2017, we had 13,307,157 shares of Class A common stock and 1,055,560 shares of Class B common stock outstanding, which includes 7,465,342 shares of our Class A common stock sold in our 2017 public offering.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2017
The following is a comparison of our results of operations for the nine months ended September 30, 2016, which we refer to as the “first nine months of fiscal 2016,” compared to the nine months ended September 30, 2017, which we refer to as the “first nine months of fiscal 2017.” The results for the first nine months of fiscal 2016 include the operations of JAG for the period from February 16, 2016 through September 30, 2016 and Warnock for the period from April 20, 2016 through September 30, 2016. Results for the first nine months of fiscal 2016 do not include any results for UC&S, which was acquired in December 2016. In addition, we acquired several billboard operations, throughout the first nine months of fiscal 2017, and SSS in July 2017. Therefore, comparisons of our results for the first nine months of fiscal 2016 to the first nine months of fiscal 2017 may not be meaningful.
Revenues. For the first nine months of fiscal 2016 and the first nine months of fiscal 2017, our revenues in dollars and as a percentage of total revenues were as follows:
For the Nine Months Ended September 30, (unaudited)
We realized revenues of $6,249,791 during the first nine months of fiscal 2017, a 145.1% increase over revenues of $2,550,060 during the first nine months of fiscal 2016.
During the first nine months of fiscal 2017, we realized billboard revenues of $3,681,653, an increase of 62.0% over revenues of $2,273,210 for billboard rentals during the first nine months of fiscal 2016. This increase was mainly driven by a full nine months of operations from billboard acquisitions completed during fiscal 2016 as well as additional billboard acquisitions completed at various times during 2017.
Revenues during the first nine months of fiscal 2017 included $1,574,877 in net premiums earned from UC&S. During the first nine months of fiscal 2017, UC&S focused significant efforts in increasing the number of states in which it may sell surety insurance products, with the number of states in which it is authorized to sell insurance increasing from nine at the end of 2016 to 40 and the District of Columbia at September 30, 2017. These additional authorizations were primarily received during the second and third quarters of fiscal 2017 and we anticipate we will begin to see additional increased revenues from our UC&S operations later this year.
Revenues from insurance commissions generated by Warnock and SSS were $892,246 during the first nine months of fiscal 2017. As previously noted, we acquired SSS in July 2017 and Warnock in April 2016. Insurance commission revenues of $276,850 for the first nine months of fiscal 2016 represent Warnock operations from April through September 2016.
Investment and other income during the first nine months of fiscal 2017 was $101,015, representing investment income on treasury notes and certificates of deposit held by UC&S. There was no investment income in the first nine months of fiscal 2016 as we did not complete the acquisition of UC&S until December 2016.
Expenses. For the first nine months of fiscal 2016 and the first nine months of fiscal 2017, our expenses in dollars and as a percentage of total revenues were as follows:
2016 vs2017
During the first nine months of fiscal 2017, we had expenses of $10,297,633, primarily from employee costs, cost of billboard revenues, depreciation and amortization expenses, professional fees and general and administrative expenses. Total costs and expenses for the first nine months of fiscal 2017 increased by $5,511,943, an increase of 115.2% from the first nine months of fiscal 2016. However, total costs and expenses as a percentage of revenues during the first nine months of fiscal 2017 dropped to 164.8% from 187.7% during the first nine months of fiscal 2016. During the first nine months of 2017, we incurred a loss of $361,326 associated with the disposition of three digital billboards which required replacement ahead of schedule, the sale of vehicles and equipment acquired from JAG, and the removal of three billboard structures.
During the first nine months of fiscal 2017:
Billboard expenses as a percentage of billboard revenues increased from 38.5% in the first nine months of 2016 to 50.7%, primarily due to an increase in lease expenses from newly acquired billboard assets in certain regions where lease expenses are higher than in more rural areas.
Total employee costs increased by $1,726,258, from $1,140,009 in the first nine months of fiscal 2016, to $2,866,267 in the first nine months of fiscal 2017, reflecting increased headcount in our billboard operations, increased headcount at Warnock, and the acquisitions of UC&S and SSS insurance operations, all of which occurred subsequent to September 30, 2016. For these reasons, employee costs as a percentage of revenues increased from 44.7% of total revenues in the first nine months of fiscal 2016 to 45.9% of total revenues in the first nine months of fiscal 2017.
Professional fees in the first nine months of fiscal 2017 were $1,371,990, or 22.0% of total revenues, compared to $974,214, or 38.2% of total revenues, for the first nine months of fiscal 2016. Professional fees in the first nine months of fiscal 2017 were primarily associated with accounting and audit costs for Boston Omaha Corporation, statutory audit costs for UC&S, legal and accounting expenses associated with acquisitions, costs associated with applying for authority to sell surety insurance in all 50 states and the District of Columbia, and other costs incurred as a public company.
Non-cash expenses in the first nine months of fiscal 2017 included $731,415 in depreciation and $1,313,075 in amortization expenses associated with our acquisitions since June 2015, or a combined 32.7% of total revenues, compared to $654,125 in depreciation and $596,601 of amortization expenses, or a combined 49.1% of total revenues, during the first nine months of fiscal 2016. This higher depreciation and amortization expense relates primarily to certain billboard asset acquisitions completed in fiscal 2016 and 2017.
General and administrative expenses increased from $517,885 to $1,302,392, an increase of 151.5%. As a percentage of total revenues, general and administrative expenses increased slightly from 20.3% in the first nine months of fiscal 2016 to 20.8% in the first nine months of fiscal 2017. The increase in absolute dollars was due primarily to a full nine months of operations from our Warnock and UC&S acquisitions, as well as the continued expansion of our billboard and insurance businesses.
During the first nine months of 2017, we expensed $361,326 in connection with three digital billboards which required replacement ahead of schedule, the sale of vehicles and equipment acquired from JAG, and the removal of three billboard structures.
Net Loss from Operations. Net loss from operations for the first nine months of fiscal 2017 was $4,047,842, or 64.8% of total revenues, as compared to net loss from operations of $2,235,630, or 87.7% of total revenues, in the first nine months of fiscal 2016. The decrease in net loss from operations as a percentage of total revenues was primarily due to the addition of the insurance operations and the reduction of professional fees and depreciation and amortization expenses as a percentage of revenues as well as the impact of other fixed costs spread over a greater revenue base. Net loss from operations was also impacted by an increase in direct costs as we increased our personnel, general and administrative expenses associated with the expansion of our billboard and insurance operations, and certain one-time application fees and other expenses associated with our efforts to expand UC&S’ authority to issue surety insurance in all 50 states and the District of Columbia.
Other Income (Expense). During the first nine months of fiscal 2017, we had equity in income of $63,746 from our interests in certain real estate management ventures. During the first nine months of fiscal 2016, we had equity in loss of $32,958 related to our interest in these real estate management ventures.
Net Loss. We had a net loss in the amount of $3,989,983 during the first nine months of fiscal 2017, or a loss per share of $0.41, based on 9,622,370 weighted average shares outstanding. This compared to a net loss in the amount of $2,270,828 during the first nine months of 2016, or a loss per share of $0.40, based on 5,744,898 weighted average shares outstanding. We completed the initial closing of our 2017 public offering in June 2017. At the end of September 2017, we had 13,307,157 shares of Class A common stock and 1,055,560 shares of Class B common stock outstanding, which includes 7,465,342 shares of our Class A common stock sold in our 2017 public offering.
Cash Flows
Cash Flows for the First Nine Months of Fiscal 2016 compared to the First Nine Months of Fiscal 2017
The table below summarizes our cash flows, in dollars, for the first nine months of fiscal 2016 and the first nine months of fiscal 2017:
Nine Months EndedSeptember 30, 2016(unaudited)
NineMonths EndedSeptember 30, 2017(unaudited)
Net cash used in operating activities
)
Net cash used in investing activities
Net cash provided by financing activities
Net increase in cash
Net cash used in operating activities was $2,031,046 for the first nine months of fiscal 2017 compared to cash outflow of $1,098,484 for the first nine months of fiscal 2016. The increase in cash used in operating activities in 2017 was primarily attributable to higher operating expenses (excluding depreciation and amortization) as we seek to grow our billboard and insurance businesses, as well as an increased use of working capital.
Net cash used in investing activities for the first nine months of 2017 was $16,156,887 as compared with $11,476,143 during the first nine months of fiscal 2016. During the nine months ended September 30, 2017, we expended $10,586,890 in acquisitions, $3,874,593 in certificates of deposit and treasury notes and $1,855,743 in equipment and related assets.
Net cash provided by financing activities for the first nine months of 2017 was $91,433,091, representing the funds raised through the sale of our Class A common stock in our 2017 public offering, net of offering expenses. During the first nine months of fiscal 2016, we raised $41,761,319 through the sale of Class A common stock.
Liquidity and Capital Resources
Currently, we own billboards in Alabama, Florida, Georgia and Wisconsin, three surety insurance brokerage firms, including a firm based in Georgia, a firm based in Kansas and a firm acquired in November 2017 based in California, a surety insurance company, and minority investments in several real estate entities. During the third quarter, we completed the acquisition of SSS for $450,000 and acquired certain billboard assets for $623,596. 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 paid for an acquisition with our equity securities.
At September 30, 2017, we had $102,810,133 in unrestricted cash and no debt. On October 10, 2017, we expanded our cash management strategy and invested $88,000,000 of available cash in short-term U.S. Treasury securities.
As of the date of this report, we have entered into nonbinding letters of intent to acquire two businesses. We believe the proposed acquisitions are consistent with our growth strategy. We also intend to continue our efforts to selectively assess and acquire additional billboard assets and surety brokerage firms. There can be no assurance that we will consummate acquisitions pursuant to our letters of intent or acquire any additional billboard assets or surety brokerage firms. Furthermore, our acquisitions are subject to a number of risks and uncertainties, including as to when, whether and to what extent the anticipated benefits and cost savings of a particular acquisition will be realized. Our failure to successfully identify and complete future acquisitions of assets or businesses could reduce future potential earnings, available cash and slow our anticipated growth.
We believe that our existing cash position will be sufficient to meet working capital requirements, and anticipated capital expenditures for the next 12 months. We expect that we will have access to adequate cash to continue the implementation of our strategy at least over the next 12 months to grow through additional acquisitions and the expansion of our existing insurance activities.
Although we have no current plans to do so, we may in the future use a number of different sources to finance our acquisitions and operations, including cash flows from operations, seller financing, private financings (such as bank credit facilities, which may or may not be secured by our assets), additional common or preferred equity issuances or any combination of these sources, to the extent available to us, or other sources that may become available from time to time, which could include asset sales and issuance of debt securities. Any debt that we incur may be recourse or non-recourse and may be secured or unsecured. We also may take advantage of joint venture or other partnering opportunities as such opportunities arise in order to acquire properties that would otherwise be unavailable to us. We may use the proceeds of any future borrowings to acquire assets or for general corporate purposes. We expect to use leverage conservatively, assessing the appropriateness of new equity or debt capital based on market conditions, including assumptions regarding future cash flow, the creditworthiness of customers and future rental rates.
Our certificate of incorporation and bylaws do not limit the amount of debt that we may incur. Our board of directors has not adopted a policy limiting the total amount of debt that we may incur. Our board of directors will consider a number of factors in evaluating the amount of debt that we may incur. If we adopt a debt policy, our board of directors may from time to time modify such policy in light of then-current economic conditions, relative costs of debt and equity capital, market values of our properties, general conditions in the market for debt and equity securities, fluctuations in the market price of our Class A common stock if then trading on any exchange, growth and acquisition opportunities and other factors. Our decision to use leverage in the future to finance our assets will be at our discretion and will not be subject to the approval of our stockholders, and we are not restricted by our governing documents or otherwise in the amount of leverage that we may use.
Off-Balance Sheet Arrangements
Except for our normal operating leases, we do not have any off-balance sheet financing arrangements, transactions or special purpose entities.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements and related notes to the consolidated financial statements included in the notes to the consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. In the notes accompanying the consolidated financial statements, we describe the significant accounting policies used in the preparation of our consolidated financial statements
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At September 30, 2017, we held no significant derivative instruments that materially increased our exposure to market risks for interest rates, foreign currency rates, commodity prices or other market price risks. Our operations are currently conducted entirely within the U.S.; therefore, we had no significant exposure to foreign currency exchange rate risk.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our President and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2017. Based on that evaluation, our management, including our President and Chief Financial Officer, concluded that our disclosure controls were not effective as of September 30, 2017 for the reasons discussed below.
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 Securities Exchange Act of 1934, as amended, which we refer to as 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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the design and operation of our internal control over financial reporting as of September 30, 2017 based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation.
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, 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, 2017, our internal control over financial reporting and disclosure controls and procedures are not effective.
Despite our current view that internal control over financial reporting is not effective, we have taken a number of steps to address this potential area of risk. In June 2016, we hired a full-time controller, who has subsequently become our Chief Financial Officer. He has been 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, in April 2016 we appointed our first independent member of our board of directors and we have subsequently added two additional independent directors as members of our Audit Committee in June 2017. We have also engaged an outside consulting firm to assist us in completing our internal testing procedures and anticipate fully addressing this deficiency before the end of 2017. Notwithstanding the assessment that our internal control over financial reporting is not effective and that there was a material weakness 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, 2017 and the nine months ended September 30, 2017 fairly present our financial position, results of operations and cash flows for the periods covered thereby in all material respects.
Limitations on Effectiveness of Controls and Procedures
Our management, including our principal executive officers and principal financial and accounting 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.
Changes in Internal Control over Financial Reporting
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.
Item 3. Defaults upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits.
(a) The following exhibits are filed with this Quarterly Report or are incorporated herein by reference:
ExhibitNumber
Description
31.01
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.02
32.01
Certification Pursuant to 18 U.S.C. Section 1350, as pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Labels Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
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 13, 2017
/s/ Joshua P. Weisenburger
Joshua P. Weisenburger
Chief Financial Officer
(Principal Financial and Accounting Officer)