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, Section 21E of the Securities Exchange Act of 1934, as amended, and other federal securities laws. We have based these forward-looking statements on our current intent, expectations and projections about future events, and these forward-looking statements are not guaranteed to occur and may not occur. 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,” “will,” “should,” “could,” “would,” “intend,” “project,” “contemplate,” “potential,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. These statements are only predictions. 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 OUTCOME OF THE EVENTS DESCRIBED IN THIS REPORT ALSO CONTAINS STATISTICAL AND OTHER INDUSTRY AND MARKET DATA RELATED TO OUR BUSINESS AND INDUSTRY THAT WE OBTAINED FROM INDUSTRY PUBLICATIONS AND RESEARCH, SURVEYS AND STUDIES CONDUCTED BY US AND THIRD PARTIES, AS WELL AS OUR ESTIMATES OF POTENTIAL MARKET OPPORTUNITIES. INDUSTRY PUBLICATIONS, THIRD-PARTY AND OUR OWN RESEARCH, SURVEYS AND STUDIES GENERALLY INDICATE THAT THEIR INFORMATION HAS BEEN OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE ALTHOUGH THEY DO NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION. THIS MARKET DATA INCLUDES PROJECTIONS THAT ARE BASED ON A NUMBER OF ASSUMPTIONS. IF THESE ASSUMPTIONS TURN OUT TO BE INCORRECT, ACTUAL RESULTS MAY DIFFER FROM THE PROJECTIONS BASED ON THESE ASSUMPTIONS. AS A RESULT, OUR MARKETS MAY NOT GROW AT THE RATES PROJECTED BY THIS DATA, OR AT ALL. THE FAILURE OF THESE MARKETS TO GROW AT THESE PROJECTED RATES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION AND THE MARKET PRICE OF OUR COMMON STOCK.
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. IN ADDITION, OUR BUSINESS AND FUTURE RESULTS ARE SUBJECT TO A NUMBER OF FACTORS, INCLUDING THOSE FACTORS SET FORTH IN THE “risk factors” SECTION OF OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018. 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 2019 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 outdoor billboard advertising and surety insurance and related brokerage businesses. In addition, we hold minority investments in commercial real estate management and brokerage services, a bank focused on servicing the automotive loan market, and a homebuilding company with operations located primarily in the Southeast United States.
Billboards
: We commenced our billboard business operations in June 2015 through acquisitions of smaller billboard companies located in the Southeast United States and Wisconsin. As of June 30, 2018, we operated 479 billboard structures. During July and August 2018, we acquired the membership interests or assets of three larger billboard companies which increased our overall billboard count to approximately 2,900 billboards. These transactions include our acquisition on July 31, 2018 of Tammy Lynn Outdoor, LLC, which we refer to as “Tammy Lynn,” for cash and stock consideration, our acquisition on August 22, 2018 of substantially all of the assets of Key Outdoor, Inc., which we refer to as “Key,” for approximately $38 million, and our acquisition on August 31, 2018 of Waitt Outdoor, LLC, which we refer to as “Waitt,” for approximately $84 million. We believe that the acquisitions of Waitt and Key, with over 1,600 and 700 billboard structures, respectively, make us a leading outdoor billboard advertising company in the markets we serve in the Midwest. As of May 6, 2019, we operate approximately 2,900 billboards with approximately 5,400 advertising faces. One of our principal business objectives is to continue to acquire additional billboard assets through acquisitions of existing billboard businesses in the United States when they can be made at what we believe to be attractive prices relative to other opportunities generally available to us.
Surety Insurance
: Our surety insurance business commenced in April 2016 with the acquisition of a surety insurance brokerage business with a national internet-based presence. In December 2016, we completed the acquisition of United Casualty & Surety Insurance Company, which we refer to as “UCS,” a surety insurance company, which at that time was licensed to issue surety bonds in only nine states. Since that time, we worked to grow the number of states in which UCS can issue surety bonds and, as a result, UCS is now licensed to issue surety insurance in all 50 states and the District of Columbia. In addition, over the last two years, we have also acquired several additional surety insurance brokerage businesses located in various regions of the United States.
Investments
:
|
●
|
We have made a series of investments in the commercial real estate management, brokerage and related services business commencing in September 2015. We currently own 30% of Logic Real Estate Companies LLC, which we refer to as “Logic,” and approximately 49.9% of 24
th
Street Holding Company, LLC, both directly and indirectly through our ownership in Logic.
|
|
●
|
In late December 2017, we invested $10 million in Dream Finders Holdings LLC, the parent company of Dream Finders Homes, LLC, a national home builder with operations in Florida, Texas, Georgia, Colorado and the greater northern Virginia and Maryland areas.
|
|
●
|
In May 2018, we invested, through one of our subsidiaries, approximately $19 million, through the purchase of common stock of CB&T Holding Corporation, the privately-held parent company of Crescent Bank & Trust, Inc., which we refer to as “Crescent.” Crescent is located in New Orleans and generates the majority of its revenues from indirect subprime automobile lending across the United States.
|
In each of our businesses, we hope to expand our geographic reach and market share and seek to develop a competitive advantage and/or brand name for our services, which we hope will be a differentiating factor for customers. Our insurance market primarily services small contractors, small- and medium-sized businesses and individuals that are required to provide surety bonds (1) in connection with their work for government agencies and others, (2) in connection with contractual obligations, or (3) to meet regulatory requirements and other needs. We have expanded the licensing of the UCS business to all 50 states and the District of Columbia as of March 13, 2019. In outdoor advertising, our plan is to continue to grow this business through acquisitions of billboard assets. We also expect to continue to make additional investments in real estate management service businesses, as well as in other businesses. In the future, we expect to expand the range of services we provide in the insurance sector, seek to continue to expand our billboard operations and to possibly consider acquisitions of other businesses, as well as investments, in other sectors. Our decision to expand outside of these current business sectors we serve or in which we have made investments will be based on the opportunity to acquire businesses which we believe provide the potential for sustainable earnings at an attractive level relative to capital employed and, with regard to investment, we believe have the potential to provide attractive returns.
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/or 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. We also believe our investment in Crescent provides the opportunity for Crescent to significantly grow its business.
How We Generate Our Revenues and Evaluate Our Business
We currently generate revenues primarily 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 recognized at a point in time, on a bond-by-bond basis as of the policy effective date and are generally nonrefundable.
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 taxes, fees, and assessments, and losses and loss adjustment expenses.
Results of Operations
Three Months Ended
March 31, 2019
Compared to Three Months Ended
March 31, 2018
The following is a comparison of our results of operations for the three months ended March 31, 2019, which we refer to as the “first quarter of fiscal 2019,” compared to the three months ended March 31, 2018, which we refer to as the “first quarter of fiscal 2018.” Our results for the first quarter of fiscal 2019 include the financial and operating results of Waitt, Key and Tammy Lynn. Additionally, in the second quarter of fiscal 2018, Freestate Bonds, Inc. was reorganized into The Warnock Agency, Inc. Therefore, comparisons of our results for the first quarter of fiscal 2019 to the first quarter of fiscal 2018 may not be meaningful.
Revenues.
For the first quarter of fiscal 2019 and the first quarter of fiscal 2018, our revenues in dollars and as a percentage of total revenues were as follows:
|
|
For the Three Months Ended
March 31
,
(unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
|
201
9 vs 2018
|
|
|
|
Amount
|
|
|
As a % of
Total
Revenues
|
|
|
Amount
|
|
|
As a % of
Total
Revenues
|
|
|
$ Variance
|
|
Revenues
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billboard rentals, net
|
|
$
|
6,780,390
|
|
|
|
74.4
|
%
|
|
$
|
1,550,190
|
|
|
|
54.9
|
%
|
|
$
|
5,230,200
|
|
Premiums earned
|
|
|
1,882,342
|
|
|
|
20.7
|
%
|
|
|
477,304
|
|
|
|
16.9
|
%
|
|
|
1,405,038
|
|
Insurance commissions
|
|
|
355,147
|
|
|
|
3.9
|
%
|
|
|
765,184
|
|
|
|
27.1
|
%
|
|
|
(410,037
|
)
|
Investment and other income
|
|
|
92,846
|
|
|
|
1.0
|
%
|
|
|
30,266
|
|
|
|
1.1
|
%
|
|
|
62,580
|
|
Total Revenues
|
|
$
|
9,110,725
|
|
|
|
100.0
|
%
|
|
$
|
2,822,944
|
|
|
|
100.0
|
%
|
|
$
|
6,287,781
|
|
We realized total revenues of $9,110,725 during the first quarter of fiscal 2019, an increase of 222.7% as compared to revenues of $2,822,944 during the first quarter of fiscal 2018. Total revenues were largely driven by increases in our net billboard rentals, which reflects several billboard acquisitions completed in fiscal 2018. The increase in revenues was also due to increased written premiums reflecting our obtaining approval to issue bonds in California and improved marketing efforts. We recognize revenues for written premium over the life of the surety bond, and, as a result, increased sales activities are not fully reflected in the quarter in which the policy is sold.
|
●
|
Net billboard rentals in the first quarter of fiscal 2019 increased $5,230,200 or 337.4% from the first quarter of fiscal 2018, primarily due to the acquisitions of billboard businesses in July 2018 and August 2018, principally from the Waitt, Key and Tammy Lynn transactions. The increase in net billboard rentals also reflects continued improvement in rental and occupancy rates of our existing billboards.
|
|
●
|
Premiums earned from our UCS insurance subsidiary in the first quarter of fiscal 2019 increased 294.4% from the first quarter of fiscal 2018. The increase in premium earned is due primarily to an increase in gross written premium now that UCS is licensed in all 50 states and the District of Columbia and our agents are able to place more bond business through UCS.
|
|
●
|
Revenues from insurance commissions generated by our surety brokerage operations decreased by 53.6%, mainly reflecting that UCS is now licensed in all 50 states and the District of Columbia and our agents are able to place more bond business through UCS rather than other carriers.
|
|
●
|
Investment and other income increased 206.8% to $92,846 in the first quarter of fiscal 2019 from $30,266 in the first quarter of fiscal 2018. The increase in investment and other income primarily reflects gains from certain investments held by UCS.
|
Expenses.
For the first quarter of fiscal 2019 and the first quarter of fiscal 2018, our expenses, in dollars, and as a percentage of total revenues, were as follows:
|
|
For the Three Months Ended
March 31
,
(unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
|
2019 vs 2018
|
|
|
|
Amount
|
|
|
As a % of
Total
Revenues
|
|
|
Amount
|
|
|
As a % of
Total
Revenues
|
|
|
$ Variance
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of billboard revenues
|
|
$
|
2,711,397
|
|
|
|
29.7
|
%
|
|
$
|
722,834
|
|
|
|
25.6
|
%
|
|
$
|
1,988,563
|
|
Cost of insurance revenues
|
|
|
1,285,722
|
|
|
|
14.1
|
%
|
|
|
212,864
|
|
|
|
7.5
|
%
|
|
|
1,072,858
|
|
Employee costs
|
|
|
2,878,019
|
|
|
|
31.6
|
%
|
|
|
1,842,366
|
|
|
|
65.3
|
%
|
|
|
1,035,653
|
|
Professional fees
|
|
|
1,419,146
|
|
|
|
15.6
|
%
|
|
|
843,914
|
|
|
|
29.9
|
%
|
|
|
575,232
|
|
Depreciation
|
|
|
843,283
|
|
|
|
9.3
|
%
|
|
|
328,693
|
|
|
|
11.6
|
%
|
|
|
514,590
|
|
Amortization
|
|
|
2,848,552
|
|
|
|
31.3
|
%
|
|
|
760,335
|
|
|
|
26.9
|
%
|
|
|
2,088,217
|
|
General and administrative
|
|
|
1,816,621
|
|
|
|
19.9
|
%
|
|
|
851,273
|
|
|
|
30.2
|
%
|
|
|
965,348
|
|
Loss (gain) on disposition of assets
|
|
|
(17,721
|
)
|
|
|
(0.2
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,721
|
)
|
Accretion
|
|
|
32,778
|
|
|
|
0.4
|
%
|
|
|
3,056
|
|
|
|
0.1
|
%
|
|
|
29,722
|
|
Bad debt expense
|
|
|
80,878
|
|
|
|
0.9
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
80,878
|
|
Total Costs and Expenses
|
|
$
|
13,898,675
|
|
|
|
152.6
|
%
|
|
$
|
5,565,335
|
|
|
|
197.1
|
%
|
|
$
|
8,333,340
|
|
During the first quarter of fiscal 2019, we had total costs and expenses of $13,898,675, as compared to total costs and expenses of $5,565,335 in the first quarter of fiscal 2018. Total costs and expenses as a percentage of total revenues decreased from 197.1% in the first quarter of fiscal 2018 to 152.6% in the first quarter of fiscal 2019, a decrease of 44.5%, which reflects our increase in total revenues, primarily attributable to the Waitt, Key and Tammy Lynn transactions in the third quarter of fiscal 2018. Many of our most significant increases in costs reflect these acquisitions completed in the third quarter of fiscal 2018, including amortization of goodwill associated with these acquisitions and cost of billboard revenues, as well as costs to meet future anticipated demand in our operations. In the first quarter of fiscal 2019, employee costs, professional fees, depreciation and general and administrative expenses decreased as a percentage of total revenues as compared to the first quarter of fiscal 2018. Cost of billboard revenues, cost of insurance revenues, and amortization expenses increased as a percentage of total revenues in the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018 due primarily to the three acquisitions completed in the third quarter of fiscal 2018 and increased gross written premium by UCS. Accretion and bad debt expense remained relatively constant.
|
●
|
Cost of billboard revenues in the first quarter of fiscal 2019 increased by $1,988,563, a 275.1% increase from the first quarter of fiscal 2018. The increase in expenses is primarily due to the Waitt, Key and Tammy Lynn transactions, which significantly increased our number of billboards and accordingly increased the costs associated with operating this increased inventory, including increased land expense and increased commissions paid reflecting the greater sales volume.
|
|
●
|
Cost of insurance revenues includes commissions paid, premium taxes, fees and assessments, and loss and loss adjustment expense. Due to increased gross written premium now that UCS is licensed in all 50 states and the District of Columbia, the cost of insurance revenues increased by $1,072,858 or 504.0% from the first quarter of fiscal 2018 to the first quarter of fiscal 2019.
|
|
●
|
During the first quarter of fiscal 2019, total employee costs increased by 56.2% from the first quarter of fiscal 2018. However, employee costs as a percentage of revenues decreased to 31.6% in the first quarter of fiscal 2019 from 65.3% in the first quarter of fiscal 2018. This decrease in employee costs as a percentage of revenues was primarily due to significantly higher revenues, partially offset by increased staffing levels in our billboard and insurance operations. Most of the increase in staffing costs reflects increased headcount as a result of the acquisitions and increased staffing to meet future anticipated demand for our products and services.
|
|
●
|
Non-cash expenses in the first quarter of fiscal 2019 included $2,848,552 in amortization expense, $843,283 in depreciation expense, and $32,778 in accretion expense. Amortization expense increased by 274.6% and depreciation expense increased by 156.6% from the first quarter of fiscal 2018 to the first quarter of fiscal 2019. These increases are primarily associated with the Waitt, Key and Tammy Lynn transactions in the third quarter of fiscal 2018. Amortization was our second largest expense in the first quarter of fiscal 2019, increasing $2,088,217 from the first quarter of fiscal 2018. In the first quarter of fiscal 2019, amortization expense equaled 31.3% of total revenues, as compared to 26.9% of total revenues the first quarter of fiscal 2018. Accretion expense is in connection with asset retirement obligations for certain billboard assets, which increased by $29,722 primarily due to the Waitt, Key and Tammy Lynn transactions.
|
|
●
|
General and administrative expenses increased from $851,273 in the first quarter of fiscal 2018 to $1,816,621 in the first quarter of fiscal 2019, an increase of 113.4%. The increase was due primarily to increased staffing and systems implementations from recent acquisitions as well as increasing staffing in our insurance business to meet future anticipated demand for our products and services. As a percentage of total revenues, general and administrative expenses decreased from 30.2% in the first quarter of fiscal 2018 to 19.9% in the first quarter of fiscal 2019.
|
|
●
|
Professional fees in the first quarter of fiscal 2019 were $1,419,146, or 15.6% of total revenues, as compared to $843,914, or 29.9% of total revenues, in the first quarter of fiscal 2018. Professional fees increased in the first quarter of fiscal 2019, primarily due to accounting, audit, legal and consulting fees, including fees for our fiscal 2018 audit, initial internal controls attestation by our outside independent auditor and new accounting systems implementation. Professional fees decreased as a percentage of total revenues as revenues grew more quickly than these costs.
|
Net Loss from Operations.
Net loss from operations for the first quarter of fiscal 2019 was $4,787,950, or 52.6% of total revenues, as compared to a net loss from operations of $2,742,391, or 97.1% of total revenues, in the first quarter of fiscal 2018. The increase in net loss from operations in dollars was primarily due to the increases in amortization and cost of billboard and insurance revenues as a percentage of revenues. The decrease in net loss from operations as a percentage of revenues was primarily due to the decrease of general and administrative expenses and professional fees as a percentage of revenues as revenues from the Waitt, Key and Tammy Lynn transactions in the third quarter of fiscal 2018 and increased revenues from our UCS surety bond business grew at a faster rate than these expenses.
Other Income (Expense).
During the first quarter of fiscal 2019, we had net other income of $698,472, which approximates 7.6% of total revenues. Net other income included $94,753 in equity in income of unconsolidated affiliates, $76,105 from unrealized losses on securities, and $120,382 in realized gains from the sale of marketable equity securities held by UCS. Net other income also includes interest income of $559,442, or 6.1% of total revenues. This interest income was derived primarily from our investment in short-term treasury securities. During the first quarter of fiscal 2018, we had net other income of $632,842, or 22.4% of total revenues in the first quarter of fiscal 2018, which included $283,662 in equity in income of unconsolidated affiliates, $93,003 from unrealized losses on securities, and interest income of $443,723, which was offset by interest expense of $1,540.
Net L
oss
Attributable to Common Stockholders
.
We had a net loss attributable to common stockholders in the amount of $4,078,386 in the first quarter of fiscal 2019, as contrasted to a net loss attributable to common stockholders of $2,069,382 in the first quarter of fiscal 2018. Our loss on a per share basis in the first quarter of fiscal 2019 was $0.18, based on 22,186,219 weighted average shares outstanding, as compared to a per share loss of $0.13, based on 15,399,625 weighted average shares outstanding in the first quarter of fiscal 2018. The increase in weighted average shares outstanding reflects the 3,137,768 shares of Class A common stock issued in the second tranche of our private placement in the second quarter of fiscal 2018, 831,542 shares of Class A common stock issued in connection with our “at the market” offering after March 31, 2018, and 85,170 shares of Class A common stock issued in connection with the acquisition of Tammy Lynn.
Results of Operations by Segment
The following tables report results for the following two segments in which we operate, billboards and insurance, for the first quarter of fiscal 2019 and the first quarter of fiscal 2018:
Results of Billboard Operations
|
|
For the Three Months Ended March 31,
(unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Amount
|
|
|
As a % of Segment
Operating Revenues
|
|
|
Amount
|
|
|
As a % of Segment
Operating Revenues
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billboard rentals, net
|
|
$
|
6,780,390
|
|
|
|
100.0
|
%
|
|
$
|
1,550,190
|
|
|
|
100.0
|
%
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ground rents
|
|
|
1,593,790
|
|
|
|
23.5
|
%
|
|
|
403,112
|
|
|
|
26.0
|
%
|
Utilities
|
|
|
276,060
|
|
|
|
4.1
|
%
|
|
|
94,583
|
|
|
|
6.1
|
%
|
Commissions paid
|
|
|
597,645
|
|
|
|
8.8
|
%
|
|
|
118,414
|
|
|
|
7.6
|
%
|
Other costs of revenues
|
|
|
243,902
|
|
|
|
3.6
|
%
|
|
|
106,725
|
|
|
|
6.9
|
%
|
Total cost of revenues
|
|
|
2,711,397
|
|
|
|
40.0
|
%
|
|
|
722,834
|
|
|
|
46.6
|
%
|
Gross margin
|
|
|
4,068,993
|
|
|
|
60.0
|
%
|
|
|
827,356
|
|
|
|
53.4
|
%
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee costs
|
|
|
1,391,963
|
|
|
|
20.5
|
%
|
|
|
486,615
|
|
|
|
31.4
|
%
|
Professional fees
|
|
|
194,239
|
|
|
|
2.9
|
%
|
|
|
88,084
|
|
|
|
5.7
|
%
|
Depreciation
|
|
|
838,558
|
|
|
|
12.4
|
%
|
|
|
321,771
|
|
|
|
20.8
|
%
|
Amortization
|
|
|
2,537,215
|
|
|
|
37.4
|
%
|
|
|
442,123
|
|
|
|
28.5
|
%
|
General and administrative
|
|
|
811,910
|
|
|
|
12.0
|
%
|
|
|
204,389
|
|
|
|
13.2
|
%
|
Accretion
|
|
|
32,778
|
|
|
|
0.5
|
%
|
|
|
3,056
|
|
|
|
0.2
|
%
|
Loss (gain) on disposition of assets
|
|
|
(17,721
|
)
|
|
|
(0.3
|
%)
|
|
|
-
|
|
|
|
-
|
|
Bad debt expense
|
|
|
80,799
|
|
|
|
1.2
|
%
|
|
|
-
|
|
|
|
-
|
|
Total expenses
|
|
|
5,869,741
|
|
|
|
86.6
|
%
|
|
|
1,546,038
|
|
|
|
99.8
|
%
|
Segment Loss from Operations
|
|
|
(1,800,748
|
)
|
|
|
(26.6
|
%)
|
|
|
(718,682
|
)
|
|
|
(46.4
|
%)
|
Interest income (expense)
|
|
|
2,107
|
|
|
|
0.1
|
%
|
|
|
38
|
|
|
|
0.0
|
%
|
Net Loss Attributable to Common Stockholders
|
|
$
|
(1,798,641
|
)
|
|
|
(26.5
|
%)
|
|
$
|
(718,644
|
)
|
|
|
(46.4
|
%)
|
Comparison of
the
First
Quarter of Fiscal 201
9
to
the
First
Quarter of
Fiscal 201
8
.
In the first quarter of fiscal 2019, there was a 337.4% increase in net billboard revenues from the first quarter of fiscal 2018, reflecting the acquisition of billboards from Waitt, Key and Tammy Lynn in the third quarter of fiscal 2018, and improving rental and occupancy rates of our billboards. Other than amortization and commissions paid expenses, all costs decreased as a percentage of segment operating revenues primarily due to increased net billboard revenues. Net loss from operations for this segment increased in total dollars, but decreased as a percentage of revenues. The major factors affecting these results are as follows:
|
●
|
Amortization expenses increasing by $2,095,092 from the first quarter of fiscal 2018. The increase from 28.5% of total segment operating revenues in the first quarter of fiscal 2018 to 37.4% of total segment operating revenues in the first quarter of fiscal 2019 mainly reflects the Waitt, Key and Tammy Lynn transactions completed in the third quarter of fiscal 2018.
|
|
●
|
Increased depreciation expenses, which increased by $516,787, representing an increase of 160.6% in the first quarter of fiscal 2019 over the first quarter of fiscal 2018. This increase was also primarily due to the acquisitions of billboard assets under the Waitt, Key and Tammy Lynn transactions in the third quarter of fiscal 2018.
|
|
●
|
Increased ground rents principally from the Waitt, Key and Tammy Lynn transactions. However, due to increased net billboard revenues, ground rents decreased as a percentage of total segment operating revenues from 26.0% in the first quarter of fiscal 2018 to 23.5% in the first quarter of fiscal 2019.
|
|
●
|
Increased commissions, which increased from 7.6% of total segment operating revenues in the first quarter of fiscal 2018 to 8.8% of total segment operating revenues in the first quarter of fiscal 2019 and are associated with an increase in revenue driven both by acquisitions in the third quarter of fiscal 2018 and improved rental and occupancy rates.
|
|
●
|
Other increases in operating expenses, including increased employee costs, professional fees, and general and administrative expenses mainly reflecting the Waitt, Key and Tammy Lynn transactions in the third quarter of fiscal 2018.
|
Results of Insurance Operations
|
|
For the Three Months Ended March 31,
(unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Amount
|
|
|
As a % of Segment
Operating Revenues
|
|
|
Amount
|
|
|
As a % of Segment
Operating Revenues
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
1,882,342
|
|
|
|
80.8
|
%
|
|
$
|
477,304
|
|
|
|
37.5
|
%
|
Insurance commissions
|
|
|
355,147
|
|
|
|
15.2
|
%
|
|
|
765,184
|
|
|
|
60.1
|
%
|
Investment and other income
|
|
|
92,846
|
|
|
|
4.0
|
%
|
|
|
30,266
|
|
|
|
2.4
|
%
|
Total operating revenues
|
|
|
2,330,335
|
|
|
|
100.0
|
%
|
|
|
1,272,754
|
|
|
|
100.0
|
%
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions paid
|
|
|
798,936
|
|
|
|
34.3
|
%
|
|
|
186,639
|
|
|
|
14.7
|
%
|
Premium taxes, fees, and assessments
|
|
|
100,138
|
|
|
|
4.3
|
%
|
|
|
26,225
|
|
|
|
2.0
|
%
|
Losses and loss adjustment expense
|
|
|
386,648
|
|
|
|
16.6
|
%
|
|
|
-
|
|
|
|
-
|
|
Total cost of revenues
|
|
|
1,285,722
|
|
|
|
55.2
|
%
|
|
|
212,864
|
|
|
|
16.7
|
%
|
Gross margin
|
|
|
1,044,613
|
|
|
|
44.8
|
%
|
|
|
1,059,890
|
|
|
|
83.3
|
%
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee costs
|
|
|
1,309,873
|
|
|
|
56.2
|
%
|
|
|
1,195,501
|
|
|
|
93.9
|
%
|
Professional fees
|
|
|
68,730
|
|
|
|
3.0
|
%
|
|
|
129,283
|
|
|
|
10.2
|
%
|
Depreciation
|
|
|
4,725
|
|
|
|
0.2
|
%
|
|
|
6,922
|
|
|
|
0.5
|
%
|
Amortization
|
|
|
311,337
|
|
|
|
13.4
|
%
|
|
|
318,212
|
|
|
|
25.0
|
%
|
Bad debt expense
|
|
|
80
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
667,882
|
|
|
|
28.6
|
%
|
|
|
453,351
|
|
|
|
35.7
|
%
|
Total expenses
|
|
|
2,362,627
|
|
|
|
101.4
|
%
|
|
|
2,103,269
|
|
|
|
165.3
|
%
|
Segment Loss from Operations
|
|
|
(1,318,014
|
)
|
|
|
(56.6
|
%)
|
|
|
(1,043,379
|
)
|
|
|
(82.0
|
%)
|
Interest income (expense)
|
|
|
34
|
|
|
|
0.0
|
%
|
|
|
(1,342
|
)
|
|
|
(0.1
|
%)
|
Unrealized gains and losses
|
|
|
(44,018
|
)
|
|
|
(1.9
|
%)
|
|
|
-
|
|
|
|
-
|
|
Gain on sale of investments
|
|
|
120,382
|
|
|
|
5.2
|
%
|
|
|
-
|
|
|
|
-
|
|
Noncontrolling interest in subsidiary loss
|
|
|
11,092
|
|
|
|
0.5
|
%
|
|
|
40,167
|
|
|
|
3.2
|
%
|
Net Loss Attributable to Common Stockholders
|
|
$
|
(1,230,524
|
)
|
|
|
(52.8
|
%)
|
|
$
|
(1,004,554
|
)
|
|
|
(78.9
|
%)
|
Comparison of the
First
Quarter of Fiscal 201
9
to the
First
Quarter of Fiscal 201
8
.
In the first quarter of fiscal 2019, total operating revenues increased by 83.1% as compared to the first quarter of fiscal 2018, primarily due to a 294.4% increase in premiums earned in the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018. However, net loss attributable to common stockholders for this segment increased by 22.5% in the first quarter of fiscal 2019 as compared to the first quarter of fiscal 2018 due primarily to the following:
|
●
|
An increase in employee costs, which remains our largest expense in our insurance operations. However, employee costs as a percentage of total segment operating revenues decreased from 93.9% in the first quarter of fiscal 2018 to 56.2% in the first quarter of fiscal 2019, as a result of premiums earned increasing at a faster rate than employee costs.
|
|
●
|
Increased commissions paid to third party agents from $186,639
in the first quarter of fiscal 2018 to $798,936 in the first quarter of fiscal 2019, an increase of 328.0%, primarily due to increased revenues at UCS and the commission rates for the types of bonds sold.
|
|
●
|
Decreased insurance commissions as more premium from our brokerage operations is written internally with UCS.
|
|
●
|
Increased general and administrative expenses primarily associated with one-time costs associated with the implementation of information technology systems and expanding our operations in anticipation of potential future operational growth.
|
|
●
|
Increased losses and loss adjustment expense in connection with increasing our loss reserve estimates based on increased revenues within UCS and entering new geographic markets.
|
|
●
|
Increased premium taxes, fees, and assessments associated primarily with overall premium growth, as well as one-time costs of redomiciling UCS to Nebraska and final retaliatory premium taxes due to prior domestication.
|
The increase in loss from insurance operations was partially offset by increased premiums earned at UCS, decreased professional fees and an increase in the gain on sale of investments. Additionally, depreciation and amortization did not change materially in the first quarter of fiscal 2019 as compared with the first quarter of fiscal 2018.
Cash Flows
Cash Flows for the
First
Quarter
of Fiscal 201
9
compared to the First
Quarter
of
Fiscal 201
8
The table below summarizes our cash flows, in dollars, for the first quarter of fiscal 2019 and the first quarter of fiscal 2018:
|
|
Three Months Ended
March 31, 2019
(unaudited)
|
|
|
Three Months Ended
March 31, 2018
(unaudited)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
237,307
|
|
|
$
|
(1,067,165
|
)
|
Net cash used in investing activities
|
|
|
(11,271,571
|
)
|
|
|
(32,937,361
|
)
|
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
|
|
Net Cash
Provided By (
Used in
)
Operating Activities
.
Net cash provided by operating activities was cash inflow of $237,307 for the first quarter of fiscal 2019 compared to net cash used in operating activities, a cash outflow, of $1,067,165 for the first quarter of fiscal 2018. The increase in cash inflows was primarily attributable to improved operating results in our billboard business following the acquisitions of Waitt, Key and Tammy Lynn and increased revenues in our UCS insurance operations.
Net Cash
Used in
Investing Activities
.
Net cash used in investing activities was $11,271,571 for the first quarter of fiscal 2019 as compared with $32,937,361 during the first quarter of fiscal 2018. This decrease in net cash used in investing activities is primarily attributable to the investment of a portion of the proceeds from the 2018 private placement and our “at the market” offering in U.S. Treasury securities.
Net Cash Provided by Financing Activities
.
Net cash provided by financing activities was $3,740,138 in the first quarter of fiscal 2019 as compared to $87,453,779 in the first quarter of fiscal 2018. In the first quarter of fiscal 2019, net cash provided by financing activities consists of net proceeds of $3,740,138, after commissions and offering costs, raised through our “at the market” offering during the first quarter of fiscal 2019. In the first quarter of fiscal 2018, net cash provided by financing activities consisted of gross proceeds of $76,890,000 raised through the sale of our Class A common stock in the first tranche of our 2018 private placement and gross proceeds of $11,569,985 raised through our “at the market” offering during the first quarter of fiscal 2018, and offering costs of $1,006,206 collectively.
Liquidity and Capital Resources
Currently, we own billboards in Alabama, Florida, Georgia, Illinois, Iowa, Kansas, Missouri, Nebraska, Virginia, West Virginia and Wisconsin, surety insurance brokerage firms we acquired in 2016 and 2017, a surety insurance company we acquired in December 2016, and minority investments in several real estate management entities, a builder of residential homes, and a bank holding entity whose primary source of revenue is in subprime automobile lending. At March 31, 2019, we had approximately $10 million in unrestricted cash and approximately $88 million in U.S. Treasury securities available for sale. 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 when they can be made at what we believe to be attractive prices relative to other opportunities generally available to us. We currently expect to finance any future acquisition with cash, debt and seller or third party financing. Similar to our previous issuance in connection with the acquisition of Tammy Lynn, in the future we may satisfy all or a portion of the purchase price for an acquisition with our equity securities.
There can be no assurance that we will consummate any subsequent acquisitions. 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.
In February 2018, we announced the entry into a stock purchase agreement relating to the issuance and sale of up to $150,000,000 of our unregistered Class A common stock, which we refer to as the “2018 private placement.” 3,300,000 shares were issued in the initial closing, which occurred on March 6, 2018, resulting in gross proceeds to us of $76,890,000. The remaining 3,137,768 shares were issued during the second quarter of fiscal 2018 in a subsequent closing on May 15, 2018, resulting in gross proceeds to us of approximately $73,110,000. Under the 2018 private placement, all shares were sold at $23.30, a slight premium to the $23.29 closing price of the Class A common stock on the NASDAQ Capital Market, as reported by NASDAQ on the date of the Class A Common Stock Purchase Agreement.
During the first quarter of fiscal 2019, we utilized our “at the market” offering that is part of our shelf Registration Statement on Form S-3 (File No. 333-222853) that was filed with the Securities and Exchange Commission, which we refer to as the “SEC,” in February 2018. This registration statement was declared effective on February 9, 2018. The “at the market” offering is pursuant to 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, that we entered into in the first quarter of fiscal 2018. 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. Sales of our Class A common stock, if any, will be made in sales deemed to be “at the market offerings” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, which we refer to as the “Securities Act.” 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. There is no arrangement for funds to be received in any escrow, trust or similar arrangement. 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. In connection with sales of Class A common stock on our behalf, Cowen will be deemed to be an “underwriter” within the meaning of the Securities Act and the compensation payable to Cowen will be deemed to be underwriting commissions or discounts. We have also agreed to provide indemnification and contribution to Cowen with respect to certain liabilities, including liabilities under the Securities Act or the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act.” As of 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, of which 154,003 shares were sold during the first quarter of fiscal 2019, for net proceeds to us of $3,740,138 during the first quarter of fiscal 2019 after commissions and offering costs of $124,563. Subsequent to the first quarter of fiscal 2019 and through April 30, 2019, Cowen sold an additional 175,932 shares of our Class A common stock under our “at the market” offering for gross proceeds of $4,376,081.
We believe that our existing cash and short-term investments, generated by the proceeds from the 2018 private placement, the proceeds from the “at the market” offering to date, additional funds that we may receive in the “at the market” offering, and that we may receive from cash flows from operations will be sufficient to meet working capital requirements, and anticipated capital expenditures for the next 12 months. At March 31, 2019, we had approximately $98 million available in unrestricted cash and U.S. Treasury securities. If future additional significant acquisition opportunities become available in excess of our currently available cash and U.S. Treasury securities, we may need to seek additional capital through long term debt borrowings, the sale of our securities, and/or other financing options and we may not be able to obtain such debt or equity financing on terms favorable to us or at all.
In the future, we may use a number of different sources to finance our acquisitions and operations, including current cash on hand, potential future cash flows from operations, seller financing, debt financings (such as long-term debt and line of credit facilities, which may or may not be secured by our assets or those of our operating subsidiaries), 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. Any credit or other debt facility we may establish in the future could impose restrictions on us that could increase our vulnerability to general adverse economic and industry conditions by limiting our flexibility in planning for and reacting to changes in our billboard and insurance industries. Specifically, any such restrictions may place limits on our ability to, among other things, incur additional indebtedness, make additional acquisitions and investments, pay dividends, repurchase stock, create liens, enter into transactions with affiliates, merge or consolidate or transfer or sell our assets. We also anticipate that any future credit facility may require us to meet a fixed charge coverage ratio and other financial covenants. Our ability to comply with any future loan covenants may be affected by factors beyond our control and a breach of any loan covenants would likely result in an event of default under any such credit facility, which would permit the lenders to declare all amounts incurred thereunder to be immediately due and payable and to terminate their commitments to make future extensions of credit. 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. In determining when to use leverage, we will assess 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 markets 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.