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☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2015
	OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to __________

 

 

OTELCO INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		52-2126395
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
505 Third Avenue East, Oneonta, Alabama		35121
(Address of Principal Executive Offices)		(Zip Code)
(205) 625-3574
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

 

 

Large accelerated filer         ☐		Accelerated filer         ☐		Non-accelerated filer (Do not check if a smaller reporting company)         ☐		Smaller reporting company         ☒

 

 

 

 

 

Class		Outstanding at May 7, 2015
Class A Common Stock ($0.01 par value per share)		3,006,526
Class B Common Stock ($0.01 par value per share)		232,780

 

 

 

TABLE OF CONTENTS

			Page
PART I FINANCIAL INFORMATION			2
	Item 1.	Financial Statements	2
		Condensed Consolidated Balance Sheets as of December 31, 2014 and March 31, 2015 (unaudited)	2
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2015 (unaudited)	3
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2015 (unaudited)	4
		Notes to Condensed Consolidated Financial Statements (unaudited)	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
	Item 4.	Controls and Procedures	16
PART II OTHER INFORMATION			17
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
	Item 6.	Exhibits	17

 

 

 

 

 

 

 

OTELCO INC. CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value and share amounts) (unaudited)
		December 31, 2014				March 31, 2015
Assets
Current assets
Cash and cash equivalents		$	5,082			$	7,717
Accounts receivable:
Due from subscribers, net of allowance for doubtful accounts of $229 and $174, respectively			3,732				3,416
Unbilled receivables			1,675				1,668
Other			1,931				1,904
Materials and supplies			1,915				2,315
Prepaid expenses			3,441				1,758
Total current assets			17,776				18,778
Property and equipment, net			51,237				50,718
Goodwill			44,976				44,976
Intangible assets, net			3,178				2,940
Investments			1,870				1,864
Deferred financing costs, net			1,161				936
Other assets			471				398
Total assets		$	120,669			$	120,610
Liabilities and Stockholders’ Deficit
Current liabilities
Accounts payable		$	1,104			$	1,130
Accrued expenses			5,054				5,351
Advance billings and payments			1,410				1,413
Deferred income taxes			53				53
Customer deposits			70				77
Current maturity of long-term notes payable			6,665				9,379
Total current liabilities			14,356				17,403
Deferred income taxes			24,027				24,027
Advance billings and payments			681				668
Other liabilities			142				133
Long-term notes payable, less current maturities			105,470				100,090
Total liabilities			144,676				142,321
Stockholders’ deficit
Class A Common Stock, $.01 par value-authorized 10,000,000 shares; issued and outstanding 2,881,154 and 3,006,526 shares, respectively			29				30
Class B Common Stock, $.01 par value-authorized 250,000 shares; issued and outstanding 232,780 shares			2				2
Additional paid in capital			3,519				3,679
Retained deficit			(27,557	)			(25,422	)
Total stockholders’ deficit			(24,007	)			(21,711	)
Total liabilities and stockholders’ deficit		$	120,669			$	120,610

 

 

		Three Months Ended March 31,
		2014				2015
Revenues		$	18,782			$	17,643
Operating expenses
Cost of services			9,397				8,257
Selling, general and administrative expenses			2,627				2,630
Depreciation and amortization			2,785				2,249
Total operating expenses			14,809				13,136
Income from operations			3,973				4,507
Other income (expense)
Interest expenses			(2,322	)			(2,048	)
Other income			654				1,064
Total other expenses			(1,668	)			(984	)
Income before income tax			2,305				3,523
Income tax expense			(911	)			(1,388	)
Net income		$	1,394			$	2,135
Weighted average number of common shares outstanding:
Basic			3,103,728				3,239,306
Diluted			3,103,728				3,281,106
Basic net income per common share		$	0.45			$	0.66
Diluted net income per common share		$	0.45			$	0.65

 

 

		Three Months Ended March 31,
		2014				2015
Cash flows from operating activities:
Net income		$	1,394			$	2,135
Adjustments to reconcile net income to cash flows provided by operating activities:
Depreciation			2,343				1,914
Amortization			442				335
Amortization of loan costs			239				225
Provision for uncollectible accounts receivable			103				67
Stock-based compensation			–				161
Changes in operating assets and liabilities:
Accounts receivable			(418	)			283
Material and supplies			11				(400	)
Prepaid expenses and other assets			211				1,756
Accounts payable and accrued expenses			17				323
Advance billings and payments			(30	)			(10	)
Other liabilities			(12	)			(3	)
Net cash from operating activities			4,300				6,786
Cash flows used in investing activities:
Acquisition and construction of property and equipment			(1,415	)			(1,485	)
Purchase of Reliable Networks, net of cash acquired			(500	)			–
Net cash used in investing activities			(1,915	)			(1,485	)
Cash flows used in financing activities:
Principal repayment of long-term notes payable			(5,442	)			(2,666	)
Net cash used in financing activities			(5,442	)			(2,666	)
Net increase (decrease) in cash and cash equivalents			(3,057	)			2,635
Cash and cash equivalents, beginning of period			9,916				5,082
Cash and cash equivalents, end of period		$	6,859			$	7,717
Supplemental disclosures of cash flow information:
Interest paid		$	2,085			$	1,822
Income taxes paid		$	333			$	2

 

 

 

 

 

 

 

 

 

During 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-01 through No. 2015-05. Except for ASU No. 2015-03 and No. 2015-05, which are discussed below, these ASUs provide technical corrections or simplification to existing guidance and to specialized industries or entities and therefore, have minimal, if any impact on the Company.

 

 

 

 

 

 

 

		December 31, 2014				March 31, 2015
Third amended and restated term credit facility; General Electric Capital Corporation; variable interest rate of 6.50% at December 31, 2014 and March 31, 2015. The credit facility is secured by the total assets of the subsidiary guarantors. The unpaid balance is due April 30, 2016.		$	112,135			$	109,469
Less: current portion			(6,665	)			(9,379	)
Long-term notes payable		$	105,470			$	100,090

 

 

 

2015 (remaining)		$	7,713
2016			101,756
2017			—
2018			—
2019			—
Thereafter			—
Total		$	109,469

 

 

 

 

 

 

 

		Three Months Ended March 31,
		2014				2015
Weighted average number of common shares outstanding - basic			3,103,728				3,239,306
Effect of dilutive securities			—				41,800
Weighted average number of common shares and potential common shares - diluted			3,103,728				3,281,106
Net income available to common stockholders		$	1,394			$	2,135
Net income per common share - basic		$	0.45			$	0.66
Net income per common share - diluted		$	0.45			$	0.65

 

 

 

 

 

 

 

 

		RSUs				Weighted Average Grant Date Fair Value
Outstanding at December 31, 2014			113,961			$	4.96
Granted			—			$	—
Vested			57,139			$	4.96
Forfeited or cancelled			15,022			$	4.96
Outstanding at March 31, 2015			41,800			$	4.96

 

 

 

		Shares				Weighted Average Earned Date Fair Value
Earned at December 31, 2014			68,233			$	5.69
Earned			—			$	—
Issued			68,233			$	5.69
Forfeited or cancelled			—			$	—
Earned at March 31, 2015			—			$	—

 

 

 

 

 

 

 

 

 

 

 

 

●

Local services. We receive revenues from providing local exchange telecommunications services in our eleven rural territories and on a competitive basis throughout Maine, western Massachusetts and New Hampshire through both wholesale and retail channels. These revenues include monthly subscription charges for basic service, calling beyond the local territory on a fixed price and on a per minute basis, local private line services and enhanced calling features, such as voicemail, caller identification, call waiting and call forwarding. We also provide billing and collections services for other carriers under contract and receive revenues from directory advertising. A significant portion of our rural subscribers take bundled service plans which contain multiple services, including unlimited domestic calling, for a flat monthly fee.

 

●

Network access. We receive revenues from charges established to compensate us for the origination, transport and termination of calls of long distance, wireless and other interexchange carriers. These include subscriber line charges imposed on end users and switched and special access charges paid by carriers. Switched access charges for long distance services within Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia have historically been based on rates approved by the Alabama Public Service Commission, the Maine Public Utilities Commission, the Massachusetts Department of Telecommunications and Cable, the Missouri Public Service Commission, the New Hampshire Public Utilities Commission, the Vermont Public Service Board and the West Virginia Public Service Commission, respectively, where appropriate. The FCC Order preempted the state commissions’ authority to set terminating intrastate access service rates, and required companies with terminating access rates higher than interstate rates to reduce terminating intrastate access rates to a rate equal to interstate access service rates by July 1, 2013 and to move to “bill and keep” arrangements by July 1, 2020, which will eliminate access charges between carriers. The FCC Order prescribes a recovery mechanism for the recovery of any decrease in intrastate terminating access revenues through the Connect America Fund for RLEC companies. This recovery is limited to 95% of the previous year’s revenue requirement. Switched and special access charges for interstate and international services are based on rates approved by the FCC.

 

 

●

Internet. We receive revenues from monthly recurring charges for digital high-speed data lines, legacy dial-up internet access and ancillary services such as web hosting, computer virus protection and Classifax, which is our virtual faxing solution.

 

●

Transport Services. We receive monthly recurring revenues for the rental of fiber to transport data and other telecommunications services in Maine and New Hampshire.

 

●

Cable, IPTV and satellite television. We offer basic, digital, high-definition, digital video recording, video on demand and pay per view cable television services to the portion of our telephone service territory in Alabama, including IP television (“IPTV”). We are a reseller of satellite services for DirecTV® and DISH Network. We provide medical alert and home security systems in Alabama.

 

●

Managed services. We provide private/hybrid cloud hosting services, as well as consulting and managed services, for mission-critical applications for mid-sized North American companies. Revenues are generated from monthly recurring hosting fees, à la carte professional services and pay-as-you-use applications in a secure SOC 2 Type II redundant environment.

 

 

 

 

 

(1)	We define access line equivalents as retail and wholesale voice lines (including Classifax, our virtual faxing solution) and data lines (including cable modems, digital subscriber lines, and dedicated data access trunks).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

		Three Months Ended March 31,
		2014				2015
Revenues
Local services			36.0	%			35.6	%
Network access			33.0				31.1
Internet			19.0				20.5
Transport services			7.1				7.6
Cable, IP and satellite television			3.9				4.0
Managed services			1.0				1.2
Total revenues			100.0	%			100.0	%
Operating expenses
Cost of services			50.0	%			46.8	%
Selling, general and administrative expenses			14.0				14.9
Depreciation and amortization			14.8				12.7
Total operating expenses			78.8				74.4
Income from operations			21.2				25.6
Other income (expense)
Interest expense			(12.3	)			(11.6	)
Other income			3.4				6.0
Total other income (expense)			(8.9	)			(5.6	)
Income before income tax			12.3				20.0
Income tax expense			(4.9	)			(7.9	)
Net income			7.4	%			12.1	%

 

 

		Three Months Ended March 31,								Change
		2014				2015				Amount				Percent
		(dollars in thousands)
Local services		$	6,772			$	6,284			$	(488	)			(7.2	)%
Network access			6,195				5,480				(715	)			(11.5	)
Internet			3,561				3,608				47				1.3
Transport services			1,326				1,344				18				1.4
Cable, IP and satellite television			731				711				(20	)			(2.7	)
Managed services			197				216				19				9.6
Total		$	18,782			$	17,643			$	(1,139	)			(6.1	)

 

 

 

 

 

 

	Three Months Ended March 31,									Change
		2014				2015				Amount				Percent
	(dollars in thousands)
Cost of services		$	9,397			$	8,257			$	(1,140	)			(12.1	)%
Selling, general and administrative expenses			2,627				2,630				3				0.1
Depreciation and amortization			2,785				2,249				(536	)			(19.2	)
Total		$	14,809			$	13,136			$	(1,673	)			(11.3	)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our credit facility matures in April 2016. Assuming that we are able to successfully refinance our debt, we anticipate that our operating cash flow will be adequate to meet our currently anticipated operating, capital expenditure and scheduled debt repayment requirements for at least the next 12 months. If we are unable to successfully refinance the debt under our credit facility prior to its maturity in April 2016, we would be in default thereunder. There can be no assurance that market conditions will allow us to refinance the debt under our credit facility at or prior to its maturity on terms that are acceptable to us, or at all. Our current focus is on generating cash to continue to reduce our debt. Additional reductions in network, programming and employee costs are being implemented to continue to focus on operations improvements. Our credit facility contains certain financial covenants and restrictions on indebtedness, financial guarantees, business combinations and other related items, which impose operating and financial restrictions on us. In the event we fail to comply with the financial covenants or other similar requirements in our credit facility, we would be in default under our credit facility and our ability to meet anticipated operating and capital expenditure requirements would be impaired.

 

 

		Three Months Ended March 31,
		2014				2015
		(Dollars in thousands)
Cash generation
Revenues		$	18,782			$	17,643
Other income			654				1,064
Cash received from operations		$	19,436			$	18,707
Cost of services		$	9,397			$	8,257
Selling, general and administrative expenses(1)			2,525				2,482
Cash consumed by operations		$	11,922			$	10,739
Cash generated from operations		$	7,514			$	7,968
Cash utilization
Capital investment in operations		$	1,415			$	1,485
Purchase of Reliable Networks			500				—
Debt interest and fees			2,085				1,822
Scheduled principal payment on long-term notes payable			1,666				1,666
Excess cash flow repayment of long-term notes payable			3,079				1,000
Income taxes paid			333				2
Cash utilized by the Company		$	9,078			$	5,975
Percentage cash utilized of cash generated			120.8	%			75.0	%
Voluntary repayment on long-term notes payable		$	697			$	—
(1) Excludes non-cash stock-based compensation

 

		Three Months Ended March 31,
		2014				2015
Net income		$	1,394			$	2,135
Add: Depreciation			2,343				1,914
Interest expense			2,083				1,823
Interest expense – amortized loan lost			239				225
Income tax expense			911				1,388
Amortization – intangibles			442				335
Stock-based compensation (earn out)			112				125
Stock-based compensation (senior management)			—				36
Other excluded expenses			—				3
Loan fees			6				6
Adjusted EBITDA		$	7,530			$	7,990

 

 

 

During 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-01 through No. 2015-05. Except for ASU No. 2015-03 and No. 2015-05, which are discussed below, these ASUs provide technical corrections or simplification to existing guidance and to specialized industries or entities and therefore, have minimal, if any impact on us.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit No.		Description
31.1		Certificate pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934 of the Chief Executive Officer
31.2		Certificate pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934 of the Chief Financial Officer
32.1		Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer
32.2		Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer
101		The following information from the Company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements