|
|
Item 1.
|
Financial Statements
|
OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value and
share amounts)
(unaudited)
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,669
|
|
|
$
|
10,538
|
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
|
Due from subscribers, net of allowance for doubtful accounts of $165 and $182, respectively
|
|
|
4,796
|
|
|
|
5,035
|
|
|
Other
|
|
|
1,572
|
|
|
|
1,528
|
|
|
Materials and supplies
|
|
|
2,598
|
|
|
|
2,184
|
|
|
Prepaid expenses
|
|
|
1,817
|
|
|
|
2,912
|
|
|
Total current assets
|
|
|
21,452
|
|
|
|
22,197
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
48,830
|
|
|
|
49,271
|
|
|
Goodwill
|
|
|
44,976
|
|
|
|
44,976
|
|
|
Intangible assets, net
|
|
|
1,664
|
|
|
|
1,785
|
|
|
Investments
|
|
|
1,650
|
|
|
|
1,821
|
|
|
Other assets
|
|
|
250
|
|
|
|
222
|
|
|
Total assets
|
|
$
|
118,822
|
|
|
$
|
120,272
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,181
|
|
|
$
|
1,477
|
|
|
Accrued expenses
|
|
|
5,353
|
|
|
|
4,730
|
|
|
Advance billings and payments
|
|
|
1,537
|
|
|
|
1,487
|
|
|
Customer deposits
|
|
|
67
|
|
|
|
62
|
|
|
Current maturity of long-term notes payable, net of debt issuance cost
|
|
|
2,963
|
|
|
|
6,071
|
|
|
Total current liabilities
|
|
|
11,101
|
|
|
|
13,827
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
28,280
|
|
|
|
28,280
|
|
|
Advance billings and payments
|
|
|
2,407
|
|
|
|
1,987
|
|
|
Other liabilities
|
|
|
17
|
|
|
|
26
|
|
|
Long-term notes payable, less current maturities and debt issuance cost
|
|
|
86,230
|
|
|
|
86,860
|
|
|
Total liabilities
|
|
|
128,035
|
|
|
|
130,980
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
|
Class A Common Stock, $.01 par value-authorized 10,000,000 shares; issued and outstanding 3,346,689 and 3,291,750 shares, respectively
|
|
|
34
|
|
|
|
33
|
|
|
Additional paid in capital
|
|
|
4,072
|
|
|
|
4,186
|
|
|
Accumulated deficit
|
|
|
(13,319
|
)
|
|
|
(14,927
|
)
|
|
Total stockholders’ deficit
|
|
|
(9,213
|
)
|
|
|
(10,708
|
)
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
118,822
|
|
|
$
|
120,272
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
OTELCO
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share
amounts)
(unaudited)
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Revenues
|
|
$
|
17,380
|
|
|
$
|
17,490
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
7,813
|
|
|
|
8,131
|
|
|
Selling, general and administrative expenses
|
|
|
2,707
|
|
|
|
2,576
|
|
|
Depreciation and amortization
|
|
|
1,840
|
|
|
|
2,037
|
|
|
Total operating expenses
|
|
|
12,360
|
|
|
|
12,744
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,020
|
|
|
|
4,746
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,611
|
)
|
|
|
(2,482
|
)
|
|
Other income
|
|
|
203
|
|
|
|
619
|
|
|
Total other expense
|
|
|
(2,408
|
)
|
|
|
(1,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
2,612
|
|
|
|
2,883
|
|
|
Income tax expense
|
|
|
(1,004
|
)
|
|
|
(1,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,608
|
|
|
$
|
1,750
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,346,689
|
|
|
|
3,283,177
|
|
|
Diluted
|
|
|
3,444,370
|
|
|
|
3,375,735
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.48
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
0.47
|
|
|
$
|
0.52
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
OTELCO
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,608
|
|
|
$
|
1,750
|
|
|
Adjustments to reconcile net income to cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,739
|
|
|
|
1,778
|
|
|
Amortization
|
|
|
101
|
|
|
|
259
|
|
|
Amortization of loan costs
|
|
|
310
|
|
|
|
288
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
155
|
|
|
Provision for uncollectible accounts receivable
|
|
|
78
|
|
|
|
39
|
|
|
Stock-based compensation
|
|
|
95
|
|
|
|
141
|
|
|
Paid in kind interest - subordinated debt
|
|
|
77
|
|
|
|
37
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
117
|
|
|
|
156
|
|
|
Material and supplies
|
|
|
(414
|
)
|
|
|
(158
|
)
|
|
Prepaid expenses and other assets
|
|
|
1,067
|
|
|
|
1,070
|
|
|
Accounts payable and accrued expenses
|
|
|
327
|
|
|
|
328
|
|
|
Advance billings and payments
|
|
|
470
|
|
|
|
(46
|
)
|
|
Other liabilities
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
Net cash from operating activities
|
|
|
5,571
|
|
|
|
5,791
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
Acquisition and construction of property and equipment
|
|
|
(1,270
|
)
|
|
|
(706
|
)
|
|
Net cash used in investing activities
|
|
|
(1,270
|
)
|
|
|
(706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities:
|
|
|
|
|
|
|
|
|
|
Loan origination costs
|
|
|
—
|
|
|
|
(5,181
|
)
|
|
Principal repayment of long-term notes payable
|
|
|
(4,125
|
)
|
|
|
(100,052
|
)
|
|
Proceeds from loan refinancing
|
|
|
—
|
|
|
|
100,300
|
|
|
Retirement of investment
|
|
|
164
|
|
|
|
—
|
|
|
Tax withholdings paid on behalf of employees for restricted stock units
|
|
|
(209
|
)
|
|
|
(109
|
)
|
|
Net cash used in financing activities
|
|
|
(4,170
|
)
|
|
|
(5,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
131
|
|
|
|
43
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
10,538
|
|
|
|
6,884
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
10,669
|
|
|
$
|
6,927
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,247
|
|
|
$
|
1,378
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid (refunded)
|
|
$
|
11
|
|
|
$
|
(440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class B common stock to Class A common stock
|
|
$
|
—
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Class A common stock
|
|
$
|
1
|
|
|
$
|
1
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2017
(unaudited)
|
|
1.
|
Organization and Basis of Financial Reporting
|
Basis of Presentation and Principles
of Consolidation
The unaudited condensed
consolidated financial statements include the accounts of Otelco Inc. (the “Company”) and its subsidiaries, all of
which are either directly or indirectly wholly owned. These include: Blountsville Telephone LLC; Brindlee Mountain Telephone LLC;
CRC Communications LLC (“CRC”); Granby Telephone LLC; Hopper Telecommunications LLC; Mid-Maine Telecom LLC; Mid-Maine
TelPlus LLC; Otelco Mid-Missouri LLC (“MMT”) and its wholly owned subsidiary I-Land Internet Services LLC; Otelco Telecommunications
LLC; Otelco Telephone LLC (“OTP”); Pine Tree Telephone LLC; Saco River Telephone LLC; Shoreham Telephone LLC; and War
Telephone LLC.
The accompanying unaudited
condensed consolidated financial statements include the accounts of the Company and all of the aforesaid subsidiaries after elimination
of all material intercompany balances and transactions. The unaudited operating results for the three months ended March 31, 2017,
are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, or any other period.
The unaudited condensed
consolidated financial statements and notes included in this Quarterly Report on Form 10-Q should be read in conjunction with the
consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December
31, 2016. The interim condensed consolidated financial information herein is unaudited. The information reflects all adjustments
which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations
for the periods included in this report.
Recent Accounting Pronouncements
During 2017, the Financial
Accounting Standards Board (the “FASB”) has issued Accounting Standards Updates (“ASUs”) 2017-01 through
2017-08. Except for ASU 2017-03 and 2017-04, 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.
In May 2014, the FASB
issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”). This ASU requires that
an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This ASU also provides a more robust framework
for revenue issues and improves comparability of revenue recognition practices across industries. This ASU was the product of a
joint project between the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue
and to develop a common revenue standard. This guidance was to be effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2016, with early adoption not permitted. In July 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.
This ASU confirmed a one-year delay in
the effective date of ASU 2014-09, making the effective date for the Company the first quarter of fiscal 2018 instead of the first
quarter of fiscal 2017. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal
versus Agent Consideration (Reporting Revenues Gross versus Net)
. This ASU is further guidance to ASU 2014-09, and clarifies
principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing.
This ASU is also further guidance to ASU 2014-09, and clarifies the
identification of performance obligations. In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical Expedients.
This ASU is also further guidance to ASU 2014-09, and clarifies assessing
the narrow aspects of recognizing revenue. In December 2016, the FASB issued ASU 2016-20,
Technical Corrections and Improvements
to Topic 606, Revenue from Contracts with Customers.
This ASU is also further guidance to ASU 2014-09, and clarifies technical
corrections and improvements for recognizing revenue. In January 2017, the FASB issued ASU 2017-03,
Accounting Changes and Error
Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323)
(“ASU 2017-03”). This ASU
requires registrants to evaluate the impact ASU 2014-09 will have on financial statements and adequately disclose this information
to assist the reader in assessing the significance of ASU 2014-09 on the financial statements when adopted. ASU 2014-09 permits
the use of either a retrospective or modified retrospective application. The Company intends to use the modified retrospective
approach. The Company is continuing to evaluate ASU 2014-09 and the related guidance both internally and through its insight from
an industry working group. The Company will continue its evaluation of ASU 2014-09 and the related guidance through the date of
adoption.
In February 2016, the
FASB issued ASU 2016-02,
Leases (Topic 842)
(“ASU 2016-02”)
.
This ASU requires lessees to recognize most
leases on the balance sheet. The provisions of this guidance are effective for annual periods beginning after December 15, 2018,
and interim periods within those years, with early adoption permitted. In January 2017, the FASB issued ASU 2017-03,
which requires registrants
to evaluate the impact ASU 2016-02 will have on financial statements and adequately disclose this information to assist the reader
in assessing the significance of ASU 2016-02 on the financial statements when adopted. The Company is evaluating the requirements
of this guidance and has not yet determined the impact of the adoption on the Company’s condensed consolidated financial
position or results of operations.
In January 2017, the
FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350)
(“ASU 2017-04”). The objective of this ASU
is to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.
ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early
adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company
does not expect this ASU to have a material impact on its condensed consolidated financial statements.
Refinancing
On January 25, 2016,
the Company entered into a senior loan agreement (the “Senior Loan Agreement”), providing for a five year term loan
facility in the aggregate principal amount of $85.0 million and a five year $5.0 million revolving credit facility, and a subordinated
loan agreement (the “Subordinated Loan Agreement”), providing for a five and a half year term loan facility in the
aggregate principal amount of $15.0 million. On February 17, 2016, the Subordinated Loan Agreement was amended to increase the
aggregate principal amount available for borrowing thereunder to $15.3 million, and the Company borrowed $85.0 million under the
term loan facility of the Senior Loan Agreement and $15.3 million under the Subordinated Loan Agreement. The Company used the borrowings
under the Senior Loan Agreement and the Subordinated Loan Agreement to, among other things, pay all amounts due, including principal,
interest and fees, and satisfy in full all of its obligations under its previous credit facility (the “Previous Credit Facility”),
which was scheduled to mature on April 30, 2016. As a result of the repayment of the Previous Credit Facility, all of the shares
of the Company’s Class B common stock were automatically converted into an equal number of shares of the Company’s
Class A common stock. The term loan facility under the Senior Loan Agreement requires principal payments of $1.0 million quarterly,
which payments began on April 1, 2016. Principal amounts outstanding under the Subordinated Loan Agreement will generally not be
due until maturity. The Company recorded costs of $15 thousand and write-off of loan costs of $140 thousand in connection with
this refinancing.
Notes payable consists
of the following (in thousands, except percentages) as of:
|
|
|
March 31, 2017
|
|
|
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
|
Senior Loan Agreement with Cerberus Business Finance, LLC; variable interest rate of 8.75% at March 31, 2017, interest is monthly, paid in arrears on the first business day of each month. The Senior Loan Agreement is secured by the total assets of the subsidiary guarantors. The unpaid balance is due February 17, 2021.
|
|
$
|
4,000
|
|
|
$
|
73,875
|
|
|
$
|
77,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance cost
|
|
|
(1,037
|
)
|
|
|
(2,582
|
)
|
|
|
(3,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes payable, net of debt issuance cost
|
|
$
|
2,963
|
|
|
$
|
71,293
|
|
|
$
|
74,256
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
|
Senior Loan Agreement with Cerberus Business Finance, LLC; variable interest rate of 8.75% at December 31, 2016, interest is monthly, paid in arrears on the first business day of each month. The Senior Loan Agreement is secured by the total assets of the subsidiary guarantors. The unpaid balance is due February 17, 2021.
|
|
$
|
7,125
|
|
|
$
|
74,875
|
|
|
$
|
82,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance cost
|
|
|
(1,054
|
)
|
|
|
(2,835
|
)
|
|
|
(3,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes payable, net of debt issuance cost
|
|
$
|
6,071
|
|
|
$
|
72,040
|
|
|
$
|
78,111
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Subordinated Loan Agreement with NewSpring Mezzanine Capital III, L.P.; fixed interest rate due monthly of 12.00%. Payment in kind (“PIK”) interest rate of 2.00% per annum. PIK interest accrued is added to the principal amount then outstanding on the last business day of each quarter. The unpaid balance is due August 17, 2021.
|
|
$
|
15,300
|
|
|
$
|
15,300
|
|
|
|
|
|
|
|
|
|
|
|
|
PIK interest added to principal
|
|
|
350
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Long-term portion of debt issuance cost
|
|
|
(713
|
)
|
|
|
(753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term notes payable, net of debt issuance cost
|
|
$
|
14,937
|
|
|
$
|
14,820
|
|
Associated with the
Senior Loan Agreement, the Company has capitalized and amortized deferred financing cost using the effective interest method. The
Company has capitalized $4.9 million in deferred financing cost associated with the Senior Loan Agreement. Amortization expense
for the deferred financing cost associated with the Senior Loan Agreement was $270 thousand and $142 thousand for the three months
ended March 31, 2017, and 2016, respectively.
Associated with the
Subordinated Loan Agreement, the Company has capitalized and amortized deferred financing cost using the effective interest method.
The Company has capitalized $892 thousand in deferred financing cost associated with the Subordinated Loan Agreement. Amortization
expense for the deferred financing cost associated with the Subordinated Loan Agreement was $40 thousand and $20 thousand for the
three months ended March 31, 2017, and 2016, respectively.
The Company had a revolving
credit facility on March 31, 2017, and December 31, 2016, with a maximum borrowing capacity of $5.0 million associated with the
Senior Loan Agreement. The revolving credit facility is available until February 17, 2021. There was no balance outstanding as
of March 31, 2017, or December 31, 2016. The Company pays a monthly fee of 0.75% on the unused portion of the revolver loan under
the Senior Loan Agreement, payable in arrears. The fee expense was $9 thousand and $5 thousand for the three months ended March
31, 2017, and 2016, respectively.
Maturities of notes
payable for the next five years and thereafter, assuming no future annual excess cash flow payments and excluding the PIK interest,
are as follows (in thousands):
|
2017 (remaining)
|
|
$
|
3,000
|
|
|
2018
|
|
|
4,000
|
|
|
2019
|
|
|
4,000
|
|
|
2020
|
|
|
4,000
|
|
|
2021
|
|
|
78,175
|
|
|
Total
|
|
$
|
93,175
|
|
In addition, PIK interest
of $1,772 thousand associated with the Subordinated Loan Agreement will be paid at maturity. A total of $5,758 thousand of debt
issuance cost is amortized over the life of the loans and is recorded net of the notes payable on the condensed consolidated balance
sheets.
The Company’s
notes payable agreements are subject to certain financial covenants and restrictions on indebtedness, financial guarantees, business
combinations and other related items. As of March 31, 2017, the Company was in compliance with all such covenants and restrictions.
3. Income Tax
As of each of March
31, 2017, and December 31, 2016, the Company had U.S. federal and state net operating loss carryforwards of $0 and $25 thousand,
respectively. The Company had no alternative minimum tax credit carryforwards as of March 31, 2017, or December 31, 2016.
The Company establishes valuation allowances when necessary to reduce deferred tax assets to amounts expected to be realized.
As of March 31, 2017, the Company had no valuation allowance recorded.
The effective income
tax rate as of March 31, 2017, and December 31, 2016, was 38.4% and 41.5%, respectively.
4. Net Income
Per Common Share
Basic net income per common share is computed
by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per common
share reflects the potential dilution that would occur should all of the shares of Class A common stock underlying restricted stock
units (“RSUs”) be issued.
A reconciliation of
the common shares for purposes of the calculation of the Company’s basic and diluted net income per common share is as follows
(weighted average number of common shares outstanding in whole numbers and net income in thousands):
|
|
|
Three Months
Ended March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
|
3,346,689
|
|
|
|
3,283,177
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
97,681
|
|
|
|
92,558
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and potential common shares - diluted
|
|
|
3,444,370
|
|
|
|
3,375,735
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,608
|
|
|
$
|
1,750
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic
|
|
$
|
0.48
|
|
|
$
|
0.53
|
|
|
Net income per common share - diluted
|
|
$
|
0.47
|
|
|
$
|
0.52
|
|
Revenues for interstate
access services are based on reimbursement of costs and an allowed rate of return. Revenues of this nature are received from the
National Exchange Carrier Association in the form of monthly settlements. Such revenues amounted to 23.0% and 19.1% of the Company’s
total revenues for the three months ended March 31, 2017, and 2016, respectively.
|
|
6.
|
Commitments and Contingencies
|
From time to time,
the Company may be involved in various claims, legal actions and regulatory proceedings incidental to and in the ordinary course
of business, including administrative hearings of 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, relating primarily to rate
making and customer service requirements. In addition, the Company may be involved in similar proceedings with interconnection
carriers and the Federal Communications Commission (“FCC”). Currently, except as set forth below, none of the Company’s
legal proceedings are expected to have a material adverse effect on the Company’s business.
Sprint Communications
L.P. (“Sprint”), MCI Communications Services, Inc. (“MCI”) and Verizon Select Services, Inc. (“Verizon”)
have filed more than 60 lawsuits in federal courts across the United States alleging that over 400 local exchange carriers (“LECs”
or “LEC Defendants”) overcharged Sprint, MCI and Verizon for so-called intraMTA traffic (wireless phone calls that
originate and terminate in the same metropolitan transit area). The lawsuits seek a refund of previously-paid access charges for
intraMTA traffic, as well as a discount related to intraMTA traffic on a going-forward basis. One of the Company’s subsidiaries,
MMT, was named as a defendant in two of the lawsuits that are being brought before the District Court for the Western District
of Missouri (one filed on May 2, 2014, by Sprint and the other filed on September 5, 2014, by MCI and Verizon). In addition, one
of the Company’s other subsidiaries, OTP, was named as a defendant in a lawsuit relating to these issues filed by MCI and
Verizon in the District Court for the District of Delaware on September 5, 2014. As all of the lawsuits relating to these issues
raise the same fundamental questions of law, the United States Judicial Panel on Multidistrict Litigation has consolidated the
lawsuits in the District Court for the Northern District of Texas (the “Court”) for all pre-trial proceedings. On November
17, 2015, the Court issued a memorandum opinion and order dismissing the plaintiffs’ federal-law claims with prejudice, dismissing
the state-law claims but granting leave to replead said claims, and denying the LEC Defendants’ request to refer the matter
to the FCC. Since that time, Level 3 Communications LLC (“Level 3”) has filed similar lawsuits against many of the
same LECs, but not against the Company or any of its subsidiaries. Those proceedings have also been consolidated with the Verizon,
MCI and Sprint claims and the relevant parties have been filing motions related to the Level 3 claims and conducting preliminary
discovery. On January 7, 2017, the relevant parties jointly filed a request with the Court to stay the procedural schedule for
the Verizon, MCI and Sprint claims until the Court ruled on the relevant parties’ motions to dismiss the Level 3 claims.
On March 22, 2017, the Court issued a memorandum and order denying Level 3’s motion to dismiss the LECs’ claims that
they are entitled to assess access charges on intraMTA traffic. That order puts the Level 3 claims in a similar procedural posture
as the Verizon, MCI and Sprint claims. The parties currently are awaiting a new scheduling order from the Court for moving the
proceedings to the summary judgment phase. At this time, it is not possible to determine whether these lawsuits will have a material
adverse effect on the Company’s business.
On November 10, 2014,
a large coalition of the LEC Defendants, including MMT and OTP, filed a petition for declaratory ruling with the FCC seeking a
ruling by the FCC that: (1) any traffic intentionally routed over Interexchange carrier (“IXC”) trunks by IXCs should
be subject to access charges; (2) only carriers with specific agreements with an LEC may use alternative billing arrangements;
(3) federal tariffing rules require the LECs to assess access charges for switched access traffic routed through Feature Group
D trunks; and (4) the IXCs may not engage in self-help by refusing to pay the LEC Defendants’ properly assessed access charges.
On March 11, 2015, the LEC Defendants filed their reply brief with the FCC. No timeline has been established for a decision by
the FCC. At this time, it is not possible to determine whether this action will have a material adverse effect on the Company’s
business.
|
|
7.
|
Stock Plans and Stock Associated with Acquisition
|
The Company has previously
granted RSUs underlying 366,356 shares of Class A common stock. These RSUs (or a portion thereof) vest with respect to each recipient
over a one to three year period from the date of grant, provided the recipient remains in the employment or service of the Company
as of the vesting date and, in selected instances, certain performance criteria are attained. Additionally, these RSUs (or a portion
thereof) could vest earlier in the event of a change in control of the Company, or upon involuntary termination without cause.
Of the 366,356 previously granted RSUs, RSUs underlying 162,716 shares of Class A common stock have vested or were cancelled. During
the three months ended March 31, 2017, no RSUs were granted by the Company. The previous RSU grants were made primarily to executive-level
personnel at the Company and, as a result, no compensation costs have been capitalized.
The following table
summarizes RSU activity as of March 31, 2017:
|
|
|
RSUs
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
Outstanding at December 31, 2016
|
|
|
203,640
|
|
|
$
|
4.57
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
Vested
|
|
|
(88,287
|
)
|
|
$
|
4.66
|
|
|
Forfeited or cancelled
|
|
|
(16,410
|
)
|
|
$
|
4.40
|
|
|
Outstanding at March 31, 2017
|
|
|
98,943
|
|
|
$
|
4.51
|
|
CRC acquired substantially
all of the assets of Reliable Networks of Maine, LLC (“Reliable Networks”), a Portland, Maine-based provider of cloud
hosting and managed services for small and mid-sized companies who rely on mission-critical software applications, on January 2,
2014. Pursuant to the purchase agreement relating to the Reliable Networks acquisition, Class A common stock was issued to the
former owner of Reliable Networks in 2015 as a result of Reliable Networks achieving certain financial objectives and certain other
conditions being satisfied, including that certain individuals continued to be employed by the Company or one of its subsidiaries
and in good standing on the last day of the applicable year (the “Earn-Out”). For the year ended December 31,
2014, the Company delivered 68,233 shares of Class A common stock to the former owner of Reliable Networks on March 12, 2015,
as a result of the Earn-Out. For the years ended December 31, 2016, and 2015, the applicable Earn-Out criteria was not met
and no shares of Class A common stock were issued as a result of the Earn-Out.
Stock-based compensation
expense related to RSUs and the Earn-Out was $95 thousand and $141 thousand for the three months ended March 31, 2017, and 2016,
respectively. Accounting standards require that the Company estimate forfeitures for RSUs and the Earn-Out and reduce compensation
expense accordingly. The Company has reduced its expense by the assumed forfeiture rate and will evaluate actual experience against
the assumed forfeiture rate going forward. The forfeiture rate has been developed using historical performance metrics which could
impact the size of the final issuance of Class A common stock. The Company has no history before 2014 with RSU forfeiture or Earn-Out
stock forfeiture.
As of March 31, 2017,
the unrecognized total compensation cost related to unvested RSUs was $503 thousand. That cost is expected to be recognized by
the end of 2019.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Overview
General
Since 1999, we have
acquired and operate eleven rural local exchange carriers (“RLECS”) serving subscribers in north central Alabama, central
Maine, western Massachusetts, central Missouri, western Vermont and southern West Virginia. We also operate a competitive local
exchange carrier (“CLEC”) serving subscribers in Maine, Massachusetts, and New Hampshire. Our services include a broad
suite of communications and information services including local and long distance telephone services; internet and broadband data
services; network access to other wireline, long distance and wireless carriers for calls originated or terminated on our network;
other telephone related services; cloud hosting and professional engineering services for small and mid-sized companies who rely
on mission-critical software applications; digital high-speed transport services (in our New England market); and video and security
(in some markets). As of March 31, 2017, we operated 98,516 voice, data and other access lines, which we refer to as access line
equivalents. We view, manage and evaluate the results of operations from the various telecommunications products and services as
one company and therefore have identified one reporting segment as it relates to providing segment information.
The Federal Communications
Commission (the “FCC”) released its Universal Service Fund and Intercarrier Compensation Order (the “FCC ICC
Order”) in November 2011. The FCC ICC Order makes substantial changes in the way telecommunication carriers are compensated
for serving high cost areas and for completing traffic with other carriers. We began seeing the significant impact of the FCC ICC
Order to our business in July 2012, with additional impacts beginning in July 2013 and July 2014. The initial consequence to our
business was to reduce access revenue from intrastate calling in Maine and other states where intrastate rates were higher than
interstate rates. A portion of this revenue loss for our RLEC properties is returned to us through the Connect America Fund (the
“CAF”). There is no recovery mechanism for the lost revenue in our CLEC. The impact of the FCC ICC Order is expected
to reduce our revenue and net income through 2020.
Funding under the new
Alternative Connect America Model (“ACAM”) support is expected to increase 2017 support by an estimated $1.5 million
compared to 2016 support received under legacy rate-of-return regulation. Without the new ACAM support, in 2017 our RLECs would
have seen a normal year-over-year funding decrease under Universal Service Fund High Cost Loop (“USF HCL”) and the
FCC’s newly-adopted Budget Control mechanism. ACAM support requires additional investment in plant and equipment to reach
target broadband speeds and covered locations. ACAM support will decline through 2026 as the additional investment is completed.
The following discussion
and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes
included in Item 1 of Part I and the other financial information appearing elsewhere in this report. The following discussion and
analysis relates to our financial condition and results of operations on a consolidated basis.
Revenue Sources
Our revenues are derived
from six sources:
|
|
·
|
Local services
. We receive revenues from providing local exchange telecommunication services
in our eleven rural territories and on a competitive basis throughout Maine, New Hampshire and western Massachusetts 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 include 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 ICC 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 their terminating intrastate access rates to a rate equal to interstate
|
access service
rates by July 1, 2013, and to move to a “bill and keep” arrangement by July 1, 2020, which will eliminate access charges
between carriers. The FCC ICC Order prescribes a recovery mechanism for the recovery of any decrease in intrastate terminating
access revenues through the CAF for RLEC companies. This recovery is limited to 95% of the previous year’s revenue requirement.
Interstate access revenue is based on an FCC regulated rate-of-return on investment and recovery of expenses and taxes. From 1990
through June 2016, the rate-of-return had been authorized up to 11.25%. In March 2016, the FCC reduced the authorized rate-of-return
to 9.75% effective July 1, 2021, using a transitional approach to reduce the impact of an immediate reduction. Rate-of-return transition
began on July 1, 2016 with the authorized rate reduced to 11.0%, with further 25 basis point reductions each July 1 thereafter
until the authorized rate reaches 9.75% on July 1, 2021. Switched and special access charges for interstate and international services
are based on rates approved by the FCC. We also receive revenue from the Universal Service Fund for the deployment of voice and
broadband services to end-user customers. Since January 1, 2017, ten of our RLECs receive support payments through ACAM and one
of our RLECs receives support payments through modified legacy rate-of-return support mechanisms for USF HCL and Interstate Common
Line Support.
|
|
·
|
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 and computer virus protection.
|
|
|
·
|
Transport services
. We receive monthly recurring revenues for the rental of fiber to transport
data and other telecommunication services in Maine and New Hampshire.
|
|
|
·
|
Video and security
. We offer basic, digital, high-definition, digital video recording, video
on demand and pay per view cable television services to a portion of our telephone service territory in Alabama, including Internet
Protocol (“IP”) television (“IPTV”). We offer wireless security systems and system monitoring in Alabama
and Missouri. Until October 2016, we were a reseller of satellite services for DirecTV in Missouri.
|
|
|
·
|
Managed services
. We provide private/hybrid cloud hosting services, as well as consulting
and professional engineering services, for mission-critical software applications for small and mid-sized North American companies.
Revenues are generated from monthly recurring hosting Infrastructure as a Service fees, monthly maintenance fees,
à la
carte
professional engineering services, and pay-as-you-use Software as a Service fees. Services are domiciled in two diverse
owned data centers. Historically, Reliable Networks’ operations in-rack and professional engineering services were covered
by a SOC 2 Type II audit covering security, availability and confidentiality, and our data center operations were covered by a
separate SOC 2 Type II audit covering security and availability. However, going forward, Reliable Networks’ and our other
data operations will be covered by a single SOC 2 Type II audit.
|
Access Line and Customer
Trends
The number of voice
and data access lines serves as a fundamental factor in determining revenue stability for a telecommunications provider. Reflecting
general trends in the RLEC industry, the number of residential voice access lines we serve has been decreasing when normalized
for territory acquisitions, whereas business access lines have remained generally steady or grown. We expect that these trends
will continue, and may be potentially impacted by competition from cable and co-operative electric providers in our RLEC territories,
the availability of alternative telecommunications products, such as cellular and IP-based services, as well as economic conditions
generally. Historically, these residential trends have been partially offset by the growth of residential data access lines, also
called digital high-speed internet access service. As the penetration of data lines in our RLEC markets has increased, the growth
in residential data lines no longer offsets the decline in residential voice lines. Our competitive carrier voice and data access
lines have grown as we continue to offer new services and further penetrate our chosen markets. Our ability to continue this growth
and our response to the rural trends will have an important impact on our future revenues. Our primary strategy consists of leveraging
our strong incumbent market position, selling additional services to our rural customer base, such as alarm and medical alert monitoring
services, and providing better service and support levels and a broader suite of services, including managed services and hybrid/cloud-based
hosting, than the incumbent and other competitive carriers to our CLEC customer base.
Key Operating Statistics
(unaudited)
|
|
|
As of
|
|
|
% Change from
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
Business/Enterprise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLEC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice lines
|
|
|
18,606
|
|
|
|
17,034
|
|
|
|
16,852
|
|
|
|
(1.1
|
)%
|
|
HPBX seats
|
|
|
10,880
|
|
|
|
11,487
|
|
|
|
11,532
|
|
|
|
0.4
|
%
|
|
Data lines
|
|
|
3,629
|
|
|
|
3,655
|
|
|
|
3,315
|
|
|
|
(9.3
|
)%
|
|
Wholesale network lines
|
|
|
2,743
|
|
|
|
2,570
|
|
|
|
2,584
|
|
|
|
0.5
|
%
|
|
RLEC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice lines
|
|
|
16,123
|
|
|
|
16,621
|
|
|
|
16,359
|
|
|
|
(1.6
|
)%
|
|
Data lines
|
|
|
1,539
|
|
|
|
1,634
|
|
|
|
1,624
|
|
|
|
0.6
|
%
|
|
Access line equivalents
(1)
|
|
|
53,520
|
|
|
|
53,001
|
|
|
|
52,266
|
|
|
|
(1.4
|
)%
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLEC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice lines
|
|
|
225
|
|
|
|
199
|
|
|
|
192
|
|
|
|
(3.5
|
)%
|
|
Data lines
|
|
|
2,432
|
|
|
|
2,291
|
|
|
|
2,275
|
|
|
|
(0.7
|
)%
|
|
RLEC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice lines
|
|
|
23,143
|
|
|
|
20,978
|
|
|
|
20,556
|
|
|
|
(2.0
|
)%
|
|
Data lines
|
|
|
20,089
|
|
|
|
19,622
|
|
|
|
19,562
|
|
|
|
(0.3
|
)%
|
|
Other services
|
|
|
3,728
|
|
|
|
3,682
|
|
|
|
3,665
|
|
|
|
(0.5
|
)%
|
|
Access line equivalents
(1)
|
|
|
49,617
|
|
|
|
46,772
|
|
|
|
46,250
|
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Otelco access line equivalents
(1)
|
|
|
103,137
|
|
|
|
99,773
|
|
|
|
98,516
|
|
|
|
(1.3
|
)%
|
|
|
(1)
|
We define access line equivalents as retail and wholesale voice lines, data lines (including cable modems, digital subscriber
lines, other broadband connections and dedicated data access trunks) and other services (including entertainment and security services).
|
Our business and enterprise
access line equivalents decreased by 735 during first quarter 2017, or 1.4%, compared to December 31, 2016. The loss of data lines
for one of our New England CLEC customers and a decrease in multi-use voice lines in Alabama accounted for the decline. Residential
access line equivalents declined 522 during first quarter 2017, or 1.1%, compared to December 31, 2016, reflecting industry-wide
trends. Within the residential access line equivalents, residential data lines declined by 60 during first quarter 2017, or 0.3%,
as most customers who disconnect their voice lines choose to retain their data services.
We offer competitively-priced
location-specific bundled service packages, many including unlimited domestic calling, tailored to the varying telecommunications
requirements of our customers. Competitive pricing and bundling of services have led our long distance service to be the choice
of the majority of our voice customers in the rural markets we serve. In addition, almost all of our CLEC customers have selected
us as their long distance carrier. We also provide other services primarily to our residential customers, including cable television,
IPTV, over-the-top entertainment services and security monitoring and medical alert services.
Our Rate and Pricing
Structure
Our CLEC enterprise
pricing is based on market requirements. We combine varying services to meet individual customer requirements, including technical
support and managed services, and provide multi-year contracts which are both market sensitive for the customer and stabilizing
for our sales process.
Our RLECs operate in
six states and have limited regulation by the respective state regulatory authorities. The impact on pricing flexibility varies
by state. Our rates for other services we provide, including cable, IPTV, long distance, data lines and high-speed internet access,
are not price regulated. The market for competitive services, such as wireless, also impacts our ability to adjust prices. With
the increase of bundled services offerings, including unlimited long distance, pricing for individual services takes on reduced
importance to revenue stability. We expect this trend to continue into the immediate future.
Categories of Operating
Expenses
Our operating expenses
are categorized as cost of services; selling, general and administrative expenses; and depreciation and amortization.
Cost of services
.
This includes expenses for salaries, wages and benefits relating to our telephone central office and outside plant operation, maintenance,
sales and customer service; other plant operations, maintenance and administrative costs; network access costs; data center operations;
and costs of services for long distance, cable television, internet and directory services.
Selling, general
and administrative expenses
. This includes expenses for salaries, wages and benefits and contract service payments (for example,
legal fees) relating to engineering, financial, human resources and corporate operations; information management expenses, including
billing; allowance for uncollectible accounts receivable; expenses for travel, lodging and meals; internal and external communications
costs; insurance premiums; stock exchange and banking fees; and postage.
Depreciation and
amortization
. This includes depreciation of our telecommunications, cable and internet networks and equipment, and amortization
of intangible assets. Certain of these amortization expenses continue to be deductible for tax purposes.
Our Ability to Control
Operating Expenses
We strive to control
expenses in order to maintain our operating margins. As our revenue continues to shift to non-regulated services and CLEC customers
and our residential RLEC revenue continues to decline, operating margins decrease, reflecting the lower margins associated with
non-regulated services. Reductions over time in FCC controlled payments may be difficult to fully offset through expense control
and pricing action. With the introduction of ACAM funding in 2017, the increase in revenue can be used to support additional capital
investment in our network to enhance broadband speeds and coverage.
Results of Operations
The following table
sets forth our results of operations as a percentage of total revenues for the periods indicated:
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Local services
|
|
|
32.2
|
%
|
|
|
34.3
|
%
|
|
Network access
|
|
|
32.9
|
|
|
|
30.8
|
|
|
Internet
|
|
|
22.5
|
|
|
|
21.8
|
|
|
Transport services
|
|
|
6.6
|
|
|
|
7.5
|
|
|
Video and security
|
|
|
4.4
|
|
|
|
4.2
|
|
|
Managed services
|
|
|
1.4
|
|
|
|
1.4
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
44.9
|
%
|
|
|
46.6
|
%
|
|
Selling, general and administrative expenses
|
|
|
15.6
|
|
|
|
14.7
|
|
|
Depreciation and amortization
|
|
|
10.6
|
|
|
|
11.6
|
|
|
Total operating expenses
|
|
|
71.1
|
|
|
|
72.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
28.9
|
|
|
|
27.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(15.0
|
)
|
|
|
(14.2
|
)
|
|
Other income
|
|
|
1.1
|
|
|
|
3.6
|
|
|
Total other expense
|
|
|
(13.9
|
)
|
|
|
(10.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
15.0
|
|
|
|
16.5
|
|
|
Income tax expense
|
|
|
(5.8
|
)
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
|
9.2
|
%
|
|
|
10.0
|
%
|
Three Months Ended March 31,
2017, Compared to Three Months Ended March 31, 2016
Total revenues
.
Total revenues decreased 0.6% in the three months ended March 31, 2017, to $17.4 million from $17.5 million in the three months
ended March 31, 2016. The decrease in revenue due to the loss of residential access line equivalents was offset by the incremental
revenue associated with the FCC’s ACAM program. The table below provides the components of our revenues for the three months
ended March 31, 2017, compared to the same period of 2016.
|
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Local services
|
|
$
|
5,599
|
|
|
$
|
5,999
|
|
|
$
|
(400
|
)
|
|
|
(6.7
|
)%
|
|
Network access
|
|
|
5,712
|
|
|
|
5,393
|
|
|
|
319
|
|
|
|
5.9
|
|
|
Internet
|
|
|
3,909
|
|
|
|
3,820
|
|
|
|
89
|
|
|
|
2.3
|
|
|
Transport services
|
|
|
1,149
|
|
|
|
1,303
|
|
|
|
(154
|
)
|
|
|
(11.8
|
)
|
|
Video and security
|
|
|
765
|
|
|
|
734
|
|
|
|
31
|
|
|
|
4.2
|
|
|
Managed services
|
|
|
246
|
|
|
|
241
|
|
|
|
5
|
|
|
|
2.1
|
|
|
Total
|
|
$
|
17,380
|
|
|
$
|
17,490
|
|
|
$
|
(110
|
)
|
|
|
(0.6
|
)
|
Local services
.
Local services revenue decreased 6.7% in the three months ended March 31, 2017, to $5.6 million from $6.0 million in the three
months ended March 31, 2016. T
he decline in RLEC residential voice access lines and related
revenue accounted for a decrease of $0.2 million.
A portion of the RLEC decrease is recovered through the CAF, which is
categorized as interstate access revenue. The decline in long distance and special line revenue accounted for a decrease of $0.2
million.
Network access
.
Network access revenue increased 5.9% in the three months ended March 31, 2017, to $5.7 million from $5.4 million in the three
months ended March 31, 2016. An increase in the CAF, the initial ACAM revenue and transition payments of $2.3 million was partially
offset by a $1.9 million decrease in interstate and intrastate access, including universal service funding, and a $0.1 million
decrease in end-user based fees.
Internet
. Internet
revenue increased 2.3% in the three months ended March 31, 2017, to $3.9 million from $3.8 million in the three months ended March
31, 2016. Increased data speeds accounted for the increase.
Transport services
.
Transport services revenue decreased 11.8% in the three months ended March 31, 2017, to $1.1 million from $1.3 million in the three
months ended March 31, 2016, reflecting customer churn and market pricing.
Video and security
.
Video and security revenue increased 4.2% in the three months ended March 31, 2017, to $0.8 million from $0.7 million in the three
months ended March 31, 2016, reflecting increases in IPTV revenue.
Managed services
.
Managed services revenue increased 2.1% in the three months ended March 31, 2017, over the comparable period in 2016 to remain
at just over $0.2 million, reflecting increases in cloud hosting revenue.
Operating expenses
.
Operating expenses in the three months ended March 31, 2017, decreased 3.0% to $12.4 million from $12.7 million in the three months
ended March 31, 2016. The table below provides the components of our operating expenses for the three months ended March 31, 2017,
compared to the same period of 2016.
|
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Cost of services
|
|
$
|
7,813
|
|
|
$
|
8,131
|
|
|
$
|
(318
|
)
|
|
|
(3.9
|
)%
|
|
Selling, general and administrative expenses
|
|
|
2,706
|
|
|
|
2,576
|
|
|
|
130
|
|
|
|
5.0
|
|
|
Depreciation and amortization
|
|
|
1,840
|
|
|
|
2,037
|
|
|
|
(197
|
)
|
|
|
(9.7
|
)
|
|
Total
|
|
$
|
12,359
|
|
|
$
|
12,744
|
|
|
$
|
(385
|
)
|
|
|
(3.0
|
)
|
Cost of services
.
Cost of services decreased 3.9% in the three months ended March 31, 2017, to $7.8 million from $8.1 million in the three months
ended March 31, 2016. Network circuit and resale facility expense decreased $0.2 million; Hosted PBX equipment expense decreased
$0.1 million; toll, internet and access expense decreased $0.1 million; and customer service and sales, cloud hosting and professional
services expense decreased $0.1 million. These decreases were partially offset by an increase of $0.1 million in other services
costs.
Selling, general
and administrative expenses
. Selling, general and administrative expenses increased 5.0% in the three months ended March 31,
2017, to $2.7 million from $2.6 million in the three months ended March 31, 2016. The increase was the result of a transition from
our stock-based senior management bonus plan, which had been in place for three years, to our cash-based bonus plan for 2017.
Depreciation and
amortization
. Depreciation and amortization decreased 9.7% in the three months ended March 31, 2017, to $1.8 million from $2.0
million in three months ended March 31, 2016. Cable and CLEC depreciation and the amortization of other intangible assets in New
England decreased $0.1 million and the amortization of the telephone plant adjustment decreased $0.1 million.
|
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Interest expense
|
|
$
|
(2,611
|
)
|
|
$
|
(2,482
|
)
|
|
$
|
129
|
|
|
|
5.2
|
%
|
|
Other income
|
|
|
203
|
|
|
|
619
|
|
|
$
|
(416
|
)
|
|
|
(67.2
|
)
|
|
Income tax expense
|
|
|
(1,004
|
)
|
|
|
(1,133
|
)
|
|
$
|
(129
|
)
|
|
|
(11.4
|
)
|
Interest expense
.
Interest expense increased 5.2% in the three months ended March 31, 2017, to $2.6 million from $2.5 million in the three months
ended March 31, 2016. Higher interest rates on our current credit facilities accounted for an increase of $0.2 million, which was
partially offset by lower loan cost amortization of $0.1 million. During first quarter 2016, we executed new senior and subordinated
credit facilities which mature in 2021.
Other income
.
Other income decreased 67.2% in the three months ended March 31, 2017, to $0.2 million from $0.6 million in the three months ended
March 31, 2016, primarily related to the annual CoBank dividend. In first quarter 2016, our senior credit facility held by CoBank
(and five other banks) was fully repaid. As such, we were only entitled to a partial year of dividends from CoBank, which are received
in first quarter of each year. The CoBank patronage shares held by us are expected to be repatriated over the next nine years.
Income tax expense
.
Provision for income tax expense was $1.0 million in the three months ended March 31, 2017, compared to $1.1 million in the three
months ended March 31, 2016. The effective income tax rate as of March 31, 2017, and December 31, 2016, was 38.4% and 41.5%, respectively.
Net income
.
As a result of the foregoing, there was net income of $1.6 million and $1.8 million in the three months ended March 31, 2017, and
2016, respectively. The difference is primarily attributable to the smaller CoBank dividend received in 2017, partially offset
by continued cost reductions.
Liquidity and Capital Resources
Our liquidity needs
arise primarily from: (i) interest and principal payments related to our credit facilities; (ii) capital expenditures for investment
in our business; and (iii) working capital requirements.
For the three months
ended March 31, 2017, we generated cash from our business to invest in additional property and equipment of $1.3 million, pay loan
principal of $4.1 million and pay scheduled interest on our debt of $2.2 million. After meeting all of these needs of our business,
cash increased to $10.7 million as of March 31, 2017, from $10.5 million as of December 31, 2016.
Cash flows from operating
activities for the three months ended March 31, 2017, amounted to $5.6 million compared to $5.8 million for the three months ended
March 31, 2016, reflecting the decrease in net income.
Cash flows used in
investing activities for the three months ended March 31, 2017, were $1.3 million compared to $0.7 million in the three months
ended March 31, 2016. Increased investment in property and equipment in the three months ended March 31, 2017, reflecting additional
RLEC fiber installation, accounted for the difference.
Cash flows used in
financing activities for the three months ended March 31, 2017, were $4.2 million compared to $5.0 million in the three months
ended March 31, 2016, reflecting changes associated with our credit facilities, primarily loan origination costs for the facilities
in 2016 and principal payments in 2017.
We do not invest in
financial instruments as part of our business strategy.
Our prior credit facility
was scheduled to mature in April 2016. However, on January 25, 2016, we entered into a new senior credit facility, providing for
a five year term loan facility in the aggregate principal amount of $85.0 million and a five year $5.0 million revolving
credit facility, and a new subordinated credit facility, providing for a five and a half year term loan facility in the aggregate
principal amount of $15.0 million. On February 17, 2016, the subordinated credit facility was amended to increase the aggregate
principal amount available for borrowing thereunder to $15.3 million, and we borrowed $85.0 million under the term loan facility
of the senior credit facility and $15.3 million under the subordinated credit facility. We used the borrowings under the credit
facilities to, among other things, pay all amounts due, including principal, interest and fees, and satisfy in full all of our
obligations under our previous credit facility.
We use consolidated
earnings before interest, taxes, depreciation and amortization (“Consolidated EBITDA”) as an operational performance
measurement. Consolidated EBITDA, as presented in this Quarterly Report on Form 10-Q, corresponds to the definition of Consolidated
EBITDA in our credit facilities. Consolidated EBITDA, as presented in this Quarterly Report on Form 10-Q, is a supplemental measure
of our performance that is not required by, or presented in accordance with, accounting principles generally accepted in the United
States (“U.S. GAAP”). The lenders under our credit facilities use this measure to determine compliance with credit
facility requirements. We report Consolidated EBITDA in our quarterly earnings press release to allow current
and potential investors
to understand this performance metric and because we believe that it provides current and potential investors with helpful information
with respect to our operating performance. However, Consolidated EBITDA should not be considered as an alternative to net income
or any other performance measures derived in accordance with U.S. GAAP. Our presentation of Consolidated EBITDA may not be comparable
to similarly titled measures used by other companies. Consolidated EBITDA for the three months ended March 31, 2017, and 2016,
and its reconciliation to net income, is reflected in the table below (in thousands):
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Net income
|
|
$
|
1,608
|
|
|
$
|
1,750
|
|
|
Add: Depreciation
|
|
|
1,739
|
|
|
|
1,779
|
|
|
Interest expense less interest income
|
|
|
2,302
|
|
|
|
2,038
|
|
|
Interest expense – amortized loan cost
|
|
|
310
|
|
|
|
443
|
|
|
Income tax expense
|
|
|
1,004
|
|
|
|
1,133
|
|
|
Amortization – intangibles
|
|
|
101
|
|
|
|
258
|
|
|
Stock-based compensation (earn out)
|
|
|
—
|
|
|
|
78
|
|
|
Stock-based compensation (senior management)
|
|
|
95
|
|
|
|
63
|
|
|
Loan fees
|
|
|
39
|
|
|
|
85
|
|
|
Consolidated EBITDA
|
|
$
|
7,198
|
|
|
$
|
7,627
|
|
Recent Accounting Pronouncements
See Note 1,
Organization
and Basis of Financial Reporting
, to our unaudited condensed consolidated financial statements included in this Quarterly
Report on Form 10-Q for a description of the recent accounting pronouncements that are applicable to us.