Item 1.
|
Financial Statements
|
OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value and share
amounts)
(unaudited)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,855
|
|
|
$
|
10,538
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Due from subscribers, net of allowance for doubtful accounts of $206 and $187, respectively
|
|
|
4,637
|
|
|
|
5,035
|
|
Other
|
|
|
1,709
|
|
|
|
1,528
|
|
Materials and supplies
|
|
|
2,847
|
|
|
|
2,184
|
|
Prepaid expenses
|
|
|
1,606
|
|
|
|
2,912
|
|
Total current assets
|
|
|
19,654
|
|
|
|
22,197
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
50,078
|
|
|
|
49,271
|
|
Goodwill
|
|
|
44,976
|
|
|
|
44,976
|
|
Intangible assets, net
|
|
|
1,433
|
|
|
|
1,785
|
|
Investments
|
|
|
1,637
|
|
|
|
1,821
|
|
Other assets
|
|
|
248
|
|
|
|
222
|
|
Total assets
|
|
$
|
118,026
|
|
|
$
|
120,272
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,344
|
|
|
$
|
1,477
|
|
Accrued expenses
|
|
|
5,316
|
|
|
|
4,730
|
|
Advance billings and payments
|
|
|
1,655
|
|
|
|
1,487
|
|
Customer deposits
|
|
|
62
|
|
|
|
62
|
|
Current maturity of long-term notes payable, net of debt issuance cost
|
|
|
2,976
|
|
|
|
6,071
|
|
Total current liabilities
|
|
|
11,353
|
|
|
|
13,827
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
28,280
|
|
|
|
28,280
|
|
Advance billings and payments
|
|
|
2,401
|
|
|
|
1,987
|
|
Other liabilities
|
|
|
21
|
|
|
|
26
|
|
Long-term notes payable, less current maturities and debt issuance cost
|
|
|
81,917
|
|
|
|
86,860
|
|
Total liabilities
|
|
|
123,972
|
|
|
|
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
|
|
|
4,214
|
|
|
|
4,186
|
|
Accumulated deficit
|
|
|
(10,194
|
)
|
|
|
(14,927
|
)
|
Total stockholders’ deficit
|
|
|
(5,946
|
)
|
|
|
(10,708
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
118,026
|
|
|
$
|
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
16,946
|
|
|
$
|
17,389
|
|
|
$
|
51,732
|
|
|
$
|
52,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
7,610
|
|
|
|
7,958
|
|
|
|
23,468
|
|
|
|
23,963
|
|
Selling, general and administrative expenses
|
|
|
2,588
|
|
|
|
2,888
|
|
|
|
7,762
|
|
|
|
7,871
|
|
Depreciation and amortization
|
|
|
1,834
|
|
|
|
1,982
|
|
|
|
5,515
|
|
|
|
6,071
|
|
Total operating expenses
|
|
|
12,032
|
|
|
|
12,828
|
|
|
|
36,745
|
|
|
|
37,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,914
|
|
|
|
4,561
|
|
|
|
14,987
|
|
|
|
14,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,567
|
)
|
|
|
(2,728
|
)
|
|
|
(7,749
|
)
|
|
|
(7,931
|
)
|
Other income
|
|
|
—
|
|
|
|
—
|
|
|
|
204
|
|
|
|
624
|
|
Total other expense
|
|
|
(2,567
|
)
|
|
|
(2,728
|
)
|
|
|
(7,545
|
)
|
|
|
(7,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
2,347
|
|
|
|
1,833
|
|
|
|
7,442
|
|
|
|
6,899
|
|
Income tax expense
|
|
|
(758
|
)
|
|
|
(708
|
)
|
|
|
(2,709
|
)
|
|
|
(2,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,589
|
|
|
$
|
1,125
|
|
|
$
|
4,733
|
|
|
$
|
4,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,346,689
|
|
|
|
3,283,177
|
|
|
|
3,346,689
|
|
|
|
3,283,177
|
|
Diluted
|
|
|
3,445,632
|
|
|
|
3,384,308
|
|
|
|
3,445,632
|
|
|
|
3,380,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.47
|
|
|
$
|
0.34
|
|
|
$
|
1.41
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
0.46
|
|
|
$
|
0.33
|
|
|
$
|
1.37
|
|
|
$
|
1.24
|
|
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)
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,733
|
|
|
$
|
4,199
|
|
Adjustments to reconcile net income to cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,225
|
|
|
|
5,328
|
|
Amortization
|
|
|
290
|
|
|
|
743
|
|
Amortization of loan costs
|
|
|
927
|
|
|
|
929
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
155
|
|
Provision for uncollectible accounts receivable
|
|
|
290
|
|
|
|
271
|
|
Stock-based compensation
|
|
|
237
|
|
|
|
311
|
|
Payment in kind interest - subordinated debt
|
|
|
237
|
|
|
|
194
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(73
|
)
|
|
|
(194
|
)
|
Material and supplies
|
|
|
(663
|
)
|
|
|
(326
|
)
|
Prepaid expenses and other assets
|
|
|
1,280
|
|
|
|
1,481
|
|
Accounts payable and accrued expenses
|
|
|
453
|
|
|
|
654
|
|
Advance billings and payments
|
|
|
582
|
|
|
|
(77
|
)
|
Other liabilities
|
|
|
(3
|
)
|
|
|
(5
|
)
|
Net cash from operating activities
|
|
|
13,515
|
|
|
|
13,663
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
Acquisition and construction of property and equipment
|
|
|
(5,951
|
)
|
|
|
(4,111
|
)
|
Net cash used in investing activities
|
|
|
(5,951
|
)
|
|
|
(4,111
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities:
|
|
|
|
|
|
|
|
|
Loan origination costs
|
|
|
(77
|
)
|
|
|
(5,242
|
)
|
Principal repayment of long-term notes payable
|
|
|
(9,125
|
)
|
|
|
(102,052
|
)
|
Proceeds from loan refinancing
|
|
|
—
|
|
|
|
100,300
|
|
Retirement of CoBank equity
|
|
|
164
|
|
|
|
—
|
|
Tax withholdings paid on behalf of employees for restricted stock units
|
|
|
(209
|
)
|
|
|
(109
|
)
|
Net cash used in financing activities
|
|
|
(9,247
|
)
|
|
|
(7,103
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(1,683
|
)
|
|
|
2,449
|
|
Cash and cash equivalents, beginning of period
|
|
|
10,538
|
|
|
|
6,884
|
|
Cash and cash equivalents, end of period
|
|
$
|
8,855
|
|
|
$
|
9,333
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
6,654
|
|
|
$
|
6,065
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
1,802
|
|
|
$
|
1,197
|
|
|
|
|
|
|
|
|
|
|
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
September 30, 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 and nine months ended
September 30, 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
2017-13. Except for ASUs 2017-03, 2017-04, 2017-09 and 2017-10, which are discussed below, these ASUs provide technical corrections
or simplifications 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. Approximately 75% of the Company’s revenue is associated
with its Rural Local Exchange Carrier customers. Services to these customers are used as rendered and revenue is reflected as
earned. There are no contracts, allowing for service to be cancelled with no advance notice. The balance of the
Company’s revenue is associated with its Competitive Local Exchange Carrier and managed services customers, where
multiyear contracts are standard industry practice. In the vast majority of these contracts, the services provided to the
customer are consumed as provided. Therefore, nearly all of the Company’s revenue is not expected to change with the
implementation of ASU 2014-09. The Company’s focus with respect to ASU 2014-09 also includes installation fee revenue
that is typically recognized at the time of installation, which remains under evaluation.
The Company’s current findings reveal
any activity that is within the scope of ASU 2014-09 is not expected to have a material impact on its condensed consolidated financial
statements. 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 ASU 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 ASU 2016-02 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.
In May 2017, the FASB issued
ASU 2017-09,
Compensation-Stock Compensation (Topic 718)
(“ASU 2017-09”). ASU 2017-09 provides guidance about
which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Accounting
Standards Codification (“ASC”) Topic 718,
Stock Compensation
. ASU 2017-09 is effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for any interim period for
which financial statements have not been issued. ASU 2017-09 should be applied prospectively to an award modified on or after the
adoption date. The Company does not expect this ASU to have a material impact on its condensed consolidated financial statements.
In May 2017, the FASB issued
ASU 2017-10,
Service Concession Arrangements (Topic 853)
(“ASU 2017-10”). The objective of this ASU is to specify
that an operating entity should not account for a service concession arrangement that meets certain criteria as a lease in accordance
with ASC Topic 840,
Leases
. ASU 2017-10 further states that the infrastructure used in a service concession arrangement
should not be recognized as property, plant, and equipment of the operating entity. The provisions of this ASU are effective for
annual periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company
does not expect this ASU to have a material impact on its condensed consolidated financial statements.
2016 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 required principal payments of $1.0 million quarterly,
which payments began on April 1, 2016. Principal amounts outstanding under the Subordinated Loan Agreement were generally not due
until maturity. The Company recorded costs of $15 thousand and write-off of loan costs of $140 thousand in connection with this
refinancing. During second quarter 2017, the Company paid an amendment fee of $77.9 thousand to its senior lender under the Senior
Loan Agreement to raise the capital expenditure limits under the Senior Loan Agreement to $8.5 million and $7.5 million for 2017
and 2018, respectively. The increased capital expenditures are associated with fulfilling build out requirements associated with
the Federal Communications Commission’s (the “FCC”) Alternative Connect America Model (“ACAM”) program.
Notes payable consists
of the following (in thousands, except percentages) as of:
|
|
September 30, 2017
|
|
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
Senior Loan Agreement with Cerberus Business Finance, LLC; variable interest rate of 8.99% at September 30, 2017, interest was monthly, paid in arrears on the first business day of each month. The Senior Loan Agreement was secured by the total assets of the subsidiary guarantors. The unpaid balance was due February 17, 2021.
|
|
$
|
4,000
|
|
|
$
|
68,875
|
|
|
$
|
72,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance cost
|
|
|
(1,024
|
)
|
|
|
(2,134
|
)
|
|
|
(3,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes payable, net of debt issuance cost
|
|
$
|
2,976
|
|
|
$
|
66,741
|
|
|
$
|
69,717
|
|
|
|
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 was monthly, paid in arrears on the first business day of each month. The Senior Loan Agreement was secured by the total assets of the subsidiary guarantors. The unpaid balance was 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
|
|
|
|
September 30,
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 was added to the principal amount then outstanding on the last business day of each quarter. The unpaid balance was due August 17, 2021.
|
|
$
|
15,300
|
|
|
$
|
15,300
|
|
|
|
|
|
|
|
|
|
|
PIK interest added to principal
|
|
|
510
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
Less: Long-term portion of debt issuance cost
|
|
|
(634
|
)
|
|
|
(753
|
)
|
|
|
|
|
|
|
|
|
|
Long-term notes payable, net of debt issuance cost
|
|
$
|
15,176
|
|
|
$
|
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 $808 thousand and $704 thousand for the nine months ended
September 30, 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 $119 thousand and $99 thousand for the nine
months ended September 30, 2017, and 2016, respectively.
The Company had a revolving
credit facility on September 30, 2017, and December 31, 2016, with a maximum borrowing capacity of $5.0 million associated with
the Senior Loan Agreement. The revolving credit facility was scheduled to be available until February 17, 2021. There was no balance
outstanding as of September 30, 2017, or December 31, 2016. The Company paid 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 $28 thousand and $24 thousand
for the nine months ended September 30, 2017, and 2016, respectively.
Maturities of notes payable
for the next five years, assuming no future annual excess cash flow payments and excluding the PIK interest, were as follows as
of September 30, 2017 (in thousands):
2017 (remaining)
|
|
$
|
1,000
|
|
2018
|
|
|
4,000
|
|
2019
|
|
|
4,000
|
|
2020
|
|
|
4,000
|
|
2021
|
|
|
75,175
|
|
Total
|
|
$
|
88,175
|
|
In addition, PIK interest
of $1,772 thousand associated with the Subordinated Loan Agreement was to be paid at maturity. A total of $5,836 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 September 30, 2017, the Company was in compliance with all such covenants and restrictions.
As of each of September
30, 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 September 30, 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
September 30, 2017, the Company had no valuation allowance recorded.
The effective income tax
rate as of September 30, 2017, and December 31, 2016, was 36.4% 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 September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Weighted average number of common shares outstanding - basic
|
|
|
3,346,689
|
|
|
|
3,283,177
|
|
|
|
3,346,689
|
|
|
|
3,283,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
98,943
|
|
|
|
101,131
|
|
|
|
98,943
|
|
|
|
97,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and potential common shares - diluted
|
|
|
3,445,632
|
|
|
|
3,384,308
|
|
|
|
3,445,632
|
|
|
|
3,380,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,589
|
|
|
$
|
1,125
|
|
|
$
|
4,733
|
|
|
$
|
4,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic
|
|
$
|
0.47
|
|
|
$
|
0.34
|
|
|
$
|
1.41
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - diluted
|
|
$
|
0.46
|
|
|
$
|
0.33
|
|
|
$
|
1.37
|
|
|
$
|
1.24
|
|
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 21.8% and 18.4% of the Company’s
total revenues for the nine months ended September 30, 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 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 (“MDL”) 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. On May 5, 2016, Sprint filed amended complaints alleging additional state-law claims. Since
that time, a number of LECs, including MMT, filed claims in the MDL proceeding against Level 3 Communications LLC (“Level
3”). These claims argued that the LECs that filed the claims were entitled to access charges from Level 3 for terminating
intraMTA traffic and that Level 3 had improperly withheld payment. These claims were consolidated with the Verizon, MCI and Sprint
claims. Level 3 moved to dismiss the LECs’ claims and the LECs opposed the motion. On March 22, 2017, the Court issued a
memorandum and order denying Level 3’s motion to dismiss, putting the Level 3 claims in a similar procedural posture as the
Verizon, MCI and Sprint claims. On May 3, 2017, the Court dismissed Sprint’s amended complaints against the LECs, further
affirming the Court’s position that the LECs are entitled to receive access charges for terminating intraMTA traffic. On
June 1, 2017, the Court issued an updated scheduling order calling for the parties to submit all materials necessary for the Court
to rule on pending summary judgement motions by September 1, 2017. 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 as
of December 31, 2016. During the nine months ended September 30, 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 September 30, 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 September 30, 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 $237 thousand and $311 thousand for the nine months ended September 30, 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 September 30, 2017,
the unrecognized total compensation cost related to unvested RSUs was $343 thousand. That cost is expected to be recognized by
the end of 2019.
On November 2, 2017, the
Company refinanced the Senior Loan Agreement and the Subordinated Loan Agreement with a new $92 million, five-year credit facility
from a consortium of banks led by CoBank, ACB. The new credit facility includes an $87.0 million term loan and a $5.0 million revolving
loan, which is undrawn. The new credit facility also includes a $20.0 million accordion feature that could be used to increase
the term-loan portion of the new credit facility. Proceeds from the new term loan and cash on hand were used to pay all amounts
due in respect of principal, interest, prepayment premiums and fees under the Senior Loan Agreement and the Subordinated Loan Agreement,
as well as fees associated with the transaction.
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 September 30, 2017, we operated 96,897 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.
Support under the Alternative
Connect America Model (“ACAM”) is expected to increase in 2017 by an estimated $1.5 million compared to 2016 support
received under legacy rate-of-return regulation. Without the 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 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 affected 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
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
% Change from
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
June 30, 2017
|
|
Business/Enterprise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLEC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice lines
|
|
|
18,606
|
|
|
|
17,034
|
|
|
|
16,852
|
|
|
|
16,582
|
|
|
|
16,491
|
|
|
|
(0.5
|
)%
|
HPBX seats
|
|
|
10,880
|
|
|
|
11,487
|
|
|
|
11,532
|
|
|
|
11,322
|
|
|
|
11,410
|
|
|
|
0.8
|
%
|
Data lines
|
|
|
3,629
|
|
|
|
3,655
|
|
|
|
3,315
|
|
|
|
3,435
|
|
|
|
3,342
|
|
|
|
(2.7
|
)%
|
Wholesale network lines
|
|
|
2,743
|
|
|
|
2,570
|
|
|
|
2,584
|
|
|
|
2,521
|
|
|
|
2,548
|
|
|
|
1.1
|
%
|
RLEC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice lines
|
|
|
16,123
|
|
|
|
16,621
|
|
|
|
16,359
|
|
|
|
15,853
|
|
|
|
15,530
|
|
|
|
(2.0
|
)%
|
Data lines
|
|
|
1,539
|
|
|
|
1,634
|
|
|
|
1,624
|
|
|
|
1,625
|
|
|
|
1,621
|
|
|
|
(0.2
|
)%
|
Access line equivalents
(1)
|
|
|
53,520
|
|
|
|
53,001
|
|
|
|
52,266
|
|
|
|
51,338
|
|
|
|
50,942
|
|
|
|
(0.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLEC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice lines
|
|
|
225
|
|
|
|
199
|
|
|
|
192
|
|
|
|
631
|
|
|
|
638
|
|
|
|
1.1
|
%
|
Data lines
|
|
|
2,432
|
|
|
|
2,291
|
|
|
|
2,275
|
|
|
|
2,882
|
|
|
|
2,851
|
|
|
|
(1.1
|
)%
|
RLEC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice lines
|
|
|
23,143
|
|
|
|
20,978
|
|
|
|
20,556
|
|
|
|
20,154
|
|
|
|
19,659
|
|
|
|
(2.5
|
)%
|
Data lines
|
|
|
20,089
|
|
|
|
19,622
|
|
|
|
19,562
|
|
|
|
19,421
|
|
|
|
19,175
|
|
|
|
(1.3
|
)%
|
Other services
|
|
|
3,728
|
|
|
|
3,682
|
|
|
|
3,665
|
|
|
|
3,633
|
|
|
|
3,632
|
|
|
|
(0.0
|
)%
|
Access line equivalents
(1)
|
|
|
49,617
|
|
|
|
46,772
|
|
|
|
46,250
|
|
|
|
46,721
|
|
|
|
45,955
|
|
|
|
(1.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Otelco access line equivalents
(1)
|
|
|
103,137
|
|
|
|
99,773
|
|
|
|
98,516
|
|
|
|
98,059
|
|
|
|
96,897
|
|
|
|
(1.2
|
)%
|
|
(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
customers represent over 52% of our access line equivalents as of September 30, 2017. During third quarter 2017, our Hosted PBX
offering and wholesale network lines both increased. Customer churn of traditional telephone lines in our New England CLEC and
a decrease in multi-use voice lines in Alabama were primarily responsible for the 0.8% decline in enterprise access line equivalents
when compared to June 30, 2017. Residential access line equivalents decreased 1.6%, compared to June 30, 2017, reflecting the industry-wide
trends of reduced residential voice lines.
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 affects 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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Local services
|
|
|
33.0
|
%
|
|
|
34.5
|
%
|
|
|
32.8
|
%
|
|
|
34.3
|
%
|
Network access
|
|
|
31.5
|
|
|
|
30.4
|
|
|
|
32.2
|
|
|
|
30.7
|
|
Internet
|
|
|
23.3
|
|
|
|
22.9
|
|
|
|
22.8
|
|
|
|
22.4
|
|
Transport services
|
|
|
6.8
|
|
|
|
6.8
|
|
|
|
6.7
|
|
|
|
7.1
|
|
Video and security
|
|
|
4.4
|
|
|
|
4.1
|
|
|
|
4.4
|
|
|
|
4.2
|
|
Managed services
|
|
|
1.0
|
|
|
|
1.3
|
|
|
|
1.1
|
|
|
|
1.3
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
44.9
|
%
|
|
|
45.8
|
%
|
|
|
45.4
|
%
|
|
|
46.0
|
%
|
Selling, general and administrative expenses
|
|
|
15.3
|
|
|
|
16.6
|
|
|
|
15.0
|
|
|
|
15.1
|
|
Depreciation and amortization
|
|
|
10.8
|
|
|
|
11.4
|
|
|
|
10.6
|
|
|
|
11.7
|
|
Total operating expenses
|
|
|
71.0
|
|
|
|
73.8
|
|
|
|
71.0
|
|
|
|
72.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
29.0
|
|
|
|
26.2
|
|
|
|
29.0
|
|
|
|
27.2
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(15.2
|
)
|
|
|
(15.7
|
)
|
|
|
(15.0
|
)
|
|
|
(15.2
|
)
|
Other income
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.4
|
|
|
|
1.2
|
|
Total other expense
|
|
|
(15.2
|
)
|
|
|
(15.7
|
)
|
|
|
(14.6
|
)
|
|
|
(14.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
13.8
|
|
|
|
10.5
|
|
|
|
14.4
|
|
|
|
13.2
|
|
Income tax expense
|
|
|
(4.4
|
)
|
|
|
(4.0
|
)
|
|
|
(5.2
|
)
|
|
|
(5.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
|
9.4
|
%
|
|
|
6.5
|
%
|
|
|
9.2
|
%
|
|
|
8.1
|
%
|
Three Months and Nine Months Ended
September 30, 2017, Compared to Three Months and Nine Months Ended September 30, 2016
Total revenues
.
Total revenues decreased 2.5% in the three months ended September 30, 2017, to $16.9 million from $17.4 million in the three months
ended September 30, 2016. Total revenues decreased 0.7% in the nine months ended September 30, 2017, to $51.7 million from $52.1
million in the nine months ended September 30, 2016. The industry-wide decrease in revenue associated with RLEC residential voice
services, including long distance, and lower Hosted PBX equipment sales were partially offset by the incremental revenue associated
with the FCC’s ACAM program. The tables below provide the components of our revenues for the three months and nine months
ended September 30, 2017, compared to the same periods of 2016.
For the three months
ended September 30, 2017, and 2016
|
|
Three Months Ended September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Local services
|
|
$
|
5,584
|
|
|
$
|
6,003
|
|
|
$
|
(419
|
)
|
|
|
(7.0
|
)%
|
Network access
|
|
|
5,334
|
|
|
|
5,279
|
|
|
|
55
|
|
|
|
1.0
|
|
Internet
|
|
|
3,954
|
|
|
|
3,981
|
|
|
|
(27
|
)
|
|
|
(0.7
|
)
|
Transport services
|
|
|
1,156
|
|
|
|
1,179
|
|
|
|
(23
|
)
|
|
|
(2.0
|
)
|
Video and security
|
|
|
747
|
|
|
|
719
|
|
|
|
28
|
|
|
|
3.9
|
|
Managed services
|
|
|
171
|
|
|
|
228
|
|
|
|
(57
|
)
|
|
|
(25.0
|
)
|
Total
|
|
$
|
16,946
|
|
|
$
|
17,389
|
|
|
$
|
(443
|
)
|
|
|
(2.5
|
)
|
Local services
.
Local services revenue decreased 7.0% in the three months ended September 30, 2017, to $5.6 million from $6.0 million in the three
months ended September 30, 2016. T
he decline in RLEC residential voice access lines and related
revenue, such as long distance, accounted for a decrease of $0.3 million.
A portion of the RLEC decrease is recovered through
the CAF, which is categorized as interstate access revenue. Hosted PBX equipment sales declined $0.2 million, as more new customers
combined hardware and service in their long-term agreements. These declines were partially offset by an increase in municipal services
revenue.
Network access
.
Network access revenue increased 1.0% in the three months ended September 30, 2017, to slightly more than $5.3 million from slightly
less than $5.3 million in the three months ended September 30, 2016. ACAM revenue and related transition payments and CAF revenue
increased $2.5 million. These increases were partially offset by a $2.1 million decrease in interstate switched access, including
universal service funding. End-user based fees decreased $0.2 million and special access charges decreased by $0.1 million.
Internet
. Internet
revenue decreased 0.7% in the three months ended September 30, 2017, to just under $4.0 million in both the three months ended
September 30, 2017, and 2016. Increased revenue from higher data speeds and pricing were offset by a decrease in internet subscribers.
Transport services
.
Transport services revenue decreased 2.0% in the three months ended September 30, 2017, to just under $1.2 million in both the
three months ended September 30, 2017, and 2016. Wide Area Network services decreased $0.1 million, reflecting customer churn and
market pricing, which was partially offset by an increase in $0.1 million in wholesale transport services.
Video and security
.
Video and security revenue for the three months ended September 30, 2017, increased 3.9% from the three months ended September
30
, 2016, to remain at slightly more than $0.7 million in both periods, reflecting
increases in IPTV, pay-per-view and security revenue, partially offset by decreases in digital services.
Managed services
.
Managed services revenue decreased 25.0% in the three months ended September
30
, 2017,
to just under $0.2 million from just over $0.2 million in the three months ended September 30, 2016, reflecting a decrease in professional
services and cloud hosting revenue.
For the nine months
ended September 30, 2017, and 2016
|
|
Nine Months Ended September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Local services
|
|
$
|
16,946
|
|
|
$
|
17,851
|
|
|
$
|
(905
|
)
|
|
|
(5.1
|
)%
|
Network access
|
|
|
16,650
|
|
|
|
16,016
|
|
|
|
634
|
|
|
|
4.0
|
|
Internet
|
|
|
11,821
|
|
|
|
11,680
|
|
|
|
141
|
|
|
|
1.2
|
|
Transport services
|
|
|
3,473
|
|
|
|
3,713
|
|
|
|
(240
|
)
|
|
|
(6.5
|
)
|
Video and security
|
|
|
2,259
|
|
|
|
2,171
|
|
|
|
88
|
|
|
|
4.1
|
|
Managed services
|
|
|
583
|
|
|
|
680
|
|
|
|
(97
|
)
|
|
|
(14.3
|
)
|
Total
|
|
$
|
51,732
|
|
|
$
|
52,111
|
|
|
$
|
(379
|
)
|
|
|
(0.7
|
)
|
Local services
.
Local services revenue decreased 5.1% in the nine months ended September 30, 2017, to more than $16.9 million from less than $17.9
million in the nine months ended September 30, 2016. T
he decline in RLEC residential voice
access lines and related revenue, such as long distance, accounted for a decrease of $0.8 million.
A portion of the RLEC
decrease is recovered through the CAF, which is categorized as interstate access revenue. Hosted PBX equipment sales declined $0.2
million, as more new customers combined hardware and service in their long-term agreements. Special access revenue declined $0.1
million. These declines were partially offset by an increase of $0.2 million in municipal services revenue.
Network access
.
Network access revenue increased 4.0% in the nine months ended September 30, 2017, to $16.6 million from $16.0 million in the nine
months ended September 30, 2016. ACAM revenue and related transition payments and CAF revenue increased $6.8 million. These increases
were partially offset by a $5.5 million decrease in interstate switched access, including universal service funding. End-user based
fees decreased $0.4 million and special and state access charges decreased by $0.3 million.
Internet
. Internet
revenue increased 1.2% in the nine months ended September 30, 2017, to $11.8 million from $11.7 million in the nine months ended
September 30, 2016. Increased revenue from higher data speeds and equipment rental were partially offset by a decrease in internet
subscribers.
Transport services
.
Transport services revenue decreased 6.5% in the nine months ended September 30, 2017, to $3.5 million from $3.7 million in the
nine months ended September 30, 2016. Wide Area Network services decreased $0.2 million, reflecting customer churn and market pricing.
Video and security
.
Video and security revenue in the nine months ended September 30, 2017, increased 4.1% to 2.2 million from $2.1 million in the
nine months ended September 30, 2016. IPTV increased $0.1 million, partially offset by a decrease in digital services.
Managed services
.
Managed services revenue in the nine months ended September 30, 2017, decreased 14.3% to $0.6 million from $0.7 million in the
nine months ended September 30, 2016, reflecting a decrease in professional services revenue.
Operating expenses
.
Operating expenses in the three months ended September 30, 2017, decreased 6.2% to $12.0 million from $12.8 million in the three
months ended September 30, 2016. Operating expenses in the nine months ended September 30, 2017, decreased 3.1% to $36.7 million
from $37.9 million in the nine months ended September 30, 2016. The tables below provide the components of our operating expenses
for the three months and nine months ended September 30, 2017, compared to the same periods of 2016.
For the three months
ended September 30, 2017, and 2016
|
|
Three Months Ended September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Cost of services
|
|
$
|
7,610
|
|
|
$
|
7,958
|
|
|
$
|
(348
|
)
|
|
|
(4.4
|
)%
|
Selling, general and administrative expenses
|
|
|
2,588
|
|
|
|
2,888
|
|
|
|
(300
|
)
|
|
|
(10.4
|
)
|
Depreciation and amortization
|
|
|
1,834
|
|
|
|
1,982
|
|
|
|
(148
|
)
|
|
|
(7.5
|
)
|
Total
|
|
$
|
12,032
|
|
|
$
|
12,828
|
|
|
$
|
(796
|
)
|
|
|
(6.2
|
)
|
Cost of services
.
Cost of services decreased 4.4% to $7.6 million in the three months ended September
30
,
2017, from slightly less than $8.0 million in the three months ended September
30
,
2016. Access, toll and reciprocal compensation expense decreased $0.3 million; loop and circuit expense decreased $0.1 million;
Hosted PBX equipment expense decreased $0.2 million; and marketing and product management expense decreased $0.2 million. These
decreases were partially offset by an increase of $0.3 million in plant operations expense, including costs associated with new
municipal services, and $0.1 million in internet and cable expense.
Selling, general and
administrative expenses
. Selling, general and administrative expenses decreased 10.4% to $2.6 million in the three months ended
September
30
, 2017, from $2.9 million in the three months ended September
30
,
2016. Decreases of $0.2 million in legal expense; $0.2 million in human resources and accounting expense; $0.1 million in clouding
hosting expense; and $0.1 million in uncollectible and property tax expense were partially offset by increases of $0.1 million
each in loan fees; training expense associated with our new billing and operations support system; and the substitution of a cash-based
senior incentive compensation plan in 2017 for the stock-based plan that was in place in 2016.
Depreciation and amortization
.
Depreciation and amortization decreased 7.5% in the three months ended September
30
,
2017, to $1.8 million from $2.0 million in the three months ended September
30
, 2016.
The amortization of the telephone plant adjustment decreased $0.1 million. Cable depreciation and amortization of other intangible
assets decreased $0.1 million, driven primarily by the end of amortization of intangibles associated with acquisitions.
For the nine months
ended September 30, 2017, and 2016
|
|
Nine Months Ended September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Cost of services
|
|
$
|
23,468
|
|
|
$
|
23,963
|
|
|
$
|
(495
|
)
|
|
|
(2.1
|
)%
|
Selling, general and administrative expenses
|
|
|
7,762
|
|
|
|
7,871
|
|
|
|
(109
|
)
|
|
|
(1.4
|
)
|
Depreciation and amortization
|
|
|
5,515
|
|
|
|
6,071
|
|
|
|
(556
|
)
|
|
|
(9.2
|
)
|
Total
|
|
$
|
36,745
|
|
|
$
|
37,905
|
|
|
$
|
(1,160
|
)
|
|
|
(3.1
|
)
|
Cost of services
.
Cost of services decreased 2.1% to $23.5 million in the nine months ended
September 30
,
2017, from $24.0 million in the nine months ended
September 30
, 2016. Customer service
and sales costs decreased $0.4 million; access, toll and reciprocal compensation decreased $0.4 million; Hosted PBX equipment cost
declined $0.2 million; and last mile loop and circuit costs decreased $0.2 million. These decreases were partially offset by increases
in network and other operations expense of $0.5 million and internet, cable and cloud hosting expense of $0.2 million.
Selling, general and
administrative expenses
. Selling, general and administrative expenses decreased 1.4% to $7.8 million in the nine months ended
September 30
, 2017, from $7.9 million in the nine months ended
September
30
, 2016. Decreases of $0.3 million in legal expense; $0.1 million in human resources, accounting and general and administrative
expense; $0.1 million in cloud hosting expense; and $0.1 million in operating and property tax expense were partially offset by
increases of $0.1 million in training expense associated with our new billing and operations support system; and $0.4 million related
to the substitution of a cash-based senior incentive compensation plan in 2017 for the stock-based plan that was in place in 2016.
Depreciation and amortization
.
Depreciation and amortization decreased 9.2% in the nine months ended
September 30
,
2017, to $5.5 million from $6.1 million in the nine months ended
September 30
, 2016.
The amortization of the telephone plant adjustment decreased $0.4 million; New England RLEC depreciation decreased $0.2 million;
other intangible assets decreased $0.1 million; and cable television and New England CLEC depreciation decreased $0.1 million.
Alabama and Missouri RLEC depreciation increased $0.1 million.
For the three months
ended September 30, 2017, and 2016
|
|
Three Months Ended September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Interest expense
|
|
$
|
(2,567
|
)
|
|
$
|
(2,728
|
)
|
|
$
|
(161
|
)
|
|
|
(5.9
|
)%
|
Income tax expense
|
|
|
(758
|
)
|
|
|
(708
|
)
|
|
|
50
|
|
|
|
7.1
|
|
Interest expense
.
Interest expense decreased 5.9% in the three months ended September 30, 2017, to $2.6 million from $2.7 million in the three months
ended September 30, 2016. The lower outstanding balance on our previous senior credit facility accounted for the decrease. We prepaid
an additional $3.0 million of principal on our previous senior credit facility during third quarter 2017. We refinanced our previous
credit facilities with a new senior credit facility on November 2, 2017, which is expected to reduce our effective interest rate
by approximately four percentage points. Our new credit facility matures in November 2022. See additional information in the
Liquidity
and Capital Resources
section below.
Income tax expense
.
Provision for income tax expense was $0.8 million in the three months ended September 30, 2017, compared to $0.7 million in the
three months ended September 30, 2016. The effective income tax rate as of September 30, 2017, and December 31, 2016, was 36.4%
and 41.5%, respectively.
For the nine months
ended September 30, 2017 and 2016
|
|
Nine Months Ended September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Interest expense
|
|
$
|
(7,749
|
)
|
|
$
|
(7,931
|
)
|
|
$
|
(182
|
)
|
|
|
(2.3
|
)%
|
Other income
|
|
|
204
|
|
|
|
624
|
|
|
|
(420
|
)
|
|
|
(67.3
|
)
|
Income tax expense
|
|
|
(2,709
|
)
|
|
|
(2,700
|
)
|
|
|
9
|
|
|
|
0.3
|
|
Interest expense
.
Interest expense for the nine months ended September 30, 2017, decreased 2.3% to $7.7 million from $7.9 million in the nine months
ended September 30, 2016. The lower outstanding balance on our previous senior credit facility accounted
for the decrease. As stated
above, we prepaid an additional $3.0 million of principal on our previous senior credit facility during third quarter 2017. As
also stated above, we refinanced our previous credit facilities with a new senior credit facility on November 2, 2017, which is
expected to reduce our effective interest rate by approximately four percentage points. Our new credit facility matures in November
2022. See additional information in the
Liquidity and Capital Resources
section below.
Other income
. Other
income decreased 67.3% in the nine months ended September 30, 2017, to $0.2 million from $0.6 million in the nine months ended
September 30, 2016, primarily related to the annual CoBank dividend. In first quarter 2016, our then 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 the first quarter of each year. The CoBank patronage shares held by us and that relate to our prior credit facility
with CoBank are expected to be repatriated over the next nine years.
Income tax expense
.
Provision for income tax expense was $2.7 million in the nine months ended September 30, 2017, and the nine months ended September
30, 2016. The effective income tax rates as of September 30, 2017, and December 31, 2016, were 36.4% and 41.5%, respectively.
Net income
. As a
result of the foregoing, there was net income of just under $1.6 million and just over $1.1 million in the three months ended September
30, 2017, and 2016, respectively. The difference was primarily driven by cost and expense management and the new ACAM revenue.
As a result of the foregoing, there was net income of $4.7 million and $4.2 million in the nine months ended September 30, 2017,
and 2016, respectively. The difference is primarily attributable to cost and expense management and the new ACAM revenue, partially
offset by the smaller CoBank dividend received in 2017.
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 nine months ended
September 30, 2017, we generated cash from our business to invest in additional property and equipment of $6.0 million, pay loan
principal of $9.1 million and pay scheduled interest on our debt of $6.7 million. After meeting all of these needs of our business,
cash decreased to $8.9 million as of September 30, 2017, from $10.5 million as of December 31, 2016.
Cash flows from operating
activities for the nine months ended September 30, 2017, amounted to $13.5 million compared to $13.7 million for the nine months
ended September 30, 2016, reflecting an increase in net income offset by deferred income tax benefits.
Cash flows used in investing
activities for the nine months ended September 30, 2017, were $6.0 million compared to $4.1 million in the nine months ended September
30, 2016. Increased investment in property and equipment in the nine months ended September 30, 2017, reflecting additional RLEC
fiber installation associated with the FCC’s ACAM program, and investment in our new billing and operations support system,
accounted for the difference.
Cash flows used in financing
activities for the nine months ended September 30, 2017, were $9.2 million compared to $7.1 million in the nine months ended September
30, 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 facilities
were funded on February 17, 2016, and consisted of a 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 subordinated credit
facility, providing for a five and a half year term loan facility in the aggregate principal amount of $15.3 million. On
November 2, 2017, we refinanced those credit facilities with a new $92 million, five year credit facility from a consortium of
banks led by CoBank, ACB. The new credit facility includes an $87.0 million term loan and a $5.0 million revolving loan, which
is undrawn. The new credit facility also includes a $20.0 million accordion feature that could be used to increase the term-loan
portion of the new credit facility. Proceeds from the new term loan and cash on hand were used to pay all amounts due in respect
of principal, interest, prepayment premiums and fees under our prior credit facilities, as well as fees associated with the transaction.
We anticipate that operating
cash flow, together with borrowings under our revolving credit facility, will be adequate to meet our currently anticipated operating
and capital expenditure requirements for at least the next 12 months. Our cash position reflects the continuing strength of our
operations.
We use consolidated earnings
before interest, taxes, depreciation and amortization (“Consolidated EBITDA”) and the ratio of our debt, net of cash,
to Consolidated EBITDA for the last twelve months (“Leverage Ratio”) as operational performance measurements. Consolidated
EBITDA, as presented in this Quarterly Report on Form 10-Q, corresponds to the definition of Consolidated EBITDA in our credit
facility. Consolidated EBITDA and the Leverage Ratio, as presented in this Quarterly Report on Form 10-Q, are supplemental
measures of our performance
that are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“U.S.
GAAP”). The lenders under our credit facility use Consolidated EBITDA to determine compliance with credit facility requirements.
We report Consolidated EBITDA and the Leverage Ratio in our quarterly earnings press release to allow current and potential investors
to understand these performance metrics and because we believe that they provide current and potential investors with helpful information
with respect to our operating performance, including our ability to generate earnings sufficient to service our debt, and enhance
understanding of our financial performance and highlight operational trends. However, Consolidated EBITDA and the Leverage Ratio
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 and the Leverage Ratio may not be comparable to similarly titled measures used by other
companies. Consolidated EBITDA for the three months and nine months ended September 30, 2017, and 2016, and the twelve months ended
September 30, 2017, and its reconciliation to net income, is reflected in the table below (in thousands):