10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number: 1-32362

OTELCO INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	52-2126395
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
505 Third Avenue East, Oneonta, Alabama	35121
(Address of Principal Executive Offices)	(Zip Code)

(205) 625-3574

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes x      No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 

Yes x      No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

  Large accelerated filer ¨   Accelerated filer    ¨   Non-accelerated filer   x   Smaller reporting company    x    Emerging growth company   ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes ¨      No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at November 6, 2018
Class A Common Stock ($0.01 par value per share)	3,388,624
Class B Common Stock ($0.01 par value per share)	0

OTELCO INC.
FORM 10-Q
For the three-month period ended September 30, 2018

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION		2
Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017 (audited)	2
	Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2018 and 2017 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	22
PART II OTHER INFORMATION		23
Item 6.	Exhibits	23

 i

Unless the context otherwise requires, the words “we,” “us,” “our,” the “Company” and “Otelco” refer to Otelco Inc., a Delaware corporation, and its consolidated subsidiaries as of September 30, 2018.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. These forward-looking statements are based on assumptions that we have made in light of our experience in the industry in which we operate, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial condition or results of operations, or cause our actual results to differ materially from those in the forward-looking statements.

 1

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share par value and share amounts)
(unaudited, with the exception of December 31, 2017, being audited)

	September 30, 2018		December 31, 2017
Assets
Current assets
Cash and cash equivalents	$	3,720	$	3,570
Accounts receivable:
Due from subscribers, net of allowance for doubtful accounts of $351 and $206, respectively		4,939		4,647
Other		2,003		1,875
Materials and supplies		2,773		2,700
Prepaid expenses		1,143		3,122
Total current assets		14,578		15,914
Property and equipment, net		51,544		50,888
Goodwill		44,976		44,976
Intangible assets, net		1,019		1,328
Investments		1,493		1,632
Interest rate cap		40		–
Other assets		151		201
Total assets	$	113,801	$	114,939
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	1,083	$	1,619
Accrued expenses		6,298		4,803
Advance billings and payments		1,568		1,684
Customer deposits		64		58
Current maturity of long-term notes payable, net of debt issuance cost		3,903		3,891
Total current liabilities		12,916		12,055
Deferred income taxes		18,939		18,939
Advance billings and payments		2,260		2,367
Other liabilities		21		13
Long-term notes payable, less current maturities and debt issuance cost		71,101		80,058
Total liabilities		105,237		113,432
Stockholders’ equity
Class A Common Stock, $.01 par value-authorized 10,000,000 shares; issued and outstanding 3,388,624 and 3,346,689 shares, respectively		34		34
Additional paid in capital		4,112		4,285
Retained earnings (accumulated deficit)		4,418		(2,812	)
Total stockholders’ equity		8,564		1,507
Total liabilities and stockholders’ equity	$	113,801	$	114,939

The accompanying notes are an integral part of these condensed consolidated financial statements.

 2

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,
	2018			2017			2018			2017
Revenues	$	16,252		$	16,946		$	49,867		$	51,732
Operating expenses
Cost of services		7,578			7,610			23,026			23,468
Selling, general and administrative expenses		2,382			2,588			7,691			7,762
Depreciation and amortization		1,756			1,834			5,382			5,515
Total operating expenses		11,716			12,032			36,099			36,745
Income from operations		4,536			4,914			13,768			14,987
Other income (expense)
Interest expense		(1,459	)		(2,567	)		(4,384	)		(7,749	)
Other income		83			—			252			204
Total other expense		(1,376	)		(2,567	)		(4,132	)		(7,545	)
Income before income tax expense		3,160			2,347			9,636			7,442
Income tax expense		(834	)		(758	)		(2,406	)		(2,709	)
Net income	$	2,326		$	1,589		$	7,230		$	4,733
Weighted average number of common shares outstanding:
Basic		3,388,624			3,346,689			3,388,624			3,346,689
Diluted		3,454,936			3,445,632			3,438,386			3,445,632
Basic net income per common share	$	0.69		$	0.47		$	2.13		$	1.41
Diluted net income per common share	$	0.67		$	0.46		$	2.10		$	1.37

The accompanying notes are an integral part of these condensed consolidated financial statements.

 3

OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (in thousands)
(unaudited)

	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net income	$	7,230		$	4,733
Adjustments to reconcile net income to cash flows provided by operating activities:
Depreciation		5,135			5,225
Amortization		247			290
Amortization of loan costs		354			927
Provision for uncollectible accounts receivable		283			290
Stock-based compensation		207			237
Paid in kind interest - subordinated debt		—			237
Changes in operating assets and liabilities
Accounts receivable		(704	)		(73	)
Materials and supplies		(73	)		(663	)
Prepaid expenses and other assets		2,030			1,280
Accounts payable and accrued expenses		959			453
Advance billings and payments		(223	)		582
Other liabilities		15			(3	)
Net cash from operating activities		15,460			13,515
Cash flows used in investing activities:
Acquisition and construction of property and equipment		(5,710	)		(5,951	)
Net cash used in investing activities		(5,710	)		(5,951	)
Cash flows used in financing activities:
Loan origination costs		(37	)		(77	)
Principal repayment of long-term notes payable		(9,262	)		(9,125	)
Interest rate cap		(40	)		—
Retirement of CoBank equity		119			164
Tax withholdings paid on behalf of employees for restricted stock units		(380	)		(209	)
Net cash used in financing activities		(9,600	)		(9,247	)
Net increase (decrease) in cash and cash equivalents		150			(1,683	)
Cash and cash equivalents, beginning of period		3,570			10,538
Cash and cash equivalents, end of period	$	3,720		$	8,855
Supplemental disclosures of cash flow information:
Interest paid	$	4,029		$	6,654
Income taxes paid	$	2		$	1,802
Issuance of Class A common stock	$	—		$	1

The accompanying notes are an integral part of these condensed consolidated financial statements.

 4

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)

1. Organization and Basis of Financial Reporting

Basis of Presentation and Principles of Consolidation

The 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; 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 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, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, or any other period.

The condensed consolidated financial statements and notes included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The interim condensed consolidated financial information herein is unaudited, with the condensed consolidated balance sheet as of December 31, 2017, being derived from the Company’s audited consolidated financial statements. 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.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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. ASU 2014-09 permits the use of either a retrospective or modified retrospective application. 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. The Company commenced its assessment of ASU 2014-09 beginning in June 2016. This assessment included analyzing ASU 2014-09’s impact on the Company’s various revenue streams, comparing the Company’s historical accounting policies and practices to the requirements of ASU 2014-09, and identifying potential differences from applying the requirements of ASU 2014-09 to the Company’s contracts. The Company has used a five-step process to identify the contract with the customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when or as the performance obligations are satisfied. The Company has implemented the appropriate changes to its business processes, systems and controls to support revenue recognition and disclosures under ASU 2014-09.

 5

The Company adopted ASU 2014-09 at the beginning of its 2018 fiscal year using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Prior period amounts have not been adjusted and continue to be reported in accordance with historic accounting standards in effect during those periods. The adoption of ASU 2014-09 and related amendments did not have a material impact on the Company’s condensed consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) (“ASU 2016-01”). This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. That presentation provides financial statement users with more decision-useful information about an entity’s involvement in financial instruments. The provisions of this ASU were to be effective for annual periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10), which made targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU also confirmed a six-month delay in the effective date of ASU 2016-01, making the effective date for the Company the second quarter of fiscal 2018 instead of the first quarter of fiscal 2018, with early adoption permitted. The Company adopted ASU 2016-01 as of March 31, 2018, and that adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This ASU is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017, with early adoption permitted. The Company adopted this ASU and that adoption did not have a material impact on the Company’s 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 adopted this ASU and that adoption did not have a material impact on the Company’s 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 adopted this ASU and that adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740). The objective of this ASU is to amend ASC 740, Income Taxes to reflect Staff Accounting Bulletin No. 118, issued by the staff of the Securities and Exchange Commission (“SAB 118”), which addresses the enactment of the Tax Cuts and Jobs Act (the “Tax Act”). SAB 118 outlines the approach companies may take if they determine that the necessary information is not available (in reasonable detail) to evaluate, compute, and prepare accounting entries to recognize the effects of the Tax Act by the time the financial statements are required to be filed. Companies may use this approach when the timely determination of some or all of the income tax effects from the Tax Act are incomplete by the due date of the financial statements. A reporting entity must act in good faith and update provisional amounts as soon as more information becomes available, evaluated and prepared, during a measurement period that cannot exceed one year from the enactment date. Initial reasonable estimates and subsequent changes to provisional amounts should be reported in income tax expense or benefit from continuing operations in the period in which they are determined. As of December 31, 2017, the provisional amount recorded related to the remeasurement of the Company’s deferred tax liability balance was $9.3 million and reflected a one-time reduction in the Company’s income tax provision.

Recent Accounting Pronouncements

During 2017, the FASB issued ASUs 2017-01 through 2017-15 and, during 2018, the FASB has issued ASUs 2018-01 through 2018-15. Except for the ASUs discussed above and 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.

 6

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. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. This ASU provides an optional transition practical expedient to not evaluate under ASU 2016-02 existing or expired land easements that were not previously accounted for as leases under ASC Topic 840, Leases. An entity that elects this practical expedient should evaluate new or modified land easements under ASU 2016-02 beginning at the date that the entity adopts ASU 2016-02. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which provides improvements and clarifications for ASU 2016-02. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This ASU provides an additional transition method by allowing entities to initially apply the new lease standard at the date of adoption. This ASU also gives lessors the option of electing, as a practical expedient by class of underlying asset, not to separate the lease and nonlease components of a contract when those lease contracts meet certain criteria. The Company is evaluating the requirements of this guidance and implementing the processes necessary to adopt ASU 2016-02. The Company will adopt ASU 2016-02 on the effective date of January 1, 2019. While the Company continues to assess all of the effects of adoption, the Company currently believes the most significant effects relate to the recognition of new right-of-use assets and lease liabilities on the balance sheet for real estate operating leases, and providing significant new disclosures about the Company’s leasing activities.

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 June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718). This ASU expands the scope of ASU 2017-09, which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods and services. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than the Company’s adoption date of ASU 2014-09. The Company does not expect this ASU to have a material impact on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”). This ASU modifies the disclosure requirements on fair value measurements in ASU 2018-13, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect this ASU to have a material impact on its condensed consolidated financial statements.

2017 Refinancing

On November 2, 2017, the Company refinanced its senior loan agreement with Cerberus Business Finance, LLC (the “Senior Loan Agreement”) and its subordinated loan agreement with NewSpring Mezzanine Capital III, L.P. (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”). 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 Credit Facility 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. The Company recorded costs of $28 thousand and write-off of loan costs of $3.7 million in connection with this refinancing.

 7

2. Notes Payable

Notes payable consists of the following (in thousands, except percentages) as of:

							September 30,			December 31,
	Current			Long-term			2018			2017
New Credit Facility with CoBank, ACB; variable interest rate of 6.74% at September 30, 2018, interest is quarterly, paid in arrears on the last business day of each quarter. The New Credit Facility is secured by the total assets of the subsidiary guarantors. The unpaid balance is due November 3, 2022.	$	4,350		$	72,300		$	76,650		$	85,912
Debt issuance cost		(447	)		(1,199	)		(1,646	)		(1,963	)
Notes payable, net of debt issuance cost	$	3,903		$	71,101		$	75,004		$	83,949

The Senior Loan Agreement was fully repaid on November 2, 2017. Associated with the Senior Loan Agreement, the Company had $4.9 million in deferred financing cost. Amortization expense for the deferred financing cost associated with the Senior Loan Agreement was $808 thousand for the nine months ended September 30, 2017, which is included in interest expense.

The Subordinated Loan Agreement was fully repaid on November 2, 2017. Associated with the Subordinated Loan Agreement, the Company had $892 thousand in deferred financing cost. Amortization expense for the deferred financing cost associated with the Subordinated Loan Agreement was $120 thousand for the nine months ended September 30, 2017, which is included in interest expense.

Associated with the New Credit Facility, the Company has $2.1 million in deferred financing cost. Amortization expense for the deferred financing cost associated with the New Credit Facility was $354 thousand for the nine months ended September 30, 2018, which is included in interest expense.

The Company had a revolving credit facility of $5.0 million associated with the Senior Loan Agreement. There was no balance outstanding as of September 30, 2017. The Senior Loan Agreement was terminated on November 2, 2017. The Company paid a monthly fee of 0.75% per annum on the unused portion of the revolver loan under the Senior Loan Agreement, payable in arrears. The fee expense was $28 thousand for the nine months ended September 30, 2017.

The revolving credit facility associated with the Company’s New Credit Facility had a maximum borrowing capacity of $5.0 million on September 30, 2018. The revolving credit facility is available until November 3, 2022. There was no balance outstanding as of September 30, 2018. The Company pays a commitment fee of 0.50% per annum, payable quarterly in arrears, on the unused portion of the revolver loan under the New Credit Facility. The commitment fee expense was $19 thousand for the nine months ended September 30, 2018.

Maturities of notes payable for the next five years, assuming no future annual excess cash flow payments, are as follows (in thousands):

2018 (remaining)	$	1,088
2019		4,350
2020		4,350
2021		4,350
2022		62,512
Total	$	76,650

A total of $2.1 million of debt issuance cost is amortized over the life of the loan and is recorded net of the notes payable on the condensed consolidated balance sheets.

The Company made voluntary principal prepayments of $1.0 million and $2.0 million under the New Credit Facility on July 31, 2018, and August 31, 2018, respectively, which are reflected in the remaining balance of the notes payable total listed above.

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, 2018, the Company was in compliance with all such covenants and restrictions.

 8

3. Income Tax

As of September 30, 2018, and December 31, 2017, the Company had no U.S. federal net operating loss carryforwards. As of September 30, 2018, and December 31, 2017, the Company had state net operating loss carryforwards of $43 thousand and $33 thousand, respectively. The Company had no alternative minimum tax credit carryforwards as of September 30, 2018, or December 31, 2017. The Company establishes valuation allowances when necessary to reduce deferred tax assets to amounts expected to be realized. As of September 30, 2018, the Company had no valuation allowance recorded.

The effective income tax rate as of September 30, 2018, and December 31, 2017, was 25.0% and (184.5)%, 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,
	2018		2017		2018		2017
Weighted average number of common shares outstanding - basic		3,388,624		3,346,689		3,388,624		3,346,689
Effect of dilutive securities		66,312		98,943		49,762		98,943
Weighted average number of common shares and potential common shares - diluted		3,454,936		3,445,632		3,438,386		3,445,632
Net income	$	2,326	$	1,589	$	7,230	$	4,733
Net income per common share - basic	$	0.69	$	0.47	$	2.13	$	1.41
Net income per common share - diluted	$	0.67	$	0.46	$	2.10	$	1.37

5. Revenue Streams and Concentrations

Revenue Streams

The Company identifies its revenue streams with similar characteristics as follows (in thousands):

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Local services	$	5,302	$	16,218
Network access		5,120		15,918
Internet		3,775		11,485
Transport services		1,211		3,613
Video and security		689		2,144
Managed services		155		489
Total revenues	$	16,252	$	49,867

ASU 2014-09 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. As stated above in Note 1, Organization and Basis of Financial Reporting – Recently Adopted Accounting Pronouncements, the Company has used a five-step process to identify the contract with the customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when or as the performance obligations are satisfied. The majority of the Company’s revenue is recognized at the point in time control of the service is transferred to the customer. For certain other services, such as unlimited long distance, revenue is recognized over the period of time the service is provided. The Company has implemented the appropriate changes to its business processes, systems and controls to support revenue recognition and disclosures under ASU 2014-09.

 9

The following table identifies revenue generated from customers (in thousands):

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Local services	$	5,302	$	16,218
Network access		1,131		3,553
Internet		3,775		11,485
Transport services		1,173		3,500
Video and security		689		2,144
Managed services		155		490
Total revenues	$	12,225	$	37,390

The following table summarizes the revenue generated from contracts with customers among each revenue stream as of September 30, 2018 (in thousands, except percentages):

	Three Months Ended
	September 30, 2018		% In-Scope			% Total
Month to month (“MTM”) customers	$	7,492		62.1	%		46.1	%
Competitive local exchange carrier (“CLEC”) business customers		3,447		28.6			21.2
Network access		666		5.5			4.1
Total revenue streams		11,605		96.2			71.4
Global access*		464		3.8			2.9
Total revenue from contracts with customers		12,069		100.0	%		74.3
Indefeasible rights-of-use agreements**		38		n/a			0.2
Managed services**		155		n/a			1.0
Network access**		3,990		n/a			24.5
Total revenues	$	16,252					100.0	%

*Fixed fees charged to MTM customers and CLEC business customers.

** Revenue generated from sources not within the scope of ASU 2014-09.                        

	Nine Months Ended
	September 30, 2018		% In-Scope			% Total
MTM customers	$	22,759		61.7	%		45.6	%
CLEC business customers		10,588		28.7			21.2
Network access		2,076		5.6			4.2
Total revenue streams		35,423		96.0			71.0
Global access*		1,477		4.0			3.0
Total revenue from contracts with customers		36,900		100.0	%		74.0
Indefeasible rights-of-use agreements**		113		n/a			0.2
Managed services**		490		n/a			1.0
Network access**		12,364		n/a			24.8
Total revenues	$	49,867					100.0	%

*Fixed fees charged to MTM customers and CLEC business customers.

** Revenue generated from sources not within the scope of ASU 2014-09.                        

Payment terms vary by customer. The Company typically invoices customers in the month following when the service was provided. The term between invoicing and when payment is due is less than a year and is not considered significant. Certain customers are invoiced in advance of the service being provided. Revenue is deferred until the point in time control of the service is transferred to the customer or over the term the service is provided.

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Revenue is recognized net of taxes collected on behalf of third parties.

As of September 30, 2018, the Company had approximately $8.0 million of unsatisfied performance obligations. As of September 30, 2018, the Company expected to recognize approximately $0.9 million of revenue within the next year and $7.1 million in the next 2 to 5 years related to such unsatisfied performance obligations. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected life of one year or less or for contracts for which the Company has a right to invoice for services performed.

The deferred revenue balance as of January 1, 2018, was $4.1 million. Approximately $1.5 million of revenue from that balance was recognized as revenue during the three months ended March 31, 2018, offset by payments received as of March 31, 2018, in advance of control of the service being transferred to the customer.

The deferred revenue balance as of June 30, 2018, was $3.9 million. Approximately $1.4 million of revenue from that balance was recognized as revenue during the three months ended September 30, 2018, offset by payments received as of September 30, 2018, in advance of control of the service being transferred to the customer.

Revenue Concentrations

Revenues for interstate access services are based on reimbursement of costs and 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 22.6% and 21.8% of the Company’s total revenues for the nine months ended September 30, 2018, and 2017, 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 Utility Commission 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 (the “FCC”). Currently, 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”) 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. In addition, MMT filed suit, along with other LECs, against Level 3 Communications LLC (“Level 3”) seeking payment of access charges that Level 3 was refusing to pay because of its position on intraMTA traffic. 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”). On May 5, 2018, the Court granted the LEC Defendants’ request to dismiss all of the claims brought by Sprint, MCI and Verizon. The Court also granted the LECs’ motion for summary judgment against Level 3. Sprint, MCI and Verizon have appealed the Court’s ruling. The Fifth Circuit Court of Appeals (the “Fifth Circuit”) is currently accepting party appearances and corporate disclosures. A briefing schedule from the Fifth Circuit is expected in the near future.

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.

7. Stock Plans

During the nine months ended September 30, 2018, 34,755 RSUs were granted by the Company. Prior to that time, the Company had previously granted RSUs underlying 366,356 shares of Class A common stock. The 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, the 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 RSUs granted prior to the nine months ended September 30, 2018, RSUs underlying 267,413 shares of Class A common stock had vested or were cancelled as of December 31, 2017. The RSU grants were made primarily to executive-level personnel at the Company and, as a result, no compensation costs have been capitalized.

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The following table summarizes RSU activity as of September 30, 2018:

	RSUs			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2017		98,943		$	4.51
Granted		34,755		$	13.30
Vested		(67,386	)	$	4.56
Forfeited or cancelled		—		$	—
Outstanding at September 30, 2018		66,312		$	9.06

Stock-based compensation expense related to RSUs was $207 thousand and $237 thousand for the nine months ended September 30, 2018, and 2017, respectively. Accounting standards require that the Company estimate forfeitures for RSUs 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.

As of September 30, 2018, the unrecognized total compensation cost related to unvested RSUs was $684 thousand. That cost is expected to be recognized by the end of 2022.

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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). The majority of our revenue comes from providing local and long distance voice services and internet broadband data services to both enterprise and residential customers. In addition, a significant portion of our revenue comes from providing access to our customers for other service providers and the associated funds from programs initiated by the Federal Communications Commission (the “FCC”). Our organization is structured functionally across all states in which we operate. Therefore, we view, manage and evaluate the results of operations from the various telecommunications services as one company and have identified one reporting segment as it relates to providing segment information.

The FCC released its Universal Service Fund and Intercarrier Compensation Order (the “FCC ICC Order”) in November 2011. The FCC ICC Order has made and continues to make 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 continue reducing our revenue and net income through 2020.

In 2017, we began receiving support under the Alternative Connect America Model (“ACAM”). ACAM support requires additional investment in plant and equipment to reach target broadband speeds and covered locations. A portion of ACAM support represents transition payments that will decline through 2026 as the additional investment is completed. Our ACAM transition payments will decrease $0.2 million to $1.3 million in 2018, compared to $1.5 million received in 2017.

On March 23, 2018, the FCC issued a Report and Order, Third Order on Reconsideration, and Notice of Proposed Rulemaking (the “Report and Order”) on high-cost rate-of-return reform that offers additional high-cost support to some carriers that previously accepted ACAM support. One of our RLECs qualifies for additional support under the Report and Order, and we have accepted the FCC’s offer for an additional $1.5 million of support under the Report and Order over the ten-year period.

On June 25, 2018, the FCC named us one of 220 qualified bidders who were authorized to participate in the FCC’s Connect America Fund Phase II auction. This reverse auction awarded support payments over the next ten years to service providers who successfully bid to offer service in unserved, high-cost areas, which are defined by the FCC. Winning service providers must complete a long-form application process and meet various other requirements before being authorized to receive support payments. Winning service providers must also commit to offer voice and broadband services to a fixed number of locations. The auction began on July 24, 2018, and we were named the winning bidder for three areas in western Massachusetts on August 28, 2018. After the FCC approves our long-form application, we will begin receiving $92 thousand annually in support for the three areas for the next ten years.

The Tax Cuts and Jobs Act (the “Tax Act”) passed in December 2017 has reduced, and is expected to continue to reduce, our cash tax liability. Specifically, both the lower income tax rate and the extension of bonus depreciation under the Tax Act have positively impacted, and are expected to continue to positively impact, our federal tax requirements. The limitation on interest deductibility under the Tax Act is not expected to impact our tax liabilities. For the 2018 tax year, the Tax Act is expected to reduce our cash tax liability by approximately $2.1 million.

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.

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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 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 Utility Commission 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, when the authorized rate was 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 Universal Service Fund High Cost Loop and Interstate Common Line Support.

· Internet. We receive revenues from monthly recurring charges for digital high-speed data lines delivered on fiber, coaxial and copper networks 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.

· 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.

Customer Trends

The number of customers we serve and the services they receive from us are measures of the stability of our revenue stream. Enterprise and local business customers have remained generally steady or grown over time and the services they receive have been very consistent. Reflecting general trends in the RLEC industry, the number of residential voice customers we serve has been decreasing as customers move to individual mobile phones versus shared residential home phones for voice calls. The decrease in residential data services has been at a much slower rate, as the need for wired data services and the associated requirement for higher throughput capacity remain important to our residential customer base. We expect that these trends will continue, as we face a similar level of competition from cable, wireless and co-operative electric providers in our RLEC territories and the availability of alternative telecommunications products, such as IP-based services. The same competitors have also offered services to our smaller customers in our CLEC service areas. Our competitive carrier voice and data access lines reflect the continuing industry shift to IP-based services. We continue to install fiber directly to our customers’ locations to increase the security, stability and capability of our offerings. We also sell additional services to our rural customer base, such as alarm and medical alert monitoring services, and are the provider of cable and IPTV services in our Alabama markets. Our managed services and hybrid/cloud-based hosting are also available to our CLEC customer base.

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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.

Our recent conversion to a single billing and operations support platform is expected to provide us with additional information by customer to allow for more refined marketing programs and more detailed service management data. This information may include measures such as the number of services per customer, which would be an indication of the efficacy of our offers. As the data is developed, selected quantitative measures may be included in our business analysis in the future.

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. The years of reductions in FCC-controlled payments has made it difficult to fully offset revenue decline through expense control and pricing action. With the introduction of ACAM funding in 2017, there was an increase in revenue which can be used to support additional capital investment in our network to enhance broadband speeds and coverage. The funds received through ACAM funding will decline over the remaining eight years of the program.

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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,
	2018			2017			2018			2017
Revenues
Local services		32.6	%		33.0	%		32.5	%		32.8	%
Network access		31.5			31.5			31.9			32.2
Internet		23.2			23.3			23.0			22.8
Transport services		7.5			6.8			7.3			6.7
Video and security		4.2			4.4			4.3			4.4
Managed services		1.0			1.0			1.0			1.1
Total revenues		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses
Cost of services		46.6	%		44.9	%		46.2	%		45.4	%
Selling, general and administrative expenses		14.7			15.3			15.4			15.0
Depreciation and amortization		10.8			10.8			10.8			10.6
Total operating expenses		72.1			71.0			72.4			71.0
Income from operations		27.9			29.0			27.6			29.0
Other income (expense)
Interest expense		(9.0	)		(15.2	)		(8.8	)		(15.0	)
Other income		0.5			—			0.5			0.4
Total other expense		(8.5	)		(15.2	)		(8.3	)		(14.6	)
Income before income tax expense		19.4			13.8			19.3			14.4
Income tax expense		(5.1	)		(4.4	)		(4.8	)		(5.2	)
Net income available to common stockholders		14.3	%		9.4	%		14.5	%		9.2	%

Three Months and Nine Months Ended September 30, 2018, Compared to Three Months and Nine Months Ended September 30, 2017

Total revenues. Total revenues decreased 4.1% in the three months ended September 30, 2018, to $16.3 million from $16.9 million in the three months ended September 30, 2017. Total revenues decreased 3.6% in the nine months ended September 30, 2018, to $49.9 million from $51.7 million in the nine months ended September 30, 2017. The decrease was primarily due to the decrease in traditional voice access services and CAF revenue affected by the FCC ICC Order and residential RLEC voice customers. The tables below provide the components of our revenues for the three months and nine months ended September 30, 2018, compared to the same periods of 2017.

For the three months ended September 30, 2018, and 2017

	Three Months Ended September 30,				Change
	2018		2017		Amount			Percent
	(dollars in thousands)
Local services	$	5,302	$	5,584	$	(282	)		(5.1	)%
Network access		5,120		5,334		(214	)		(4.0	)%
Internet		3,775		3,954		(179	)		(4.5	)%
Transport services		1,211		1,156		55			4.8	%
Video and security		689		747		(58	)		(7.8	)%
Managed services		155		171		(16	)		(9.4	)%
Total	$	16,252	$	16,946	$	(694	)		(4.1	)%

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Local services. Local services revenue decreased 5.1% in the three months ended September 30, 2018, to $5.3 million from $5.6 million in the three months ended September 30, 2017. The decline in RLEC residential voice customers and the impact of the FCC ICC Order, which reduced or eliminated intrastate and local cellular 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. Long distance accounted for a decrease of $0.1 million.

Network access. Network access revenue decreased 4.0% in the three months ended September 30, 2018, to $5.1 million from $5.3 million in the three months ended September 30, 2017. CAF and transition support payments decreased $0.4 million and end-user fees decreased by $0.1 million. These decreases were partially offset by an increase of $0.3 million in switched and special access.

Internet. Internet revenue decreased 4.5% in the three months ended September 30, 2018, to $3.8 million from $4.0 million in the three months ended September 30, 2017. A decrease in customers and equipment rental charges accounted for the decline.

Transport services. Transport services revenue increased 4.8% in the three months ended September 30, 2018, to just over $1.2 million from just under $1.2 million in the three months ended September 30, 2017, reflecting an increase in wide area network services.

Video and security. Video and security revenue decreased 7.8% in the three months ended September 30, 2018, to just under $0.7 million from just over $0.7 million in the three months ended September 30, 2017, reflecting an increase in IPTV revenue, offset by decreases in basic cable and pay-per-view revenue.

Managed services. Managed services revenue decreased 9.4% to remain at just under $0.2 million in the three months ended September 30, 2018, and the three months ended September 30, 2017.

For the nine months ended September 30, 2018, and 2017

	Nine Months Ended September 30,				Change
	2018		2017		Amount			Percent
	(dollars in thousands)
Local services	$	16,218	$	16,949	$	(731	)		(4.3	)%
Network access		15,918		16,650		(732	)		(4.4	)%
Internet		11,485		11,821		(336	)		(2.8	)%
Transport services		3,613		3,473		140			4.0	%
Video and security		2,143		2,256		(113	)		(5.0	)%
Managed services		490		583		(93	)		(16.0	)%
Total	$	49,867	$	51,732	$	(1,865	)		(3.6	)%

Local services. Local services revenue decreased 4.3% in the nine months ended September 30, 2018, to $16.2 million from $16.9 million in the nine months ended September 30, 2017. The decline in RLEC residential voice customers and the impact of the FCC ICC Order, which reduced or eliminated intrastate and local cellular revenue, accounted for a decrease of $0.6 million. A portion of the RLEC decrease is recovered through the CAF, which is categorized as interstate access revenue. Long distance accounted for a decrease of $0.2 million and directory services accounted for a decrease of $0.1 million. An increase in network fees and special line charges of $0.2 million partially offset the declines.

Network access. Network access revenue decreased 4.4% in the nine months ended September 30, 2018, to $15.9 million from $16.6 million in the nine months ended September 30, 2017. ACAM support payments increased $0.2 million, which was more than offset by a decrease of $0.2 million in switched and special access, $0.3 million in end-user fees and $0.4 million in CAF and Alabama Transition Service Fund revenue.

Internet. Internet revenue decreased 2.8% in the nine months ended September 30, 2018, to $11.5 million from $11.8 million in the nine months ended September 30, 2017. A decrease in customers and equipment rental charges accounted for the decline.

Transport services. Transport services revenue increased 4.0% in the nine months ended September 30, 2018, to $3.6 million from $3.5 million in the nine months ended September 30, 2017, reflecting an increase in wide area and wholesale network services.

Video and security. Video and security revenue decreased 5.0% in the nine months ended September 30, 2018, to just over $2.1 million from just under $2.3 million in the nine months ended September 30, 2017, reflecting an increase in IPTV revenue, offset by decreases in basic cable and pay-per-view revenue.

 17

Managed services. Managed services revenue decreased 16.0% in the nine months ended September 30, 2018, to $0.5 million from $0.6 million in the nine months ended September 30, 2017, reflecting decreases in professional services and cloud hosting revenue.

Operating expenses. Operating expenses in the three months ended September 30, 2018, decreased 2.6% to $11.7 million from $12.0 million in the three months ended September 30, 2017. Operating expenses in the nine months ended September 30, 2018, decreased 1.8% to $36.1 million from $36.7 million in the nine months ended September 30, 2017. The tables below provide the components of our operating expenses for the three months and nine months ended September 30, 2018, compared to the same periods of 2017.

For the three months ended September 30, 2018, and 2017

	Three Months Ended September 30,				Change
	2018		2017		Amount			Percent
	(dollars in thousands)
Cost of services	$	7,578	$	7,610	$	(32	)		(0.4	)%
Selling, general and administrative expenses		2,382		2,588		(206	)		(8.0	)%
Depreciation and amortization		1,756		1,834		(78	)		(4.3	)%
Total	$	11,716	$	12,032	$	(316	)		(2.6	)%

Cost of services. Cost of services decreased 0.4% to just under $7.6 million in the three months ended September 30, 2018, from just over $7.6 million in the three months ended September 30, 2017. Customer service and sales and pole rental expenses each increased $0.1 million, while access decreased $0.2 million.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased 8.0% to $2.4 million in the three months ended September 30, 2018, from $2.6 million in the three months ended September 30, 2017. The decrease was composed of $0.1 million in senior management incentive compensation expense, $0.1 million in cloud hosting and accounting and finance expense and $0.1 million in loan fees, which were partially offset by a $0.1 million increase in training and conversion expense associated with our new billing and operating support system.

Depreciation and amortization. Depreciation and amortization decreased 4.3% in the three months ended September 30, 2018, to just under $1.8 million from just over $1.8 million in the three months ended September 30, 2017. The decrease in amortization of intangibles and CLEC depreciation was partially offset by increased depreciation in RLEC investment associated with ACAM investments.

For the nine months ended September 30, 2018, and 2017

	Nine Months Ended September 30,				Change
	2018		2017		Amount			Percent
	(dollars in thousands)
Cost of services	$	23,026	$	23,468	$	(442	)		(1.9	)%
Selling, general and administrative expenses		7,691		7,762		(71	)		(0.9	)%
Depreciation and amortization		5,382		5,515		(133	)		(2.4	)%
Total	$	36,099	$	36,745	$	(646	)		(1.8	)%

Cost of services. Cost of services decreased 1.9% to $23.0 million in the nine months ended September 30, 2018, from $23.5 million in the nine months ended September 30, 2017. Access and cost of toll decreased $0.7 million and cost of HPBX equipment decreased $0.1 million. An increase in internet and pole attachment costs of $0.2 million and network operations expense of $0.2 million partially offset the reductions.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased 0.9% to $7.7 million in the nine months ended September 30, 2018, from $7.8 million in the nine months ended September 30, 2017. The decrease was composed of $0.4 million in senior management incentive compensation expense, $0.1 million in cloud hosting expense, $0.1 million in accounting and finance expense and $0.1 million in loan fees, which were partially offset by a an increase of $0.5 million in training and conversion expense associated with our new billing and operating support system, and a $0.2 million increase in legal and external relations expense.

 18

Depreciation and amortization. Depreciation and amortization decreased 2.4% in the nine months ended September 30, 2018, to $5.4 million from $5.5 million in the nine months ended September 30, 2017. The decrease in amortization of intangibles and CLEC depreciation was partially offset by increased depreciation in RLEC investment associated with ACAM investments.

For the three months ended September 30, 2018, and 2017

	Three Months Ended September 30,						Change
	2018			2017			Amount			Percent
	(dollars in thousands)
Interest expense	$	(1,459	)	$	(2,567	)	$	(1,108	)		(43.2	)%
Other income		83			—			83			NM	*
Income tax expense		(834	)		(758	)		76			10.0
* Not a meaningful calculation.

Interest expense. Interest expense decreased 43.2% in the three months ended September 30, 2018, to $1.5 million from $2.6 million in the three months ended September 30, 2017. Lower interest rates and lower principal balance accounted for $0.9 million of the decrease and lower loan cost amortization accounted for $0.2 million of the decrease. We refinanced our previous credit facilities with a new credit facility on November 2, 2017, which reduced 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 of $0.1 million in the three months ended September 30, 2018, reflects a one-time CoBank dividend associated with impact of the Tax Act. There was no comparable dividend in the three months ended September 30, 2017.

Income tax expense. Provision for income tax expense was $0.8 million in the three months ended September 30, 2018, and in the three months ended September 30, 2017. The Tax Act, implemented at the end of 2017, increased bonus depreciation from 50% to 100% and reduced the maximum federal corporate tax rate from 35% to 21%. While lower interest expense increased net income, the net effect of the new law was to lower the provision for federal income taxes and raise the provision for state income taxes. The effective income tax rate as of September 30, 2018, and December 31, 2017, was 26.6% and (184.5)%, respectively. The December 31, 2017, rate reflects the impact of the Tax Act on deferred taxes.

For the nine months ended September 30, 2018 and 2017

	Nine Months Ended September 30,						Change
	2018			2017			Amount			Percent
	(dollars in thousands)
Interest expense	$	(4,384	)	$	(7,749	)	$	(3,365	)		(43.4	)%
Other income		252			204			48			23.5
Income tax expense		(2,406	)		(2,709	)		(303	)		(11.2	)

Interest expense. Interest expense decreased 43.4% in the nine months ended September 30, 2018, to $4.4 million from $7.7 million in the nine months ended September 30, 2017. Lower interest rates and lower principal balance accounted for $2.8 million of the decrease and lower loan cost amortization accounted for $0.6 million of the decrease. We refinanced our previous credit facilities with a new credit facility on November 2, 2017, which reduced our effective interest rate by approximately four percentage points. Our new credit facility matures in November 2022.

Other income. Other income increased 23.5% in the nine months ended September 30, 2018, to under $0.3 million from $0.2 million in the nine months ended September 30, 2017, primarily related to the one-time CoBank dividend received in the third quarter of 2018.

Income tax expense. Provision for income tax expense was $2.4 million in the nine months ended September 30, 2018, compared to $2.7 million in the nine months ended September 30, 2017. The Tax Act, implemented at the end of 2017, increased bonus depreciation from 50% to 100% and reduced the maximum federal corporate tax rate from 35% to 21%. While lower interest expense increased net income, the net effect of the new law was to lower the provision for federal income taxes and raise the provision for state income taxes, producing the reduction in the provision for income taxes of $0.3 million for the nine months ended September 30, 2018, when compared to the same period in 2017. The effective income tax rate as of September 30, 2018, and December 31, 2017, was 26.6% and (184.5)%, respectively. The December 31, 2017, rate reflects the impact of the Tax Act on deferred taxes.

 19

Net income. As a result of the foregoing, there was net income of $2.3 million and $1.6 million in the three months ended September 30, 2018, and 2017, respectively. As a result of the foregoing, there was net income of $7.2 million and $4.7 million in the nine months ended September 30, 2018, and 2017, respectively. The difference in both periods was primarily driven by the impact of the Tax Act and lower interest expense.

Liquidity and Capital Resources

Our liquidity needs arise primarily from: (i) interest and principal payments related to our credit facility; (ii) capital expenditures for investment in our business, including ACAM requirements; and (iii) working capital requirements.

For the nine months ended September 30, 2018, we generated cash from our business to invest in additional property and equipment of $5.7 million, pay loan principal of $10.3 million and pay scheduled interest on our debt of $4.0 million. After meeting all of these needs of our business, cash increased to $3.7 million as of September 30, 2018, from $3.6 million as of December 31, 2017.

Cash flows from operating activities for the nine months ended September 30, 2018, amounted to $15.5 million compared to $13.5 million for the nine months ended September 30, 2017, reflecting an increase in net income associated with lower interest expense and income tax expense, offset by changes in working capital items.

Cash flows used in investing activities for the nine months ended September 30, 2018, were $5.7 million compared to $6.0 million for the nine months ended September 30, 2017, reflecting RLEC fiber installation associated with the FCC’s ACAM program and investment in our new billing and operations support system.

Cash flows used in financing activities for the nine months ended September 30, 2018, were $9.6 million compared to $9.2 million in the nine months ended September 30, 2017, reflecting a voluntary principal prepayment of $7.0 million in 2018 under our new credit facility and an excess cash flow payment of $3.1 million in 2017 under our former senior credit facility.

We do not invest in financial instruments as part of our business strategy. However, our new credit facility required that we acquire an interest rate hedge on at least 50% of our outstanding notes payable balance for a period of at least two years. Accordingly, we purchased a two-year 3.0% interest rate cap on one-month LIBOR covering $45.0 million on February 26, 2018. The interest rate cap is accounted for as an asset and marked to market each quarter.

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, subject to the satisfaction of certain conditions and lender participation. 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. Our new credit facility requires annual principal reduction of $4.3 million paid equally on a quarterly basis and, beginning in 2019, an annual principal payment equal to 50% of our excess cash flow for the year. During the nine months ended September 30, 2018, we made scheduled principal payments of $3.3 million and voluntary principal prepayments of $7.0 million, reducing the outstanding principal under our new credit facility to $76.6 million. The voluntary principal prepayments incurred no prepayment penalty and may be used to offset the 2019 excess cash flow payment.

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.

 20

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 (the “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, 2018, and 2017, and the twelve months ended September 30, 2018, and its reconciliation to net income, is reflected in the table below (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,				Twelve Months Ended September 30,
	2018		2017		2018		2017		2018
Net income	$	2,326	$	1,589	$	7,230	$	4,733	$	14,612
Add: Depreciation		1,677		1,746		5,135		5,225		6,911
Interest expense less interest income		1,343		2,260		4,030		6,822		5,634
Interest expense - amortized loan cost		116		307		354		927		4,250
Income tax expense		834		758		2,406		2,709		(8,159	)
Amortization - intangibles		79		88		247		290		333
Loan fees		19		114		56		194		2,310
Stock-based compensation		56		72		207		237		278
Consolidated EBITDA	$	6,450	$	6,934	$	19,665	$	21,137	$	26,169

The table below provides the calculation of the Leverage Ratio, as of September 30, 2018 (dollar amounts in thousands).

Notes payable	$	75,004
Debt issuance costs		1,646
Notes outstanding	$	76,650
Less cash		(3,720	)
Notes outstanding, net of cash	$	72,930
Consolidated EBITDA for the last twelve months	$	26,169
Leverage Ratio		2.79

As we reduce our debt, the Leverage Ratio would be expected to decline if Consolidated EBITDA remains consistent.

Recently Adopted 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 recently adopted accounting pronouncements that are applicable to us, including details relating to our adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), at the beginning of 2018, which adoption did not have a material impact on our unaudited condensed consolidated financial statements.

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our short-term excess cash balance is invested in short-term commercial paper. We do not invest in any derivative or commodity type instruments. Accordingly, we are subject to minimal market risk on our investments.

Interest rates applicable to the term loans (including any incremental term loans incurred under the accordion feature) and the revolving loans under our credit facility are set at a margin over an adjusted LIBOR rate (which is defined as the higher of (1) LIBOR multiplied by the statutory reserve rate and (2) 0.0% per annum) or a base rate (which is defined as the highest of (1) the prime rate, (2) the federal funds effective rate plus 0.50% per annum, (3) the adjusted LIBOR rate for an interest period of one month plus 1.0% per annum and (4) 0.0% per annum). Accordingly, we are exposed to interest rate risk. A one percentage point change in one-month LIBOR interest rates from the interest rates actually applicable to the loans under our credit facility during the period would have resulted in an increase of $0.2 million and $0.6 million in our interest expense for the three months and nine months ended September 30, 2018, respectively.

 21

Item 4. Controls and Procedures

With the participation of the Chief Executive Officer and the Chief Financial Officer, management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2018.

We have implemented a new billing and operations support system. End-user billing was fully implemented at the end of July 2018 and required significant capital and human resources to deploy . The implementation of the new billing and operations support system affected the processes that constitute our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934), and our management took steps to ensure that appropriate controls were designed and implemented as each functional area of the new billing and operations support system was enacted.

Other than as described above, there were no changes in our internal control over financial reporting during the three months ended September 30, 2018, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 22

PART II OTHER INFORMATION

Item 6. Exhibits

Exhibits

See Exhibit Index.

 23

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 7, 2018	OTELCO INC.
	By:	/s/ Curtis L. Garner, Jr.
		Curtis L. Garner, Jr.
		Chief Financial Officer

 24

EXHIBIT INDEX

Exhibit No.	Description
31.1	Certificate pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934 of the Chief Executive Officer
31.2	Certificate pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934 of the Chief Financial Officer
32.1	Certificate pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer
32.2	Certificate pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer
101	The following information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements

 25

EX-31.1

Exhibit 31.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER

I, Robert J. Souza, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Otelco Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2018

/s/ Robert J. Souza

Robert J. Souza

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER

I, Curtis L. Garner, Jr., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Otelco Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2018

/s/ Curtis L. Garner, Jr.

Curtis L. Garner, Jr.

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Otelco Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert J. Souza, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert J. Souza

Robert J. Souza

Chief Executive Officer

November 7, 2018

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Otelco Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Curtis L. Garner, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Curtis L. Garner, Jr.

Curtis L. Garner, Jr.

Chief Financial Officer

November 7, 2018

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Nov. 06, 2018
Document Information [Line Items]
Entity Registrant Name	OTELCO INC.
Entity Central Index Key	0001288359
Trading Symbol	otel
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Common Stock, Shares Outstanding (in shares)		3,388,624
Document Type	10-Q
Document Period End Date	Sep. 30, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Current assets
Cash and cash equivalents	$ 3,720	$ 3,570
Accounts receivable:
Due from subscribers, net of allowance for doubtful accounts of $351 and $206, respectively	4,939	4,647
Other	2,003	1,875
Materials and supplies	2,773	2,700
Prepaid expenses	1,143	3,122
Total current assets	14,578	15,914
Property and equipment, net	51,544	50,888
Goodwill	44,976	44,976
Intangible assets, net	1,019	1,328
Investments	1,493	1,632
Interest rate cap	40
Other assets	151	201
Total assets	113,801	114,939
Current liabilities
Accounts payable	1,083	1,619
Accrued expenses	6,298	4,803
Advance billings and payments	1,568	1,684
Customer deposits	64	58
Current maturity of long-term notes payable, net of debt issuance cost	3,903	3,891
Total current liabilities	12,916	12,055
Deferred income taxes	18,939	18,939
Advance billings and payments	2,260	2,367
Other liabilities	21	13
Notes payable, net of debt issuance cost, long-term	71,101	80,058
Total liabilities	105,237	113,432
Stockholders' equity
Additional paid in capital	4,112	4,285
Retained earnings (accumulated deficit)	4,418	(2,812)
Total stockholders' equity	8,564	1,507
Total liabilities and stockholders' equity	113,801	114,939
Common Class A [Member]
Stockholders' equity
Class A Common Stock, $.01 par value-authorized 10,000,000 shares; issued and outstanding 3,388,624 and 3,346,689 shares, respectively	$ 34	$ 34

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Allowance for doubtful accounts	$ 351	$ 206
Common Class A [Member]
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, authorized (in shares)	10,000,000	10,000,000
Common stock, issued (in shares)	3,388,624	3,346,689
Common stock, outstanding (in shares)	3,388,624	3,346,689

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($) $ in Thousands	3 Months Ended			9 Months Ended
	Sep. 30, 2018		Sep. 30, 2017	Sep. 30, 2018		Sep. 30, 2017
Revenues	$ 16,252	[1]	$ 16,946	$ 49,867	[1]	$ 51,732
Operating expenses
Cost of services	7,578		7,610	23,026		23,468
Selling, general and administrative expenses	2,382		2,588	7,691		7,762
Depreciation and amortization	1,756		1,834	5,382		5,515
Total operating expenses	11,716		12,032	36,099		36,745
Income from operations	4,536		4,914	13,768		14,987
Other income (expense)
Interest expense	(1,459)		(2,567)	(4,384)		(7,749)
Other income	83			252		204
Total other expense	(1,376)		(2,567)	(4,132)		(7,545)
Income before income tax expense	3,160		2,347	9,636		7,442
Income tax expense	(834)		(758)	(2,406)		(2,709)
Net income	$ 2,326		$ 1,589	$ 7,230		$ 4,733
Weighted average number of common shares outstanding:
Basic (in shares)	3,388,624		3,346,689	3,388,624		3,346,689
Diluted (in shares)	3,454,936		3,445,632	3,438,386		3,445,632
Basic net income per common share (in dollars per share)	$ 0.69		$ 0.47	$ 2.13		$ 1.41
Diluted net income per common share (in dollars per share)	$ 0.67		$ 0.46	$ 2.10		$ 1.37

[1] Revenue generated from sources not within the scope of ASU 2014-09.

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities:
Net income	$ 7,230	$ 4,733
Adjustments to reconcile net income to cash flows provided by operating activities:
Depreciation	5,135	5,225
Amortization	247	290
Amortization of loan costs	354	927
Provision for uncollectible accounts receivable	283	290
Stock-based compensation	207	237
Payment in kind interest - subordinated debt		237
Changes in operating assets and liabilities
Accounts receivable	(704)	(73)
Materials and supplies	(73)	(663)
Prepaid expenses and other assets	2,030	1,280
Accounts payable and accrued expenses	959	453
Advance billings and payments	(223)	582
Other liabilities	15	(3)
Net cash from operating activities	15,460	13,515
Cash flows used in investing activities:
Acquisition and construction of property and equipment	(5,710)	(5,951)
Net cash used in investing activities	(5,710)	(5,951)
Cash flows used in financing activities:
Loan origination costs	(37)	(77)
Principal repayment of long-term notes payable	(9,262)	(9,125)
Interest rate cap	(40)
Retirement of CoBank equity	119	164
Tax withholdings paid on behalf of employees for restricted stock units	(380)	(209)
Net cash used in financing activities	(9,600)	(9,247)
Net increase (decrease) in cash and cash equivalents	150	(1,683)
Cash and cash equivalents, beginning of period	3,570	10,538
Cash and cash equivalents, end of period	3,720	8,855
Supplemental disclosures of cash flow information:
Interest paid	4,029	6,654
Income taxes paid	2	1,802
Issuance of Class A common stock		$ 1

XML

Note 1 - Organization and Basis of Financial Reporting

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

1. Organization and Basis of Financial Reporting

Basis of Presentation and Principles of Consolidation

The 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; 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 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, 2018,

are

not

necessarily indicative of the results that

may

be expected for the year ending

December 31, 2018,

or any other period.

The condensed consolidated financial statements and notes included in this Quarterly Report on Form

10

-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form

10

-K for the year ended

December 31, 2017.

The interim condensed consolidated financial information herein is unaudited, with the condensed consolidated balance sheet as of

December 31, 2017,

being derived from the Company’s audited consolidated financial statements. 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.

Recently Adopted Accounting Pronouncements

In

May 2014,

the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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. ASU

2014

-

09

permits the use of either a retrospective or modified retrospective application. 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. The Company commenced its assessment of ASU

2014

-

09

beginning in

June 2016.

This assessment included analyzing ASU

2014

-

09’s

impact on the Company’s various revenue streams, comparing the Company’s historical accounting policies and practices to the requirements of ASU

2014

-

09,

and identifying potential differences from applying the requirements of ASU

2014

-

09

to the Company’s contracts. The Company has used a

five

-step process to identify the contract with the customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when or as the performance obligations are satisfied. The Company has implemented the appropriate changes to its business processes, systems and controls to support revenue recognition and disclosures under ASU

2014

-

09.

The Company adopted ASU

2014

-

09

at the beginning of its

2018

fiscal year using the modified retrospective method applied to those contracts which were

not

completed as of

January 1, 2018.

Prior period amounts have

not

been adjusted and continue to be reported in accordance with historic accounting standards in effect during those periods. The adoption of ASU

2014

-

09

and related amendments did

not

have a material impact on the Company’s condensed consolidated financial statements.

In

January 2016,

the FASB issued ASU

2016

-

01,

Financial Instruments - Overall (Subtopic

825

-

10

)

(“ASU

2016

-

01”

). This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU

2016

-

01

requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. That presentation provides financial statement users with more decision-useful information about an entity’s involvement in financial instruments. The provisions of this ASU were to be effective for annual periods beginning after

December 15, 2017,

and interim periods within those years, with early adoption permitted. In

February 2018,

the FASB issued ASU

2018

-

03,

Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic

825

-

10

),

which made targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU also confirmed a

six

-month delay in the effective date of ASU

2016

-

01,

making the effective date for the Company the

second

quarter of fiscal

2018

instead of the

first

quarter of fiscal

2018,

with early adoption permitted. The Company adopted ASU

2016

-

01

as of

March 31, 2018,

and that adoption did

not

have a material impact on the Company’s condensed consolidated financial statements.

In

August 2016,

the FASB issued ASU

2016

-

15

, Statement of Cash Flows (Topic

230

): Classification of Certain Cash Receipts and Cash Payments

. This ASU addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic

230,

Statement of Cash Flows, and other Topics. This ASU is effective for annual reporting periods, and interim periods therein, beginning after

December 15, 2017,

with early adoption permitted. The Company adopted this ASU and that adoption did

not

have a material impact on the Company’s 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 adopted this ASU and that adoption did

not

have a material impact on the Company’s 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 adopted this ASU and that adoption did

not

have a material impact on the Company’s condensed consolidated financial statements.

In

March 2018,

the FASB issued ASU

2018

-

05,

Income Taxes (Topic

740

)

. The objective of this ASU is to amend ASC

740,

Income Taxes to reflect Staff Accounting Bulletin

No.

118,

issued by the staff of the Securities and Exchange Commission (“SAB

118”

), which addresses the enactment of the Tax Cuts and Jobs Act (the “Tax Act”). SAB

118

outlines the approach companies

may

take if they determine that the necessary information is

not

available (in reasonable detail) to evaluate, compute, and prepare accounting entries to recognize the effects of the Tax Act by the time the financial statements are required to be filed. Companies

may

use this approach when the timely determination of some or all of the income tax effects from the Tax Act are incomplete by the due date of the financial statements.  A reporting entity must act in good faith and update provisional amounts as soon as more information becomes available, evaluated and prepared, during a measurement period that cannot exceed

one

year from the enactment date. Initial reasonable estimates and subsequent changes to provisional amounts should be reported in income tax expense or benefit from continuing operations in the period in which they are determined.  As of

December 31, 2017,

the provisional amount recorded related to the remeasurement of the Company’s deferred tax liability balance was

$9.3

million and reflected a

one

-time reduction in the Company’s income tax provision.

Recent Accounting Pronouncements

During

2017,

the FASB issued ASUs

2017

-

01

through

2017

-

15

and, during

2018,

the FASB has issued ASUs

2018

-

01

through

2018

-

15.

Except for the ASUs discussed above and 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

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. In

January 2018,

the FASB issued ASU

2018

-

01,

Leases (Topic

842

): Land Easement Practical Expedient for Transition to Topic

842

. This ASU provides an optional transition practical expedient to

not

evaluate under ASU

2016

-

02

existing or expired land easements that were

not

previously accounted for as leases under ASC Topic

840,

Leases

. An entity that elects this practical expedient should evaluate new or modified land easements under ASU

2016

-

02

beginning at the date that the entity adopts ASU

2016

-

02.

In

July 2018,

the FASB issued ASU

2018

-

10,

Codification Improvements to Topic

842,

Leases,

which provides improvements and clarifications for ASU

2016

-

02.

In

July 2018,

the FASB issued ASU

2018

-

11,

Leases (Topic

842

):

Targeted Improvements

. This ASU provides an additional transition method by allowing entities to initially apply the new lease standard at the date of adoption. This ASU also gives lessors the option of electing, as a practical expedient by class of underlying asset,

not

to separate the lease and nonlease components of a contract when those lease contracts meet certain criteria. The Company is evaluating the requirements of this guidance and implementing the processes necessary to adopt ASU

2016

-

02.

The Company will adopt ASU

2016

-

02

on the effective date of

January 1, 2019.

While the Company continues to assess all of the effects of adoption, the Company currently believes the most significant effects relate to the recognition of new right-of-use assets and lease liabilities on the balance sheet for real estate operating leases, and providing significant new disclosures about the Company’s leasing activities.

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

June 2018,

the FASB issued ASU

2018

-

07,

Compensation –

Stock Compensation (Topic

718

)

.

This ASU expands the scope of ASU

2017

-

09,

which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods and services. The amendments in this ASU are effective for public companies for fiscal years beginning after

December 15, 2018,

and interim periods within those fiscal years.  Early adoption is permitted, but

no

earlier than the Company’s adoption date of ASU

2014

-

09.

The Company does

not

expect this ASU to have a material impact on its condensed consolidated financial statements.

In

August 2018,

the FASB issued ASU

2018

-

13,

Fair Value Measurement (Topic

820

)

(“ASU

2018

-

13”

)

.

This ASU modifies the disclosure requirements on fair value measurements in ASU

2018

-

13,

based on the concepts in the Concepts Statement, including the consideration of costs and benefits. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. ASU

2018

-

13

is effective for fiscal years beginning after

December 15, 2019,

and interim periods within those fiscal years. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does

not

expect this ASU to have a material impact on its condensed consolidated financial statements.

2017

Refinancing

On

November 2, 2017,

the Company refinanced its senior loan agreement with Cerberus Business Finance, LLC (the “Senior Loan Agreement”) and its subordinated loan agreement with NewSpring Mezzanine Capital III, L.P. (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”). 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 Credit Facility 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. The Company recorded costs of

$28

thousand and write-off of loan costs of

$3.7

million in connection with this refinancing.

XML

Note 2 - Notes Payable

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Debt Disclosure [Text Block]

2. Notes Payable

Notes payable consists of the following (in thousands, except percentages) as of:

							September 30 ,			December 31,
	Current			Long-term			2018			2017
New Credit Facility with CoBank, ACB; variable interest rate of 6.74% at September 30, 2018, interest is quarterly, paid in arrears on the last business day of each quarter. The New Credit Facility is secured by the total assets of the subsidiary guarantors. The unpaid balance is due November 3, 2022.	$	4,350		$	72,300		$	76,650		$	85,912
Debt issuance cost		(447	)		(1,199	)		(1,646	)		(1,963	)
Notes payable, net of debt issuance cost	$	3,903		$	71,101		$	75,004		$	83,949

The Senior Loan Agreement was fully repaid on

November 2, 2017.

Associated with the Senior Loan Agreement, the Company had

$4.9

million in deferred financing cost. Amortization expense for the deferred financing cost associated with the Senior Loan Agreement was

$808

thousand for the

nine

months ended

September 30, 2017,

which is included in interest expense.

The Subordinated Loan Agreement was fully repaid on

November 2, 2017.

Associated with the Subordinated Loan Agreement, the Company had

$892

thousand in deferred financing cost. Amortization expense for the deferred financing cost associated with the Subordinated Loan Agreement was

$120

thousand for the

nine

months ended

September 30, 2017,

which is included in interest expense.

Associated with the New Credit Facility, the Company has

$2.1

million in deferred financing cost. Amortization expense for the deferred financing cost associated with the New Credit Facility was

$354

thousand for the

nine

months ended

September 30, 2018,

which is included in interest expense.

The Company had a revolving credit facility of

$5.0

million associated with the Senior Loan Agreement. There was

no

balance outstanding as of

September 30, 2017.

The Senior Loan Agreement was terminated on

November 2, 2017.

The Company paid a monthly fee of

0.75%

per annum on the unused portion of the revolver loan under the Senior Loan Agreement, payable in arrears. The fee expense was

$28

thousand for the

nine

months ended

September 30, 2017.

The revolving credit facility associated with the Company’s New Credit Facility had a maximum borrowing capacity of

$5.0

million on

September 30, 2018.

The revolving credit facility is available until

November 3, 2022.

There was

no

balance outstanding as of

September 30, 2018.

The Company pays a commitment fee of

0.50%

per annum, payable quarterly in arrears, on the unused portion of the revolver loan under the New Credit Facility. The commitment fee expense was

$19

thousand for the

nine

months ended

September 30, 2018.

Maturities of notes payable for the next

five

years, assuming

no

future annual excess cash flow payments, are as follows (in thousands):

2018 (remaining)	$	1,088
2019		4,350
2020		4,350
2021		4,350
2022		62,512
Total	$	76,650

A total of

$2.1

million of debt issuance cost is amortized over the life of the loan and is recorded net of the notes payable on the condensed consolidated balance sheets.

The Company made voluntary principal prepayments of

$1.0

million and

$2.0

million under the New Credit Facility on

July 31, 2018,

and

August 31, 2018,

respectively, which are reflected in the remaining balance of the notes payable total listed above.

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, 2018,

the Company was in compliance with all such covenants and restrictions.

XML

Note 3 - Income Tax

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Income Tax Disclosure [Text Block]

3. Income Tax

As of

September 30, 2018,

and

December 31, 2017,

the Company had

no

U.S. federal net operating loss carryforwards. As of

September 30, 2018,

and

December 31, 2017,

the Company had state net operating loss carryforwards of

$43

thousand and

$33

thousand, respectively. The Company had

no

alternative minimum tax credit carryforwards as of

September 30, 2018,

or

December 31, 2017.

The Company establishes valuation allowances when necessary to reduce deferred tax assets to amounts expected to be realized. As of

September 30, 2018,

the Company had

no

valuation allowance recorded.

The effective income tax rate as of

September 30, 2018,

and

December 31, 2017,

was

25.0%

and (

184.5

)%, respectively.

XML

Note 4 - Net Income Per Common Share

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Earnings Per Share [Text Block]

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,
	2018		2017		2018		2017
Weighted average number of common shares outstanding - basic		3,388,624		3,346,689		3,388,624		3,346,689
Effect of dilutive securities		66,312		98,943		49,762		98,943
Weighted average number of common shares and potential common shares - diluted		3,454,936		3,445,632		3,438,386		3,445,632
Net income	$	2,326	$	1,589	$	7,230	$	4,733
Net income per common share - basic	$	0.69	$	0.47	$	2.13	$	1.41
Net income per common share - diluted	$	0.67	$	0.46	$	2.10	$	1.37

XML

Note 5 - Revenue Streams and Concentrations

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

5. Revenue Streams and Concentration s

Revenue Streams

The Company identifies its revenue streams with similar characteristics as follows (in thousands):

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Local services	$	5,302	$	16,218
Network access		5,120		15,918
Internet		3,775		11,485
Transport services		1,211		3,613
Video and security		689		2,144
Managed services		155		489
Total revenues	$	16,252	$	49,867

ASU

2014

-

09

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. As stated above in Note

1,

Organization and Basis of Financial Reporting

–

Recently Adopted Accounting Pronouncements

, the Company has used a

five

-step process to identify the contract with the customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when or as the performance obligations are satisfied. The majority of the Company’s revenue is recognized at the point in time control of the service is transferred to the customer. For certain other services, such as unlimited long distance, revenue is recognized over the period of time the service is provided. The Company has implemented the appropriate changes to its business processes, systems and controls to support revenue recognition and disclosures under ASU

2014

-

09.

The following table identifies revenue generated from customers (in thousands):

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Local services	$	5,302	$	16,218
Network access		1,131		3,553
Internet		3,775		11,485
Transport services		1,173		3,500
Video and security		689		2,144
Managed services		155		490
Total revenues	$	12,225	$	37,390

The following table summarizes the revenue generated from contracts with customers among each revenue stream as of

September 30, 2018 (

in thousands, except percentages):

	Three Months Ended
	September 30 , 2018		% In-Scope			% Total
Month to month (“MTM”) customers	$	7,492		62.1	%		46.1	%
Competitive local exchange carrier (“CLEC”) business customers		3,447		28.6			21.2
Network access		666		5.5			4.1
Total revenue streams		11,605		96.2			71.4
Global access*		464		3.8			2.9
Total revenue from contracts with customers		12,069		100.0	%		74.3
Indefeasible rights-of-use agreements**		38		n/a			0.2
Managed services**		155		n/a			1.0
Network access**		3,990		n/a			24.5
Total revenues	$	16,252					100.0	%

*Fixed fees charged to MTM customers and CLEC business customers.

** Revenue generated from sources

not

within the scope of ASU

2014

-

09.

	Nine Months Ended
	September 30, 2018		% In-Scope			% Total
MTM customers	$	22,759		61.7	%		45.6	%
CLEC business customers		10,588		28.7			21.2
Network access		2,076		5.6			4.2
Total revenue streams		35,423		96.0			71.0
Global access*		1,477		4.0			3.0
Total revenue from contracts with customers		36,900		100.0	%		74.0
Indefeasible rights-of-use agreements**		113		n/a			0.2
Managed services**		490		n/a			1.0
Network access**		12,364		n/a			24.8
Total revenues	$	49,867					100.0	%

*Fixed fees charged to MTM customers and CLEC business customers.

** Revenue generated from sources

not

within the scope of ASU

2014

-

09.

Payment terms vary by customer. The Company typically invoices customers in the month following when the service was provided. The term between invoicing and when payment is due is less than a year and is

not

considered significant. Certain customers are invoiced in advance of the service being provided. Revenue is deferred until the point in time control of the service is transferred to the customer or over the term the service is provided.

Revenue is recognized net of taxes collected on behalf of

third

parties.

As of

September 30, 2018,

the Company had approximately

$8.0

million of unsatisfied performance obligations. As of

September 30, 2018,

the Company expected to recognize approximately

$0.9

million of revenue within the next year and

$7.1

million in the next

2

to

5

years related to such unsatisfied performance obligations. The Company does

not

disclose the value of unsatisfied performance obligations for contracts with an original expected life of

one

year or less or for contracts for which the Company has a right to invoice for services performed.

The deferred revenue balance as of

January 1, 2018,

was

$4.1

million. Approximately

$1.5

million of revenue from that balance was recognized as revenue during the

three

months ended

March 31, 2018,

offset by payments received as of

March 31, 2018,

in advance of control of the service being transferred to the customer.

The deferred revenue balance as of

June 30, 2018,

was

$3.9

million. Approximately

$1.4

million of revenue from that balance was recognized as revenue during the

three

months ended

September 30, 2018,

offset by payments received as of

September 30, 2018,

in advance of control of the service being transferred to the customer.

Revenue Concentrations

Revenues for interstate access services are based on reimbursement of costs and 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

22.6%

and

21.8%

of the Company’s total revenues for the

nine

months ended

September 30, 2018,

and

2017,

respectively.

XML

Note 6 - Commitments and Contingencies

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

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 Utility Commission 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 (the “FCC”). Currently,

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”) 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.

In addition, MMT filed suit, along with other LECs, against Level

3

Communications LLC (“Level

3”

) seeking payment of access charges that Level

3

was refusing to pay because of its position on intraMTA traffic. 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”). On

May 5, 2018,

the Court granted the LEC Defendants’ request to dismiss all of the claims brought by Sprint, MCI and Verizon. The Court also granted the LECs’ motion for summary judgment against Level 

3.

Sprint, MCI and Verizon have appealed the Court’s ruling. The Fifth Circuit Court of Appeals (the “Fifth Circuit”) is currently accepting party appearances and corporate disclosures. A briefing schedule from the Fifth Circuit is expected in the near future.

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.

XML

Note 7 - Stock Plans

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Shareholders' Equity and Share-based Payments [Text Block]

7. Stock Plans

During the

nine

months ended

September 30, 2018,

34,755

RSUs were granted by the Company. Prior to that time, the Company had previously granted RSUs underlying

366,356

shares of Class A common stock. The 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, the 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

RSUs granted prior to the

nine

months ended

September 30, 2018,

RSUs underlying

267,413

shares of Class A common stock had vested or were cancelled as of

December 31, 2017.

The 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, 2018:

	RSUs			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2017		98,943		$	4.51
Granted		34,755		$	13.30
Vested		(67,386	)	$	4.56
Forfeited or cancelled		—		$	—
Outstanding at September 30, 2018		66,312		$	9.06

Stock-based compensation expense related to RSUs was

$207

thousand and

$237

thousand for the

nine

months ended

September 30, 2018,

and

2017,

respectively. Accounting standards require that the Company estimate forfeitures for RSUs 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.

As of

September 30, 2018,

the unrecognized total compensation cost related to unvested RSUs was

$684

thousand. That cost is expected to be recognized by the end of

2022.

  

XML

Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation and Principles of Consolidation

The 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; 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 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, 2018,

are

not

necessarily indicative of the results that

may

be expected for the year ending

December 31, 2018,

or any other period.

The condensed consolidated financial statements and notes included in this Quarterly Report on Form

10

-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form

10

-K for the year ended

December 31, 2017.

The interim condensed consolidated financial information herein is unaudited, with the condensed consolidated balance sheet as of

December 31, 2017,

being derived from the Company’s audited consolidated financial statements. 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.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Adopted Accounting Pronouncements

In

May 2014,

the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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. ASU

2014

-

09

permits the use of either a retrospective or modified retrospective application. 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. The Company commenced its assessment of ASU

2014

-

09

beginning in

June 2016.

This assessment included analyzing ASU

2014

-

09’s

impact on the Company’s various revenue streams, comparing the Company’s historical accounting policies and practices to the requirements of ASU

2014

-

09,

and identifying potential differences from applying the requirements of ASU

2014

-

09

to the Company’s contracts. The Company has used a

five

-step process to identify the contract with the customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when or as the performance obligations are satisfied. The Company has implemented the appropriate changes to its business processes, systems and controls to support revenue recognition and disclosures under ASU

2014

-

09.

The Company adopted ASU

2014

-

09

at the beginning of its

2018

fiscal year using the modified retrospective method applied to those contracts which were

not

completed as of

January 1, 2018.

Prior period amounts have

not

been adjusted and continue to be reported in accordance with historic accounting standards in effect during those periods. The adoption of ASU

2014

-

09

and related amendments did

not

have a material impact on the Company’s condensed consolidated financial statements.

In

January 2016,

the FASB issued ASU

2016

-

01,

Financial Instruments - Overall (Subtopic

825

-

10

)

(“ASU

2016

-

01”

). This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU

2016

-

01

requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. That presentation provides financial statement users with more decision-useful information about an entity’s involvement in financial instruments. The provisions of this ASU were to be effective for annual periods beginning after

December 15, 2017,

and interim periods within those years, with early adoption permitted. In

February 2018,

the FASB issued ASU

2018

-

03,

Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic

825

-

10

),

which made targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This ASU also confirmed a

six

-month delay in the effective date of ASU

2016

-

01,

making the effective date for the Company the

second

quarter of fiscal

2018

instead of the

first

quarter of fiscal

2018,

with early adoption permitted. The Company adopted ASU

2016

-

01

as of

March 31, 2018,

and that adoption did

not

have a material impact on the Company’s condensed consolidated financial statements.

In

August 2016,

the FASB issued ASU

2016

-

15

, Statement of Cash Flows (Topic

230

): Classification of Certain Cash Receipts and Cash Payments

. This ASU addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic

230,

Statement of Cash Flows, and other Topics. This ASU is effective for annual reporting periods, and interim periods therein, beginning after

December 15, 2017,

with early adoption permitted. The Company adopted this ASU and that adoption did

not

have a material impact on the Company’s 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 adopted this ASU and that adoption did

not

have a material impact on the Company’s 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 adopted this ASU and that adoption did

not

have a material impact on the Company’s condensed consolidated financial statements.

In

March 2018,

the FASB issued ASU

2018

-

05,

Income Taxes (Topic

740

)

. The objective of this ASU is to amend ASC

740,

Income Taxes to reflect Staff Accounting Bulletin

No.

118,

issued by the staff of the Securities and Exchange Commission (“SAB

118”

), which addresses the enactment of the Tax Cuts and Jobs Act (the “Tax Act”). SAB

118

outlines the approach companies

may

take if they determine that the necessary information is

not

available (in reasonable detail) to evaluate, compute, and prepare accounting entries to recognize the effects of the Tax Act by the time the financial statements are required to be filed. Companies

may

use this approach when the timely determination of some or all of the income tax effects from the Tax Act are incomplete by the due date of the financial statements.  A reporting entity must act in good faith and update provisional amounts as soon as more information becomes available, evaluated and prepared, during a measurement period that cannot exceed

one

year from the enactment date. Initial reasonable estimates and subsequent changes to provisional amounts should be reported in income tax expense or benefit from continuing operations in the period in which they are determined.  As of

December 31, 2017,

the provisional amount recorded related to the remeasurement of the Company’s deferred tax liability balance was

$9.3

million and reflected a

one

-time reduction in the Company’s income tax provision.

Recent Accounting Pronouncements

During

2017,

the FASB issued ASUs

2017

-

01

through

2017

-

15

and, during

2018,

the FASB has issued ASUs

2018

-

01

through

2018

-

15.

Except for the ASUs discussed above and 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

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. In

January 2018,

the FASB issued ASU

2018

-

01,

Leases (Topic

842

): Land Easement Practical Expedient for Transition to Topic

842

. This ASU provides an optional transition practical expedient to

not

evaluate under ASU

2016

-

02

existing or expired land easements that were

not

previously accounted for as leases under ASC Topic

840,

Leases

. An entity that elects this practical expedient should evaluate new or modified land easements under ASU

2016

-

02

beginning at the date that the entity adopts ASU

2016

-

02.

In

July 2018,

the FASB issued ASU

2018

-

10,

Codification Improvements to Topic

842,

Leases,

which provides improvements and clarifications for ASU

2016

-

02.

In

July 2018,

the FASB issued ASU

2018

-

11,

Leases (Topic

842

):

Targeted Improvements

. This ASU provides an additional transition method by allowing entities to initially apply the new lease standard at the date of adoption. This ASU also gives lessors the option of electing, as a practical expedient by class of underlying asset,

not

to separate the lease and nonlease components of a contract when those lease contracts meet certain criteria. The Company is evaluating the requirements of this guidance and implementing the processes necessary to adopt ASU

2016

-

02.

The Company will adopt ASU

2016

-

02

on the effective date of

January 1, 2019.

While the Company continues to assess all of the effects of adoption, the Company currently believes the most significant effects relate to the recognition of new right-of-use assets and lease liabilities on the balance sheet for real estate operating leases, and providing significant new disclosures about the Company’s leasing activities.

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

June 2018,

the FASB issued ASU

2018

-

07,

Compensation –

Stock Compensation (Topic

718

)

.

This ASU expands the scope of ASU

2017

-

09,

which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods and services. The amendments in this ASU are effective for public companies for fiscal years beginning after

December 15, 2018,

and interim periods within those fiscal years.  Early adoption is permitted, but

no

earlier than the Company’s adoption date of ASU

2014

-

09.

The Company does

not

expect this ASU to have a material impact on its condensed consolidated financial statements.

In

August 2018,

the FASB issued ASU

2018

-

13,

Fair Value Measurement (Topic

820

)

(“ASU

2018

-

13”

)

.

This ASU modifies the disclosure requirements on fair value measurements in ASU

2018

-

13,

based on the concepts in the Concepts Statement, including the consideration of costs and benefits. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. ASU

2018

-

13

is effective for fiscal years beginning after

December 15, 2019,

and interim periods within those fiscal years. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does

not

expect this ASU to have a material impact on its condensed consolidated financial statements.

Refinancing Policy [Policy Text Block]

2017

Refinancing

On

November 2, 2017,

the Company refinanced its senior loan agreement with Cerberus Business Finance, LLC (the “Senior Loan Agreement”) and its subordinated loan agreement with NewSpring Mezzanine Capital III, L.P. (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”). 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 Credit Facility 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. The Company recorded costs of

$28

thousand and write-off of loan costs of

$3.7

million in connection with this refinancing.

XML

Note 2 - Notes Payable (Tables)

9 Months Ended

Sep. 30, 2018

Notes Tables

Schedule of Maturities of Long-term Debt [Table Text Block]

2018 (remaining)	$	1,088
2019		4,350
2020		4,350
2021		4,350
2022		62,512
Total	$	76,650

New Credit Facility [Member]

Notes Tables

Schedule of Long-term Debt Instruments [Table Text Block]

							September 30 ,			December 31,
	Current			Long-term			2018			2017
New Credit Facility with CoBank, ACB; variable interest rate of 6.74% at September 30, 2018, interest is quarterly, paid in arrears on the last business day of each quarter. The New Credit Facility is secured by the total assets of the subsidiary guarantors. The unpaid balance is due November 3, 2022.	$	4,350		$	72,300		$	76,650		$	85,912
Debt issuance cost		(447	)		(1,199	)		(1,646	)		(1,963	)
Notes payable, net of debt issuance cost	$	3,903		$	71,101		$	75,004		$	83,949

XML

Note 4 - Net Income Per Common Share (Tables)

9 Months Ended

Sep. 30, 2018

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Weighted average number of common shares outstanding - basic		3,388,624		3,346,689		3,388,624		3,346,689
Effect of dilutive securities		66,312		98,943		49,762		98,943
Weighted average number of common shares and potential common shares - diluted		3,454,936		3,445,632		3,438,386		3,445,632
Net income	$	2,326	$	1,589	$	7,230	$	4,733
Net income per common share - basic	$	0.69	$	0.47	$	2.13	$	1.41
Net income per common share - diluted	$	0.67	$	0.46	$	2.10	$	1.37

XML

Note 5 - Revenue Streams and Concentrations (Tables)

9 Months Ended

Sep. 30, 2018

Notes Tables

Disaggregation of Revenue [Table Text Block]

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Local services	$	5,302	$	16,218
Network access		5,120		15,918
Internet		3,775		11,485
Transport services		1,211		3,613
Video and security		689		2,144
Managed services		155		489
Total revenues	$	16,252	$	49,867

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Local services	$	5,302	$	16,218
Network access		1,131		3,553
Internet		3,775		11,485
Transport services		1,173		3,500
Video and security		689		2,144
Managed services		155		490
Total revenues	$	12,225	$	37,390

	Three Months Ended
	September 30 , 2018		% In-Scope			% Total
Month to month (“MTM”) customers	$	7,492		62.1	%		46.1	%
Competitive local exchange carrier (“CLEC”) business customers		3,447		28.6			21.2
Network access		666		5.5			4.1
Total revenue streams		11,605		96.2			71.4
Global access*		464		3.8			2.9
Total revenue from contracts with customers		12,069		100.0	%		74.3
Indefeasible rights-of-use agreements**		38		n/a			0.2
Managed services**		155		n/a			1.0
Network access**		3,990		n/a			24.5
Total revenues	$	16,252					100.0	%

	Nine Months Ended
	September 30, 2018		% In-Scope			% Total
MTM customers	$	22,759		61.7	%		45.6	%
CLEC business customers		10,588		28.7			21.2
Network access		2,076		5.6			4.2
Total revenue streams		35,423		96.0			71.0
Global access*		1,477		4.0			3.0
Total revenue from contracts with customers		36,900		100.0	%		74.0
Indefeasible rights-of-use agreements**		113		n/a			0.2
Managed services**		490		n/a			1.0
Network access**		12,364		n/a			24.8
Total revenues	$	49,867					100.0	%

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Note 7 - Stock Plans (Tables)

9 Months Ended

Sep. 30, 2018

Notes Tables

Schedule of Share-based Compensation, Restricted Stock Units Award Activity [Table Text Block]

	RSUs			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2017		98,943		$	4.51
Granted		34,755		$	13.30
Vested		(67,386	)	$	4.56
Forfeited or cancelled		—		$	—
Outstanding at September 30, 2018		66,312		$	9.06

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Note 1 - Organization and Basis of Financial Reporting (Details Textual) - USD ($) $ in Thousands		12 Months Ended
	Nov. 02, 2017	Dec. 31, 2017	Sep. 30, 2018
Income Tax Expense (Benefit), Continuing Operations, Adjustment of Deferred Tax (Asset) Liability		$ 9,300
Long-term Debt, Total			$ 76,650
Consortium of Banks Led By CoBank ABC [Member]
Debt Agreement, Maximum Borrowing Capacity	$ 92,000
Debt Instrument, Term	5 years
Debt Issuance Costs, Net, Total	$ 28
Write off of Deferred Debt Issuance Cost	3,700
Consortium of Banks Led By CoBank ABC [Member] | Term Loan Facility [Member]
Long-term Debt, Total	87,000
Line of Credit, Accordion Feature	20,000
Consortium of Banks Led By CoBank ABC [Member] | Revolving Credit Facility [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 5,000

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Note 2 - Notes Payable (Details Textual) - USD ($) $ in Thousands			9 Months Ended
	Aug. 31, 2018	Jul. 31, 2018	Sep. 30, 2018	Sep. 30, 2017
Amortization of Debt Issuance Costs			$ 354	$ 927
Debt Issuance Costs, Current, Net, Total			2,100
Repayments of Senior Debt, Total	$ 2,000	$ 1,000	9,262	9,125
New Credit Facility [Member]
Debt Issuance Costs, Gross			2,100
Amortization of Debt Issuance Costs			354
Line of Credit Facility, Maximum Borrowing Capacity			5,000
Long-term Line of Credit, Total			$ 0
Line of Credit Facility, Commitment Fee Percentage			0.50%
Line of Credit Facility, Commitment Fee Amount			$ 19
Debt Issuance Costs, Current, Net, Total			447
Previous Credit Facility [Member]
Line of Credit Facility, Maximum Borrowing Capacity			$ 5,000
Long-term Line of Credit, Total				$ 0
Line of Credit Facility, Commitment Fee Percentage				0.75%
Line of Credit Facility, Commitment Fee Amount				$ 28
Senior Notes [Member]
Debt Issuance Costs, Gross				4,900
Amortization of Debt Issuance Costs				808
Subordinated Debt [Member]
Debt Issuance Costs, Gross				892
Amortization of Debt Issuance Costs				$ 120

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Note 2 - Notes Payable - New Credit Facility (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Debt issuance cost, current	$ (2,100)
Notes payable, net of debt issuance cost, current	3,903	$ 3,891
Notes payable, net of debt issuance cost, long-term	71,101	80,058
New Credit Facility [Member]
Notes payable, current	4,350
Notes payable, long-term	72,300
Notes payable, face amount	76,650	85,912
Debt issuance cost, current	(447)
Debt issuance cost, long-term	(1,199)
Debt issuance cost	(1,646)	(1,963)
Notes payable, net of debt issuance cost, current	3,903
Notes payable, net of debt issuance cost, long-term	71,101
Notes payable, net of debt issuance cost	$ 75,004	$ 83,949

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Note 2 - Notes Payable - New Credit Facility (Details) (Parentheticals)	Sep. 30, 2018	Dec. 31, 2017
New Credit Facility [Member]
Notes payable, interest rate	6.74%	6.74%

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Note 2 - Notes Payable - Maturities of Notes Payable (Details) $ in Thousands	Sep. 30, 2018 USD ($)
2018 (remaining)	$ 1,088
2019	4,350
2020	4,350
2021	4,350
2022	62,512
Total	$ 76,650

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Note 3 - Income Tax (Details Textual) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Deferred Tax Assets, Valuation Allowance, Total	$ 0
Effective Income Tax Rate Reconciliation, Percent, Total	25.00%	(184.50%)
Alternative Minimum Tax [Member]
Tax Credit Carryforward, Amount	$ 0
Alternative Minimum Tax Credit [Member]
Tax Credit Carryforward, Amount		$ 0
Domestic Tax Authority [Member]
Operating Loss Carryforwards, Total	0	0
State and Local Jurisdiction [Member]
Operating Loss Carryforwards, Total	$ 43	$ 33

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Note 4 - Net Income Per Common Share - Reconciliation of Income (Loss) Per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Weighted average number of common shares outstanding - basic (in shares)	3,388,624	3,346,689	3,388,624	3,346,689
Effect of dilutive securities (in shares)	66,312	98,943	49,762	98,943
Weighted average number of common shares and potential common shares - diluted (in shares)	3,454,936	3,445,632	3,438,386	3,445,632
Net income	$ 2,326	$ 1,589	$ 7,230	$ 4,733
Net income per common share - basic (in dollars per share)	$ 0.69	$ 0.47	$ 2.13	$ 1.41
Net income per common share - diluted (in dollars per share)	$ 0.67	$ 0.46	$ 2.10	$ 1.37

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Note 5 - Revenue Streams and Concentrations (Details Textual) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Mar. 31, 2018	Sep. 30, 2018	Sep. 30, 2017	Jun. 30, 2018	Jan. 01, 2018
Revenue, Remaining Performance Obligation, Amount	$ 8.0		$ 8.0
Contract with Customer, Liability, Total					$ 3.9	$ 4.1
Contract with Customer, Liability, Revenue Recognized	1.4	$ 1.5
Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | National Exchange Carrier Association [Member]
Concentration Risk, Percentage			22.60%	21.80%
Short-term Contract with Customer [Member]
Revenue, Remaining Performance Obligation, Amount	0.9		$ 0.9
Long-term Contract with Customer [Member]
Revenue, Remaining Performance Obligation, Amount	$ 7.1		$ 7.1
Long-term Contract with Customer [Member] | Minimum [Member]
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Period	2 years		2 years
Long-term Contract with Customer [Member] | Maximum [Member]
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Period	5 years		5 years

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Note 5 - Revenue Streams and Concentrations - Revenue Streams (Details) - USD ($) $ in Thousands		3 Months Ended			9 Months Ended
		Sep. 30, 2018		Sep. 30, 2017	Sep. 30, 2018		Sep. 30, 2017
Revenues		$ 16,252	[1]	$ 16,946	$ 49,867	[1]	$ 51,732
Sales Revenue, Services, Net [Member]
Revenues, percentage	[1]	100.00%			100.00%
Month-to-Month Customers [Member]
Revenues, within scope of ASU 2014-09		$ 7,492			$ 22,759
Revenues, percentage within scope of ASU 2014-09		62.10%			61.70%
Month-to-Month Customers [Member] | Sales Revenue, Services, Net [Member]
Revenues, percentage		46.10%
Month-to-Month Customers [Member] | Sales Revenue, Net [Member]
Revenues, percentage					45.60%
Competitive Local Exchange Carrier Business Customers [Member]
Revenues, within scope of ASU 2014-09		$ 3,447			$ 10,588
Revenues, percentage within scope of ASU 2014-09		28.60%			28.70%
Competitive Local Exchange Carrier Business Customers [Member] | Sales Revenue, Services, Net [Member]
Revenues, percentage		21.20%
Competitive Local Exchange Carrier Business Customers [Member] | Sales Revenue, Net [Member]
Revenues, percentage					21.20%
Network Access Customers [member]
Revenues, within scope of ASU 2014-09		$ 666			$ 2,076
Revenues, percentage within scope of ASU 2014-09		5.50%			5.60%
Network Access Customers [member] | Sales Revenue, Services, Net [Member]
Revenues, percentage		4.10%			4.20%
Month-to-Month, Competitive Local Exchange Carrier Business, and Network Access Customers [Member]
Revenues, within scope of ASU 2014-09		$ 11,605			$ 35,423
Revenues, percentage within scope of ASU 2014-09		96.20%			96.00%
Month-to-Month, Competitive Local Exchange Carrier Business, and Network Access Customers [Member] | Sales Revenue, Services, Net [Member]
Revenues, percentage		71.40%			71.00%
Global Access Customers [Member]
Revenues, within scope of ASU 2014-09	[2]	$ 464			$ 1,477
Revenues, percentage within scope of ASU 2014-09	[2]	3.80%			4.00%
Global Access Customers [Member] | Sales Revenue, Services, Net [Member]
Revenues, percentage	[2]	2.90%			3.00%
Month-to-Month, Competitive Local Exchange Carrier Business, Network Access, and Global Access Customers [Member]
Revenues, within scope of ASU 2014-09		$ 12,069			$ 36,900
Revenues, percentage within scope of ASU 2014-09		100.00%			100.00%
Month-to-Month, Competitive Local Exchange Carrier Business, Network Access, and Global Access Customers [Member] | Sales Revenue, Services, Net [Member]
Revenues, percentage		74.30%			74.00%
Sales Channel, Directly to Consumer [Member]
Revenues		$ 12,225			$ 37,390
Local services [Member]
Revenues		5,302			16,218
Local services [Member] | Sales Channel, Directly to Consumer [Member]
Revenues		5,302			16,218
Network Access [Member]
Revenues		5,120			15,918
Network Access [Member] | Sales Channel, Directly to Consumer [Member]
Revenues		1,131			3,553
Internet [Member]
Revenues		3,775			11,485
Internet [Member] | Sales Channel, Directly to Consumer [Member]
Revenues		3,775			11,485
Transport Services [Member]
Revenues		1,211			3,613
Transport Services [Member] | Sales Channel, Directly to Consumer [Member]
Revenues		1,173			3,500
Video and Security [Member]
Revenues		689			2,144
Video and Security [Member] | Sales Channel, Directly to Consumer [Member]
Revenues		689			2,144
Management Service [Member]
Revenues		$ 155	[1]		$ 489
Management Service [Member] | Sales Revenue, Services, Net [Member]
Revenues, percentage	[1]	1.00%			1.00%
Management Service [Member] | Sales Channel, Directly to Consumer [Member]
Revenues		$ 155			$ 490
Indefeasible Rights-Of-Use Agreements, Outside of ASU 2014-09 Scope [Member]
Revenues	[1]	$ 38			$ 113
Indefeasible Rights-Of-Use Agreements, Outside of ASU 2014-09 Scope [Member] | Sales Revenue, Services, Net [Member]
Revenues, percentage	[1]	0.20%			0.20%
Network Access, Outside of ASU 2014-09 Scope [Member]
Revenues	[1]	$ 3,990			$ 12,364
Network Access, Outside of ASU 2014-09 Scope [Member] | Sales Revenue, Services, Net [Member]
Revenues, percentage	[1]	24.50%			24.80%

[1] Revenue generated from sources not within the scope of ASU 2014-09.

[2] Fixed fees charged to MTM customers and CLEC business customers.

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Note 7 - Stock Plans (Details Textual) - USD ($) $ in Thousands	9 Months Ended		12 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Total	$ 684
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period	34,755		366,356
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested or Cancelled			267,413
Employee Service Share-based Compensation, Allocation of Recognized Period Costs, Capitalized Amount			$ 0
Allocated Share-based Compensation Expense, Total	$ 207	$ 237
Restricted Stock Units (RSUs) [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			1 year
Restricted Stock Units (RSUs) [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			3 years

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Note 7 - Stock Plans - Summary of RSU Activity (Details) - Restricted Stock Units (RSUs) [Member] - $ / shares	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Outstanding at December 31, 2017 (in shares)	98,943
Outstanding at December 31, 2017 (in dollars per share)	$ 4.51
Granted (in shares)	34,755	366,356
Granted (in dollars per share)	$ 13.30
Vested (in shares)	(67,386)
Vested (in dollars per share)	$ 4.56
Forfeited or cancelled (in shares)
Forfeited or cancelled (in dollars per share)
Outstanding at September 30, 2018 (in shares)	66,312	98,943
Outstanding at September 30, 2018 (in dollars per share)	$ 9.06	$ 4.51