10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

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         ☒             No         ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes         ☒             No         ☐

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

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

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

Yes         ☐                      No         ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes         ☒                      No         ☐

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

OTELCO INC.

FORM 10-Q

For the three-month period ended March 31, 2015

TABLE OF CONTENTS

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

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 March 31, 2015.

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

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

2

 

OTELCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)
(unaudited)

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

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

3

 

OTELCO INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
(unaudited)

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

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

4

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015

(unaudited)

1.            Organization and Basis of Financial Reporting

Basis of Presentation and Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Otelco Inc. (the “Company”) and its subsidiaries, all of which are either directly or indirectly wholly owned. These include: Blountsville Telephone LLC (“BTC”); Brindlee Mountain Telephone LLC (“BMTC”); CRC Communications LLC (“CRC”); Granby Telephone LLC (“GTT”); Hopper Telecommunications LLC (“HTC”); Mid-Maine Telecom LLC (“MMTI”); Mid-Maine TelPlus LLC (“MMTP”); Otelco Mid-Missouri LLC (“MMT”) and its wholly owned subsidiary I-Land Internet Services LLC; Otelco Telecommunications LLC (“OTC”); Otelco Telephone LLC (“OTP”); Pine Tree Telephone LLC (“PTT”); Saco River Telephone LLC (“SRT”); Shoreham Telephone LLC (“ST”); and War Telephone LLC (“WT”).

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all of the aforesaid subsidiaries after elimination of all material intercompany balances and transactions. The unaudited operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 or any other period.

The condensed consolidated financial statements and notes included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The interim condensed consolidated financial information herein is unaudited. The information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods included in the report.

Recent Accounting Pronouncements

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

In April 2015, the FASB issued ASU No. 2015-03, a guidance that simplifies the presentation of debt issuance costs by ending the accounting guidance to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. The guidance is consistent with the accounting guidance related to debt discounts. This guidance is effective for the first interim or annual period beginning after December 15, 2015. Early adoption is permitted, and the Company is currently assessing the impact of this guidance on its condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, which provides guidance regarding whether a cloud computing arrangement includes a software license (FASB Accounting Standards Codification Subtopic 350-40). If a cloud computing arrangement includes a software license, then the entity should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. The guidance will not change accounting principles generally accepted in the United States for an entity’s accounting for service contracts. This pronouncement is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact of this guidance on the condensed consolidated financial statements.

Reclassifications

Certain items in the prior year’s condensed consolidated financial statements have been reclassified to confirm with 2015 presentation.

2.           Notes Payable

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

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

5

Associated with the notes payable, the Company has capitalized and amortized deferred financing costs using the effective interest method. The Company has capitalized $2.7 million in deferred financing costs associated with the credit facility. Amortization expense for the deferred financing costs associated with the third amendment and restatement of the Company’s credit facility was $239 thousand and $225 thousand for the three months ended March 31, 2014 and 2015.

The Company had a revolving credit facility on December 31, 2014 and March 31, 2015 of $5.0 million. The revolving credit facility is available until April 30, 2016. There was no balance outstanding as of December 31, 2014 or March 31, 2015. The Company pays a commitment fee of 0.50% per annum, payable quarterly in arrears, on the unused portion of the revolver loan. The commitment fee expense was $6 thousand in each of the three months ended March 31, 2014 and 2015, respectively.

Maturities of notes payable for each of the next five years and thereafter are as follows (in thousands):

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

The Company’s notes payable agreements are subject to certain financial covenants and restrictions on indebtedness, financial guarantees, business combinations and other related items. As of March 31, 2015, the Company was in compliance with all such covenants and restrictions.

3.            Income Tax

As of March 31, 2015, the Company had U.S. federal and state net operating loss carryforwards of $0 and $67 thousand, respectively. As of December 31, 2014, the Company had no U.S. federal or state net operating loss carryforwards. The Company had no alternative minimum tax credit carryforwards as of December 31, 2014 or March 31, 2015. The Company establishes valuation allowances when necessary to reduce deferred tax assets to amounts expected to be realized. As of March 31, 2015, the Company had no valuation allowance recorded.

The effective income tax rate as of December 31, 2014 and March 31, 2015 was 38.8% and 39.4%, 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”), as well as all of the shares of Class A common stock, for which the Company has accrued an expense, that may be delivered pursuant to the purchase agreement relating to the Reliable Networks of Maine, LLC (“Reliable Networks”) acquisition, be issued.

A reconciliation of the Company’s basic and diluted net income per common share calculation is as follows (weighted average number of common shares outstanding in whole numbers and net income in thousands):

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

5.            Revenue Concentration

Revenues for interstate access services are based on reimbursement of costs and an allowed rate of return. Revenues of this nature are received from the National Exchange Carrier Association in the form of monthly settlements. Such revenues amounted to 13.3% and 16.4% of the Company’s total revenues for the three months ended March 31, 2014 and 2015, respectively.

6

6.            Commitments and Contingencies

From time to time, the Company may be involved in various claims, legal actions and regulatory proceedings incidental to and in the ordinary course of business, including administrative hearings of the Alabama Public Service Commission, the Maine Public Utilities Commission, the Massachusetts Department of Telecommunications and Cable, the Missouri Public Service Commission, the New Hampshire Public Utilities Commission, the Vermont Public Service Board and the West Virginia Public Service Commission, relating primarily to rate making. In addition, the Company may be involved in similar proceedings with interconnection carriers and the Federal Communications Commission. Currently, except as set forth below, none of the legal proceedings are expected to have a material adverse effect on the Company’s business.

Sprint Communications L.P. (“Sprint”), MCI Communications Services, Inc. (“MCI”) and Verizon Select Services, Inc. (“Verizon”) have filed more than 60 lawsuits in federal courts across the United States alleging that over 400 local exchange carriers 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, has been 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. Because 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 for all pre-trial proceedings. At this time, it is too soon to determine whether these lawsuits will have a material adverse effect on the Company’s business.

7.            Stock Plans and Stock Associated with Acquisition

During the three months ended March 31, 2014 and 2015, the Company did not grant any RSUs or other equity incentive awards. During the year ended December 31, 2014, the Company granted RSUs underlying 124,167 shares of Class A common stock. These RSUs (or a portion thereof) vest with respect to each recipient over a one to three year period from the date of grant, provided the individual remains in the employment or service of the Company as of the vesting date and, in selected instances, certain performance criteria are attained. Additionally, these RSUs (or a portion thereof) could vest earlier in the event of a change in control of the Company, or upon involuntary termination without cause. These grants are made primarily to executive-level personnel at the Company and, as a result, no compensation costs have been capitalized.

The following table summarizes RSU activity as of March 31, 2015:

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

CRC acquired substantially all of the assets of Reliable Networks on January 2, 2014. Pursuant to the purchase agreement relating to the Reliable Networks acquisition, Class A common stock was issued to the former owner of Reliable Networks in 2015 and will be issued to the former owner of Reliable Networks in 2016 and 2017, contingent on Reliable Networks achieving certain financial objectives and certain other conditions being satisfied, including that certain individuals must be employed by the Company or any of its subsidiaries and in good standing on the last day of the applicable year (the “Earn-Out”). For the year ended on December 31, 2014, the Company delivered 68,233 shares of Class A common stock to the former owner of Reliable Networks on March 12, 2015 as a result of the Earn-Out.

7

The following table summarizes Earn-Out activity as of March 31, 2015:

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

Stock-based compensation expense related to RSUs and the Earn-Out was $161 thousand for the three months ended March 31, 2015. Accounting standards require that the Company estimate forfeitures for RSUs and the Earn-Out and reduce compensation expense accordingly. The Company has reduced its expense by the assumed forfeiture rate and will evaluate actual experience against the assumed forfeiture rate going forward. The forfeiture rate has been developed using historical performance metrics which could impact the size of the final issuance of Class A common stock. The Company has no history before 2014 with RSU forfeiture or Earn-Out stock forfeiture.

As of March 31, 2015, the unrecognized total compensation cost related to unvested RSUs and unvested Earn-Out stock was $397 thousand. That cost is expected to be recognized by the end of 2017 for RSUs and 2015 for Earn-Out stock.

As stated above, accounting standards require the Company to estimate forfeitures in calculating the expense related to stock-based compensation, as opposed to only recognizing these forfeitures and the corresponding reduction in expense as they occur.

8

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

General

We operate eleven rural local exchange carriers (“RLECs”) serving subscribers in north central Alabama, central and southern Maine, western Massachusetts, central Missouri, western Vermont and southern West Virginia. We are the sole wireline telephone services provider for three of the rural communities we serve. We also operate a competitive local exchange carrier (“CLEC”) serving subscribers throughout the states of 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 data services, network access, other telephone related services, private/hybrid cloud hosting and managed services for companies who rely on mission-critical applications and cable and satellite television (in some markets). We view, manage and evaluate the results of operations from the various telecommunications services as one company and therefore have identified one reporting segment as it relates to providing segment information. As of March 31, 2015, we operated 98,687 access line equivalents.

The Federal Communications Commission (the “FCC”) issued its Universal Service Fund and Intercarrier Compensation Order (the “FCC Order”) in November 2011. This order makes substantial changes in the way telecommunications carriers are compensated for serving high cost areas and for completing traffic with other carriers. We began seeing the significant impact of the FCC 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. Nationwide, all switched access rates will be reduced annually through July 2017 to less than $0.01 per minute. A portion of this revenue loss for our RLEC properties is returned to us through the Connect America Fund. There is no recovery mechanism for the lost revenue in our CLEC.

The following discussion and analysis should be read in conjunction with our 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 addresses our financial condition and results of operations on a consolidated basis.

Revenue Sources

We offer a wide range of telecommunications, data, entertainment and managed services to our subscribers. More than half of our access line equivalents serve business customers. Our residential customers purchase packages of services that are delivered and billed together. Our CLEC subscribers contract with us for selected services that meet their specific telecommunications requirements. Our revenues are derived from six sources:

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

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

9

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

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

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

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

Access Line and Customer Trends

The number of voice and data access lines served is a fundamental factor in determining revenue stability for a telecommunications provider. Reflecting general trends in the RLEC industry, the number of residential voice access lines we serve has been decreasing when normalized for territory acquisitions, whereas business access lines have remained generally steady or grown. We expect that these trends will continue, and may be potentially impacted by the availability of alternative telecommunications products, such as cellular and IP-based services, as well as economic conditions generally. Historically, these residential trends have been partially offset by the growth of residential data access lines, also called digital high-speed internet access service. As the penetration of data lines in our RLEC markets has increased, the growth in residential data lines no longer offsets the decline in residential voice lines. Our competitive carrier voice and data access lines have grown as we continue to offer new services and further penetrate our chosen markets. Our ability to continue this growth and our response to the rural trends will have an important impact on our future revenues. Our primary strategy consists of leveraging our strong incumbent market position, selling additional services to our rural customer base, such as alarm and medical alert monitoring services, and providing better service and support levels and a broader suite of services, including managed services and hybrid/cloud-based hosting, than the incumbent and other competitive carriers to our CLEC customer base.

10

Key Operating Statistics
(Unaudited)
	As of						% Change
	December 31,				March 31,		from
	2013		2014		2015		December 31, 2014
Business/Enterprise
CLEC
Voice lines		21,149		19,324		19,148		(0.9	)%
HPBX seats		8,453		10,029		10,148		1.2	%
Data lines		2,725		3,313		3,425		3.4	%
Wholesale network lines		2,817		2,968		3,036		2.3	%
Classifax		—		80		92		15.0	%
RLEC
Voice lines		12,349		15,506		15,438		(0.4	)%
Data lines		1,594		1,587		1,580		(0.4	)%
Access line equivalents(1)		49,087		52,807		52,867		0.1	%
Residential
CLEC
Voice lines		339		275		262		(4.7	)%
Data lines		416		363		353		(2.8	)%
RLEC
Voice lines		28,323		25,569		24,944		(2.4	)%
Data lines		20,566		20,206		20,261		0.3	%
Access line equivalents(1)		49,644		46,413		45,820		(1.3	)%
Otelco access line equivalents(1)		98,731		99,220		98,687		(0.5	)%
Cable, IPTV & satellite television		4,164		3,852		3,806		(1.2	)%
Security systems		174		243		270		11.1	%
Other internet lines		3,750		3,202		3,100		(3.2	)%

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

Our business and enterprise access line equivalents increased by 60 during first quarter 2015, or 0.1%, compared to December 31, 2014. The business transition from traditional voice lines to IP-based services continues with the growth in our Hosted PBX product, which now represents more than 34% of our CLEC business retail voice access lines, and the addition of the Classifax service offering. Residential access line equivalents declined 593 during first quarter 2015, or 1.3%, compared to December 31, 2014, reflecting industry-wide trends.

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 the customers in the rural markets we serve. In addition, almost all of our CLEC customers have selected us as their long distance carrier. Our cable television and satellite customers decreased 1.2% to 3,806 as of March 31, 2015, from 3,852 as of December 31, 2014. Growth in our DISH Network services offering to our Maine customer base partially offset cable and IPTV subscriber losses in Alabama. Our other internet customers decreased 3.2% to 3,100 as of March 31, 2015 compared to 3,202 as of December 31, 2014. This also includes the subscribers we service outside of our RLEC telephone service area in Maine and central Missouri, reflecting the shift to digital high-speed internet services. In Missouri, we are continuing the expansion of our territory where we offer data access lines for digital high-speed internet outside of our telephone service territory. Approximately 72% of the other internet customers are served by high-speed data capability from Otelco. We offer security monitoring and medical alert services in Alabama. During first quarter 2015, we installed 27 systems for an increase of 11.1% when compared to December 31, 2014.

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 are regulated in varying degrees by the respective state regulatory authorities. The impact on pricing flexibility varies by state. Our rates for other services we provide, including cable, satellite, long distance, data lines and dial-up and high-speed internet access, are not price regulated. The market for competitive services, such as wireless, also impacts our ability to adjust prices. With the increase of bundled services offerings, including unlimited long distance, pricing for individual services takes on reduced importance to revenue stability. We expect this trend to continue into the immediate future.

11

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 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 shifts to non-regulated services and CLEC customers and our residential RLEC revenue declines, operating margins decrease, reflecting the lower margins associated with these services. Reductions over time in Universal Service Fund and Intercarrier Compensation payments based on the FCC Order may not be fully offset by expense control.

Results of Operations

The following table sets forth our results of operations as a percentage of total revenues for the periods indicated:

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

12

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

Total revenues. Total revenues decreased 6.1% in the three months ended March 31, 2015 to $17.6 million from $18.8 million in the three months ended March 31, 2014. The table below provides the components of our revenues for the three months ended March 31, 2015 compared to the three months ended March 31, 2014.

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

Local services. Local services revenue decreased 7.2% in the quarter ended March 31, 2015 to $6.3 million from $6.8 million in the quarter ended March 31, 2014. The decline in RLEC residential voice access lines, the impact of the FCC Order which reduces or eliminates intrastate and local cellular revenue, and CLEC market pricing accounted for a decrease of $0.3 million. A portion of the RLEC decrease is recovered through the Connect America Fund, which is categorized as interstate access revenue. The decline in long distance, directory and special revenue accounted for a decrease of $0.2 million. Growth in Hosted PBX revenue was offset by the decline in one-time fiber installation revenue.

Network access. Network access revenue decreased 11.5% in first quarter 2015 to $5.5 million from $6.2 million in first quarter 2014. The Connect America Fund and access recovery fees increased by $0.1 million. This increase was more than offset by lower state and special access charges of $0.5 million and lower user based fees and switched access of $0.3 million.

Internet. Internet revenue for first quarter 2015 increased 1.3% to slightly more than $3.6 million from slightly less than $3.6 million in first quarter 2014.

Transport services. Transport services revenue for first quarter 2015 increased 1.4%, while remaining $1.3 million in both first quarter 2015 and first quarter 2014.

Cable, IP and satellite television. Cable, IP and satellite television revenue for first quarter 2015 decreased 2.8%, while remaining $0.7 million in both first quarter 2015 and first quarter 2014. Growth in security and pay-per-view were more than offset by cable subscriber attrition.

Managed services. Cloud hosting and managed services revenue increased 9.6% from less than $0.2 million in first quarter 2014 to more than $0.2 million in first quarter 2015.

Operating expenses. Operating expenses in the three months ended March 31, 2015 decreased 11.3% to $13.1 million from $14.8 million in the three months ended March 31, 2014. The table below provides the components of our operating expenses for the three months ended March 31, 2015 compared to the three months ended March 31, 2014.

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

Cost of services. Cost of services decreased 12.1% to $8.3 million in the quarter ended March 31, 2015 from $9.4 million in the quarter ended March 31, 2014. Network circuit and toll costs decreased $0.5 million, customer service and sales expense decreased $0.3 million and central office and colocation expense decreased $0.1 million as a result of network reductions implemented during 2014.

Selling, general and administrative expenses. Selling, general and administrative expenses were unchanged at $2.6 million in the quarter ended March 31, 2015 from the same period in 2014. Operating taxes increased $0.1 million in first quarter 2015 reflecting a one-time credit in the same period in 2014. Other general and administrative expenses decreased $0.1 million.

Depreciation and amortization. Depreciation and amortization decreased 19.2% to $2.2 million in the quarter ended March 31, 2015 from $2.8 million in the quarter ended March 31, 2014. Depreciation decreased by $0.1 million in Missouri and by $0.4 million in our CLEC. The amortization of other intangible assets in New England decreased $0.1 million.

13

	Three Months Ended March 31,						Change
	2014			2015			Amount			Percent
	(dollars in thousands)
Interest expense	$	(2,321	)	$	(2,048	)	$	(273	)		(11.8	)%
Other income		654			1,064		$	(410	)		62.7
Income tax expense		(911	)		(1,388	)	$	477			52.4

Interest expense. Interest expense decreased 11.8% to $2.0 million in the quarter ended March 31, 2015 from $2.3 million in the quarter ended March 31, 2014. While the interest rate on our notes payable was unchanged, the lower outstanding balance accounted for the decrease.

Other income. Other income increased $0.4 million to $1.1 million for the quarter ended March 31, 2015 from $0.7 million in the quarter ended March 31, 2014. We receive our annual dividends from CoBank, one of our lenders, during the first quarter of each year. For 2015, the dividend of $1.1 million, including patronage capital extinguishment, was $0.4 million higher than for 2014.

Income tax expense. Provision for income tax expense was $1.4 million in the quarter ended March 31, 2015, compared to $0.9 million in the quarter ended March 31, 2014. The effective income tax rate as of December 31, 2014 and March 31, 2015 was 38.8% and 39.4%, respectively.

Net income. As a result of the foregoing, there was net income of $2.1 million and $1.4 million in the three months ended March 31, 2015 and 2014, respectively. The difference is primarily attributable to the larger CoBank dividend and continued cost reductions.

Liquidity and Capital Resources

Our liquidity needs arise primarily from: (i) interest and principal payments related to our credit facility; (ii) capital expenditures; and (iii) working capital requirements.

For the three months ended March 31, 2015, we generated cash from our business to invest in additional property and equipment of $1.5 million, pay scheduled and voluntary principal payments on our debt of $2.7 million and pay scheduled interest on our debt of $1.8 million. After meeting all of these needs of our business, cash increased from $5.1 million at December 31, 2014 to $7.7 million at March 31, 2015.

Cash flows from operating activities for the first quarter of 2015 amounted to $6.8 million compared to $4.3 million for the first quarter of 2014. The increased other income from the CoBank dividend and the operational expense reductions implemented in 2015 were the primary differences.

Cash flows used in investing activities for the first quarter of 2015 were $1.5 million compared to $1.9 million in the first quarter of 2014. The acquisition of Reliable Networks of Maine, LLC (“Reliable Networks”) in 2014 accounted for the majority of the change.

Cash flows used in financing activities for the first quarter of 2015 were $2.7 million compared to $5.4 million in the first quarter of 2014, reflecting higher voluntary principal payments on our debt in 2014.

We do not invest in financial instruments as part of our business strategy.

We also have received on an annual basis patronage shares from CoBank, one of our lenders, over a period of years for which there is a limited market to determine value until the shares are redeemed by the issuing institution. Historically, these shares have been redeemed at a value similar to their issued value. In first quarter 2015, CoBank redeemed $0.8 million of its patronage shares that we had received. There is no assurance that such redemptions will continue and, if they continue, at what level of redemption. Due to this uncertainty, the patronage shares that we hold are carried at cost of $1.5 million, or approximately 40% of their issued value.

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

14

The following table provides a summary of the extent to which cash generated from operations was reinvested in our operations, used to repay principal on our debt and used to pay interest on our debt. Timing of normal cash receipt and cash payment is not reflected in the table. Voluntary and excess cash flow repayment of principal on our debt is shown separately.

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

We use adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) as an operational performance measurement. Adjusted EBITDA, as presented in this Quarterly Report on Form 10-Q, corresponds to the definition of Adjusted EBITDA in our credit facility. Adjusted EBITDA, as presented in this Quarterly Report on Form 10-Q, is a supplemental measure of our performance that is not required by, or presented in accordance with, accounting principles generally accepted in the United States (“U.S. GAAP”). Our credit facility requires that we report performance in this format each quarter and the involved lending institutions utilize this measure to determine compliance with credit facility requirements. We report Adjusted EBITDA in our quarterly earnings press release to allow current and potential investors to understand this performance metric and because we believe that it provides current and potential investors with helpful information with respect to our operating performance and cash flows. However, Adjusted EBITDA should not be considered as an alternative to net income or any other performance measures derived in accordance with U.S. GAAP or as an alternative to net cash provided by operating activities as a measure of our liquidity. Our presentation of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA for the three months ended March 31, 2014 and 2015, and its reconciliation to net income, is reflected in the table below (in thousands):

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

15

Recent Accounting Pronouncements

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

In April 2015, the FASB issued ASU No. 2015-03, a guidance that simplifies the presentation of debt issuance costs by ending the accounting guidance to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. The guidance is consistent with the accounting guidance related to debt discounts. This guidance is effective for the first interim or annual period beginning after December 15, 2015. Early adoption is permitted, and we are currently assessing the impact of this guidance on our condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, which provides guidance regarding whether a cloud computing arrangement includes a software license (FASB Accounting Standards Codification Subtopic 350-40). If a cloud computing arrangement includes a software license, then the entity should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. The guidance will not change U.S. GAAP for an entity’s accounting for service contracts. This pronouncement is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2015. We are currently evaluating the impact of this guidance on our condensed consolidated financial statements.

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.

We have the ability to borrow up to $5.0 million under a revolving credit facility that expires on April 30, 2016. The interest rate is variable and, accordingly, we are exposed to interest rate risk, primarily from a change in LIBOR or a base rate, should it exceed the minimum rate in the revolving loan facility. Currently, we have no loans drawn under this facility.

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 March 31, 2015.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the three months ended March 31, 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

16

PART II OTHER INFORMATION

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Our wholly-owned subsidiary, CRC Communications LLC (“CRC”), acquired substantially all the assets of Reliable Networks, a Portland, Maine-based provider of cloud hosting and managed services for companies who rely on mission-critical applications, on January 2, 2014. As consideration for those assets, CRC paid $0.5 million net of cash acquired at the closing of the acquisition, and we agreed to issue shares of our Class A common stock to the former owner of Reliable Networks in 2015, 2016 and 2017, contingent on Reliable Networks achieving certain financial objectives and certain other conditions being satisfied, including that certain individuals must be employed by us and in good standing on the last day of certain measurement periods. Due to the achievement of certain financial objectives for the year ended December 31, 2014, and certain other applicable conditions being satisfied, on March 12, 2015, pursuant to the purchase agreement relating to the Reliable Networks acquisition, we issued the former owner of Reliable Networks 68,233 shares of our Class A common stock. The issuance of those shares of Class A common stock was undertaken in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof.

Item 6.    Exhibits

Exhibits

See Exhibit Index.

17

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: May 7, 2015	OTELCO INC.
	By:	/s/ Curtis L. Garner, Jr.
		Curtis L. Garner, Jr.
		Chief Financial Officer

18

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. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer
32.2	Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer
101	The following information from the Company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; and (iv) Notes to Condensed Consolidated Financial Statements

19

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(s) 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: May 7, 2015

/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(s) 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: May 7, 2015

/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. SECTION 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 March 31, 2015, 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. Section 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

May 7, 2015

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 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 March 31, 2015, 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. Section 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

May 7, 2015

XML

Note 7 - Stock Plans and Stock Associated with Acquisition - Earn-Out Activity (Details) (Reliable Networks [Member], USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2015	Dec. 31, 2014
Reliable Networks [Member]
Earned (in shares)	68,233	68,233
Earned (in dollars per share)	$ 5.69	$ 5.69

XML

Note 4 - Net Income Per Common Share

3 Months Ended

Mar. 31, 2015

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”), as well as all of the shares of Class A common stock, for which the Company has accrued an expense, that may be delivered pursuant to the purchase agreement relating to the Reliable Networks of Maine, LLC (“Reliable Networks”) acquisition, be issued.

A reconciliation of the Company’s basic and diluted net income per common share calculation is as follows (weighted average number of common shares outstanding in whole numbers and net income in thousands):

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

XML

Note 3 - Income Taxes

3 Months Ended

Mar. 31, 2015

Notes to Financial Statements

Income Tax Disclosure [Text Block]

3. Income Tax

As of March 31, 2015, the Company had U.S. federal and state net operating loss carryforwards of $0 and $67 thousand, respectively. As of December 31, 2014, the Company had no U.S. federal or state net operating loss carryforwards. The Company had no alternative minimum tax credit carryforwards as of December 31, 2014 or March 31, 2015

.  The Company establishes valuation allowances when necessary to reduce deferred tax assets to amounts expected to be realized.  As of March 31, 2015, the Company had no valuation allowance recorded

. 

The effective income tax rate as of December 31, 2014 and March 31, 2015 was 38.8% and 39.4%, respectively.

XML

Condensed Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2015	Dec. 31, 2014
Current assets
Cash and cash equivalents	$ 7,717	$ 5,082
Accounts receivable:
Due from subscribers, net of allowance for doubtful accounts of $229 and $174, respectively	3,416	3,732
Unbilled receivables	1,668	1,675
Other	1,904	1,931
Materials and supplies	2,315	1,915
Prepaid expenses	1,758	3,441
Total current assets	18,778	17,776
Property and equipment, net	50,718	51,237
Goodwill	44,976	44,976
Intangible assets, net	2,940	3,178
Investments	1,864	1,870
Deferred financing costs, net	936	1,161
Other assets	398	471
Total assets	120,610	120,669
Current liabilities
Accounts payable	1,130	1,104
Accrued expenses	5,351	5,054
Advance billings and payments	1,413	1,410
Deferred income taxes	53	53
Customer Deposits	77	70
Current maturity of long-term notes payable	9,379	6,665
Total current liabilities	17,403	14,356
Deferred income taxes	24,027	24,027
Advance billings and payments	668	681
Other liabilities	133	142
Long-term notes payable, less current maturities	100,090	105,470
Total liabilities	142,321	144,676
Stockholders' deficit
Additional paid in capital	3,679	3,519
Retained deficit	(25,422)	(27,557)
Total stockholders' deficit	(21,711)	(24,007)
Total liabilities and stockholders' deficit	120,610	120,669
Common Class A [Member]
Stockholders' deficit
Common Stock	30	29
Common Class B [Member]
Stockholders' deficit
Common Stock	$ 2	$ 2

XML

Note 1 - Organization and Basis of Financial Reporting

3 Months Ended

Mar. 31, 2015

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 unaudited condensed consolidated financial statements include the accounts of Otelco Inc. (the “Company”) and its subsidiaries, all of which are either directly or indirectly wholly owned. These include: Blountsville Telephone LLC (“BTC”); Brindlee Mountain Telephone LLC (“BMTC”); CRC Communications LLC (“CRC”); Granby Telephone LLC (“GTT”); Hopper Telecommunications LLC (“HTC”); Mid-Maine Telecom LLC (“MMTI”); Mid-Maine TelPlus LLC (“MMTP”); Otelco Mid-Missouri LLC (“MMT”) and its wholly owned subsidiary I-Land Internet Services LLC; Otelco Telecommunications LLC (“OTC”); Otelco Telephone LLC (“OTP”); Pine Tree Telephone LLC (“PTT”); Saco River Telephone LLC (“SRT”); Shoreham Telephone LLC (“ST”); and War Telephone LLC (“WT”).

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all of the aforesaid subsidiaries after elimination of all material intercompany balances and transactions. The unaudited operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 or any other period.

The condensed consolidated financial statements and notes included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The interim condensed consolidated financial information herein is unaudited. The information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods included in the report.

Recent Accounting Pronouncements

During 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-01 through 2015-05. Except for ASU 2015-03 and 2015-05, which are discussed below, these ASUs provide technical corrections or simplification to existing guidance and to specialized industries or entities and therefore, have minimal, if any impact on the Company.

In April 2015, the FASB issued ASU 2015-03, a guidance that simplifies the presentation of debt issuance costs by amending the accounting guidance to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. The amendments are consistent with the accounting guidance related to debt discounts. This guidance is effective for the first interim or annual period beginning after December 15, 2015. Early adoption is permitted, and the Company is currently assessing the impact of this guidance on its condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, which provides guidance regarding whether a cloud computing arrangement includes a software license (FASB Accounting Standard Codification Subtopic 350-40). If a cloud computing arrangement includes a software license, then the entity should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. The guidance will not change GAAP for an entity’s accounting for service contracts. This pronouncement is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact of this guidance on the condensed consolidated financial statements.

Reclassification

s

Certain items in prior year’s condensed consolidated financial statements have been reclassified to conform with 2015 presentation.

XML

Note 5 - Revenue Concentrations (Details Textual) (Customer Concentration Risk [Member], Sales Revenue, Net [Member], National Exchange Carrier Association [Member])	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014
Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | National Exchange Carrier Association [Member]
Concentration Risk, Percentage	16.40%	13.30%

XML

Note 7 - Stock Plans and Stock Associated with Acquisition - RSU Activity (Details) (Restricted Stock Units (RSUs) [Member], USD $)	3 Months Ended
	Mar. 31, 2015
Restricted Stock Units (RSUs) [Member]
Outstanding at December 31, 2014 (in shares)	113,961
Outstanding at December 31, 2014 (in dollars per share)	$ 4.96
Granted (in shares)	0
Granted (in dollars per share)	$ 0
Vested (in shares)	57,139
Vested (in dollars per share)	$ 4.96
Forfeited or cancelled (in shares)	15,022
Forfeited or cancelled (in dollars per share)	$ 4.96
Outstanding at March 31, 2015 (in shares)	41,800
Outstanding at March 31, 2015 (in dollars per share)	$ 4.96

XML

Note 2 - Notes Payable

3 Months Ended

Mar. 31, 2015

Notes to Financial Statements

Debt Disclosure [Text Block]

2. Notes Payable

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

	December 31,			March 31,
	2014			2015
Third amended and restated term credit facility; General Electric Capital Corporation; variable interest rate of 6.5% at December 31, 2014 and March 31, 2015. The credit facility is secured by the total assets of the subsidiary guarantors. The unpaid balance is due April 30, 2016.	$	112,135		$	109,469
Less: current portion		(6,665	)		(9,379	)
Long-term notes payable	$	105,470		$	100,090

Associated with the notes payable, the Company has capitalized and amortized deferred financing costs using the effective interest method. The Company has capitalized $2.7 million in deferred financing costs associated with the credit facility. Amortization expense for the deferred financing costs associated with the third amendment and restatement of the Company’s credit facility was $239 thousand and $225 thousand for the three months ended March 31, 2014 and 2015, respectively.

The Company had a revolving credit facility on December 31, 2014 and March 31, 2015 of $5.0 million. The revolving credit facility is available until April 30, 2016. There was no balance outstanding as of December 31, 2014 or March 31, 2015. The Company pays a commitment fee of 0.50% per annum, payable quarterly in arrears, on the unused portion of the revolver loan. The commitment fee expense was $6 thousand in each of the three months ended March 31, 2014 and 2015, respectively.

Maturities of notes payable for the next five years and thereafter are as follows (in thousands):

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

The Company’s notes payable agreements are subject to certain financial covenants and restrictions on indebtedness, financial guarantees, business combinations and other related items. As of March 31, 2015, the Company was in compliance with all such covenants and restrictions.

XML

Condensed Consolidated Balance Sheets (Unaudited) (Parentheticals) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2015	Dec. 31, 2014
Allowance for doubtful accounts	$ 174	$ 229
Common Class A [Member]
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	10,000,000	10,000,000
Common stock, shares issued (in shares)	3,006,526	2,881,154
Common stock, shares outstanding (in shares)	3,006,526	2,881,154
Common Class B [Member]
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	250,000	250,000
Common stock, shares issued (in shares)	232,780	232,780
Common stock, shares outstanding (in shares)	232,780	232,780

XML

Note 2 - Notes Payable - Summary of Notes Payable (Details) (USD $)	Mar. 31, 2015	Dec. 31, 2014
Third amended and restated term credit facility; General Electric Capital Corporation; variable interest rate of 6.5% at December 31, 2014 and March 31, 2015. The credit facility is secured by the total assets of the subsidiary guarantors. The unpaid balance is due April 30, 2016.	$ 109,469,000
Less: current portion	(9,379,000)	(6,665,000)
Long-term notes payable, less current maturities	100,090,000	105,470,000
GE Capital 3rd [Member]
Third amended and restated term credit facility; General Electric Capital Corporation; variable interest rate of 6.5% at December 31, 2014 and March 31, 2015. The credit facility is secured by the total assets of the subsidiary guarantors. The unpaid balance is due April 30, 2016.	$ 109,469,000	$ 112,135,000

XML

Document And Entity Information	3 Months Ended
	Mar. 31, 2015
Entity Registrant Name	OTELCO INC.
Entity Central Index Key	0001288359
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Type	10-Q
Document Period End Date	Mar. 31, 2015
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q1
Amendment Flag	false
Common Class B [Member]
Entity Common Stock, Shares Outstanding (in shares)	232,780
Common Class A [Member]
Entity Common Stock, Shares Outstanding (in shares)	3,006,526

XML

Note 2 - Notes Payable - Summary of Notes Payable (Details) (Parentheticals) (GE Capital 3rd [Member])	Mar. 31, 2015	Dec. 31, 2014
GE Capital 3rd [Member]
Interest rate	6.50%	6.50%

XML

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

XML

Note 7 - Stock Plans and Stock Associated with Acquisition

3 Months Ended

Mar. 31, 2015

Notes to Financial Statements

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

7. Stock Plans and Stock Associated with Acquisition

During the three months ended March 31, 2014 and 2015, the Company did not grant any RSUs or other equity incentive awards. During the year ended December 31, 2014, the Company granted RSUs underlying 124,167 shares of Class A common stock. These RSUs (or a portion thereof) vest with respect to each recipient over a one to three year period from the date of grant, provided the individual remains in the employment or service of the Company as of the vesting date and, in selected instances, certain performance criteria are attained. Additionally, these RSUs (or a portion thereof) could vest earlier in the event of a change in control of the Company, or upon involuntary termination without cause. These grants are made primarily to executive-level personnel at the Company and, as a result, no compensation costs have been capitalized.

The following table summarizes RSU activity as of March 31, 2015:

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

CRC acquired substantially all of the assets of Reliable Networks on January 2, 2014. Pursuant to the purchase agreement relating to the Reliable Networks acquisition, Class A common stock was issued to the former owner of Reliable Networks in 2015 and will be issued to the former owner of Reliable Networks in 2016 and 2017, contingent on Reliable Networks achieving certain financial objectives and certain other conditions being satisfied, including that certain individuals must be employed by the Company or any of its subsidiaries and in good standing on the last day of the applicable year (the “Earn-Out”). For the year ended on December 31, 2014, the Company delivered 68,233 shares of Class A common stock to the former owner of Reliable Networks on March 12, 2015as a result of the Earn-Out.

The following table summarizes the Earn-Out activity as of March 31, 2015:

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

Stock-based compensation expense related to RSUs and the Earn-Out was $161 thousand for the three months ended March 31, 2015. Accounting standards require that the Company estimate forfeitures for RSUs and the Earn-Out and reduce compensation expense accordingly. The Company has reduced its expense by the assumed forfeiture rate and will evaluate actual experience against the assumed forfeiture rate going forward. The forfeiture rate has been developed using historical performance metrics which could impact the size of the final issuance of Class A common stock. The Company has no history before 2014 with RSU forfeiture or Earn-Out stock forfeiture.

As of March 31, 2015, the unrecognized total compensation cost related to unvested RSUs and unvested Earn-Out stock was $397 thousand. That cost is expected to be recognized by the end of 2017 for RSUs and 2015 for Earn-Out stock.

As stated above, accounting standards require the Company to estimate forfeitures in calculating the expense related to stock-based compensation, as opposed to only recognizing these forfeitures and the corresponding reduction in expense as they occur.

XML

Note 6 - Commitments and Contingencies

3 Months Ended

Mar. 31, 2015

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 Service Board and the West Virginia Public Service Commission, relating primarily to rate making. In addition, the Company may be involved in similar proceedings with interconnection carriers and the Federal Communications Commission. Currently, except as set forth below, none of the legal proceedings are expected to have a material adverse effect on the Company’s business.

Sprint Communications L.P. (“Sprint”), MCI Communications Services, Inc. (“MCI”) and Verizon Select Services, Inc. (“Verizon”) have filed more than 60 lawsuits in federal courts across the United States alleging that over 400 local exchange carriers overcharged Spring, 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, has been 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. Because 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 for all pre-trial proceedings. At this time, it is too soon to determine whether these lawsuits will have a material adverse effect on the Company’s business.

XML

Note 7 - Stock Plans and Stock Associated with Acquisition (Details Textual) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended	12 Months Ended	3 Months Ended
	Mar. 31, 2015	Dec. 31, 2014	Mar. 31, 2014
Allocated Share-based Compensation Expense	$ 161
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	$ 397
Restricted Stock Units (RSUs) [Member] | 2014 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period		124,167
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
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period	0		0
Reliable Networks [Member] | Common Class A [Member]
Business Acquisition, Equity Interest Issued or Issuable, Number of Shares	68,233
Reliable Networks [Member]
Business Acquisition, Equity Interest Issued or Issuable, Number of Shares	68,233	68,233

XML

Note 2 - Notes Payable - Maturities of Notes Payable (Details) (USD $)	Mar. 31, 2015
2015 (remaining)	$ 7,713,000
2016	101,756,000
2017	0
2018	0
2019	0
Thereafter	0
Total	$ 109,469,000

XML

Note 7 - Stock Plans and Stock Associated with Acquisition (Tables)

3 Months Ended

Mar. 31, 2015

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, 2014		113,961	$	4.96
Granted		—	$	—
Vested		57,139	$	4.96
Forfeited or cancelled		15,022	$	4.96
Outstanding at March 31, 2015		41,800	$	4.96

Reliable Networks [Member]

Notes Tables

Schedule of Business Acquisitions by Acquisition, Equity Interest Issued or Issuable [Table Text Block]

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

XML

Note 2 - Notes Payable (Tables)

3 Months Ended

Mar. 31, 2015

Notes Tables

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

	December 31,			March 31,
	2014			2015
Third amended and restated term credit facility; General Electric Capital Corporation; variable interest rate of 6.5% at December 31, 2014 and March 31, 2015. The credit facility is secured by the total assets of the subsidiary guarantors. The unpaid balance is due April 30, 2016.	$	112,135		$	109,469
Less: current portion		(6,665	)		(9,379	)
Long-term notes payable	$	105,470		$	100,090

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

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

XML

Note 4 - Net Income Per Common Share (Tables)

3 Months Ended

Mar. 31, 2015

Notes Tables

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

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

XML

Note 2 - Notes Payable (Details Textual) (USD $)	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014	Dec. 31, 2014
Amortization of Financing Costs	$ 225,000	$ 239,000
Revolving Credit Facility [Member]
Long-term Line of Credit	0		0
Line of Credit Facility, Maximum Borrowing Capacity	5,000,000		5,000,000
Line of Credit Facility, Commitment Fee Amount	6,000	6,000
Line of Credit Facility, Commitment Fee Percentage	0.50%
Senior Credit Facility [Member]
Deferred Finance Costs, Gross			$ 2,700,000

XML

Note 4 - Net Income Per Common Share - Reconciliation of Income (Loss) Per Common Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2015	Mar. 31, 2014
Weighted average number of common shares outstanding - basic (in shares)	3,239,306	3,103,728
Effect of dilutive securities (in shares)	41,800
Weighted average number of common shares and potential common shares - diluted (in shares)	3,281,106	3,103,728
Net income available to common stockholders	$ 2,135	$ 1,394
Net income per common share - basic (in dollars per share)	$ 0.66	$ 0.45
Net income per common share - diluted (in dollars per share)	$ 0.65	$ 0.45

XML

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

XML

Note 5 - Revenue Concentrations

3 Months Ended

Mar. 31, 2015

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

5. Revenue Concentrations

Revenues for interstate access services are based on reimbursement of costs and an allowed rate of return. Revenues of this nature are received from the National Exchange Carrier Association in the form of monthly settlements. Such revenues amounted to 13.3% and 16.4% of the Company’s total revenues for the three months ended March 31, 2014 and 2015, respectively.

XML

Note 3 - Income Taxes (Details Textual) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2015	Dec. 31, 2014
Deferred Tax Assets, Tax Credit Carryforwards, Alternative Minimum Tax	$ 0	$ 0
Deferred Tax Assets, Valuation Allowance	0
Effective Income Tax Rate Reconciliation, Percent	39.40%	38.80%
State and Local Jurisdiction [Member]
Operating Loss Carryforwards	67,000	0
Domestic Tax Authority [Member]
Operating Loss Carryforwards	$ 0	$ 0