UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2019

OR

For the transition period from __________ to __________

Commission file number: 1-32362

Securities registered pursuant to Section 12(b) of the Act:

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

Yes     x           No     ¨

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

Yes     x           No     ¨

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

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

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

Yes     ¨           No     x

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

OTELCO INC.
FORM 10-Q
For the three-month period ended June 30, 2019

TABLE OF CONTENTS

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 June 30, 2019.

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, including the factors under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

PART I FINANCIAL INFORMATION

OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share par value and share amounts)
(unaudited with the exception of December 31, 2018 being audited)

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

OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

OTELCO INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)

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

OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
(unaudited)

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

Basis of Presentation and Principles of Consolidation

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

The accompanying condensed consolidated financial statements include the accounts of the Company and all of the aforesaid subsidiaries after elimination of all material intercompany balances and transactions. The unaudited operating results for the six months ended June 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or any other period.

The condensed consolidated financial statements and notes included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The interim condensed consolidated financial information herein is unaudited, with the condensed consolidated balance sheet as of December 31, 2018, being derived from the Company’s audited consolidated financial statements. The information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods included in this report.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). This ASU requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also provides a more robust framework for revenue issues and improves comparability of revenue recognition practices across industries. This ASU was the product of a joint project between the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard. ASU 2014-09 permits the use of either a retrospective or modified retrospective application. This guidance was to be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption not permitted. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This ASU confirmed a one-year delay in the effective date of ASU 2014-09, making the effective date for the Company the first quarter of fiscal 2018 instead of the first quarter of fiscal 2017.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenues Gross versus Net). This ASU is further guidance to ASU 2014-09, and clarifies principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This ASU is also further guidance to ASU 2014-09, and clarifies the identification of performance obligations. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This ASU is also further guidance to ASU 2014-09, and clarifies assessing the narrow aspects of recognizing revenue. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. This ASU is also further guidance to ASU 2014-09, and clarifies technical corrections and improvements for recognizing revenue.

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323) (“ASU 2017-03”). This ASU requires registrants to evaluate the impact ASU 2014-09 will have on financial statements and adequately disclose this information to assist the reader in assessing the significance of ASU 2014-09 on the financial statements when adopted. The Company commenced its assessment of ASU 2014-09 beginning in June 2016. This assessment included analyzing ASU 2014-09’s impact on the Company’s various revenue streams, comparing the Company’s historical accounting policies and practices to the requirements of ASU 2014-09, and identifying potential differences from applying the requirements of ASU 2014-09 to the Company’s contracts. The Company has used a five-step process to identify the contract with the customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue when or as the performance obligations are satisfied. The Company has implemented the appropriate changes to its business processes, systems and controls to support revenue recognition and disclosures under ASU 2014-09.

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

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). This ASU requires lessees to recognize most leases on the balance sheet. The provisions of this guidance are effective for annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. In January 2017, the FASB issued ASU 2017-03, which requires registrants to evaluate the impact ASU 2016-02 will have on financial statements and adequately disclose this information to assist the reader in assessing the significance of ASU 2016-02 on the financial statements when adopted. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. This ASU provides an optional transition practical expedient to not evaluate under ASU 2016-02 existing or expired land easements that were not previously accounted for as leases under ASC Topic 840, Leases. An entity that elects this practical expedient should evaluate new or modified land easements under ASU 2016-02 beginning at the date that the entity adopts ASU 2016-02. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which provides improvements and clarifications for ASU 2016-02. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). This ASU provides an additional transition method by allowing entities to initially apply the new lease standard at the date of adoption with a cumulative effect adjustment to the opening balances of retained earnings in the period of adoption. This ASU also gives lessors the option of electing, as a practical expedient by class of underlying asset, not to separate the lease and nonlease components of a contract when those lease contracts meet certain criteria. In December 2018, the FASB issued ASU 2018-20, Narrow-Scope Improvements for Lessors. This ASU clarifies lessor treatment for sales taxes and other similar taxes collected from lessees, certain lessor costs, and recognition of variable payments for contracts with lease and nonlease components. In March 2019, the FASB issued ASU 2019-01, Codification Improvements. This ASU clarifies determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, presentation on the statement of cash flows for sales-type and direct financing leases, and transition disclosures related to Topic 250, Accounting Changes and Error Corrections. The Company has completed its evaluation of the requirements of this guidance and implemented the processes necessary to adopt ASU 2016-02, as amended. The Company has elected certain practical expedients available at adoption. The Company elected the package of practical expedients upon transition not to reassess whether expired or existing contracts contain leases under the new definition of a lease; not to reassess the lease classification for expired or existing leases; and not to reassess whether previously capitalized initial direct costs would qualify for capitalization under ASU 2016-02. In evaluating certain equipment rental arrangements such as cable, internet and security service contracts, the Company considered the practical expedient that allows lessors to elect, by class of underlying asset, to not separate non-lease components from the associated lease components if the non-lease components otherwise would be accounted for in accordance with the new revenue recognition standard. The Company elected this practical expedient as the following two criteria are met; the lease component and the associated non-lease components have the same timing and pattern of transfer; and the lease component, if accounted for separately, would be classified as an operating lease. The Company elected to adopt the new standard using the transition method provided by ASU 2018-11; therefore, prior periods will not be restated. The Company has determined that the impact of adoption is limited to real property leases and is consistent with industry practices. Adoption of the new standard resulted in the Company recognizing an aggregate of $1,073,919 in lease liabilities and corresponding right of use (“ROU”) assets and no impact on the opening retained earnings balances. The adoption of ASU 2016-02 had an immaterial impact on the condensed consolidated statements of operations and condensed consolidated statements of cash flows for the six months ended June 30, 2019.

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

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) (“ASU 2017-09”). ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for any interim period for which financial statements have not been issued. ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. The Company adopted this ASU and that adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In May 2017, the FASB issued ASU 2017-10, Service Concession Arrangements (Topic 853) (“ASU 2017-10”). The objective of this ASU is to specify that an operating entity should not account for a service concession arrangement that meets certain criteria as a lease in accordance with ASC Topic 840, Leases. ASU 2017-10 further states that the infrastructure used in a service concession arrangement should not be recognized as property, plant, and equipment of the operating entity. The provisions of this ASU are effective for annual periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company adopted this ASU and that adoption did not have a material impact on the Company’s condensed consolidated financial statements.

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

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

Recent Accounting Pronouncements

During 2018, the FASB issued ASUs 2018-01 through 2018-15 and, during 2019, the FASB has issued ASUs 2019-01 through 2019-06. Except for the ASUs discussed above and below, these ASUs provide technical corrections or simplifications to existing guidance and to specialized industries or entities and therefore have minimal, if any, impact on the Company.

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

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses (“ASU 2018-19”). This ASU improves the disclosure requirements in ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) issued in June 2016, to make a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the amendments are effective. The effective date and transition requirements for the amendments in this update are the same as the effective dates and transition requirements in ASU 2016-13, as amended by ASU 2018-19. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU improves the disclosure requirements in ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) issued in June 2016, to allow the measurement of allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets. In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326). This ASU improves the disclosure requirements in ASU 2016-13 issued in June 2016, to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The effective date and transition requirements for the amendments in this update are the same as the effective dates and transition requirements in ASU 2016-13, as amended by ASU 2018-19. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity is permitted to early adopt as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not expect this ASU to have a material impact on its consolidated financial statements.

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

Associated with the Credit Facility, the Company has $2.1 million in deferred financing cost. Amortization expense for the deferred financing cost associated with the Credit Facility was $230 thousand and $239 thousand for the six months ended June 30, 2019, and 2018, respectively, which is included in interest expense.

The revolving credit facility associated with the Company’s Credit Facility had a maximum borrowing capacity of $5.0 million on June 30, 2019. The revolving credit facility is available until November 3, 2022. There was no balance outstanding as of June 30, 2019. The Company pays a commitment fee of 0.50% per annum, payable quarterly in arrears, on the unused portion of the revolver loan under the Credit Facility. The rate declined from 0.50% per annum to 0.38% per annum on October 22, 2018. The commitment fee expense was $9 thousand and $13 thousand for the six months ended June 30, 2019, and 2018, respectively.

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

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

The Company’s notes payable agreements are subject to certain financial covenants and restrictions on indebtedness, financial guarantees, business combinations and other related items. As of June 30, 2019, the Company was in compliance with all such covenants and restrictions.

For the six months ended June 30, 2019, the effective tax rate was 25.2%, compared to 24.3% for the six months ended June 30, 2018. The effective tax rate varies from the federal corporate tax rate of 21% largely due to state income taxes and other permanent differences.

Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that would occur should all of the shares of Class A common stock underlying restricted stock units (“RSUs”) be issued.

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

Revenue Streams

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

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

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

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

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

The following table summarizes the revenue generated from contracts with customers among each revenue stream for the three and six month periods (in thousands, except percentages):

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

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

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

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

The following table summarizes the revenue generated from contracts with customers among each revenue stream for the three and six month periods (in thousands, except percentages):

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

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

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

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

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

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

As of June 30, 2019, the Company had approximately $8.5 million of unsatisfied performance obligations. As of June 30, 2019, the Company expected to recognize approximately $1.5 million of revenue within the next year and $7.0 million in the next 2 to 5 years related to such unsatisfied performance obligations. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected life of one year or less or for contracts for which the Company has a right to invoice for services performed.

The deferred revenue balance as of March 31, 2019, was $3.8 million. Approximately $1.4 million of revenue from that balance was recognized as revenue during the three months ended June 30, 2019, offset by payments received as of June 30, 2019, in advance of control of the service being transferred to the customer.

Revenue Concentrations

Revenues for interstate access services are based on reimbursement of costs and allowed rate of return. Revenues of this nature are received from the National Exchange Carrier Association in the form of monthly settlements. Such revenues amounted to 23.4% and 22.8% of the Company’s total revenues for the six months ended June 30, 2019, and 2018, respectively.

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

ASU 2016-02 requires lessees to recognize most leases on the balance sheet. As stated above in Note 1, Organization and Basis of Financial Reporting – Recently Adopted Accounting Pronouncements, the Company has elected certain practical expedients available at adoption. The Company elected the package of practical expedients upon transition not to reassess whether expired or existing contracts contain leases under the new definition of a lease; not to reassess the lease classification for expired or existing leases; and not to reassess whether previously capitalized initial direct costs would qualify for capitalization under ASU 2016-02. In evaluating certain equipment rental arrangements such as cable, internet and security service contracts, the Company considered the practical expedient that allows lessors to elect, by class of underlying asset, to not separate non-lease components from the associated lease components if the non-lease components otherwise would be accounted for in accordance with the new revenue recognition standard. The Company elected this practical expedient as the following two criteria are met; the lease component and the associated non-lease components have the same timing and pattern of transfer; and the lease component, if accounted for separately, would be classified as an operating lease. The Company elected to adopt the new standard using the transition method provided by ASU 2018-11; therefore, prior periods will not be restated. The Company has determined that the impact of adoption is limited to real property leases and is consistent with industry practices. This ASU was effective January 1, 2019, the Company recognized an aggregate of $1,073,919 in lease liabilities and corresponding ROU assets and no impact on the opening retained earnings balances.

In consideration of whether an agreement contains a lease as defined under ASU 2016-02, the Company answered these three questions; has an asset been identified, is the asset physically distinct, and does the customer have the right to control the asset. The Company determined based on the three step questions above, the arrangements pertaining to real property building and office facilities in Alabama, Maine and Massachusetts are within the scope of ASU 2016-02.

In calculating the lease liability, the Company considered the lease term in which the Company would include any periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option. The Company evaluated factors that might create an economic incentive to exercise options to extend, including contract, asset, entity and market-based factors. The Company determined that there would be no significant relocation and interruption costs associated with moving to alternative space that would disincentivize a move at renewal; therefore, renewals to extend the lease term are not included in the ROU asset and lease liabilities.

A lessee may recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. The accounting policy election for short-term leases shall be made by class of underlying asset to which the right of use relates. A short-term lease is defined as a lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. The Company elected to exclude short-term leases from the recognition requirements.

In discounting the liability, ASU 2016-02 indicates that the incremental rate used must be comparable to a rate attributable to a similar amount, for a similar term, and with similar collateral as the assets in the lease. The Company observed that published commercial borrowing rates were generally between 5% to 7% for loans collateralized by the real estate for terms ranging from 5-10 years. The Company has elected to use a discount rate of 6.5% for all leases.

Maturities of lease liabilities as of June 30, 2019 are as follows (in thousands):

Supplemental cash flow information related to operating leases was as follows (in thousands, except years and percentages):

The Company has previously granted RSUs underlying 401,111 shares of Class A common stock. These RSUs (or a portion thereof) vest with respect to each recipient over a one to three year period from the date of grant, provided the recipient remains in the employment or service of the Company as of the vesting date and, in selected instances, certain performance criteria are attained. Additionally, these RSUs (or a portion thereof) could vest earlier in the event of a change in control of the Company, or upon involuntary termination without cause. Of the 401,111 previously granted RSUs, RSUs underlying 334,799 shares of Class A common stock have vested or were cancelled as of December 31, 2018. During the six months ended June 30, 2019, no RSUs were granted by the Company. The previous RSU grants were made primarily to executive-level personnel at the Company and, as a result, no compensation costs have been capitalized.

The following table summarizes RSU activity for the six months ended June 30, 2019:

Stock-based compensation expense related to RSUs was $71 thousand and $151 thousand for the six months ended June 30, 2019, and 2018, respectively. Stock-based compensation related to RSUs is recognized over the 39-month vesting schedule. Accounting standards require that the Company estimate forfeitures for RSUs and reduce compensation expense accordingly. The Company has reduced its expense by the assumed forfeiture rate and will evaluate actual experience against the assumed forfeiture rate going forward. The forfeiture rate has been developed using historical performance metrics which could impact the size of the final issuance of Class A common stock. The Company has no history before 2014 with RSU forfeiture.

As of June 30, 2019, the unrecognized total compensation cost related to unvested RSUs was $145 thousand. That cost is expected to be recognized by the end of 2021.

On October 15, 2018, the Company granted 29,460 incentive stock options (“ISOs”) and 20,540 non-qualified (“NQ”) stock options to purchase shares of Class A common stock. These options vest with respect to the recipient thereof over a five year period with 20% becoming exercisable on each anniversary of the vesting commencement date of October 15, 2019, provided the recipient remains in the employment or service of the Company as of the vesting date. Additionally, these options (or a portion thereof) could vest earlier in the event of a change in control of the Company. These option grants were made to one executive-level employee of the Company and, as a result, no compensation costs have been capitalized.

The following table summarizes ISO and NQ stock option activity for the six months ended June 30, 2019:

Stock-based compensation expense related to ISOs and NQ stock options was $43 thousand for the six months ended June 30, 2019.

As of June 30, 2019, the unrecognized total compensation cost related to unvested ISOs and NQ stock options was $372 thousand. That cost is expected to be recognized by the end of 2023.

Overview

General

Since 1999, we have acquired and operate eleven rural local exchange carriers (“RLECs”) serving subscribers in north central Alabama, central Maine, western Massachusetts, central Missouri, western Vermont and southern West Virginia. We also operate a competitive local exchange carrier (“CLEC”) serving subscribers in Maine, Massachusetts and New Hampshire. Our services include a broad suite of communications and information services including local and long distance telephone services; internet and broadband data services; network access to other wireline, long distance and wireless carriers for calls originated or terminated on our network; other telephone related services; cloud hosting and professional engineering services for small and mid-sized companies who rely on mission-critical software applications; digital high-speed transport services (in our New England market); and video and security (in some markets). The majority of our revenue comes from providing local and long distance voice services and internet broadband data services to both enterprise and residential customers. In addition, a significant portion of our revenue comes from providing access to our customers for other service providers and the associated funds from programs initiated by the Federal Communications Commission (the “FCC”). Our organization is structured functionally across all states in which we operate. Therefore, we view, manage and evaluate the results of operations from the various telecommunications services as one company and have identified one reporting segment as it relates to providing segment information.

The FCC released its Universal Service Fund and Intercarrier Compensation Order (the “FCC ICC Order”) in November 2011. This order has made and continues to make substantial changes in the way telecommunication carriers are compensated for serving high cost areas and for completing traffic with other carriers. We began seeing the significant impact of the FCC ICC Order to our business in July 2012, with additional impacts beginning in July 2013 and July 2014. The initial consequence to our business was to reduce access revenue from intrastate calling in Maine and other states where intrastate rates were higher than interstate rates. A portion of this revenue loss for our RLEC properties is returned to us through the Connect America Fund (the “CAF”). There is no recovery mechanism for the lost revenue in our CLEC. The impact of the FCC ICC Order is expected to continue reducing our revenue and net income through 2020.

The FCC made additional offers for us to receive increased Alternative Connect America Model (“A-CAM”) model-based support in 2019. One company will receive an additional $442,000 in A-CAM support each year, and the 10-year A-CAM support program was extended two years for all ten of our companies that receive A-CAM support. One company, not included in previous A-CAM support offers, received an offer of A-CAM support on May 2, 2019, and filed a letter with the FCC on June 17, 2019, to accept the A-CAM support offer, which is effective as of January 1, 2019. The A-CAM support replaces the legacy rate-of-return support it currently receives. A-CAM support requires additional investment in plant and equipment to reach target broadband speeds and covered locations. A-CAM support will decline through 2028 as the additional investment is completed.

The Tax Cuts and Jobs Act, which we refer to as the Tax Act, passed in December 2017, has reduced, and is expected to continue to reduce, our cash tax liability. Specifically, both the lower income tax rate and the extension of bonus depreciation under the Tax Act have positively impacted, and are expected to continue to positively impact, our federal tax requirements. The limitation on interest deductibility under the Tax Act is not expected to impact our tax liabilities.

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included in Item 1 of Part I and the other financial information appearing elsewhere in this report. The following discussion and analysis relates to our financial condition and results of operations on a consolidated basis.

Revenue Sources

Our revenues are derived from six sources:

Customer and Service Trends

With the implementation of our new billing system supporting all of our customers, we have adopted managerial systems that focus on retaining customers and offering them a variety of service options. We offer competitively priced location-specific bundled service packages tailored to the varying telecommunications requirements of our customers.

Key Operating Statistics

(unaudited)

⁽¹⁾ Service metrics for 2018 have been adjusted to reflect current service definitions.

One of our key performance measures is to track the number of business and residence customers served and the number of telecommunications services provided to these customers. The table above provides a summary of the change in customers and the change in the four largest telecommunications services beginning with September 30, 2108, shortly after our consolidated billing and operations system was completed.

For the three months ended June 30, 2019, customers served decreased 1.0%, or 337 customers, an improvement when compared to a decrease of 1.6%, or 552 customers, in the three months ended March 31, 2019. For the three months ended June 30, 2019, services provided to these customers decreased 1.1%, or 786 services, an improvement when compared to 1.3%, or 950 services, in the three months ended March 31, 2019. For the three months ended June 30, 2019, data services decreased 0.2%, or 46 services, an improvement when compared to 0.8%, or 181 services, in the three months ended March 31, 2019. Speeds to all data customers were increased to the maximum available within our network while additional network improvements are deployed. The continued deployment over the next two years of fiber-based services, the transition to VDSL in all of our networks and the deployment of DOCSIS 3.1 in our cable network is expected to improve the speed of our service offerings and further reduce the level of customer and service churn.

Our Rate and Pricing Structure

Our CLEC enterprise pricing is based on market requirements. We combine varying services to meet individual customer requirements, including technical support and managed services, and provide multi-year contracts which are both market sensitive for the customer and stabilizing for our sales process.

Our RLECs operate in six states and have limited regulation by the respective state regulatory authorities. The impact on pricing flexibility varies by state. Our rates for other services we provide, including cable, Internet Protocol television, long distance, data lines and high-speed internet access, are not price regulated. The market for competitors’ services, including wireless and IP based services, and the nationwide scope of their offering also affects our ability to adjust prices. We expect this trend to continue into the immediate future.

Categories of Operating Expenses

Our operating expenses are categorized as cost of services; selling, general and administrative expenses; and depreciation and amortization.

Cost of services. This includes expenses for salaries, wages and benefits relating to our telephone central office and outside plant operation, maintenance, sales and customer service; other plant operations, maintenance and administrative costs; network access costs; data center operations; and costs of services for long distance, cable television, internet and directory services.

Selling, general and administrative expenses. This includes expenses for salaries, wages and benefits and contract service payments (for example, legal fees and market studies) relating to engineering, financial, human resources and corporate operations; information management expenses, including billing; allowance for uncollectible accounts receivable; expenses for travel, lodging and meals; internal and external communications costs; insurance premiums; stock exchange and banking fees; and postage.

Depreciation and amortization. This includes depreciation of our telecommunications, cable and internet networks and equipment, and amortization of intangible assets. Certain of these amortization expenses continue to be deductible for tax purposes.

Our Ability to Control Operating Expenses

We strive to control expenses in order to maintain our operating margins. As our revenue continues to shift to non-regulated services and our residential RLEC revenue continues to decline, operating margins decrease, reflecting the lower margins associated with non-regulated services. The years of reductions in FCC-controlled payments has made it difficult to fully offset revenue decline through expense control and pricing action. The introduction of A-CAM funding in 2017 provided support for additional capital investment in our network to enhance broadband speeds and coverage. The funds received through A-CAM funding will decline over the remaining nine years of the program.

Results of Operations

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

Revenues by category for the three months and six months ended June 30, 2018, have been adjusted to be consistent with the revenues by category for the three months and six months ended June 30, 2019.

Three Months and Six Months Ended June 30, 2019, Compared to Three Months and Six Months Ended June 30, 2018

Total revenues. Total revenues decreased 7.3% in the three months ended June 30, 2019, to $15.7 million from $16.9 million in the three months ended June 30, 2018. Total revenues decreased 6.6% in the six months ended June 30, 2019, to $31.4 million from $33.6 million in the six months ended June 30, 2018. The decrease was primarily due to the decrease in residential local services and traditional access revenue affected by the FCC ICC Order. The tables below provide the components of our revenues for the three months and six months ended June 30, 2019, compared to the same periods of 2018.

For the three months ended June 30, 2019, and 2018

Local services. Local services revenue decreased 7.9% in the three months ended June 30, 2019, to $4.9 million from $5.3 million in the three months ended June 30, 2018. The decline in RLEC residential voice lines, including long distance and other related services, and the impact of the FCC ICC Order, accounted for the decrease.

Network access. Network access revenue decreased 8.3% in the three months ended June 30, 2019, to $5.2 million from $5.7 million in the three months ended June 30, 2018. ACAM, CAF and transition support payments each decreased $0.1 million. Switched and special access and end-user fees decreased $0.2 million.

Internet. Internet revenue decreased 3.8% in the three months ended June 30, 2019, to $3.7 million from $3.8 million in the three months ended June 30, 2018. A decrease in customers and related equipment rental charges accounted for the decline.

Transport services. Transport services revenue decreased 12.8% in the three months ended June 30, 2019, to $1.1 million from $1.4 million in the three months ended June 30, 2018, reflecting a wholesale carrier disconnect and two retail customer disconnects.

Video and security. Video and security revenue decreased 3.8% in the three months ended June 30, 2019, to just under $0.7 million in the three months ended June 30, 2019, from just over $0.7 million in the three months ended June 30, 2018, reflecting a decrease in cable customers.

Managed services. Managed services revenue decreased 9.4% in the three months ended June 30, 2019, to just over $0.1 million from just under $0.2 million in the three months ended June 30, 2018, reflecting slightly lower professional services and cloud hosting revenue.

For the six months ended June 30, 2019, and 2018

Local services. Local services revenue decreased 7.2% in the six months ended June 30, 2019, to $9.9 million from $10.6 million in the six months ended June 30, 2018. The decline in RLEC residential voice lines, including long distance and other related services, and the impact of the FCC ICC Order, accounted for a decrease of $0.7 million. Special line charges accounted for a decrease of $0.1 million.

Network access. Network access revenue decreased 4.9% in the six months ended June 30, 2019, to $10.5 million from $11.1 million in the six months ended June 30, 2018. Switched and special access decreased by $0.2 million. Transition support payments decreased by $0.2 million. CAF and access recovery fees decreased by $0.2 million. End-user fees decreased by $0.1 million. These decreases were partially offset by a $0.1 million increase in A-CAM revenue.

Internet. Internet revenue decreased 5.0% in the six months ended June 30, 2019, to $7.3 million from $7.7 million in the six months ended June 30, 2018. A decrease in customers and equipment rental charges accounted for the decline.

Transport services. Transport services revenue decreased 14.6% in the six months ended June 30, 2019, to $2.1 million from $2.4 million in the six months ended June 30, 2018, reflecting a wholesale carrier disconnect and two retail customer disconnects.

Video and security. Video and security revenue decreased 8.1% in the six months ended June 30, 2019, to $1.3 million from $1.5 million in the six months ended June 30, 2018, reflecting a decrease in cable customers.

Managed services. Managed services revenue decreased 10.5% in the six months ended June 30, 2019, to $0.3 million from just over $0.3 million in the six months ended June 30, 2018, reflecting slightly lower professional services and cloud hosting revenue.

Operating expenses. Operating expenses in the three months ended June 30, 2019, increased 2.0% to $11.9 million from $11.7 million in the three months ended June 30, 2018. Operating expenses in the six months ended June 30, 2019, decreased 1.8% to $23.9 million from $24.4 million in the six months ended June 30, 2018. The tables below provide the components of our operating expenses for the three months and six months ended June 30, 2019, compared to the same periods of 2018.

For the three months ended June 30, 2019, and 2018

Cost of services. Cost of services was unchanged at $7.5 million in the three months ended June 30, 2019, and the three months ended June 30, 2018. Customer service and sales increased $0.1 million. Toll and access costs were unchanged. All other operations costs decreased $0.1 million.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 5.3% to $2.6 million in the three months ended June 30, 2019, from $2.4 million in the three months ended June 30, 2018. During the three months ended June 30, 2018, the $0.2 million of conversion expenses associated with our new billing system had no comparable expense in the three months ended June 30, 2019. This decrease was offset by $0.2 million in one-time expense associated with the development of our long-term network design plans and $0.2 million in senior management incentive compensation accrual reflecting a change from stock to cash incentive compensation for the 2019 performance year.

Depreciation and amortization. Depreciation and amortization increased 5.6% to $1.9 million in the three months ended June 30, 2019, from $1.8 million in the three months ended June 30, 2018. An increase in RLEC depreciation combined with depreciation of our new billing system accounted for the increase.

For the six months ended June 30, 2019, and 2018

Cost of services. Cost of services decreased 2.3% to $15.1 million in the six months ended June 30, 2019, from $15.4 million in the six months ended June 30, 2018. Access and internet expense decreased $0.1 million. Digital expense decreased $0.1 million. All other operations costs decreased $0.1 million. The decreases were partially offset by an increase of $0.1 million in customer service and sales expense.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased 5.3% to $5.0 million in the six months ended June 30, 2019, from $5.3 million in the six months ended June 30, 2018. During the six months ended June 30, 2018, the $0.4 million of conversion expenses associated with our new billing system had no comparable expense in the six months ended June 30, 2019. In addition, accounting, finance and human resources expense decreased $0.2 million. Legal expense decreased $0.1 million. Uncollectible expense declined $0.1 million. The decreases were partially offset by $0.2 million in one-time expense associated with the development of our long-term network design plans and $0.3 million in senior management incentive compensation accrual reflecting a change from stock to cash incentive compensation for the 2019 performance year.

Depreciation and amortization. Depreciation and amortization increased 5.5% to $3.8 million in the six months ended June 30, 2019, from $3.6 million in the six months ended June 30, 2018. Depreciation of our new billing system was $0.1 million with no comparable depreciation in 2018. RLEC depreciation increased $0.1 million.

For the three months ended June 30, 2019, and 2018

Interest expense. Interest expense decreased 7.2% in the three months ended June 30, 2019, to $1.4 million from $1.5 million in the three months ended June 30, 2018. Lower outstanding principal was partially offset by higher interest rates. We refinanced our previous credit facilities with a new credit facility on November 2, 2017, which reduced our effective interest rate by approximately four percentage points. Our new credit facility matures in November 2022. See additional information in the Liquidity and Capital Resources section below.

Income tax expense. The Tax Cuts and Jobs Act enacted on December 22, 2017, reduced the maximum federal corporate tax rate from 35% to 21% which results in a lower effective income tax rate when compared to historical rates prior to 2018. For the three months ended June 30, 2019, our effective tax rate was 27.0%, as compared to 21.5% for the three months ended June 30, 2018. The effective income tax rate varies from the federal corporate tax rate of 21% largely due to state income taxes and other permanent differences.

For the six months ended June 30, 2019 and 2018

Interest expense. Interest expense decreased 6.7% in the six months ended June 30, 2019, to $2.7 million from $2.9 million in the six months ended June 30, 2018. Lower outstanding principal was partially offset by higher interest rates. We refinanced our previous credit facilities with a new credit facility on November 2, 2017, which reduced our effective interest rate by approximately four percentage points. Our new credit facility matures in November 2022. See additional information in the Liquidity and Capital Resources section below.

Other income. Other income increased 256.5% in the six months ended June 30, 2019, to $0.6 million from $0.2 million in the six months ended June 30, 2018, primarily related to the annual CoBank dividend received in the first quarter of each year.

Income tax expense. The Tax Cuts and Jobs Act enacted on December 22, 2017, reduced the maximum federal corporate tax rate from 35% to 21% which results in a lower effective income tax rate when compared to historical rates prior to 2018. For the six months ended June 30, 2019, our effective tax rate was 25.2%, as compared to 24.3% for the six months ended June 30, 2018. The effective income tax rate varies from the federal corporate tax rate of 21% largely due to state income taxes and other permanent differences.

Net income. As a result of the foregoing, there was net income of $1.7 million and $2.9 million in the three months ended June 30, 2019, and 2018, respectively. As a result of the foregoing, there was net income of $4.0 million and $4.9 million in the six months ended June 30, 2019, and 2018, respectively.

Liquidity and Capital Resources

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

For the six months ended June 30, 2019, we generated cash from our business to invest in additional property and equipment of $4.4 million, pay loan principal of $2.2 million and pay scheduled interest on our debt of $2.5 million. After meeting all of these needs of our business, cash increased to $5.4 million as of June 30, 2019, from $4.7 million as of December 31, 2018.

Cash flows from operating activities for the six months ended June 30, 2019, amounted to $7.5 million compared to $9.5 million for the six months ended June 30, 2018, primarily reflecting lower prepaid expenses.

Cash flows used in investing activities for the six months ended June 30, 2019, were $4.4 million compared to $3.3 million for the six months ended June 30, 2018, primarily reflecting RLEC fiber installation, including investments associated with the FCC’s A-CAM program. Plans have been announced that will increase investment in our network to an estimated $11.5 million in 2019, as we improve our network with additional fiber deployment and move to a VDSL delivery platform in all RLEC territories.

Cash flows used in financing activities for the six months ended June 30, 2019, were $2.4 million compared to $5.5 million in the six months ended June 30, 2018, reflecting $3.0 million in voluntary principal payments for the six months ended June 30, 2018 with no comparable payment for the same period in 2019. Our plans are to continue reducing our debt through our required quarterly payments while utilizing available cash from network improvements.

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

On November 2, 2017, we refinanced our prior credit facilities with a new $92.0 million, five-year credit facility from a consortium of banks led by CoBank, ACB. The existing credit facility includes an $87.0 million term loan and a $5.0 million revolving loan, which is undrawn. The existing credit facility also includes a $20.0 million accordion feature that could be used to increase the term-loan portion of the credit facility, subject to the satisfaction of certain conditions and lender participation. Proceeds from the term loan and cash on hand were used to pay all amounts due in respect of principal, interest, prepayment premiums and fees under our prior credit facilities, as well as fees associated with the transaction. Our existing credit facility requires annual principal reduction of $4.3 million paid equally on a quarterly basis and, beginning in 2019, an annual principal payment equal to 50% of our excess cash flow for the year. During the six months ended June 30, 2019, we made our scheduled principal payment of $2.2 million. We made no voluntary principal prepayments. The 2018 voluntary principal prepayments were used to offset the required 2019 excess cash flow payment due in first quarter 2019.

We anticipate that operating cash flow, together with borrowings under our revolving credit facility, will be adequate to meet our currently anticipated operating and capital expenditure requirements for at least the next 12 months. Our cash position reflects the continuing strength of our operations.

We use consolidated earnings before interest, taxes, depreciation and amortization (“Consolidated EBITDA”) and the ratio of our debt, net of cash, to Consolidated EBITDA for the last twelve months (the “Leverage Ratio”) as operational performance measurements. Consolidated EBITDA, as presented in this Quarterly Report on Form 10-Q, corresponds to the definition of Consolidated EBITDA in our credit facility. Consolidated EBITDA and the Leverage Ratio, as presented in this Quarterly Report on Form 10-Q, are supplemental measures of our performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“U.S. GAAP”). The lenders under our credit facility use Consolidated EBITDA to determine compliance with credit facility requirements. We report Consolidated EBITDA and the Leverage Ratio in our quarterly earnings press release to allow current and potential investors to understand these performance metrics and because we believe that they provide current and potential investors with helpful information with respect to our operating performance, including our ability to generate earnings sufficient to service our debt, and enhance understanding of our financial performance and highlight operational trends. However, Consolidated EBITDA and the Leverage Ratio should not be considered as an alternative to net income or any other performance measures derived in accordance with U.S. GAAP. Our presentation of Consolidated EBITDA and the Leverage Ratio may not be comparable to similarly titled measures used by other companies. Consolidated EBITDA for the three months and six months ended June 30, 2019, and 2018, and the twelve months ended June 30, 2019, and its reconciliation to net income, is reflected in the table below (dollar amounts in thousands):

The table below provides the calculation of the Leverage Ratio as of June 30, 2019 (dollar amounts in thousands).

As we reduce our debt, our Leverage Ratio will vary based on changes in Consolidated EBITDA.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.

Recently Adopted Accounting Pronouncements

See Note 1, Organization and Basis of Financial Reporting, to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of the recently adopted accounting pronouncements that are applicable to us, including details relating to our adoption of ASU 2016-02, Leases (Topic 842), at the beginning of 2019, which adoption did not have a material impact on our unaudited condensed consolidated financial statements.

Recent Accounting Pronouncements

See Note 1, Organization and Basis of Financial Reporting, to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of the recent accounting pronouncements that are applicable to us.

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

Interest rates applicable to the term loans (including any incremental term loans incurred under the accordion feature) and the revolving loans under our credit facility are set at a margin over an adjusted LIBOR rate (which is defined as the higher of (1) LIBOR multiplied by the statutory reserve rate and (2) 0.0% per annum) or a base rate (which is defined as the highest of (1) the prime rate, (2) the federal funds effective rate plus 0.50% per annum, (3) the adjusted LIBOR rate for an interest period of one month plus 1.0% per annum and (4) 0.0% per annum). Accordingly, we are exposed to interest rate risk. A one percentage point change in one-month LIBOR interest rates from the interest rates actually applicable to the loans under our credit facility during the period would have resulted in an increase of $0.4 million in our interest expense for the six months ended June 30, 2019.

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 June 30, 2019.

There were no changes in our internal control over financial reporting during the three months ended June 30, 2019, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

EXHIBIT INDEX

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.

Exhibit 31.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER

I, Robert J. Souza, certify that:

Exhibit 31.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER

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

Exhibit 32.1

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

In connection with the Quarterly Report of Otelco Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert J. Souza, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

Exhibit 32.2

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

In connection with the Quarterly Report of Otelco Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Curtis L. Garner, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: