OTEL Otelco Inc

Otelco Inc. (NASDAQ: OTEL) (“Otelco” or the “Company”), a wireline telecommunications services provider in Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia, today announced operational and financial results for its third quarter ended September 30, 2020. Key operational and financial highlights for Otelco include:

• Total revenues of $15.6 million for third quarter 2020.
• Operating income of $2.6 million for third quarter 2020.
• Net income of $1.2 million for third quarter 2020.
• Consolidated EBITDA (as defined below) of $4.8 million for third quarter 2020.
• Scheduled principal payments of $1.1 million in third quarter 2020 reduced debt to $67.0 million at the end of third quarter 2020.

THIRD QUARTER 2020 RESULTS The Company continued to execute on its strategy of network improvements to provide enhanced data speeds in third quarter 2020. Revenues for third quarter 2020 declined $0.2 million, or 1.2%, from third quarter 2019, primarily from a reduction in voice services and access fees, partially offset by increases in internet, video and security and managed services. Compared to second quarter 2020, revenues increased $0.1 million. Cost of services decreased by $0.1 million, or 1.6%, from third quarter 2019. Selling, general and administrative expense, excluding $0.9 million in Board project expenses related to Oak Hill Capital’s (“Oak Hill”) plan to acquire the Company (see details below), increased $0.1 million when compared to third quarter 2019. Interest expense declined $0.4 million reflecting lower interest rates and the reduction in principal outstanding under the Company’s credit agreement. Net income was $1.2 million in third quarter 2020, compared to $1.8 million in third quarter 2019. Excluding the $0.9 million in expenses related to Oak Hill’s plan to acquire the Company, net income for third quarter 2020 was $2.1 million. The Company invested $2.6 million in its network and operations during third quarter 2020. Consolidated EBITDA was $4.8 million for third quarter 2020, compared to $5.8 million for the same period in the previous year. Excluding the Board project expense, Consolidated EBITDA was $5.7 million for third quarter 2020, consistent with $5.7 million in second quarter 2020. The ratio of debt, net of cash, to Consolidated EBITDA was 2.74, reflecting the scheduled payments made on the debt. Basic net income per share was $0.36 for third quarter 2020, compared to $0.53 per share in the same period of 2019.

COVID-19 UPDATEA novel strain of coronavirus (COVID-19), first identified in December 2019, continues to impact the world’s economy and Otelco’s operations. Otelco has closely monitored developments in the states it serves and adjusted its operations accordingly to mitigate the potential risks related to the COVID-19 pandemic to the Company, its employees and its customers. Otelco has continuously provided essential voice and data services to its customers throughout the pandemic, while improving its ability to provide higher speed internet through investment in its network. The Company has adapted installation and repair service processes to limit customer contact and adapted employee workspace to provide appropriate social distancing. In states providing programs to support communications services for families qualifying for assistance, the Company has implemented the state’s requirements to provide the subsidized services.

As a result of the measures implemented by the Company, no significant adverse impact on results of operations or its financial position at September 30, 2020, has occurred. The full extent of the future impacts of COVID-19 on the Company’s operations is uncertain. An increase of COVID-19 cases in the Company’s service areas could have a material adverse impact on financial results and business operations of the Company, including the timing and ability of the Company to collect accounts receivable and procure materials and services from its suppliers.

ALABAMA FIBER INSTALLATION SERVING CUSTOMERS; CABLE UPGRADE TO DOCSIS 3.1 TO BE COMPLETED IN FOURTH QUARTER 2020; VDSL UPGRADES FOR QUALIFYING CUSTOMERS In June 2019, the Company announced plans to install 113 miles of additional fiber in Alabama by early 2020, focusing on the northern part of its territory in and around Arab, Alabama. All of the planned fiber is in service and marketing is underway to 4,167 Arab locations. Fiber-To-The-Premise (“FTTP”) provides up to one gigabit speed internet capability. Through September, 926 customers have upgraded their existing service or signed up for the new Lightwave fiber service in Alabama and in two towns in Maine. Deployment of equipment in New England service territories to support higher speed VDSL service and standardize on the same platform that provides service in Alabama and Missouri locations has been completed. 

In the southern part of its Alabama territory in and around Oneonta, Alabama, where Otelco is also the cable provider, work to upgrade its hybrid fiber coax network to DOCSIS 3.1 is nearing completion. Upon completion of this project, Otelco expects that all of its cable customers will also gain access to gigabit internet speeds, similar to speeds available over a FTTP network. The Company also continues to increase the speed of its Lightwave FTTP service and is now offering gigabit speeds throughout its entire FTTP service area.

Commenting on these developments, Richard Clark, President and Chief Executive Officer, pointed out that the Company continues to increase the speed of its Lightwave FTTP service and looks forward to expanding its fiber network in 2021 using additional investment from Oak Hill. Clark said, “Our offer of gigabit speeds in all of our FTTP communities in Maine, Alabama, Missouri and Vermont has been well received by our customers. While gigabit service is probably not necessary for most customers today, the higher speeds not available through standard DSL, but now available through our network improvements, allow customers to support multiple devices simultaneously as more work and study at home requirements are instituted. Our network is positioned to also provide for future increased requirements.”

BALANCE SHEET At the end of third quarter 2020, the Company reported cash of $8.1 million compared to $3.1 million at the end of 2019, including $3.0 million in Paycheck Protection Program ("PPP”) loan proceeds received in April 2020. The Company has completed its application for loan forgiveness. The forgiveness process could take up to six months to complete. Total assets increased from $120.7 million at the end of 2019 to $127.2 million at September 30, 2020. During the first nine months of 2020, the Company invested $8.1 million in improving its network and operational capabilities, compared to $7.6 million during the same period in 2019. The Company’s leverage ratio (as defined in its credit agreement) of consolidated indebtedness to Consolidated EBITDA was 3.12 at the end of third quarter 2020, reflecting the use of additional cash generated from business operations to improve its network. Its ratio of debt, net of cash (excluding PPP loan), to Consolidated EBITDA was 2.88. The interest rate margin on its loan is 4.50% and the current and projected one-month LIBOR rates are projected to remain well below 1.0% for the balance of 2020.

SUMMARY “Otelco’s employees have focused on meeting our customers’ needs in the face of the risks and uncertainties brought on by the COVID-19 pandemic,” noted Clark. “Changes and updates to work locations and operational routines presented challenges for making and keeping commitments to provide service and complete network enhancements. Our dedicated team has installed new high-speed fiber connections for our customers and improved internet speeds with VDSL conversions while adhering to changing governmental crisis guidance. Year-to-date, customers have increased 1.5% compared to a loss of 3.7% for the 2019 calendar year. By the end of 2020, we expect our projects to bring gigabit internet capability to more than 27% of our market, while increasing available speeds to 50 and 75 mbps to another 9% of our market with VDSL. When these projects are completed, approximately 21% of the Otelco market will have access to speeds ranging from 25 mbps to 75 mbps and 27% will have availability of gigabit speeds. Our objective is unchanged: improve service capabilities and add new customers to the Otelco family of companies. Our investment in our broadband networks and delivering faster internet service to customers is positively impacting our internet revenue and customer retention.”

OTELCO AGREES TO BE ACQUIRED BY OAK HILL CAPITALOn July 27, 2020, Otelco announced that it had entered into a definitive agreement to be acquired by affiliates formed by Oak Hill Capital, a private equity firm, for $11.75 per share in cash, or a total equity purchase price of $40.6 million (the “Transaction”). On October 9, 2020, at a special meeting of Otelco’s stockholders, the stockholders approved a proposal to adopt the definitive agreement. The Transaction is not subject to financing contingencies and is expected to close in the first quarter of 2021, after normal regulatory approvals. The press release, proxy statement and related SEC filing are available in the Investors section of the Company’s website at www.Otelco.com.

THIRD QUARTER 2020 EARNINGS CONFERENCE CALLOtelco has scheduled a conference call, which will be broadcast live over the internet, on Wednesday, November 4, 2020, at 11:30 a.m. (Eastern Time). To participate in the call, participants should dial (856) 344-9206 and ask for the Otelco call 10 minutes prior to the start time. Investors, analysts and the general public will also have the opportunity to listen to the conference call free over the internet by visiting the Company’s website at www.Otelco.com. To listen to the live call online, please visit the website at least 15 minutes early to register, download and install any necessary audio software. For those who cannot listen to the live webcast, a replay of the webcast will be available on the Company's website at www.Otelco.com for 30 days. A two-week telephonic replay may also be accessed by calling (719) 457-0820 and entering the Confirmation Code 5583353.

Third Quarter 2020 Financial Summary
(in thousands, except per share amounts)
(Unaudited)
		Three Months Ended
		September 30,								Change
			2020				2019			Amount				Percent
Revenues		$	15,574			$	15,762			$	(188	)			(1.2	)	%
Operating income		$	2,605			$	3,841			$	(1,236	)			(32.2	)	%
Interest expense		$	(931	)		$	(1,315	)		$	(384	)			(29.2	)	%
Net income available to stockholders		$	1,228			$	1,819			$	(591	)			(32.5	)	%
Basic net income per share		$	0.36			$	0.53			$	(0.17	)			(32.1	)	%
Diluted net income per share		$	0.36			$	0.53			$	(0.17	)			(32.1	)	%
Consolidated EBITDA		$	4,766			$	5,790			$	(1,024	)			(17.7	)	%
Capital expenditures		$	2,568			$	3,157			$	(589	)			(18.7	)	%
		Nine Months Ended
		September 30,								Change
			2020				2019			Amount				Percent
Revenues		$	46,464			$	47,175			$	(711	)			(1.5	)	%
Operating income		$	8,740			$	11,312			$	(2,572	)			(22.7	)	%
Interest expense		$	(3,100	)		$	(4,044	)		$	(944	)			(23.3	)	%
Net income		$	4,877			$	5,816			$	(939	)			(16.1	)	%
Net income per share		$	1.43			$	1.71			$	(0.28	)			(16.4	)	%
Diluted net income per share		$	1.42			$	1.70			$	(0.28	)			(16.5	)	%
Consolidated EBITDA		$	15,912			$	17,828			$	(1,916	)			(10.7	)	%
Capital expenditures		$	8,066			$	7,594			$	472				6.2		%

ABOUT OTELCOOtelco Inc. provides wireline telecommunications services in Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia. The Company’s services include local and long distance telephone, digital high-speed data lines, transport services, network access, cable television and other related services. Otelco is among the top 20 largest local exchange carriers in the United States. Otelco operates eleven incumbent telephone companies serving rural markets, or rural local exchange carriers. It also provides competitive retail and wholesale communications services and technology consulting, managed services and private/hybrid cloud hosting services through several subsidiaries. For more information, visit the Company’s website at www.Otelco.com.

FORWARD LOOKING STATEMENTSStatements in this press release that are not statements of historical or current fact constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors, some of which are listed below, that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms “believes,” “belief,” “expects,” “intends,” “anticipates,” “plans,” or similar terms to be uncertain and forward-looking, including statements regarding the Company’s response to the COVID-19 pandemic, network upgrade plans and customer growth. Important risk factors related to the Transaction that may cause such differences include: (1) the occurrence of any event, change or other circumstances that could give rise to the termination of the definitive agreement, including a termination under circumstances that could require the Company to pay a termination fee; (2) Oak Hill’s failure to obtain the necessary equity and debt financing or the failure of that financing to be sufficient to complete the Transaction; (3) the inability to complete the Transaction due to the failure to satisfy certain conditions to completion of the Merger, including the receipt of required regulatory approvals, or for any other reason; (4) risks that the Transaction disrupts current plans and operations, including possible adverse effect on the Company’s business relationships, diversion of management’s attention, and the potential difficulties in employee retention as a result of the Transaction; (5) the outcome of any legal proceedings, regulatory proceedings or enforcement matters that have been or may be instituted against the Company or others relating to the Transaction; (6) the definitive agreement’s contractual restrictions on the conduct of the Company’s business prior to the completion of the Transaction; and (7) the possible adverse effect on the Company’s business and the price of its common stock if the Transaction is not consummated in a timely manner or at all. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company’s filings with the Securities and Exchange Commission. The Company assumes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

OTELCO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share par value and share amounts)
(unaudited with the exception of December 31, 2019 being audited)
									September 30,			December 31,
									2020			2019
Assets
	Current assets
	Cash and cash equivalents								$	8,086		$	3,113
	Accounts receivable:
	Due from subscribers, net of allowance for doubtful
	accounts of $253 and $209, respectively									3,985			3,908
	Other									1,946			1,905
	Materials and supplies									3,731			3,954
	Prepaid expenses									1,310			1,624
	Other assets									207			251
	Total current assets									19,265			14,755
	Property and equipment, net									59,465			57,284
	Goodwill									44,976			44,976
	Intangible assets, net									249			530
	Operating lease right-of-use asset									1,636			1,146
	Investments									1,458			1,477
	Other assets									120			577
	Total assets								$	127,169		$	120,745
Liabilities and Stockholders' Equity
	Current liabilities
	Accounts payable								$	1,779		$	1,525
	Accrued expenses									5,835			4,861
	Advance billings and payments									1,606			1,618
	Customer deposits									27			44
	Current operating lease liability									398			296
	Current maturity of long-term notes payable, net of debt issuance cost									3,872			3,929
	Total current liabilities									13,517			12,273
	Deferred income taxes									21,521			21,521
	Advance billings and payments									2,011			2,157
	Other liabilities									1			12
	Long-term operating lease liability									1,238			850
	PPP notes payable									2,975			-
	Long-term notes payable, less current maturities and debt issuance cost									62,133			65,172
	Total liabilities									103,396			101,985
	Stockholders' equity
	Class A Common Stock, $.01 par value-authorized 10,000,000 shares;
	issued and outstanding 3,421,794 and 3,412,805 shares, respectively									34			34
	Additional paid in capital									4,411			4,275
	Retained earnings									19,328			14,451
	Total stockholders' equity									23,773			18,760
	Total liabilities and stockholders' equity								$	127,169		$	120,745

OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
							Three Months Ended September 30,								Nine Months Ended September 30,
								2020				2019				2020				2019
Revenues							$	15,574			$	15,762			$	46,464			$	47,175
Operating expenses
	Cost of services							7,422				7,542				22,235				22,630
	Selling, general and administrative expenses							3,459				2,506				9,326				7,535
	Depreciation and amortization							2,088				1,873				6,163				5,698
		Total operating expenses						12,969				11,921				37,724				35,863
Income from operations								2,605				3,841				8,740				11,312
Other income (expense)
	Interest expense							(931	)			(1,315	)			(3,100	)			(4,044	)
	Other income							6				5				813				604
		Total other expense						(925	)			(1,310	)			(2,287	)			(3,440	)
Income before income tax expense								1,680				2,531				6,453				7,872
Income tax expense								(452	)			(712	)			(1,576	)			(2,056	)
Net income							$	1,228			$	1,819			$	4,877			$	5,816
Weighted average number of common shares outstanding:
		Basic						3,421,794				3,410,936				3,421,794				3,410,936
		Diluted						3,440,772				3,431,229				3,440,772				3,431,229
Basic net income per common share							$	0.36			$	0.53			$	1.43			$	1.71
Diluted net income per common share							$	0.36			$	0.53			$	1.42			$	1.70

OTELCO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
									Nine Months Ended September 30,
										2020				2019
Cash flows from operating activities:
	Net income								$	4,877			$	5,816
	Adjustments to reconcile net income to cash flows provided by operating activities:
	Depreciation									5,939				5,465
	Amortization									224				233
	Amortization of loan costs									379				342
	Non-cash lease amortization									311				166
	Provision for uncollectible accounts receivable									283				163
	Stock-based compensation									156				173
	Gain on the sale of property									(211	)			-
	Changes in operating assets and liabilities
	Accounts receivable									(358	)			(198	)
	Materials and supplies									223				(1,448	)
	Prepaid expenses and other assets									771				(337	)
	Accounts payable and accrued expenses									1,228				1,743
	Advance billings and payments									(158	)			(248	)
	Other liabilities									(339	)			(182	)
	Net cash from operating activities									13,325				11,688
Cash flows used in investing activities:
	Acquisition and construction of property and equipment									(8,066	)			(7,594	)
	Proceeds from the sale of property									234				-
	Net cash used in investing activities									(7,832	)			(7,594	)
Cash flows used in financing activities:
	Loan origination costs									(213	)			(12	)
	Principal repayment of long-term notes payable									(3,262	)			(3,262	)
	Interest rate cap									-				4
	Tax withholdings paid on behalf of employees for restricted stock units									(20	)			(183	)
	Proceeds from PPP loan									2,975				-
	Net cash used in financing activities									(520	)			(3,453	)
Net increase in cash and cash equivalents										4,973				641
Cash and cash equivalents, beginning of period										3,113				4,657
Cash and cash equivalents, end of period									$	8,086			$	5,298
Supplemental disclosures of cash flow information:
	Interest paid								$	2,707			$	3,717
	Income taxes paid								$	788			$	1,243

CONSOLIDATED EBITDA – Consolidated EBITDA is defined as consolidated net income plus consolidated net interest expense, depreciation and amortization, income taxes and certain other fees, expenses and non-cash charges reducing consolidated net income. Consolidated EBITDA is a supplemental measure of the Company’s performance that is not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). Consolidated EBITDA corresponds to the definition of Consolidated EBITDA in the Company’s credit facility. The lenders under the Company’s credit facility utilize this measure to determine compliance with credit facility requirements. The Company uses Consolidated EBITDA as an operational performance measurement to focus attention on the operational generation of cash, which is used for reinvestment into the business; to repay its debt and to pay interest on its debt; to pay income taxes; and for other corporate requirements. The Company reports Consolidated EBITDA to allow current and potential investors to understand this performance metric and because the Company believes that it provides current and potential investors with helpful information with respect to the Company’s operating performance. However, Consolidated EBITDA should not be considered as an alternative to net income or any other performance measures derived in accordance with GAAP. The Company’s presentation of Consolidated EBITDA may not be comparable to similarly titled measures used by other companies.

Reconciliation of Consolidated EBITDA to Net Income																		Twelve Months
(in thousands)										Nine Months Ended								Ended
		September 30,								September 30,								September 30,
			2020				2019				2020				2019			2020
Net income		$	1,228			$	1,819			$	4,877			$	5,816			$	6,856
Add:	Depreciation		1,997				1,798				5,939				5,465				7,817
	Interest expense less interest income		802				1,198				2,706				3,691				3,817
	Interest expense - amortized loan cost		125				112				379				342				489
	Income tax expense		452				712				1,576				2,056				1,913
	Amortization - intangibles		91				75				224				233				291
	Loan fees		19				17				55				52				72
	Stock-based compensation (senior management)		52				59				156				173				238
Consolidated EBITDA		$	4,766			$	5,790			$	15,912			$	17,828			$	21,493

LEVERAGE RATIO – The Company uses the ratio of debt, net of cash, to Consolidated EBITDA for the last twelve months as an operational performance measurement of Otelco’s leverage. Such ratio is a supplemental measure of the Company’s performance that is not required by, or presented in accordance with, GAAP. The Company reports such ratio to allow current and potential investors to understand this performance metric. The Company also believes that it provides current and potential investors with helpful information with respect to the Company’s operating performance, including the Company’s ability to generate earnings sufficient to service its debt, and enhances understanding of the Company’s financial performance and highlights operational trends. However, such ratio should not be considered as an alternative to net income or any other performance measures derived in accordance with GAAP. The Company’s presentation of such ratio may not be comparable to similarly titled ratios used by other companies. The table below provides the calculation of such ratio as of September 30, 2020. In addition, its credit agreement measures the ratio of debt to Consolidated EBITDA for the last twelve months as a covenant under the agreement.

	Ratio of Debt, Net of Cash, to Consolidated EBITDA
	as of September 30, 2020
	(in thousands)
	Notes payable			$	66,005
	Debt issuance costs				945
		Notes outstanding		$	66,950
	Less cash (excluding PPP loan)				(5,111	)
	Notes outstanding, net of cash			$	61,839
	Consolidated EBITDA for the
		last twelve months		$	21,493
	Total leverage ratio, net of cash				2.88

Contact:		Curtis Garner
		Chief Financial Officer
		Otelco Inc.
		205-625-3580
		Curtis.Garner@Otelco.com