NUVR 10-K
Nuvera Communications, Inc. (NUVR)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the fiscal year ending
For the transition period from______to______
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
(Address of principal executive offices)
Registrant's telephone number, including area code: (
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock - $1.66 par value NUVR OTCQB Marketplace
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐
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.
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
1
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,” “non-accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ☐ Large accelerated filer ☒
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Securities registered pursuant to Section 12(b) of the Act: None.
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| | | OTCQB Marketplace |
The aggregate market value of the registrant’s common stock held by non-affiliates computed by reference to the price at which the common stock was sold, as of the last business day of the registrant’s most recently completed second fiscal quarter was $
As of March 16, 2022, the registrant had
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2022 Annual Meeting of Stockholders to be held on May 26, 2022 are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2021.
2
3
NOTE ABOUT FORWARD LOOKING STATEMENTS
The Securities and Exchange Commission (SEC) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. Certain statements in this Annual Report on Form 10-K, including those relating to the impact on future revenue sources, pending and future regulatory orders, continued expansion of the fiber communications network and expected changes in the sources of our revenue and cost structure resulting from our entrance into new communications markets, are forward-looking statements and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These statements reflect, among other things, our current expectations, plans, strategies and anticipated financial results. There are a number of risks, uncertainties and conditions that may cause our actual results to differ materially from those expressed or implied by these statements. Many of these circumstances are beyond our ability to control or predict. Moreover, forward-looking statements necessarily involve assumptions on our part. These statements generally are identified by the words “believes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “may,” “will,” “would,” “seeks,” “targets,” “continues,” “should,” “will be,” “will continue,” or similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Nuvera Communications, Inc. and its subsidiaries (“Nuvera,” the “Company,” “we” or “our” or “us”) to be different from those expressed or implied in the forward-looking statements. These risks and uncertainties may include, but are not limited to: i) unfavorable general economic conditions that could negatively affect our operating results; ii) substantial regulatory change and increased competition; iii) our possible pursuit of acquisitions could be expensive or not successful; iv) we may not accurately predict technological trends or the success of new products; v) shifts in our product mix may result in declines in our operating profitability; vi) possible consolidation among our customers; vii) a failure in our operational systems or infrastructure could affect our operations; viii) data security breaches; ix) possible replacement of key personnel; x) elimination of governmental network support we receive; xi) our current debt structure may change due to increases in interest rates or our ability to comply with lender loan covenants and xii) possible customer payment defaults. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements that appear throughout this report. Furthermore, these statements speak only as of the date they are made. Except as required under federal securities laws or the rules and regulations of the SEC, we disclaim any intention or obligation to update or revise publicly any forward-looking statements. Undue reliance should not be placed on forward-looking statements.
Website Access to SEC Reports
Our website at www.nuvera.net provides information about our products and services, along with general information about Nuvera and its management and financial results. Copies of our most recent Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, can be obtained, free of charge, as soon as reasonably practical after these reports are electronically filed or furnished to the SEC. To obtain this information, visit our website noted above and select “About Us – Investors” to view Nuvera SEC filings,” or call (844) 354-4111. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding public companies, including Nuvera Communications, Inc. Any reports filed with the SEC may also be obtained from the SEC’s Reference Room at 100F Street, NE, Washington, DC 20549.
Code of Business Conduct and Ethics
Our Board of Directors (BOD) has adopted a Code of Business Conduct and Ethics that is applicable to all directors, the chief executive officer (CEO), chief financial officer (CFO) and to all other employees of Nuvera. All employees of Nuvera have undergone training on this Code of Business Conduct and Ethics. The information required by Item 406 of Regulation S-K is contained under “Code of Business Conduct” in the definitive proxy statement (2022 Proxy Statement) and is incorporated by reference. Our BOD has also adopted written charters for its committees that comply with the NASDAQ Global Select Market. Copies of the committee charters are available on our website above or by contacting us at (844) 354-4111.
4
PART I
Item 1. Business
Company Overview and History
Nuvera is a diversified communications company headquartered in New Ulm, Minnesota with more than 116 years of experience in the communications business. We operate in one principal business segment: the Communications Segment.
Our principal line of business is the operation of seven communications companies. Our original business was founded in 1905 and consisted of the operation of a single communications company (New Ulm Rural Telephone Company). In 1984, we changed our name to New Ulm Telecom, Inc. In 1986, we acquired Western Telephone Company (WTC). In 1993, we acquired Peoples Telephone Company (PTC). In 2008, we acquired Hutchinson Telephone Company (HTC). In 2012, we acquired Sleepy Eye Telephone Company (SETC). In 2018, we acquired Scott-Rice Telephone Co. (Scott-Rice). Our businesses consist of connecting customers to our advanced fiber communications network, providing managed services, switched service and dedicated private lines, connecting customers to long distance service providers and providing many other services associated with our businesses. Our businesses also provide Internet protocol television (IPTV), cable television services (CATV), Internet access services, including high-speed broadband access, and long distance service. We also install and maintain communications systems to the areas in and around our service territories in southern Minnesota and northern Iowa. In 2008 we acquired Hutchinson Telecommunications, Inc. This company operates in and around the city of Litchfield, Minnesota and operates under less regulatory oversight than our other communications companies. In 2010, we acquired the cable TV system in the city of Glencoe and operate Glencoe under the Hutchinson Telecommunications, Inc. communications company. This company offers the same services as our other communications companies. In 2000, we changed our marketing name to NU-Telecom and operated under that name in our markets. In 2018, we changed our marketing name to Nuvera and currently operate under that name in our markets.
Recent Business Development
On December 15, 2021, the Company announced plans to build and deploy gigabit-speed (Gig or Gbps) fiber internet across its network creating crucial access to the fastest speeds available for rural communities, small cities and suburban areas across Minnesota. “This is a transformational moment for Nuvera as we make a future-focused investment in the communities we serve by providing the most reliable fiber-to-the-premise (FTTP) access to Gig-speed services,” said Glenn Zerbe, CEO. “Our homes, businesses and communities need reliable and affordable connections to school, workplaces and entertainment, as an important and growing part of everyday life.” “Nuvera’s investment in fiber-to-the-home network infrastructure will allow more underserved communities across Minnesota to leverage the quality of life and economic opportunity that access to a state-of-the-art network provides now and for years to come.” said, State Sen. Nick Frentz, DFL-North Mankato. Nuvera’s Gig-speed end-to-end fiber network is building and rolling out now. Service will be available for thousands of customers in 2022. The company will continue to build and deploy the Gig-speed service over the next few years. “We’re excited to create ‘Nuvera Gig Cities’ in the communities we serve while also expanding access to fiber-based internet service at a range of speeds,” said Zerbe. “Nuvera’s fiber network gives customers affordable access to a range of speeds from 100 Mbps to 1 Gig at prices that are the same whether you’re in rural Goodhue or suburban Prior Lake.”
5
While Nuvera’s goal is to bring Gig-speed service to as many communities as possible, the initial buildout will focus on the following cities and surrounding communities:
● ● New Ulm
● ● Hutchinson
● ● Glencoe
● ● Goodhue
● ● Litchfield
● ● Redwood Falls
● ● Prior Lake
● ● Elko New Market
● ● Savage
● ● Sleepy Eye
● ● Springfield
● ● Aurelia, IA
Nuvera’s fiber internet prices range from $50 per month to $125 per month for Gig-speed services. Customers can choose the right speed at an affordable price, including low-income households through Federal programs.
Our operations are currently conducted through the following subsidiaries:
Communications Segment
| ● | Communications Companies: | ||
|
| ▪ |
| Nuvera Communications, Inc., the parent company; |
|
| ▪ |
| Hutchinson Telephone Company, a wholly-owned subsidiary of Nuvera; |
|
| ▪ |
| Peoples Telephone Company, a wholly-owned subsidiary of Nuvera; |
|
| ▪ |
| Scott-Rice Telephone Co., a wholly-owned subsidiary of Nuvera; |
|
| ▪ |
| Sleepy Eye Telephone Company, a wholly-owned subsidiary of Nuvera; |
|
| ▪ |
| Western Telephone Company, a wholly-owned subsidiary of Nuvera; and |
|
| ▪ |
| Hutchinson Telecommunications, Inc., a wholly-owned subsidiary of HTC, located in Litchfield and Glencoe, Minnesota |
|
|
| ||
| ● | Our investments and interests in several of the following entities include some management responsibilities: | ||
|
| ▪ |
| FiberComm, LC – 20.00% subsidiary equity ownership interest. FiberComm, LC is located in Sioux City, Iowa; |
|
| ▪ |
| Broadband Visions, LLC (BBV) – 24.30% subsidiary equity ownership interest. BBV provides video headend and Internet services; |
|
| ▪ |
| Independent Emergency Services, LLC (IES) – 14.29% subsidiary equity ownership interest. IES is a provider of E-911 services to the State of Minnesota as well as a number of counties located in Minnesota; and |
|
| ▪ |
| Fiber Minnesota, LLC (FM) – 7.54% subsidiary equity ownership interest. FM is a Minnesota state-wide network that provides connectivity for regional businesses. |
We report the business operations of our seven communications companies and their associated services as a single segment that we refer to as the Communications Segment.
6
The Communications Segment operates the following communications companies: Nuvera, HTC, PTC, Scott-Rice, SETC, WTC, Litchfield and Glencoe, Minnesota. Nuvera, HTC, Scott-Rice, SETC, WTC, Litchfield and Glencoe are independent communications companies that are regulated by the Minnesota Public Utilities Commission at the state level, while PTC is an independent communications company that is regulated by the Iowa Utilities Board at the state level. Our communications company located in Redwood Falls, Litchfield and Glencoe is currently not under the same level of regulatory oversight as our communications companies. As of December 31, 2021 we served 32,520 broadband connections and 17,216 access lines in the Minnesota communities of Bellechester, Courtland, Elko, Evan, Goodhue, Hanska, Hutchinson, Klossner, Litchfield, Mazeppa, New Market, New Ulm, Prior Lake, Redwood Falls, Sanborn, Savage, Searles, Sleepy Eye, Springfield and White Rock, as well as the adjacent rural areas of Blue Earth, Brown, Goodhue, McLeod, Meeker, Nicollet, Redwood, Rice, Scott and Wabasha counties in south central Minnesota. We also serve the community of Aurelia, Iowa as well as the adjacent rural areas surrounding Aurelia. The Communications Segment also operates multiple IPTV and CATV systems in Minnesota (including the cities of Cologne, Courtland, Elko, Glencoe, Goodhue, Hanska, Hutchinson, Litchfield, Mayer, New Market, New Germany, New Ulm, Plato, Prior Lake, Redwood Falls, Sanborn, Savage, Sleepy Eye and Springfield) and one IPTV system in Aurelia, Iowa. These systems serve 10,172 customers.
The Communications Segment derives its principal revenues from (i) voice service charges to its residential and business subscribers, (ii) access charges to Interexchange Carriers (IXCs) for providing the carriers access to our local phone networks and (iii) the provisioning of video and data services.
None of our communications companies are dependent upon any single customer or small group of customers. No single customer accounted for 10% or more of our consolidated revenues in any of the last two years.
We provide a variety of business communication services to small, medium and large business customers, including many services over our advanced fiber-optic (fiber) network. The services we offer include scalable high speed broadband Internet access and voice over Internet protocol (VoIP) phone services, which range from basic service plans to virtual hosted systems. Our hosted VoIP package utilizes our soft switching technology and enables our customers to have the flexibility of employing new telephone advances and features without investing in a new telephone system. This package bundles voice service, calling features, IP business telephones and unified messaging, which integrates multiple technologies into a single system and allows the customer to receive and listen to voice messages through e-mail.
In addition to Internet and VoIP services, we also offer a variety of commercial data connectivity services in select markets including private line and Ethernet services to provide high bandwidth across point-to-point and multiple site networks.
We receive the majority of our revenues through the following sources:
Voice Service – We receive recurring revenue for basic voice services that enable end-user customers to make and receive telephone calls within a defined local calling area for a flat monthly fee. In addition to subscribing to basic local telephone services, our customers may choose from multiple voice service plans with a variety of custom calling features such as call waiting, call forwarding, caller identification and voicemail. Our VoIP digital phone service is also available as an alternative to the traditional telephone line.
Network Access – We provide access services to other communications carriers for the use of our facilities to terminate or originate long distance calls on our fiber network. Additionally, we bill monthly subscriber line charges (SLCs) to substantially all of our customers for access to the public switched network. These monthly SLCs are regulated and approved by the Federal Communications Commission (FCC). In addition, network access revenue is derived from several federally administered pooling arrangements designed to provide support and distribute funding to us.
7
Video Service – We provide a variety of enhanced video services on a monthly recurring basis to our customers. Depending on geographical market availability, our video services range from limited basic service to advanced digital TV, which includes several plans each with hundreds of local, national music channels including premium and pay-per-view channels as well as video-on-demand service. Certain customers may also subscribe to our advanced video services, which consist of high-definition (HD) TV, digital video recorders (DVR) and Whole Home DVR. Our Whole Home DVR allows customers the ability to watch recorded shows on any TV in the house, record multiple shows at one time and utilize an intuitive on-screen guide and user interface. Video subscribers also have access to our TV Everywhere service which allows subscriber access to full episodes of available shows, movies and live screens using a computer or mobile device. We also receive monthly recurring revenue from our subscribers for providing commercial TV programming in competition with local CATV, satellite dish TV and off-air TV service providers. We serve twenty-two communities with our IPTV services and five communities with our CATV services.
Data Service – We provide high speed Internet to business and residential customers depending on the nature of the network facilities that are available, the level of service selected and the location. Our revenue is earned based on the offering of various flat rate packages based on the level of service, data speeds and features. We also provide e-mail and managed services, such as web hosting and design, on-line file back up and on-line file storage.
Alternative Connect America Cost Model (A-Cam)/Federal Universal Service Fund (FUSF) – The Company currently receives funding based on the A-CAM, with the exception of Scott-Rice, which receives funding from the FUSF. Scott-Rice’s settlements from the National Exchange Carriers Association (NECA) pools are based on nationwide average schedules, which includes the pooling and redistribution of revenues based on a company’s actual or average costs. See below for a discussion regarding A-CAM and FUSF.
Other – Our customers are billed for toll and long-distance services on either a per call or flat-rate basis. This also includes the offering of directory assistance, operator service and long distance private lines. We also generate revenue from directory publishing through an outside vendor, sales and service of customer premise equipment (CPE), bill processing and other customer services. Our directory publishing revenue in our telephone directories recurs monthly. We also provide retail sales and service of cellular phones and accessories through Telespire, a national wireless provider. We resell these wireless services as Nuvera Wireless, our branded product. We receive both recurring revenue for our wireless services, as well as revenue collected for the sale of wireless phones and accessories.
Strategy
Our vision is to transform our Company into a dominate fiber Gig broadband provider. On December 15, 2021, the Company announced plans to build and deploy Gig-speed fiber internet across its network creating crucial access to the fastest speeds available for rural communities, small cities and suburban areas across Minnesota. The five-year build plan, which began in late 2021, will when complete, include approximately 69,000 location passings to fiber enabling Gig-capable services by 2025. In 2022, we plan to upgrade more than 8,000 locations with fiber services and faster broadband speeds. This marks the biggest fiber deployment project in our Company’s history. In addition, to best-in-class upload and download speeds, we believe the resulting fiber network will offer better reliability, improved speed consistency, and a lower operating cost relative to competing broadband network technologies. Given these benefits, we believe that our fiber deployment strategy will allow us to realize meaningful improvements to our operating results, broadband subscriber penetration and customer retention.
We believe our customers place a value on the fact that we are a local company whose goal is to meet their total communications needs. The success of this vision depends on the following strategies:
● We have and will continue to upgrade our fiber networks through our five-year build plan and enhance our products and services to take advantage of the latest technology including advanced high-bandwidth capabilities and services, expansion of our fiber network for wholesale and retail customers, Fiber-to-the-Tower services for wireless carriers and last mile fiber builds to residential and business customers. We intend to continue to introduce new services that draw upon our core competencies and we believe are attractive to our target customers. In considering new services and market expansion, we look for market opportunities that we believe present growth opportunities.
8
● As consumer demands for bandwidth continue to increase, our focus is on enhancing our broadband services, and progressively increasing broadband speeds. We began an extensive FTTP overbuild in portions of New Ulm in 2021. We currently offer speeds of up to 1 Gbps in select areas where fiber is available, and up to 100 Megabits per second (Mbps) and 60 Mbps in areas where 1 Gbps is not yet available. As we continue to increase broadband speeds, we are also able to simultaneously expand the array of services and content offerings that the fiber network provides.
● We market services to our residential and business customers either individually or as a bundled package. Data connections continue to increase as a result of consumer trends towards increased Internet usage and our enhanced product and service offerings.
● Our consumer broadband speed allows us to continue to meet the needs of our customers and the demand for higher speed resulting from the growing trend of over-the-top content viewing. The availability of faster speeds also complements our wireless home networking (Wi-Fi) and supports our TV everywhere service and allows our subscribers to watch their favorite programs at home or away on a computer, smartphone or tablet.
● We tailor our services to commercial customers by developing solutions to fit their specific needs. We provide services to a wide range of commercial customers from sole proprietors and other small businesses to multi-location corporations. Our business suite of services includes local and long-distance calling plans, hosted voice services using network servers, the added capacity for multiple phone lines, scalable broadband Internet, online back up and business directory listings.
● We believe that we have several advantages over our competition, including an advanced fiber communications network, competitive pricing and costs, outstanding service quality, a strong reputation, a high level of commitment to the communities we serve and a direct billing relationship with a vast majority of the customers we serve in our service territories. We manage the potential decline in communications network access and voice service revenues by offering value-added services such as higher Internet speeds, HD IPTV, DVR services, managed services, customized communications solutions, along with outstanding customer service as a competitive differentiator.
● We continue to seek ways to improve our internal processes and gain operational efficiencies. While focusing resources on revenue growth and market share gains, we continually challenge our management team and employees at all levels to seek efficiencies and enhance our customers’ experience. We continue to invest in our fiber networks and train our employees to achieve customer service excellence.
● Our current customer base provides a recurring revenue stream generating stable cash flow. Our focus remains on growing our services and supporting product lines so as to generate sufficient cash flow to fund our current operations, service our debt, fund our capital expenditure needs, pay dividends and expand our business. We have allocated resources to maintain and upgrade our fiber network while focusing on optimizing returns by completing strategic capital outlays that will make our fiber network more efficient and cost effective while providing the products and services that our customers desire in the markets we serve.
● We intend to continue to pursue a disciplined process of evaluating acquisitions of businesses as well as organic growth opportunities of market expansion and/or products which are complementary to our business portfolio.
● Across all of our service territories, we have successfully managed capital expenditures to optimize returns through disciplined planning and targeted investment of capital. For example, strategic investments in our fiber networks allows significant flexibility to expand our commercial footprint, offer competitive products and services and provide services in a cost-efficient manner while maintaining our reputation as a high-quality service provider. We will continue to invest in strategic growth initiatives to enhance and expand our fiber network to new markets and customers in order to optimize new business, backhaul and wholesale opportunities.
● Commercial services are expected to be a key growth area in the future. We are focused on enhancing our broadband and commercial product suite and are continually enhancing our commercial product offerings to meet the needs of our business customers. We overbuilt our existing networks with advanced fiber networks in the commercial areas of New Ulm, Prior Lake and Hutchinson in 2021, 2020 and 2019. We tailor our services for business customers by developing solutions to fit their specific needs. Additionally, we are continuously enhancing our suite of managed and cloud services, which increases efficiency and enables greater scalability and reliability for businesses. We are utilizing multiple software platforms to gather relevant leads and for customer relations management.
9
● In addition to Internet and VoIP services, we also offer a variety of commercial data connectivity services in select markets including Ethernet services; software defined wide area network (SD-WAN), a software-based network technology that provides a simplified management and automation of SD-WAN connections; multi-protocol label switching; and private line services to provide high bandwidth connectivity across point-to-point and multiple site networks. We offer a suite of cloud-based services, which includes a hosted unified communications solution that replaces the customer’s on-site phone systems and data networks, managed network security services and data protection services, including back-up and disaster recovery.
Competition
We compete in a rapidly evolving and highly competitive industry, and expect competition will continue to intensify as consolidations and mergers occur within the industry. Regulatory developments and technological advances over the past several years have increased opportunities for alternative communications service providers, which in turn have increased competitive pressures on our business. These alternative providers often face fewer regulations and have lower cost structures than we do. In addition, several of our competitors have consolidated with other communication providers and as a result are generally larger, have more financial and business resources and have greater geographical reach to provide services. Our competitive advantages include: our strong commitment and presence in the communities we serve, knowledge of these markets, our experienced voice service and support team, and our ability to offer more flexible communications solutions than our larger competitors.
The long-range effect of competition on the delivery of communications services and equipment will depend on technological advances, regulatory actions at both the federal and the state levels, court decisions, and possible additional future federal and state legislation. Past federal and state legislation have tended to expand competition in the communications industry.
Alternatives to our service include customers leasing private line switched voice and data services in or adjacent to our service territories that permit the bypassing of our communications facilities. In addition, microwave transmission services, wireless communications, fiber/coaxial cable deployment, VoIP, satellite and other services also permit the bypassing of our local exchange network. These alternatives to local exchange service represent a potential threat to our long-term ability to provide local exchange services at economical rates.
In order to meet the competition present in our industry, we have deployed new technology to enable our local exchange networks to capture operating efficiencies and to provide additional new services to our new and existing customer base. These new technologies include the latest release of digital switching technology for all of our switches and the installation of a Common Channel Signaling System No. 7 out-of-band system for all of our access lines. We have also connected fiber rings (redundant route designs that allow traffic to be re-routed in the event of network problems) that protect our local fiber networks and enable them to provide a reliable level of service to our customers. The value of our local fiber network is also enhanced by the ability of our operating companies to offer access to high-speed Internet with broadband access to our access lines. Broadband technology allows customer access to high-speed Internet and traditional voice connectivity over the same connection. In addition, our businesses have further enhanced our fiber networks to allow the offering of video services over the same facilities that provide our customers with voice and Internet access. This technology is available to approximately 93% of our access lines.
We compete in the cities of Redwood Falls, Litchfield and Glencoe, Minnesota. These communications companies are currently not under the same level of regulatory oversight as our communications companies. Lumen Technologies is the existing communications company in these markets. Competition also exists in the other communities and areas served by us for traditional telephone service from wireless communications providers and we also expect competition to increase from service providers offering VoIP. We experience competition in the Minnesota communities of Elko, Glencoe, Hutchinson, Litchfield, New Market, New Ulm, Prior Lake, Savage, Sleepy Eye and Springfield in the provisioning of video services. Comcast is the existing incumbent provider of video services in the New Ulm market. Mediacom is the existing incumbent provider of video services in the Elko, Hutchinson, Litchfield, New Market, Prior Lake, Redwood Falls, Savage, Sleepy Eye and Springfield markets. Several other communications providers compete with us in our markets in providing Internet services. We have responded to these competitive pressures by creating active programs to market our products, bundle our services and enhance our infrastructure to create higher customer value.
10
We are experiencing competition for some of our other services from IXCs, such as customer billing services, dedicated private lines and network switching. The provisioning of these services is contractual in nature and is primarily directed by the IXCs. Other services, such as directory advertising, operator services and cellular communications are open to competition, based primarily on service and customer experience.
Human Capital Resources
As of December 31, 2021, we employed approximately 213 employees, including part-time employees. We also use temporary employees in the normal course of our business. Our employees are the cornerstone of our success. We are committed to providing meaningful, challenging work and opportunities for professional growth in a positive environment. To attract and retain qualified and experienced employees, we offer competitive compensation and benefit packages, which we believe are competitive within the industry and the local markets in which we operate. Our benefit packages, may include, among other things, incentive compensation based on the achievement of financial targets, healthcare and insurance benefits, health savings and flexible spending accounts, a 401(k) savings plan with an employer match, paid time off, and wellness and employee assistance programs. Additionally, for certain eligible employees, we provide long-term incentive compensation, in the form of restricted stock units (RSU’s). In addition, we are committed to providing employees continuing education and training programs in order for employees to achieve career goals and professional growth.
We seek high-quality employees of all backgrounds and experiences. Honoring our employees as individuals is key to our culture. We believe diversity of backgrounds contributes to different ideas, which in turn drives better results for customers. We respect differences and diversity qualities that enhance our efforts as a team and believe in and support principles incorporated in all anti-discrimination and equal employment laws.
We are committed to workplace health and safety. In 2020, in response to the Coronavirus (COVID-19) pandemic, we implemented safety protocols and procedures to protect our employees, customers and business partners. These procedures included transitioning as many employees as possible to remote work-from-home arrangements, providing additional safety training and personal protective equipment for customer-facing employees, and complying with social distancing and other health and safety measures as required by federal, state and local governmental agencies.
Materials and Supplies
The materials and supplies that are necessary for our operations are available from a variety of sources. We are not dependent on any particular supplier or group of affiliated suppliers for our equipment needs.
Regulation
The following summary provides a high-level overview, but may not include all present and proposed federal, state and local legislation and regulations affecting the communications industry. Some legislation and other regulations are currently the subject of judicial proceedings, legislative hearings and administrative proposals that could change the manner in which this industry operates. At this time, we cannot predict the outcome of any of these developments or their potential impact on us. Regulation can change rapidly in the communications industry and these changes could have an adverse effect on us in the future.
11
Overview
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), rules and regulations of the SEC and, where applicable, conform to the accounting principles as prescribed by federal and state telephone utility regulatory authorities.
The services we offer are subject to varying levels of regulatory oversight. Federal and state regulatory agencies share responsibility for enforcing statutes and rules relative to the provision of communications services. Our interstate communications services are subject to regulation by the FCC. Intrastate services are governed by the relevant state regulatory commission. The Telecommunications Act of 1996 (TA96) and the rules enacted under it also gave oversight of interconnection arrangements and access to network elements to the state commissions. Our TV services are governed by FCC rules and municipal franchise agreements. There are also varying levels of regulatory oversight depending on the nature of the services offered or if the services are offered by a communications company.
Our communications company located in Redwood Falls, Litchfield and Glencoe provides services with less regulatory oversight than our communications companies. A company must file for interexchange authority to operate with the appropriate public utility commission in each state it serves. Our communications company located in Redwood Falls, Litchfield and Glencoe provides a variety of services to both residential and business customers in multiple jurisdictions.
Federal Regulatory Framework
All carriers must comply with the FCC Act of 1934 (FCA34) as amended that requires, among other things, that our interstate services be provided at just and reasonable rates and on non-discriminatory terms and conditions. The TA96 amended the FCA34 and has had a dramatic effect on the competitive environment in the communications industry. In addition to these laws, we are also subject to rules promulgated by the FCC and could be affected by any regulatory decisions or orders they issue.
The TA96 and Local Competition
The primary goal of the TA96 and the FCC’s rules promulgated under it was to open local communications markets to competition while enhancing universal service. To some extent, Congress pre-empted the local authority of states to oversee local communications services.
The TA96 imposes a number of requirements on all local communications providers including:
● To interconnect directly or indirectly with other carriers;
● To allow others to resell services;
● To provide for number portability to allow end-users to retain their telephone number when changing providers;
● To ensure dialing parity;
● To ensure that competitor customers have non-discriminatory access to telephone numbers, operator services, directory assistance and directory listing services; and
● To allow competitors access to telephone poles, ducts, conduits and rights-of-way, and to establish reciprocal compensation arrangements for the transport and termination of communications traffic.
12
Access Charges
Access charges refer to the compensation received by local exchange carriers (LECs) for the use of their networks by an IXC. We provide two types of access services: special access and switched access. Special access is provided through dedicated circuits that connect other carriers to our network and is structured on a flat monthly fee basis. Switched access rates that are billed to other carriers are based on a per-minute of use fee basis. The FCC regulates prices that we charge for interstate access charges. There has been a trend toward lowering the rates charged to carriers accessing local networks and the application of a SLC as a flat rate on end-user bills. Regulation, competition, carriers optimizing their network costs and lower demand for dedicated lines have resulted in lower access rates and overall lower minutes of use on our network, which has affected our network access revenues.
Interstate access rates are established by the nationwide pooling of companies known as NECA. The FCC established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of each company’s actual or average costs. There has been a change in the composition of interstate access charges in recent years, shifting more of the charges to the end user and reducing the amount of access charges paid by IXCs. We believe this trend will continue.
Intrastate access rates are filed with the regulatory commissions in Minnesota and Iowa.
Wireline Interstate
Our communications companies participate in the NECA common line pool where end-user common line funds collected are pooled. A portion of our communications companies’ revenue are based on settlements distributed from this pool. Our communications companies also participates in the NECA traffic-sensitive pool. These pool settlements are adjusted periodically.
Access rates for our communications company located in Redwood Falls, Litchfield and Glencoe were established according to an order issued by the FCC in 2001. Under that order, the switched access rates charged by a competitive carrier can be no higher than the rates charged by the communications company with whom we compete.
Intercarrier Compensation and FUSF Reform
The FCC released the National Broadband Plan in April 2010 recommending significant changes to the access charge policy and processes. This was followed on November 18, 2011, by FCC Order 11-161 (the Transformation Order), with comprehensive rules reforming all forms of intercarrier compensation and implementing a new support mechanism for the deployment of broadband. Generally, the intercarrier compensation reform sets forth a path towards a “bill & keep” regime which eliminates compensation for termination of traffic received from another carrier. The timeline for this transition had numerous steps depending on the type of traffic exchanged and the regulated status of the affected LEC.
These rules have been clarified in several orders on Reconsideration and have had an impact on our companies by reducing our terminating intercarrier compensation, including intrastate and interstate access charges.
The FCC Transformation Order also confirmed the applicability of access charges on VoIP traffic and eliminated reciprocal compensation charges for termination of local wireless traffic. Despite these changes IXCs and others are still quite aggressive in disputing carrier access charges and/or the applicability of access charges to their traffic.
Due to the combination of rate reforms instituted by the FCC, competitive substitution by wireless and other carriers and decreased use of the switched network, the aggregate amount of interstate network access charges paid by long distance carriers to access providers such as our company, has decreased and we project that this decline will continue. For the year ended December 31, 2021, communications network access revenue represented 8.6% of our operating revenue, down from 9.4% for the year ended December 31, 2020. This excludes any funding received from FUSF and the A-CAM for broadband funding (see below for more information).
13
FUSF
The FUSF was originally established to overcome geographic differences in costs of providing voice service and to enable all citizens to communicate over networks regardless of geographical location and/or personal income. The FCC established universal service policies at the national level under terms contained in the Telecommunications Act of 1934. The TA96 requires explicit FUSF mechanisms and enlarged the scope of universal service to include four distinct programs:
● High-Cost program that supports local carriers operating in high-cost regions of the country to ensure reasonably based telephone rates;
● Lifeline (low-income) Subscribers program that includes the Link Up and Lifeline programs that provide support for service initiation and monthly fees and have eligibility based on subscriber income;
● Rural Health Care Providers program that supports communication services used by rural health care providers and provides them with toll free access to an Internet service provider; and
● Schools and Libraries program, also called the E-Rate program that provides support funding to schools and libraries for communications services, Internet access and internal connections.
In its Transformation Order released November 18, 2011, the FCC adopted rules which dramatically reform the universal service program and intercarrier compensation regime. These rules eliminated the legacy Local Switching support, but also provide for a new Connect America Fund (CAF) support for rate of return carriers to make up some of their access revenue reductions and provide direct support to PriceCap carriers (i.e. the larger, national LECs such as Verizon and AT&T) for broadband build outs. The new rules have caused rates for end users to increase as intercarrier compensation is reduced and the legacy mandate for ubiquitous voice service shifts toward broadband availability as a key outcome of the program.
FUSF high-cost payments are distributed by NECA and are only available to carriers that have been designated as an eligible telecommunications carrier (ETC) by a state commission. Each of our communications companies has been designated as an ETC. Our communications company located in Redwood Falls, Litchfield and Glencoe is also eligible to be designated as ETCs if it meets the requirements of the program and meet a public interest standard as determined by the appropriate state regulatory agency. Our communications company located in Redwood Falls, Litchfield and Glencoe is currently not receiving FUSF support. All ETCs must certify annually to the Universal Service Administrative Company or their appropriate state regulatory commission that the funds they receive from the FUSF are being used in the manner intended. The states must then certify to the FCC which carriers have met this standard. The Transformation Order expands the information that must be reported to the State Commissions to include information on broadband availability, plans for expansion to unserved and underserved areas, in addition to information about voice services. To some extent, these levels of scrutiny make the receipt of a consistent level of FUSF payments each year more difficult to predict.
For the year ended December 31, 2021, we received an aggregate of $2,793,354 from FUSF, consisting of $1,559,009 of CAF support and $1,234,345 of Broadband Loop Support. Our net FUSF in 2021 comprised 4.2% of our total revenue for the year. For the year ended December 31, 2020, we received an aggregate of $3,135,119 from FUSF, consisting of $1,700,248 of CAF support and $1,345,316 of Broadband Loop Support. Our net FUSF in 2020 comprised 4.8% of our total revenue for the year. We receive no State universal service funding as the states in which we operate have not established state universal service funding mechanisms.
In 2019, the Company elected to receive funding from A-CAM, with the exception of Scott-Rice, which still receives funding from the FUSF.
14
A-CAM
The FUSF was established as part of the TA96 and provides subsidies to communications providers as means of increasing the availability and affordability of advanced communications services. In 2011, significant reform was introduced, including the creation of the CAF, to help modernize the FUSF and promote support of these communications services in the nation’s high-cost areas. In 2016, the FCC announced additional reform to further transition the CAF from supporting the provision of voice services to the provision of broadband services. On March 30, 2016, the FCC issued a Report and Order (2016 Order) that adopts the following changes to the FUSF for rate-of-return carriers:
● Establishes a voluntary cost model;
● Creates specific broadband deployment obligations;
● Provides a mechanism for support of broadband-only deployment;
● Gradually reduces the authorized rate-of-return from 11.25 percent to 9.75 percent;
● Eliminates support in those local areas served by unsubsidized competitors;
● Establishes “glide-path” transition periods for all the new changes; and
● Maintains the $2 billion budget established by the 2011 Transformation Order.
While the 2011 FUSF Transformation Order established CAF Phase I and CAF Phase II as high-cost support mechanisms for the price-cap carriers (i.e., the larger, national LECs such as Verizon and AT&T), it was not as specific about how subsidies would change for the rate-of-return carriers (i.e., the smaller LECs, including all rural LECs). In contrast, the 2016 Order focused on the rate-of-return carriers, announced specific changes to existing funding mechanisms as well as a new funding mechanism, and provided rural communications providers with greater certainty about future support.
One of the major changes introduced by the 2016 Order was the creation of the A-CAM, a new CAF support mechanism for rate-of-return carriers. Utilization of the A-CAM was voluntary; and rate-of-return carriers may have instead chose to continue relying on the legacy support mechanism known as interstate common line support, but then modified and renamed CAF Broadband Loop Support. Each carrier needed to decide which support mechanism to elect, and must have chosen one or the other, per state.
On February 25, 2019, the FCC issued Public Notice DA 19-115, which contained revised offers of A-CAM support and associated revised service deployment obligations. On February 27, 2019, the Company’s BOD authorized and directed the Company to accept the FCC’s revised offer of A-CAM support and the revised associated service deployment obligations. Under the revised FCC offer Notice, the Company will be entitled to annually receive (i) $596,084 for its Iowa operations and (ii) $8,354,481 for its Minnesota operations. The Company will receive the revised A-CAM offer over the next 10 years starting in 2019. The Company will use the support that it receives through the A-CAM program to meet its defined broadband build-out obligations, which the Company is currently completing. A letter of acceptance to elect the revised A-CAM support was filed by the Company with the FCC on March 8, 2019. The FCC accepted the Company’s letter on March 11, 2019.
Build-out obligations: A-CAM carriers under the original A-CAM program must complete deployment of 10 Mbps downstream/1 Mbps upstream service to a number of eligible locations equal to 40 percent of fully funded locations by the end of 2020, to 50 percent of fully funded locations by the end of 2021, to 60 percent of fully funded locations by the end of 2022, to 70 percent of fully funded locations by the end of 2023, to 80 percent of fully funded locations by the end of 2024, to 90 percent of fully funded locations by the end of 2025, and to 100 percent of fully funded locations by the end of 2026. A-CAM carriers who elected additional funding and additional obligations under the revised A-CAM program must complete deployment of 25 Mbps downstream/3 Mbps upstream service to a number of eligible locations equal to 40 percent of fully funded locations by the end of 2022, to 50 percent of fully funded locations by the end of 2023, to 60 percent of fully funded locations by the end of 2024, to 70 percent of fully funded locations by the end of 2025, to 80 percent of fully funded locations by the end of 2026, to 90 percent of fully funded locations by the end of 2027, and to 100 percent of fully funded locations by the end of 2028. As of December 31, 2021, Nuvera has completed the deployment of 10/1 service to 92.0% of its funded locations and 25/3 service to 50.4% of its funded locations in Minnesota, and has completed deployment of 10/1 service to 100% of its funded locations and 25/3 service to 78.2% of its funded locations in Iowa.
15
Privacy and Data Security Regulation
The FCA34 generally restricts the nonconsensual collection and disclosure to third parties of communication company customers’ personally identifiable information by communication companies, except for rendering service, conducting legitimate business activities related to the service, and responding to legal requests. We are also subject to various state and federal regulations that provide protections for customer proprietary network information (CPNI) related to our voice services. The FCC expects broadband Internet access service providers such as us to take reasonable, good faith steps to comply with existing statutory requirements to protect broadband CPNI and plans to propose new privacy and data security rules for broadband Internet service providers. The FCC has recently imposed substantial civil penalties and remediation obligations on several companies for alleged privacy and data security violations.
The Federal Trade Commission exercises authority over privacy protections, generally, using its existing authority over unfair and deceptive acts or practices to apply greater restrictions on the collection and use of personally identifiable and other information relating to customers. It also has undertaken numerous enforcement actions against parties that do not provide sufficient security protections against the loss of unauthorized disclosure of this type of information. We also are subject to stringent data security and data retention requirements on website operators and online services. Other privacy-oriented laws have been extended by courts to online video providers and are increasingly being used in privacy lawsuits, including class actions, against providers of video materials online.
We are also subject to state and federal laws and regulations regarding data security that primarily apply to sensitive personal information that could be used to commit identity theft. Most states have security breach notification laws that generally require a business to give notice to consumers and government agencies when certain information has been disclosed, due to a security breach, and the FCC has adopted security breach rules for voice services. Several states have also enacted general data security requirements to safeguard consumer information, including the proper disposal of consumer information.
The National Institute of Standards and Technology, in cooperation with other federal agencies and owners and operators of United States critical infrastructure, have developed a voluntary framework that provides a prioritized, flexible, repeatable, performance-based and cost-effective approach to cybersecurity risk. It is compendiums of existing cross-sector cyber-defense processes, practices and protocols that can help companies identify, assess and manage their cyber risks and vulnerabilities, and several governmental agencies have encouraged compliance with this framework. Additionally, in December 2015, Congress enacted the Cybersecurity Act of 2015, which is intended to encourage and facilitate the sharing of security threat and defensive measure information with government agencies and other companies, in order to strengthen the country’s overall cybersecurity protections. Finally, there are pending legislative proposals that could impose new requirements on owners and operators of critical infrastructure and the FCC is considering expanding its cybersecurity guidelines or adopting new cybersecurity requirements.
Network Architecture and Technology
We have and plan to continue to make significant investments in our technologically advanced fiber communications networks and continue to enhance and expand our fiber network by deploying technologies to provide additional capacity to our customers. As a result, we are able to deliver high-quality, reliable data, video and voice services in the markets we serve. Our wide-ranging fiber network provides an easy reach into existing and new areas. By bringing the fiber network into the customer premises, we can increase our service offerings, quality and bandwidth services. Our existing fiber network enables us to efficiently respond and adapt to changes in technology and is capable of supporting the rising customer demand for bandwidth in order to support the growing amount of wireless data devices in our customer’s homes and businesses.
16
Our fiber networks are supported by advanced 100% digital switches, with a core fiber network connecting all of our remote exchanges. We continue to replace our copper cable network to increase bandwidth in order to provide additional products and services to our marketable homes. We are replacing our existing copper cable with fiber cable throughout our network and to all customer premises that take our services, resulting in a 100% fiber network that supports all of the inter-office and host-remote links, as well as all business parks within our service areas that take our service. In addition, this fiber infrastructure provides the connectivity required to provide broadband and long-distance services to our residential and commercial customers. Our fiber network utilizes FTTP and fiber-to-the-node networks to offer bundled residential and commercial services.
We operate advanced fiber networks which we own or have entered into long-term leases for fiber network access. At December 31, 2021, our fiber networks consisted of approximately 2,780 route miles.
At December 31, 2021, we passed 7,413 locations with FTTP. We intend to continue to make strategic enhancements to our fiber network including improvements in overall network reliability and increases to our broadband speeds. We offer data speeds of up to 1 Gbps in select markets, and up to 100 Mbps and 60 Mbps in markets where 1 Gbps is not yet available, depending on the geographical region.
We also provide fixed wireless broadband service to homes and small businesses from 29 towers, six of which we own, with the remaining towers being leased. Twelve of these towers utilize Citizens Broadband Radio Service (CBRS) spectrum. Having secured 21 licenses in twelve CBRS spectrum counties in Minnesota and Iowa, we plan to add ten towers in 2022 and additional towers beyond 2022. This allows us to offer high-speed Internet to unserved, under-served and hard to serve rural areas.
Environmental Regulation
We are subject to federal, state and local laws and regulations governing the use, storage, disposal of, and exposure to, hazardous materials, the release of pollutants into the environment and the remediation of contamination. We could be subject to environmental laws that impose liability for the entire cost of cleanup at a contaminated site, regardless of fault or the lawfulness of the activity that resulted in contamination. We believe that our operations are in compliance with all applicable environmental laws and regulations.
Employees
As of March 1, 2022 we had 193 full-time equivalent employees dedicated to Nuvera’s operations. In addition, as of March 1, 2022 we had an additional 10 full-time equivalent employees that are employed by Nuvera but are dedicated to IES. IES is a minority equity subsidiary of Nuvera and Nuvera acts as the managing entity for IES.
Intellectual Property
Intellectual property is necessary for our operations but is not material to our overall operations.
17
Executive Officers of the Registrant
The names and ages of all our executive officers and the positions held by them as of March 1, 2022, are as follows:
|
Name and Age |
Position with the Company |
Age |
||
|
Glenn H. Zerbe |
President and CEO |
56 |
||
|
Barbara A.J. Bornhoft |
Vice-President, Chief Operating Officer |
65 |
||
|
|
||||
|
Curtis O. Kawlewski |
CFO and Treasurer |
|
55 |
Our executive officers are appointed annually and serve at the discretion of our BOD. Mr. Zerbe, President and CEO; Ms. Bornhoft, Vice-President, COO and Corporate Secretary; and Mr. Kawlewski, CFO and Treasurer have written employment contracts. There are no familial relationships between any director and executive officers.
Mr. Zerbe has been President and CEO since September of 2019. Prior to that time, he served as Vice President of Sales for Frontier Communications Corporation until March 2019, where he held positions of increasing responsibility since joining Frontier in 2011. Prior to his employment with Frontier, Mr. Zerbe had more than 20 years of sales, marketing and management experience in the communications industry, with companies such as Spanlink, Cisco Systems, SBC, AT&T and IBM. Mr. Zerbe serves as Chairman of the Board for IES and BBV, all equity subsidiaries of ours. In addition, Mr. Zerbe serves on the Board of Governors of FM and FiberComm, LC, also equity subsidiaries of ours.
Ms. Bornhoft has been Vice President, COO and Corporate Secretary since 1998. Ms. Bornhoft has been employed with the Company since 1990. Ms. Bornhoft serves as a board member for BBV, in addition to serving as President for both IES and BBV, both equity subsidiaries of ours.
Mr. Kawlewski has been CFO and Treasurer since 2009. Mr. Kawlewski also serves as the Treasurer for IES and BBV, both equity subsidiaries of ours.
Item 1A. Risk Factors.
Not required for a smaller reporting company.
Item 1B. Unresolved Staff Comments
Not required for a smaller reporting company.
Item 2. Properties
We are primarily focused on the provision of communication services and our properties are used primarily for administrative support and to house and safeguard our operating equipment. On December 31, 2021, our gross property, plant and equipment totaled $228,735,284 (net balance of $81,149,354).
Our corporate headquarters are located at 27 North Minnesota Street, New Ulm, Minnesota. We also own office facilities and related equipment for administrative personnel, central office buildings and operations in Minnesota and Iowa.
In addition to land and structures, our property consists of equipment necessary for the provision of communication services including central office equipment, CPE and connections, pole lines, towers, remote terminals, aerial and underground cable and wire facilities and associated outside plant for use in providing our services, telephone switches, fiber networks and fiber communications network equipment, vehicles, furniture and fixtures, computers and other equipment.
In addition to plant and equipment we wholly-own, we utilize poles, towers, cable and conduit systems jointly-owned with other entities and lease space on facilities from other entities. These arrangements are in accordance with written agreements customary in the industry. We also have appropriate easements, rights of way and other arrangements for the accommodation of our pole lines, underground conduits, aerial and underground cables and wires.
18
We believe our properties are suitable and adequate to provide modern and effective communications services within our service areas, including local dial-tone, long distance service, broadband, TV and dedicated and switched long-haul transport. We also believe our properties and equipment are adequately insured. See Note 6 – “Long-Term Debt” for descriptions of the mortgages and collateral relating to the above referenced properties. See Note 1 – “Business Description and Summary Of Significant Accounting Policies” and Note 4 – “Property, Plant and Equipment” for a description of our depreciation policies and information relating to the above referenced properties and equipment and their respective depreciation.
Item 3. Legal Proceedings
Other than routine litigation incidental to us, there are no pending material legal proceedings to which we are a party or to which any of our property is subject.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the OTCQB Marketplace under the symbol "NUVR." As of March 1, 2022 there were 1,253 registered stockholders and approximately 977 beneficial owners of Nuvera stock.
The Company’s Articles of Incorporation restrict any one individual or entity from beneficially owning more than seven percent of the outstanding capital stock of the corporation. Specific details of this restriction are contained in Article III of the Company’s Articles of Incorporation.
Issuer Purchases of Equity Securities
Repurchases of Nuvera common stock are made to support the Company’s stock-based employee compensation plans and for other corporate purposes. In May 2019, Nuvera announced the adoption of a $4.0 million stock repurchase program running through the end of 2021. Under the stock repurchase program, repurchases can be made from time to time using a variety of methods, including through open market purchase or in privately negotiated transactions in compliance with the rules of the SEC and other applicable legal requirements.
Issuer Purchases of Equity Securities (registered pursuant to Section 12 of the Exchange Act)
The following table summarizes stock repurchases for the year ended December 31, 2021.
19
| Period |
| Total Number of Shares Purchased as Part of Publicaly Announced Plans or or Programs (1) |
| Average Price Paid per Share |
| Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||
| July 1, 2019 - December 31, 2020 | 19,487 | N/A | $ | 3,647,263 | ||||
| January 1 - June 30, 2021 | 3,028 | $ | 23.80 | $ | 3,575,197 | |||
| July 1 - December 31, 2021 | 4,000 | $ | 23.85 | $ | 3,479,797 | |||
| Total July 1, 2019 - December 31, 2021 | 26,515 | |||||||
| (1) The total number of shares purchased includes: shares purchased under the Board's authorizations described | ||||||||
| above, including market purchases and privately negotiated purchases. | ||||||||
Dividends and Restrictions
On May 6, 2020, the Company’s BOD decided that, given the continuing uncertainty about the severity and duration of the COVID-19 pandemic and its potential effect on the country’s economy generally and on the Company’s future sales and profitability specifically, as well as the Company’s need to preserve its liquidity and capital resources, the Company would (i) suspend declaring and paying a dividend in the second quarter of 2020 and (ii) temporarily suspend future purchases under its Stock Repurchase Program.
On August 25, 2020, the Company’s BOD determined that it would (i) continue to suspend declaring and paying a dividend in the third quarter of 2020 and (ii) continue to temporarily suspend future purchases under its Stock Repurchase Program.
On November 30, 2020, the Company’s BOD determined that it would (i) declare and pay a dividend in the fourth quarter of 2020 and (ii) resume purchases under its Stock Repurchase Program. The Company announced that it had successfully adjusted its operations including securing sufficient operating funds during a time of market uncertainty and can now look forward to recovering with the nation and return as an even stronger company and community in 2021.
We declared a quarterly dividend of $0.14 per share for the second, third and fourth quarters of 2021 and $0.13 per share for the first quarter of 2021, which totaled $729,407 for the fourth quarter, $729,188 for the third quarter, $729,749 for the second quarter and $676,090 for the first quarter. We declared a quarterly dividend of $0.13 per share for the first and fourth quarters of 2020, which totaled $674,171 for the first quarter and $675,883 for the fourth quarter. A quarterly cash dividend of $0.14 per share will be paid on March 15, 2022 to stockholders of record at the close of business on March 7, 2022.
We expect to continue to pay quarterly dividends during 2022, but only if and to the extent declared by our BOD on a quarterly basis and subject to various restrictions on our ability to do so (described below). Dividends on our common stock are not cumulative.
There are security and loan agreements underlying our current CoBank, ACB (CoBank) credit facility that contain restrictions on our distributions to stockholders and investment in, or loans, to others. See below and Note 6 – “Long-Term Debt” for additional information.
20
Our loan agreements include restrictions on our ability to pay cash dividends to our stockholders. However, we are allowed to pay dividends (a) (i) in an amount up to $2,700,000 in any year if our “Total Leverage Ratio,” that is, the ratio of our “Indebtedness” to “EBITDA” (earnings before interest, taxes, depreciation and amortization – as defined in the loan documents), is greater than 2.00 to 1.00, and (ii) in any amount if our Total Leverage Ratio is less than 2.00 to 1.00, and (b) in either case, if we are not in default or potential default under the loan agreements. On December 31, 2020, our Total Leverage Ratio fell below 2.00, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders. Our current Total Leverage Ratio as of December 31, 2021, was 1.83.
Our BOD reviews quarterly dividend declarations based on our anticipated earnings, capital requirements and our operating and financial conditions. The cash requirements of our current dividend payment practices are in addition to our other expected cash needs. Should our BOD determine a dividend will be declared, we expect we will have sufficient availability from our current cash flows from operations to fund our existing cash needs and the payment of our dividends. In addition, we expect we will have sufficient availability under our revolving credit facility to fund dividend payments in addition to any fluctuations in working capital and other cash needs.
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our historical financial statements and the related notes contained elsewhere in this report.
Overview
Nuvera has an advanced fiber communications network and offers a diverse array of communications products and services. We provide local voice service and network access to other communications carriers for connections to our fiber networks. In addition, we provide long distance service, broadband Internet access, video services, and managed and hosted solutions services.
Our operations consist primarily of providing services to customers for a monthly charge. Because many of these services are recurring in nature, backlog orders and seasonality are not significant factors. Our working capital requirements include financing the construction of our advanced fiber networks. We also require capital to maintain our advanced fiber networks and infrastructure; fund the payroll costs of our highly skilled labor force; maintain inventory to service capital projects, our advanced fiber network and our communication equipment customers; pay dividends and provide for the carrying value of trade accounts receivable, some of which may take several months to collect in the normal course of business.
COVID-19
We continue to closely monitor the impact on our business of the outbreak of the COVID-19 pandemic. We have and are continuing to take precautions to ensure the safety of our employees, customers and business partners, while assuring business continuity and reliable service and support to our customers. Health and safety measures implemented include transitioning to remote work-from-home policies, proof of COVID-19 vaccination and mandatory mask wearing for our employees that are not vaccinated, redesigning and investing in our office spaces to accommodate a more healthy air quality environment, providing our field technicians and customer-facing personnel with personal protective equipment and additional safety training, practicing social distancing and adding calling in advance for work that must be performed inside customer premises. We are proactively monitoring and augmenting our network capacity, to meet the higher demands for data usage during the pandemic as a result of increased usage from work from home and remote learning applications. As a result of the pandemic, the demand for bandwidth upgrades have increased for our consumer, commercial and carrier customers. Our existing network enables us to efficiently respond and adapt to the increase in internet traffic during this time.
21
While we have not seen a significant adverse impact to our financial results from COVID-19 to date, the extent of the future impact of the COVID-19 pandemic on our business is uncertain and difficult to predict. Capital markets and the United States economy have also been significantly impacted by the pandemic. Adverse economic and market conditions as a result of COVID-19 could also adversely affect the demand for our products and services and may also impact the ability of our customers to satisfy their obligations to us. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be materially and adversely affected.
In 2021, we have seen an increase in our revenues due to internet growth mentioned above, however, we continue to see an accelerated loss in our voice service and video service customers as those customers make choices about their entertainment needs and personal finances in light of the COVID-19 pandemic. We have also experienced increased costs in 2021 which have affected our margins. In addition, we are anticipating increased inflation and future supply chain issues in the inventory, equipment and fiber we use in our business and have therefore purchased a large amount of these items in order to mitigate these potential issues and not disrupt our business operations.
With respect to liquidity, we continue to evaluate costs and spending across our organization. This includes evaluating discretionary spending and non-essential capital investment expenditures. As of December 31, 2021, we have $8.9M on our bank revolver available for use in the event that the need arises. We will continue to actively monitor the situation and may take further actions that alter our operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders.
Executive Summary
Highlights:
● On December 15, 2021, the Company announced plans to build and deploy Gig fiber internet across its network creating crucial access to the fastest speeds available for rural communities, small cities and suburban areas across Minnesota. “This is a transformational moment for Nuvera as we make a future-focused investment in the communities we serve by providing the most reliable FTTP access to Gig-speed services,” said Glenn Zerbe, CEO. “Our homes, businesses and communities need reliable and affordable connections to school, workplaces and entertainment, as an important and growing part of everyday life.” “Nuvera’s investment in fiber-to-the-home network infrastructure will allow more underserved communities across Minnesota to leverage the quality of life and economic opportunity that access to a state-of-the-art network provides now and for years to come.” said, State Sen. Nick Frentz, DFL-North Mankato. Nuvera’s Gig-speed end-to-end fiber network is building and rolling out now. Service will be available for thousands of customers in 2022. The company will continue to build and deploy the Gig-speed service over the next few years. “We’re excited to create ‘Nuvera Gig Cities’ in the communities we serve while also expanding access to fiber-based internet service at a range of speeds,” said Zerbe. “Nuvera’s fiber network gives customers affordable access to a range of speeds from 100 Mbps to 1 Gig at prices that are the same whether you’re in rural Goodhue or suburban Prior Lake.” While Nuvera’s goal is to bring Gig-speed service to as many communities as possible, the initial buildout will focus on the following cities and surrounding communities:
22
o New Ulm
o Hutchinson
o Glencoe
o Goodhue
o Litchfield
o Redwood Falls
o Prior Lake
o Elko New Market
o Savage
o Sleepy Eye
o Springfield
o Aurelia, IA
Nuvera’s fiber internet prices range from $50 per month to $125 per month for Gig-speed services. Customers can choose the right speed at an affordable price, including low-income households through Federal programs.
● On January 29, 2021, the Company was awarded five broadband grants from the Minnesota Department of Employment and Economic Development (DEED). The grants will provide up to 35.4% of the total cost of building fiber connections to homes and businesses for improved high-speed internet in unserved or underserved communities and businesses in the Company’s service area. The Company is eligible to receive $1,918,037 of the approximately $5,419,617 total project costs. The Company will provide the remaining 64.6% matching funds. Construction and expenditures for these projects began in the spring of 2021. We have not received any funds for these projects as of December 31, 2021.
● On April 16, 2020, Nuvera received a $2,889,000 loan under the Small Business Administration’s (SBA) Payroll Protection Program (PPP). The PPP was designed to provide a direct incentive for small businesses to keep their workers employed during the COVID-19 crisis. The SBA forgave loans if all employees were kept on the payroll for a required period of time under the program starting April 16, 2020, and the loan funds were used for payroll, rent and utilities. Nuvera retained employment of all employees through this period and followed all the SBA rules regarding this loan. The Company applied for debt forgiveness in August 2020. On February 3, 2021, the Company was notified by Citizens, the lender on the Company’s PPP Loan that Citizens has received payment in full from the United States federal government for the amount of the Company’s PPP Loan and the Company’s PPP Loan had been fully forgiven.
● In January 2020, the Company was awarded a broadband grant from the DEED. The grant will provide up to 36.5% of the total cost of building fiber connections to homes and businesses for improved high-speed internet in unserved or underserved communities and businesses in the Company’s service area. The Company is eligible to receive $730,000 of the approximately $2,000,000 total project costs. The Company will provide the remaining 63.5% matching funds. Construction and expenditures for these projects began in the spring of 2020 and were completed under budget in the third quarter of 2021. We have received $724,465 for these projects as of December, 31 2021.
● Net income in 2021 totaled $12,251,921, which was a $2,416,109, or 24.6% increase compared to 2020. This increase was primarily due to PPP Loan Forgiveness, partially offset by a decrease in operating income, all of which are described below.
● Consolidated revenue for 2021 totaled $65,837,521, which was a $926,450 increase compared to 2020. This increase was primarily due to increases in video and data revenues, partially offset by decreases in local service, network access, and other revenues, all of which are described below.
Business Trends
Included below is a synopsis of business trends management believes will continue to affect us in 2022.
23
Voice and switched access revenues are expected to continue to be adversely impacted by future declines in access lines due to competition in the communications industry from CATV providers, VoIP providers, wireless, other competitors, emerging technologies and the on-going effects of COVID-19. As we experience access line losses, our switched access revenue will continue to decline consistent with industry-wide trends. A combination of changing minutes of use, carriers optimizing their network costs, lower demand for dedicated lines and downward rate pressures may affect our future voice and switched access revenues. Access line losses totaled 2,954 or 14.65% in 2021 compared to 2020 due to the reasons mentioned above.
The expansion of our advanced fiber communications network, growth in broadband connection sales along with continued migration to higher connectivity speeds and the sales of Internet value-added services such as on-line data backup, and hosted and managed service solutions are expected to continue to offset the revenue declines from the access line trends discussed above.
To be competitive, we continue to emphasize the bundling of our products and services. Our customers have the option to bundle local phone, high-speed Internet, long distance and video services. These bundles provide our customers with one convenient location to obtain all of their communications and entertainment options, a convenient billing solution and bundle discounts. We believe that product bundles positively impact our customer retention, and the associated discounts provide our customers the best value for their communications and entertainment options. We have an advanced fiber broadband network, which, along with the bundling of our voice, Internet and video services allows us to meet customer demands for products and services. We continue to focus on the research and deployment of advanced technological products that include broadband services, wireless services, private line, VoIP, digital video, IPTV and hosted and managed services.
We continue to evaluate our operating structure to identify opportunities for increased operational efficiencies and effectiveness. This involves evaluating opportunities for task automation, network efficiency and the balancing of our workforce based on the current needs of our customers.
Financial results for the Communications Segment for the years ended December 31, 2021 and 2020 are included below:
24
| Telecom Segment | |||||||||||
| 2021 | 2020 | Increase (Decrease) | |||||||||
| Operating Revenues |
|
|
|
|
|
|
|
|
|
|
|
| Voice Service | $ | 6,175,847 | $ | 6,685,961 | $ | (510,114) | -7.6% | ||||
| Network Access |
|
| 5,652,372 |
|
| 6,086,090 |
|
| (433,718) |
| -7.1% |
| Video Service | 12,597,289 | 12,224,574 | 372,715 | 3.0% | |||||||
| Data Service |
|
| 25,495,739 |
|
| 23,377,726 |
|
| 2,118,013 |
| 9.1% |
| A-CAM/FUSF | 11,743,918 | 12,085,683 | (341,765) | -2.8% | |||||||
| Other |
|
| 4,172,356 |
|
| 4,451,037 |
|
| (278,681) |
| -6.3% |
| Total Operating Revenues |
| 65,837,521 |
| 64,911,071 |
| 926,450 | 1.4% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of Services, Excluding Depreciation and Amortization | 29,034,757 | 27,895,371 | 1,139,386 | 4.1% | |||||||
| Selling, General and Administrative |
|
| 10,377,186 |
|
| 9,854,343 |
|
| 522,843 |
| 5.3% |
| Depreciation and Amortization Expenses |
| 12,538,778 |
| 12,143,330 |
| 395,448 | 3.3% | ||||
| Total Operating Expenses |
|
| 51,950,721 |
|
| 49,893,044 |
|
| 2,057,677 |
| 4.1% |
| Operating Income |
| $ | 13,886,800 |
| $ | 15,018,027 |
| $ | (1,131,227) |
| -7.5% |
| Net Income |
| $ | 12,251,921 |
| $ | 9,835,812 |
| $ | 2,416,109 |
| 24.6% |
| Capital Expenditures |
| $ | 19,011,909 |
| $ | 12,002,735 |
| $ | 7,009,174 |
| 58.4% |
| Key metrics |
|
|
|
|
|
|
|
|
|
|
|
| Access Lines | 17,216 | 20,170 | (2,954) | -14.6% | |||||||
| Video Customers |
|
| 10,172 |
|
| 10,873 |
|
| (701) |
| -6.4% |
| Broadband Connections | 32,520 | 31,050 | 1,470 | 4.7% | |||||||
Revenue
Voice Service – We receive recurring revenue for basic voice services that enable customers to make and receive telephone calls within a defined local calling area for a flat monthly fee. In addition to subscribing to basic local voice services, our customers may choose from a variety of custom calling features such as call waiting, call forwarding, caller identification and voicemail. Voice service revenue was $6,175,847, which was $510,114 or 7.6% lower in 2021 compared to 2020. This decrease was primarily due to a decrease in access lines, which continues to be impacted by the on-going effects of COVID-19, which has accelerated an industry trend of customers moving to other communications options, partially offset by a combination of rate increases introduced into several of our markets in the first quarters of 2021 and 2020.
The number of access lines we serve as a company have been decreasing, which is consistent with a general industry trend, as customers are increasingly utilizing other technologies, such as wireless phones and IP services. To help offset declines in voice service revenue, we implemented an overall strategy that continues to focus on selling a competitive bundle of services. Our focus on marketing competitive service bundles to our customers creates value for the customer and aids in the retention of our voice lines.
Network Access – We provide access services to other communications carriers for the use of our facilities to terminate or originate traffic on our network. Additionally, we bill SLCs to substantially all of our customers for access to the public switched network. These monthly SLCs are regulated and approved by the FCC. In addition, network access revenue was derived from several federally administered pooling arrangements designed to provide network support and distribute funding to communications companies. Network access revenue was $5,652,372, which was $433,718 or 7.1% lower in 2021 compared to 2020. This decrease was primarily due to lower minutes of use on our network and lower special access revenues, which continues to be impacted by the on-going effects of COVID-19, which has accelerated an industry trend of customers moving to other communications options.
25
In recent years, IXCs and others have become more aggressive in disputing both interstate carrier access charges and the applicability of access charges to their network traffic. We believe that long distance and other communication providers will continue to challenge the applicability of access charges either before the FCC or directly with the LECs. We cannot predict the likelihood of future claims and cannot estimate the impact.
Video Service – We receive monthly recurring revenue from our subscribers for providing commercial TV programming in competition with local CATV, satellite dish TV and off-air TV service providers. We serve twenty-two communities with our IPTV services and five communities with our CATV services. Video service revenue was $12,597,289, which was $372,715 or 3.0% higher in 2021 compared to 2020. This increase was primarily due to a combination of rate increases introduced into several of our markets, partially offset by a decrease in video customers, which continues to be impacted by the on-going effects of COVID-19, which has accelerated an industry trend of customers moving to other video options.
Data Service – We provide high speed Internet to business and residential customers. Our revenue is earned based on the offering of various flat rate packages based on the level of service, data speeds and features. We also provide e-mail and managed services, such as web hosting and design, on-line file back up and on-line file storage. Data service revenue was $25,495,739, which was $2,118,013 or 9.1% higher in 2021 compared to 2020. This increase was primarily due to an increase in data customers, customers upgrading their packages and speeds and the implementation of a monthly equipment charge to our customers in 2021. We expect continued growth in this area will be driven by completing our advanced FTTP network, expansion of service areas and marketing managed service solutions to businesses.
A-CAM/FUSF – In 2019, the Company elected to receive funding from A-CAM, with the exception of Scott-Rice, which still receives funding from the FUSF. See Note 2 – “Revenue Recognition” for a discussion regarding FUSF.
A-CAM/FUSF support totaled $11,743,918, which was $341,765 or 2.8% lower in 2021 compared to 2020. This decrease was primarily due to lower FUSF support received for Scott-Rice due to declining access lines.
Other Revenue – Our customers are billed for toll and long-distance services on either a per call or flat-rate basis. This also includes the offering of directory assistance, operator service and long distance private lines. We also generate revenue from directory publishing through an outside vendor, sales and service of CPE, bill processing and other customer services. Our directory publishing revenue in our telephone directories recurs monthly. We also provide retail sales and service of cellular phones and accessories through Telespire, a national wireless provider. We resell these wireless services as Nuvera Wireless, our branded product. We receive both recurring revenue for our wireless services, as well as revenue collected for the sales of wireless phones and accessories. Other revenue was $4,172,356, which was $278,681 or 6.3% lower in 2021 compared to 2020. This decrease was primarily due to decreases in the sales and installation of CPE, and lower long-distance revenues.
Cost of Services (Excluding Depreciation and Amortization)
Cost of services (excluding depreciation and amortization) was $29,034,757, which was $1,139,386 or 4.1% higher in 2021 compared to 2020. This increase was primarily due to higher programming costs from video content providers, higher costs associated with increased maintenance and support agreements on our equipment and software, and increased costs to maintain a highly-skilled workforce. We have experienced increased inflation in our operations in 2021 and expect future inflationary pressures could affect our costs to operate our business.
26
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $10,377,186, which was $522,843 or 5.3% higher in 2021 compared to 2020. This increase was primarily due to higher costs associated with professional and consulting services. We have experienced increased inflation in our operations in 2021 and expect future inflationary pressures could affect our costs to operate our business.
Depreciation and Amortization
Depreciation and amortization was $12,538,778, which was $395,448 or 3.3% higher in 2021 compared to 2020. This increase was primarily due to increases in our advanced FTTP network, reflecting our continual investment in technology and infrastructure in order to meet our customers’ demands for products and services.
Operating Income
Operating income was $13,886,800, which is $1,131,227 or 7.5% lower in 2021 compared to 2020. This decrease was primarily due to higher operating expenses, partially offset by higher operating revenues, all of which are described above.
See Consolidated Statements of Income Below (for discussion)
Other Income (Expense) and Interest Expense
Other income in 2021 and 2020, included a patronage credit earned with CoBank, which was a result of our debt agreements with them. The patronage credit allocated and received in 2021 was $625,490, compared to $647,369 allocated and received in 2020. CoBank determines and pays the patronage credit annually, generally in the first quarter of the calendar year, based on its results from the prior year. We record these patronage credits as income when they are received.
Interest and dividend income decreased $22,375 in 2021 compared to 2020. This decrease was primarily due to a decrease in dividend income earned on our investments.
Interest expense decreased $376,500 in 2021 compared to 2020. This decrease was primarily due to lower outstanding debt balances in connection with our credit facility with CoBank.
On February 3, 2021, the Company was notified by Citizens, the lender on the Company’s PPP Loan, that Citizens has received payment-in-full from the United States federal government for the amount of the Company’s PPP Loan and the Company’s PPP Loan had been fully forgiven resulting in a gain on debt forgiveness of $2,912,433, which was the total of the PPP Loan plus accrued interest on the loan.
Other investment income increased $79,580 in 2021 compared to 2020. Other investment income is primarily from our equity ownerships in several partnerships and limited liability companies.
Income Taxes
Income tax expense decreased by $329,340 in 2021 compared to 2020 as we recorded income tax expense of $3,731,973 in 2021 and $4,061,313 in 2020. The decrease in income taxes was primarily due to a decrease in operating income and the PPP Loan forgiveness being tax exempt at the federal and state level. The effective income tax rate was approximately 23.4% for 2021 and 29.2% 2020. The difference between the effective tax rate and the federal statutory tax rate are reconciled in Note 8 – “Income Taxes.”
27
Non-GAAP Measures
In addition to the results reported with GAAP, we also use certain non-GAAP measures such as EBITDA and adjusted EBITDA to evaluate operating performance and to facilitate the comparison of our historical results and trends. These financial measures are not a measure of financial performance under GAAP and should not be considered in isolation or as a substitute for net income as a measure of performance and net cash provided by operating activities as a measure of liquidity. They are not, on their own, necessarily indicative of cash available to fund cash needs as determined in accordance with GAAP. The calculation of these non-GAAP measures may not be comparable to similarly titled measures used by other companies. Reconciliations of these non-GAAP measures to the most directly comparable financial measures presented in accordance with GAAP are provided below.
EBITDA is defined as net earnings before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA is comprised of EBITDA, adjusted for certain items as permitted or required under our credit facility as described in the reconciliations below. These measures are a common measure of operating performance in the communications industry and are useful, with other data, as a means to evaluate our ability to fund our estimated uses of cash.
The following table is a reconciliation of net income to adjusted EBITDA for the years ended December 31, 2021 and 2020.
28
|
|
2021 |
|
2020 |
|||
|
Net Income |
|
$ |
12,251,921 |
|
$ |
9,835,812 |
|
Add (subtract): |
||||||
|
Interest Expense, net of interest income |
|
|
2,126,240 |
|
|
2,480,693 |
|
Income tax expense (benefit) |
3,731,973 |
4,061,313 |
||||
|
Depreciation and amortization |
|
|
12,538,778 |
|
|
12,143,330 |
|
EBITDA |
30,648,912 |
28,521,148 |
||||
|
|
|
|
|
|
|
|
|
Adjustments to EBITDA: |
||||||
|
Other, net ¹ |
|
|
(4,043,089) |
|
|
(1,126,337) |
|
Investment distributions ² |
(30,245) |
(80,573) |
||||
|
Non-cash, stock-based compensation ³ |
|
|
187,951 |
|
|
69,452 |
|
Adjusted EBITDA |
$ |
26,763,529 |
$ |
27,383,690 |
||
|
|
|
|
|
|
|
|
|
¹ Includes the equity earnings from our investments, patronage income, PPP Loan forgiveness, and certain other |
||||||
|
² Includes other cash distributions received from our investments less cash dividends. |
||||||
|
³ Represents compensation expenses in connection with the issuance of stock awards, which, because of the non-cash nature |
||||||
Liquidity and Capital Resources
Capital Structure
Nuvera’s total capital structure (long-term and short-term debt obligations, net of unamortized loan fees plus stockholders’ equity) was $146,277,211 at December 31, 2021, reflecting 67.4% equity and 32.6% debt. This compares to a capital structure of $141,570,577 at December 31, 2020, reflecting 61.9% equity and 38.1% debt. In the communications industry, debt financing is most often based on operating cash flows. Specifically, our current use of our credit facilities is in a ratio of approximately 1.83 times debt to EBITDA (as defined in the loan documents), which is well within acceptable limits for our agreements and our industry. Our management believes adequate operating cash flows and other internal and external resources, such as our cash on hand and revolving credit facility are available to finance ongoing operating requirements, including capital expenditures, business development, debt service and temporary financing of trade accounts receivable. In addition, the Company expects that a new credit facility will be obtained from our current lenders, CoBank, in either the first or second quarter of 2022 to accommodate the Company’s fiber-build plans and fund operations.
Liquidity Outlook
Our short-term and long-term liquidity needs arise primarily from (i) capital expenditures; (ii) working capital requirements needed to support our growth; (iii) debt service; (iv) dividend payments on our stock and (v) potential acquisitions.
29
Our primary sources of liquidity for the year ended December 31, 2021 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. As of December 31, 2021, we had a working capital surplus of $2,545,129. In addition, as of December 31, 2021, we had $8.9 million available under our revolving credit facility to fund any short-term working capital needs. The working capital surplus as of December 31, 2021 was primarily the result of increased inventories and a lower current portion due on our long-term debt.
We have not conducted a public equity offering. We operate with original equity capital, retained earnings and additions to indebtedness in the form of senior debt and bank lines of credit.
Cash Flows
We expect our liquidity needs to include capital expenditures, payment of interest and principal on our indebtedness, income taxes and dividends. We use our cash inflow to manage the temporary increases in cash demand and utilize our revolving credit facility to manage more significant fluctuations in liquidity caused by growth initiatives.
While it is often difficult for us to predict the impact of general economic conditions, including the impact of COVID-19 on us, we believe that we will be able to meet our current and long-term cash requirements primarily through our operating cash flows and anticipated debt financing and anticipate that we will be able to plan for and match future liquidity needs with future internal and available external resources.
We periodically seek to add growth initiatives by either expanding our network or our markets through organic or internal investments or through strategic acquisitions. We believe we can adjust the timing or the number of our initiatives according to any limitations which may be imposed by our capital structure or sources of financing.
Impact of COVID-19 on Our Cash Flows
The global spread of COVID-19 and the various attempts to contain it may create volatility with our future cash flows. Our future cash flows are could be impacted by our customer’s inability to pay for or keep their existing services, or their inability to acquire our services due to their personal financial hardships created by COVID-19. We may not be able to expand our network, acquire new customers or service existing customers based on our future cash flow position. We continue to monitor our discretionary spending in reaction to the COVID-19 pandemic. We have experienced disruptions in our business as we implemented modifications to preserve adequate liquidity and ensure that our business can continue to operate during this uncertain time.
The following table summarizes our cash flow:
|
| For Year Ended December 31 |
|
| ||||||||
|
| 2021 |
| 2020 |
| Increase (Decrease) | ||||||
| Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
| Operating activities | $ | 20,782,468 | $ | 21,244,610 | $ | (462,142) | -2.18% | ||||
| Investing activities |
|
| (21,253,732) |
|
| (12,948,677) |
|
| (8,305,055) |
| -64.14% |
| Financing activities |
| (5,840,247) |
| (2,671,273) |
| (3,168,974) |
| -118.63% | |||
| Change in cash |
| $ | (6,311,511) |
| $ | 5,624,660 |
| $ | (11,936,171) |
| -212.21% |
Cash Flows from Operating Activities
Cash generated by operations for the year ended December 31, 2021 was $20,782,468, compared to cash generated by operations of $21,244,610 in 2020. The decrease in cash from operating activities in 2021 was primarily due to the timing of the increase/decrease in assets and liabilities.
Cash generated by operations continues to be our primary source of funding for existing operations, capital expenditures, debt service and dividend payments to stockholders. Cash as of December 31, 2021 was $2,306,149, compared to $8,617,660 at December 31, 2020.
30
Cash Flows From Investing Activities
We operate in a capital-intensive business. We continue to upgrade our advanced fiber networks for changes in technology in order to provide advanced services to our customers.
Cash flows used in investing activities were $21,253,732 for the year ended December 31, 2021, compared to $12,948,677 used in investing activities in 2020. Capital expenditures relating to on-going operations were $19,011,909 in 2021 and $12,002,735 in 2020. Our total plant additions in 2021 and 2020 were recorded net of broadband grants awarded by the State of Minnesota. Materials and supply expenditures increased by $2,178,732 in 2021. This increase was primarily due to a large purchase of these items to support our fiber build initiatives and to avoid anticipated supply chain issues and increased inflation we are expecting in 2022. Our investing expenditures were financed with cash flows from our current operations and advances on our line of credit when needed. We believe that our current operations and anticipated new debt financing from CoBank will provide adequate cash flows to fund our plant additions for the upcoming year; however, funding from our revolving credit facility is available if the timing of our cash flows from operations does not match our cash flow requirements. As of December 31, 2021, we had $8.9 million available under our existing credit facility to fund capital expenditures and other operating needs.
Cash Flows Used in Financing Activities
Cash used in financing activities for the year ended December 31, 2021 was $5,840,247. This included long-term debt repayments of $4,610,400, changes in revolving credit facility of $1,077,589, grants received for plant construction of $724,465, the repurchase of common stock of $167,467 and the distribution of $2,864,434 of dividends to stockholders. Cash used in financing activities for the year ended December 31, 2020 was $2,671,273. This included long-term debt repayments of $4,621,815, the issuance of debt (PPP loan funds) of $2,889,000, grants received for plant construction of $650,208, the repurchase of common stock of $238,612 and the distribution of $1,350,054 of dividends to stockholders. The change in cash flows used in financing activities in 2021 was primarily due to the issuance of PPP loan funds, changes in revolving credit facility and lower dividends paid.
Working Capital
We had a working capital surplus (i.e. current assets minus current liabilities) of $2,545,129 as of December 31, 2021, with current assets of approximately $13.4 million and current liabilities of approximately $10.8 million, compared to a working capital surplus of $3,055,128 at December 31, 2020. The ratio of current assets to current liabilities was 1.23 and 1.25 at December 31, 2021 and 2020. The working capital surplus as of December 31, 2021 was primarily the result of increased inventories and a lower current portion due on our long-term debt.
Long-Term Debt and Revolving Credit Facilities
Our long-term debt obligations as of December 31, 2021, were $43,369,374 (excluding long-term loan origination fees), net of current debt maturities of $4,610,400 (excluding short-term loan origination fees). Our long-term debt obligations as of December 31, 2020, were $47,514,599 (excluding long-term loan origination fees), net of current debt maturities of $6,886,986 (excluding short-term loan origination fees).
31
Our Long-Term Debt consists of the following notes:
Master Loan Agreements (MLA) RX0583
| ▪ |
| RX0583(A)-T4 - $64,550,000 term note with interest payable quarterly. Final maturity date of this note is July 31, 2025. Twenty-eight quarterly principal payments of $1,152,600 are due commencing September 30, 2018 through June 30, 2025. A final balloon payment of $32,265,785 is due at maturity of this note on July 31, 2025. |
|
| ||
| ▪ |
| RX0583(A)-T5 - $10,000,000 revolving note with interest payable quarterly. Final maturity date of this note is July 31, 2025. We currently have drawn $1.1 million on this revolving note as of December 31, 2021. |
|
|
|
|
| RX0583(A)-T4 and RX0583(A)-T5 initially bear interest at a “LIBOR Margin” rate equal to 3.25 percent over the applicable LIBOR rate. The LIBOR Margin decreases as our “Leverage Ratio” decreases. | ||
We generally use variable-rate debt to finance our operations, capital expenditures and acquisitions. These variable-rate debt obligations expose us to variability in interest payments due to changes in interest rates. The terms of our credit facility with CoBank require that we enter into interest rate agreements designed to protect us against fluctuations in interest rates, in an aggregate principal amount and for a duration determined under the credit facility.
As described in Note 7 – “Interest Rate Swaps,” on August 1, 2018 we entered into an interest rate swap agreement (IRSA) with CoBank covering 25 percent of our existing debt balance or $16,137,500 of our aggregate indebtedness to CoBank on August 1, 2018. As of December 31, 2021, our IRSA covered $12,103,400, with a weighted average rate of 5.27%.
As described in Note 7 – “Interest Rate Swaps,” on August 29, 2019 we entered into a second IRSA with CoBank covering an additional $42,000,000 of our aggregate indebtedness to CoBank at August 29, 2019. As of December 31, 2021, our IRSA covered $33,923,670, with a weighted average rate of 3.50%.
Our remaining debt of $10.9 million ($8.9 million available under the revolving credit facilities and $2.0 million currently outstanding) remains subject to variable interest rates at an effective weighted average interest rate of 2.36%, as of December 31, 2021.
Nuvera and its respective subsidiaries also have entered into security agreements under which substantially all the assets of Nuvera and its respective subsidiaries have been pledged to CoBank as collateral. In addition, Nuvera and its respective subsidiaries have guaranteed all the obligations under the credit facility. The mortgage notes are required to be paid in quarterly installments covering principal and interest, beginning in the year of issue and maturing on July 31, 2025.
Our loan agreements include restrictions on our ability to pay cash dividends to our stockholders. However, we are allowed to pay dividends (a) (i) in an amount up to $2,700,000 in any year if our “Total Leverage Ratio,” that is, the ratio of our “Indebtedness” to “EBITDA” (as defined in the loan documents), is greater than 2.00 to 1.00, and (ii) in any amount if our Total Leverage Ratio is less than 2.00 to 1.00, and (b) in either case, if we are not in default or potential default under the loan agreements. On December 31, 2020, our Total Leverage Ratio fell below 2.00, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders. Our current Total Leverage Ratio as of December 31, 2021, is 1.83.
Our credit facility requires us to comply with specified financial ratios and tests. These financial ratios include total leverage ratio, debt service coverage ratio, equity to total assets ratio and annual maximum aggregate capital expenditures. As of December 31, 2021, we were in compliance with all the stipulated financial ratios in our loan agreements.
There are security and loan agreements underlying our current CoBank credit facility that contain restrictions on our distributions to stockholders and investment in, or loans, to others. Also, our credit facility contains restrictions that, among other things, limits or restricts our ability to enter into guarantees and contingent liabilities, incur additional debt, issue stock, transact asset sales, transfers or dispositions, and engage in mergers and acquisitions, without CoBank approval.
32
On April 16, 2020, Nuvera received a $2,889,000 loan under the SBA’s PPP, which was established as part of the COVID-19 CARES Act. The PPP Loan was unsecured and was evidenced by a note in the favor of Citizens as the lender.
The interest rate on the Note was 1.0% per annum. Payments of principal and interest were deferred for 180 days from the date of the Note (the deferral period). The PPP provided a mechanism for forgiveness of up to the full amount borrowed as long as Nuvera used the loan proceeds during the 24-week period after the loan origination for eligible purposes, including U.S. payroll costs, certain benefit costs, rent and utilities costs, and maintained its employment and compensation levels, subject to certain other requirements and limitations. The amount of the loan forgiveness was subject to reduction, among other things, if Nuvera terminated employees or reduced salaries or wages during the 24-week period. Any unforgiven portion of the PPP Loan was payable over a two-year term, with payments deferred during the deferral period. Nuvera was permitted to prepay the Note at any time without payment of any premium. The Note contained customary events of material defaults, including, among others, those relating to failure to make a payment, bankruptcy, other indebtedness, breaches of representations, and material adverse changes. The Company adhered to all guidelines under the terms of the Note and applied for debt forgiveness in August, 2020.
On February 3, 2021, the Company was notified by Citizens, the lender on the Company’s PPP Loan that Citizens had received payment in full from the United States federal government for the amount of the Company’s PPP Loan and the Company’s PPP Loan had been fully forgiven. We recognized a gain on the forgiveness of $2,912,433, which included the original amount of the loan plus accrued interest in the quarter ended March 31, 2021.
See Note 6 – “Long-Term Debt” for information pertaining to our long-term debt and current effective interest rates.
Guarantees
We have guaranteed a portion of the obligations of our Nuvera subsidiary joint venture investment in FiberComm, LC. See Note 13 – “Guarantees.”
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations stated in this 2021 Annual Report on Form 10-K are based upon Nuvera’s consolidated financial statements that have been prepared in accordance with GAAP, rules and regulations of the SEC and, where applicable, conform to the accounting principles as prescribed by federal and state telephone utility regulatory authorities. We presently give accounting recognition to the actions of regulators where appropriate. The preparation of our financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities at the date of the financial statements and during the reporting period. Actual results may differ from these estimates. Our senior management has discussed the development and selection of accounting estimates and the related Management Discussion and Analysis disclosure with our Audit Committee. For a summary of our significant accounting policies, see Note 1 – “Business Description and Summary of Significant Accounting Policies.”
33
Revenue Recognition
See Note 2 – “Revenue Recognition” for a discussion of our revenue recognition policies.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In making the determination of the appropriate allowance for doubtful accounts, we consider specific accounts, historical write-offs, changes in customer relationships, credit worthiness and concentrations of credit risk. Specific accounts receivable are written off once a determination is made that the account is uncollectible. Additional allowances may be required if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments. Our allowance for doubtful accounts was $80,000 and $160,000 as of December 31, 2021 and 2020.
Valuation of Goodwill
We have goodwill on our books related to prior acquisitions of communications company properties. As discussed more fully in Note 5 – “Goodwill and Intangibles,” and in accordance with GAAP, goodwill is reviewed for impairment annually or more frequently if an event occurs or circumstances change that would reduce the fair value below its carrying value. We perform our annual fair value evaluation in the fourth quarter of each year.
The impairment test for goodwill involves measuring a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Any excess of the carrying value of the reporting unit goodwill over the implied fair value of the reporting unit goodwill will be recorded as an impairment loss.
In 2021 and 2020, we engaged an independent valuation firm to aid in the completion of an annual impairment test for existing goodwill acquired. For 2021 and 2020, the testing resulted in no impairment to goodwill as the determined fair value was sufficient to pass the impairment test. We used a combination of Income (Discounted Cash Flow Method or DCF Method) and Market Approaches to estimate the fair value of the goodwill on our books related to prior acquisitions of communications company properties. The assumptions used in the estimates of fair value were based on projections provided by our management and a rate of return based on market information observed in debt and traded equity securities. Their Market Approaches considered market multiples observed in companies comparable to ours, traded on public exchange or over-the-counter, or transacted in a merger or acquisition transaction.
Assumptions used in our 2021 DCF model include the following:
● An 8.00% weighted average cost of capital based on an industry weighted average cost of capital;
● A 1.50% terminal revenue growth rate.
The most significant amount of goodwill recorded on our books was due to the acquisitions of HTC, SETC and Scott-Rice. The carrying value of the goodwill was $49,903,029 as of December 31, 2021 and 2020.
In 2021, we tested the HTC, SETC and Scott-Rice goodwill. Based on the DCF model approach that was used, we determined the estimated enterprise fair value of our reporting units exceeded the carrying amount of that reporting units by approximately 29.8%, 22.0% and 26.0% for HTC, SETC and Scott-Rice, respectively, which indicated that we had no impairment as of December 31, 2021. Future negative changes relating to our financial operations could result in a potential impairment of goodwill.
34
Income Taxes
The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax basis. Significant components of our deferred taxes arise from differences (i) in the basis of property, plant and equipment due to the use of accelerated depreciation methods for tax purposes, as well as (ii) in partnership investments and intangible assets due to the difference between book and tax basis. Our effective income tax rate is normally higher than the United States tax rate due to state income taxes and permanent differences.
We account for income taxes in accordance with GAAP, which requires an asset and liability approach to financial accounting and reporting for income taxes. As required by GAAP, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
In accordance with GAAP, we record net unrecognized tax benefits that, if recognized, would affect the income tax provision when recorded. See Note 8 – “Income Taxes.”
As of December 31, 2021 and 2020 we had $38,673 and $44,155 of unrecognized tax benefits.
We are primarily subject to United States, Minnesota, Iowa, Nebraska, North Dakota and Wisconsin income taxes. Tax years subsequent to 2016 remain open to examination by federal and state tax authorities. Our policy is to recognize interest and penalties related to income tax matters as income tax expense. As of December 31, 2021 and 2020 we had $4,102 and $3,208 of interest or penalties accrued that related to income tax matters.
Property, Plant and Equipment
We record impairment losses on long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. In assessing the recoverability of long-lived assets, we compare the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, we would write down those assets based on the excess of the carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted future cash flows expected from those assets. Changes in these estimates could have a material adverse effect on the assessment of long-lived assets, thereby requiring a write-down of the assets. Write-downs of long-lived assets are recorded as impairment charges and are a component of operating expenses. We have reviewed our long-lived assets and concluded that no impairment charge on these long-lived assets is necessary.
We use the group life method (mass asset accounting) to depreciate the assets of our communication companies. Communications plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. When an asset is retired, both the asset and the accumulated depreciation associated with that asset are removed from the books. Due to rapid changes in technology, selecting the estimated economic life of communications plant and equipment requires a significant amount of judgment. We periodically review data on expected utilization of new equipment, asset retirement activity and net salvage values to determine adjustments to our depreciation rates. We have not made any significant changes to the lives of assets in the two-year period ended December 31, 2021.
35
Equity Method Investment
We are an investor in several partnerships and limited liability corporations. Our percentages of ownership in these joint ventures range from 7.54% to 24.30%. We use the equity method of accounting for these investments, which reflects original cost and the recognition of our share of the net income or losses from the respective operations.
Incentive Compensation
We engaged an outside consultant in 2005 to advise us in our development of an Employee Incentive Plan for employees other than executive officers and a Management Incentive Plan for our executive officers. Both plans were implemented in 2006. Both of these plans are cash/stock-based incentive plans. Payments on each plan are based on an achievement of objectives of measurable corporate and operational performance with financial targets. The financial targets include the achievement of specified certain operating revenue and operating income before interest, taxes, depreciation and amortization (OIBITDA) criteria, while the operational target is based upon net internet customer additions. The Plan permits the issuance of up to 200,000 shares of our Common Stock in stock awards.
We accrue an estimated liability each year for these potential payouts and reverse that accrual if the incentive payout targets are not met and paid out. Incentive payouts, if earned, are typically paid in late March of the year following the target year and after the filing of our Annual Report on Form 10-K.
On February 24, 2017, our BOD adopted the Nuvera Communications, Inc. 2017 Omnibus Stock Plan (the Plan) effective May 25, 2017. The shareholders of the Company approved the Plan at the May 25, 2017 Annual Meeting of Shareholders. The purpose of the Plan was to enable Nuvera and its subsidiaries to attract and retain talented and experienced people, closely link employee compensation with performance realized by shareholders, and reward long-term results with long-term compensation. The Plan enables us to grant stock incentive awards to current and new employees, including officers, and to Board members and service providers. The Plan permits stock incentive awards in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, RSU’s, performance stock, performance units, and other awards in stock or cash. The Plan permits the issuance of up to 625,000 shares of our Common Stock in any of the above stock awards.
See Note 15 – “Restricted Stock Units” for a detailed discussion of our incentive compensation and RSUs.
Recent Accounting Developments
See Note 1 – “Business Description and Summary of Significant Accounting Policies” for a discussion of recent accounting developments.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required for a smaller reporting company.
36
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Nuvera Communications, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Nuvera Communications, Inc. (a Minnesota corporation) and subsidiaries (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements, present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
37
Evaluation of Goodwill for Impairment
Description of the Matter
At December 31, 2021, the Company’s goodwill balance was $49,903,029. As discussed in Note 5 to the consolidated financial statements, reporting unit goodwill is tested for impairment at least annually or when events or circumstances indicate the fair value of a reporting unit may be below its carrying value. This analysis involves comparing the carrying value of a reporting unit’s equity against the estimated fair value of the reporting units equity which is determined using discounted cash flow (DCF) models and market based approaches using market multiples of peer companies which offer comparable services to its reporting units. These fair value estimates are sensitive to significant assumptions, such as cash flow projections, operating and EBITDA margins, discount rates, terminal values, subscriber growth and churn, and capital investment. These assumptions are affected by expectations about future market and economic conditions.
Auditing management’s annual impairment tests for goodwill was complex because of the significant judgment required to evaluate the management assumptions described above used to determine the fair value of the reporting units.
How We Addressed the Matter in Our Audit
We obtained an understanding of the controls over the Company’s goodwill impairment review processes. This included controls over management’s use of both an outside specialist and internal review of the valuation models and the significant assumptions noted above, utilized in both the DCF and market valuation methods.
To test the estimated fair value of the Company’s reporting units, we involved our valuation specialists to assist us in performing our audit procedures. Our procedures included, among others, testing the valuation methodology used and the significant assumptions within the valuation methodology. For example, we compared the significant assumptions to current industry, market and economic trends, and other guideline companies in the same industry and to other factors. Where appropriate, we evaluated whether changes to the company’s business model, customer base and other factors would affect the significant assumptions. We also assessed the historical accuracy of management’s past estimates, tested the clerical accuracy of the valuation calculations, and performed independent sensitivity analyses. In addition, we tested management’s reconciliation of the cumulative fair value of its reporting units to the market capitalization of the Company.
We have served as the Company’s auditor since 2008.
March 16, 2022
38
| NUVERA COMMUNICATIONS, INC. AND SUBSIDIARIES | ||||||
| CONSOLIDATED STATEMENTS OF INCOME | ||||||
| FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 | ||||||
| 2021 | 2020 | |||||
| OPERATING REVENUES: | ||||||
| Voice Service | $ | | $ | | ||
| Network Access | | | ||||
| Video Service | | | ||||
| Data Service | | | ||||
| A-CAM/FUSF | | | ||||
| Other Non-Regulated |
| |
| | ||
| Total Operating Revenues |
| |
| | ||
| OPERATING EXPENSES: | ||||||
| Plant Operations (Excluding Depreciation | | | ||||
| Cost of Video | | | ||||
| Cost of Data | | | ||||
| Cost of Other Non-Regulated Services | | | ||||
| Depreciation and Amortization | | | ||||
| Selling, General, and Administrative |
| |
| | ||
| Total Operating Expenses |
| |
| | ||
| OPERATING INCOME |
| |
| | ||
| OTHER INCOME (EXPENSE): | ||||||
| Interest During Construction | | | ||||
| CoBank Patronage Dividends | | | ||||
| Interest/Dividend Income |
|
| |
|
| |
| Interest Expense | ( | ( | ||||
| Gain on PPP Loan Forgiveness | | - | ||||
| Gain (Loss) on Investments |
|
| - |
|
| |
| Other Investment Income |
| |
| | ||
| Total Other Income (Expense) |
| |
| ( | ||
| INCOME BEFORE INCOME TAXES | | | ||||
| INCOME TAXES EXPENSE |
| |
| | ||
| NET INCOME | $ | | $ | | ||
| NET INCOME PER SHARE | ||||||
| Basic | $ | | $ | | ||
| Diluted | $ | | $ | | ||
| DIVIDENDS PER SHARE | $ | | $ | | ||
| WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||
| Basic |
| |
| | ||
| Diluted |
| |
| | ||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||
39
| NUVERA COMMUNICATIONS, INC. AND SUBSIDIARIES | ||||||
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||
| FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 | ||||||
| 2021 | 2020 | |||||
| NET INCOME | $ | | $ | | ||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||
| Unrealized Gains (Losses) on Interest Rate Swaps | | ( | ||||
| Income Tax Benefit (Expense) Related to Unrealized Gains (Losses) on Interest Rate Swaps |
| ( |
| | ||
| OTHER COMPREHENSIVE INCOME (LOSS) |
| |
| ( | ||
| COMPREHENSIVE INCOME | $ | | $ | | ||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||
40
|
NUVERA COMMUNICATIONS, INC. AND SUBSIDIARIES |
||||||
|
CONSOLIDATED BALANCE SHEETS |
||||||
|
DECEMBER 31, 2021 AND 2020 |
||||||
|
ASSETS |
||||||
|
2021 |
2020 |
|||||
|
CURRENT ASSETS: |
||||||
|
Cash |
$ |
|
$ |
|
||
|
Receivables, Net of Allowance for Doubtful Accounts of $ |
|
|
||||
|
Income Taxes Receivable |
|
|
||||
|
Materials, Supplies and Inventories |
|
|
||||
|
Prepaid Expenses and Other Current Assets |
|
|
|
|
||
|
Total Current Assets |
|
|
|
|
||
|
INVESTMENTS & OTHER ASSETS: |
||||||
|
Goodwill |
|
|
||||
|
Intangibles |
|
|
||||
|
Other Investments |
|
|
||||
|
Right of Use Asset |
|
|
||||
|
Other Assets |
|
|
|
|
||
|
Total Investments and Other Assets |
|
|
|
|
||
|
PROPERTY, PLANT & EQUIPMENT: |
||||||
|
Communications Plant |
|
|
||||
|
Other Property & Equipment |
|
|
||||
|
Video Plant |
|
|
|
|
||
|
Total Property, Plant and Equipment |
|
|
||||
|
Less Accumulated Depreciation |
|
|
|
|
||
|
Net Property, Plant & Equipment |
|
|
|
|
||
|
TOTAL ASSETS |
$ |
|
$ |
|
||
|
The accompanying notes are an integral part of these consolidated financial statements. |
||||||
41
|
NUVERA COMMUNICATIONS, INC. AND SUBSIDIARIES |
||||||
|
CONSOLIDATED BALANCE SHEETS (continued) |
||||||
|
DECEMBER 31, 2021 AND 2020 |
||||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||
|
2021 |
2020 |
|||||
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
Current Portion of Long-Term Debt, Net of Unamortized Loan Fees |
$ |
|
$ |
|
||
|
Accounts Payable |
|
|
|
|
|
|
|
Other Accrued Taxes |
|
|
|
|
|
|
|
Deferred Compensation |
|
|
||||
|
Accrued Compensation |
|
|
|
|
|
|
|
Other Accrued Liabilities |
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT, Net of Unamortized Loan Fees |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
NONCURRENT LIABILITIES: |
||||||
|
Loan Guarantees |
|
|
|
|
|
|
|
Deferred Income Taxes |
|
|
||||
|
Unrecognized Tax Benefit |
|
|
|
|
|
|
|
Other Accrued Liabilities |
|
|
||||
|
Financial Derivative Instruments |
|
|
|
|
|
|
|
Deferred Compensation |
|
|
|
|
|
|
|
Total Noncurrent Liabilities |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES: |
||||||
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY: |
||||||
|
Preferred Stock $ Authorized, No Shares Issued and Outstanding |
|
|
|
|
||
|
Common Stock - $ |
|
|
||||
|
Accumulated Other Comprehensive Loss |
|
|
( |
|
|
( |
|
Unearned Compensation |
|
|
||||
|
Retained Earnings |
|
|
|
|
|
|
|
Total Stockholders' Equity |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
$ |
|
$ |
|
||
|
The accompanying notes are an integral part of these consolidated financial statements. |
||||||
42
|
NUVERA COMMUNICATIONS, INC. AND SUBSIDIARIES |
||||||
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
||||||
|
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 |
||||||
|
2021 |
2020 |
|||||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
Net Income |
$ |
|
$ |
|
||
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
||||
|
PPP Loan Forgiveness |
|
|
( |
|
|
|
|
Unrealized Gains on Investments |
( |
|||||
|
Undistributed Earnings of Other Equity Investment |
|
|
( |
|
|
( |
|
Noncash Patronage Refund |
( |
( |
||||
|
Stock Issued in Lieu of Cash Payment |
|
|
|
|
|
|
|
Distributions from Equity Investments |
|
|
||||
|
Stock-based Compensation |
|
|
|
|
|
|
|
Changes in Assets and Liabilities: |
|
|||||
|
Receivables |
|
|
( |
|
|
|
|
Income Taxes Receivable |
( |
( |
||||
|
Inventories for Resale |
|
|
( |
|
|
( |
|
Prepaid Expenses |
( |
( |
||||
|
Other Assets |
|
|
( |
|
|
( |
|
Accounts Payable |
|
( |
||||
|
Accrued Income Taxes |
|
|
- |
|
|
( |
|
Other Accrued Taxes |
|
|
||||
|
Other Accrued Liabilities |
|
|
( |
|
|
( |
|
Deferred Income Tax |
|
|
||||
|
Deferred Compensation |
|
|
( |
|
|
( |
|
Net Cash Provided by Operating Activities |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||
|
Additions to Property, Plant, and Equipment, Net |
|
|
( |
|
|
( |
|
Materials and Supplies for Construction |
( |
|||||
|
Purchase of Intangible |
|
|
|
|
( |
|
|
Other, Net |
|
|
( |
|
|
( |
|
Net Cash Used in Investing Activities |
|
( |
|
( |
||
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||
|
Principal Payments of Long-Term Debt |
|
|
( |
|
|
( |
|
Loan Proceeds |
|
|||||
|
Changes in Revolving Credit Facility |
|
|
|
|
|
|
|
Grants Received for Construction of Plant |
|
|
|
|
|
|
|
Repurchase of Common Stock |
( |
( |
||||
|
Dividends Paid |
|
( |
|
( |
||
|
Net Cash Used in Financing Activities |
|
|
( |
|
|
( |
|
NET CHANGE IN CASH |
|
|
( |
|
|
|
|
CASH at Beginning of Period |
|
|
|
|
|
|
|
CASH at End of Period |
|
$ |
|
|
$ |
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
Cash paid for interest |
$ |
|
$ |
|
||
|
Net cash paid for income taxes |
|
$ |
|
|
$ |
|
|
Certain historical numbers have changed to conform with the current year's presentation |
||||||
|
The accompanying notes are an integral part of these consolidated financial statements. |
||||||
43
| NUVERA COMMUNICATIONS, INC. AND SUBSIDIARIES | ||||||||||||||||
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | ||||||||||||||||
| FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 | ||||||||||||||||
| Common Stock | Accumulated Other Comprehensive | Unearned | Retained | Total | ||||||||||||
| Shares | Amount | Income (Loss) | Compensation | Earnings | Equity | |||||||||||
| BALANCE on December 31, 2019 | |
| $ | |
| $ | ( |
| $ | |
| $ | |
| $ | |
| Directors Stock Plan | |
|
| |
|
|
|
|
|
|
|
| |
|
| |
| Employee Stock Plan | | | | | ||||||||||||
| Restricted Stock Grant |
|
|
|
|
|
|
|
|
| |
|
|
|
|
| |
| Exercise of RSU's | | | ( | | ( | |||||||||||
| Repurchase of Common Stock | ( |
|
| ( |
|
|
|
|
|
|
|
| ( |
|
| ( |
| Net Income | | | ||||||||||||||
| Dividends |
|
|
|
|
|
|
|
|
|
|
|
| ( |
|
| ( |
| Unrealized Loss on Interest Rate Swap | ( | ( | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BALANCE on December 31, 2020 | | | ( | | | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Directors Stock Plan | | | | | ||||||||||||
| Employee Stock Plan | |
|
| |
|
|
|
|
|
|
|
| |
|
| |
| Restricted Stock Grant | | | ||||||||||||||
| Exercise of RSU's | |
|
| |
|
|
|
|
| ( |
|
| |
|
| |
| Repurchases of Common Stock | ( | ( | ( | ( | ||||||||||||
| Net Income |
|
|
|
|
|
|
|
|
|
|
|
| |
|
| |
| Dividends | ( | ( | ||||||||||||||
| Unrealized Gain on Interest Rate Swap |
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| BALANCE on December 31, 2021 | |
| $ | |
| $ | ( |
| $ | |
| $ | |
| $ | |
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||
44
NOTE 1 – BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Nuvera is a diversified communications company headquartered in New Ulm, Minnesota with more than 116 years of experience in the communications business. Our principal line of business is the operation of seven communications companies. Our businesses consist of connecting customers to our state-of-the-art, advanced fiber communications network, providing managed services, switched service and dedicated private lines, connecting customers to long distance service providers and providing many other services associated with our company. We also provide IPTV, CATV, Internet access services, including high-speed broadband access, and long distance service. We also install and maintain communications systems to the areas in and around our service territories in southern Minnesota and northern Iowa.
Basis of Presentation and Principles of Consolidation
Our accounting policies conform with GAAP and rules and regulations of the SEC and, where applicable, conform to the accounting principles as prescribed by federal and state telephone utility regulatory authorities. We presently give accounting recognition to the actions of regulators where appropriate in preparing general purpose financial statements for most public utilities. In general, the type of regulation covered by this statement permits rates (prices) for some services to be set at levels intended to recover the estimated costs of providing regulated services or products, including the cost of capital (interest costs and a provision for earnings on stockholders’ investments).
Our consolidated financial statements report the financial condition and results of operations for Nuvera and its subsidiaries in
Classification of Costs and Expenses
Cost of services includes all costs related to delivery of communication services and products. These operating costs include all costs of performing services and providing related products including engineering, network monitoring and transportation costs.
Selling, general and administrative expenses include direct and indirect selling expenses, customer service, billing and collections, advertising and all other general and administrative costs associated with our operations.
Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires our management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. The estimates and judgements used in the accompanying consolidated financial statements are based on our management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from those estimates and assumptions.
Revenue Recognition
See Note 2 – “Revenue Recognition” for a discussion of our revenue recognition policies.
45
Receivables
As of December 31, 2021 and 2020, our consolidated receivables totaled $
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In making the determination of the appropriate allowance for doubtful accounts, we consider specific accounts, historical write-offs, changes in customer relationships, credit worthiness and concentrations of credit risk. Specific accounts receivable are written off once a determination is made that the account is uncollectible. Additional allowances may be required if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments.
The activity in our allowance for doubtful accounts includes the following:
| Year Ended December 31 | |||||
| 2021 | 2020 | ||||
| Balance at beginning of year | $ | |
| $ | |
| Additions charged to costs and expenses | | | |||
| Accounts written off, net of recoveries |
| ( |
|
| ( |
| Balance at end of year | $ | | $ | | |
Inventories
Inventory includes parts, materials and supplies stored in our warehouses to support basic levels of service and maintenance as well as scheduled capital projects and equipment awaiting configuration for customers. Inventory also includes (i) parts and equipment shipped directly from vendors to customer locations while in transit and (ii) parts and equipment returned from customers that are being returned to vendors for credit. Our inventory value as of December 31, 2021 and 2020 was $
We value inventory using the lower of cost or net realizable value. Similar to our allowance for doubtful accounts, we make estimates related to the valuation of inventory. As of December 31, 2021 and 2020, we had no inventory reserve. We adjust our inventory carrying value for estimated obsolescence or unmarketable inventory to the net realizable value based upon assumptions about future demand and market conditions. As market and other conditions change, we may establish additional inventory reserves at a time when the facts that give rise to a lower value are warranted. We use the first-in, first-out method of inventory costing for our non-retail inventory. We use the average cost method of inventory costing for our retail inventory.
Property, Plant and Equipment
We record impairment losses on long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. In assessing the recoverability of long-lived assets, we compare the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, we would write down those assets based on the excess of the carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted future cash flows expected from those assets. Changes in these estimates could have a material adverse effect on the assessment of long-lived assets, thereby requiring a write-down of the assets. Write-downs of long-lived assets are recorded as impairment charges and are a component of operating expenses. We have reviewed our long-lived assets and concluded that no impairment charge on our long-lived assets is necessary.
46
Property, plant and equipment additions are recorded net of any Broadband grants received.
We use the group life method (mass asset accounting) to depreciate the assets of our communications companies. Communications plant acquired in a given year is grouped into similar categories and depreciated over the remaining estimated useful life of the group. When an asset is retired, both the asset and the accumulated depreciation associated with that asset are removed from the books. Due to rapid changes in technology, selecting the estimated economic life of communications plant and equipment requires a significant amount of judgment. We periodically review data on expected utilization of new equipment, asset retirement activity and net salvage values to determine adjustments to our depreciation rates. We have not made any significant changes to the lives of these assets in the two year period ended December 31, 2021.
Goodwill and Intangible Assets
We amortize our definite-lived intangible assets over their estimated useful lives. Customer relationships are amortized over
Financial Derivative Instruments and Fair Value Measurements
We have adopted the rules prescribed under GAAP for our financial assets and liabilities. GAAP includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:
| Level 1: |
| Inputs are quoted prices in active markets for identical assets or liabilities. |
| Level 2: |
| Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs that are derived principally from or corroborated by observable market data. |
| Level 3: |
| Inputs are derived from valuation techniques where one or more significant inputs or value drivers are unobservable. |
We have used financial derivative instruments to manage our overall cash flow exposure to fluctuations in interest rates. We accounted for derivative instruments in accordance with GAAP that requires derivative instruments to be recorded on the balance sheet at fair value. Changes in fair value of derivative instruments must be recognized in earnings unless specific hedge accounting criteria are met, in which case, the gains and losses are included in other comprehensive income rather than in earnings.
We have entered into IRSAs with our lender, CoBank to manage our cash flow exposure to fluctuations in interest rates. These instruments are designated as cash flow hedges and are effective at mitigating the risk of fluctuations on interest rates in the marketplace. Any gains or losses related to changes in the fair value of these derivatives are accounted for as a component of accumulated other comprehensive income (loss) for as long as the hedge remains effective.
47
The fair value of our IRSAs is discussed in Note 7 – “Interest Rate Swaps”. The fair value of our swap agreement was determined based on Level 2 inputs.
Other Financial Instruments
Other Investments - We conducted an evaluation of our investments in all of our investees in connection with the preparation of our audited financial statements at December 31, 2021. As of December 31, 2021, we believe the carrying value of our investments is not impaired.
Debt – We estimate the fair value of our long-term debt based on the discounted future cash flows we expect to pay using current rates of borrowing for similar types of debt. Fair value of the debt approximates carrying value.
Other Financial Instruments - Our financial instruments also include cash equivalents, trade accounts receivable and accounts payable where the current carrying amounts approximate fair market value.
Investments and Other Assets
We are a co-investor with other communication companies in several partnerships and limited liability companies. These joint ventures make it possible to offer services to customers, including digital video services and fiber transport services that we would have difficulty offering on our own. These joint ventures also make it possible to invest in new technologies with a lower level of financial risk. We use the equity method of accounting for these investments that reflects original cost and recognition of our share of the net income or losses from the respective operations. See Note 16 – “Segment Information” for a listing of our investments.
Investments in other companies that are not intended for resale and are not accounted for on the equity method of accounting are valued at fair value where there are readily determinable fair values. Investments in other companies that are not intended for resale and are not accounted for on the equity method of accounting are valued at cost where there are no readily determinable fair values. See Note 12 – “Other Investments” for additional information regarding our investments.
Advertising Expense
Advertising is expensed as incurred. Advertising expense charged to operations was $
Interest During Construction
We include an average cost of debt for the construction of plant in our communications plant accounts.
Income Taxes
We account for income taxes in accordance with GAAP, which requires an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferred tax assets and liabilities arise from the difference between the tax basis of an asset or liability and its reported amount in the financial statements and operating and tax credit carryforwards. Deferred tax assets and liabilities are determined using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We recognize interest and penalties related to income tax matters as income tax expense. Income tax expense or benefit is the tax payable or refundable, respectively, for the period plus or minus the change in deferred tax assets and liabilities during the period.
48
GAAP requires us to recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. See Note 8 – “Income Taxes” for additional information regarding income taxes.
Collection of Taxes from Customers
Sales, excise and other taxes are imposed on most of our sales to nonexempt customers. We collect these taxes from our customers and remit the entire amounts to governmental authorities. Our accounting policies dictate that we exclude these taxes collected and remitted from our revenues and expenses.
Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash investments and receivables. We deposit our cash investments in high credit quality financial institutions accounts which, at times, may exceed federally insured limits. We have not experienced any losses in these accounts and do not believe we are exposed to any significant credit risk. Concentrations of credit risk with respect to trade receivables are limited due to our large number of customers.
Earnings and Dividends Per Share
Basic and diluted net income per share are calculated as follows:
| Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||
| Basic | Diluted | Basic | Diluted | ||||||||
| Net Income | $ | |
| $ | |
| $ | |
| $ | |
| Weighted-average common |
| |
|
| |
|
| |
|
| |
| Net income per share | $ | |
| $ | |
| $ | |
| $ | |
The weighted-average shares outstanding, basic and diluted, are calculated as follows:
| Year Ended December 31, 2021 | Year Ended December 31, 2020 | ||||||||||
| Basic | Diluted | Basic | Diluted | ||||||||
| Weighted-average common |
| |
|
| |
|
| |
|
| |
| Potentially Dilutive RSU's |
| - |
|
| |
|
| - |
|
| |
| Weighted-average common |
| |
|
| |
|
| |
|
| |
49
Nuvera’s BOD reviews quarterly dividend declarations based on our anticipated earnings, capital requirements and our operating and financial conditions.
Recent Accounting Developments
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU No. 2101-01, “Reference Rate Reform (Topic 848): Scope.” ASU 2021-01 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2020-04 and ASU 2021-01 are both elective and are effective upon issuance through December 31, 2022. The Company is evaluating the impact this update will have on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. The second step measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under ASU 2017-04, a company will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 will be applied prospectively and is effective for annual or interim goodwill impairment tests in the fiscal years beginning January 1, 2021. The Company adopted ASU 2017-04 on January 1, 2021, and the adoption of the standard did not have a material effect on our financial position, results of operations or cash flows.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires entities to use a new forward-looking, expected loss model to estimate credit losses. It also requires additional disclosures relating to the credit quality of trade and other receivables, including information relating to management’s estimate of credit allowances. The Company is required to adopt ASU 2016-13 for fiscal periods beginning after December 15, 2022, including interim periods within that fiscal year. Early adoption as of December 15, 2018, is permitted. Management is evaluating the impact the adoption of ASU 2016-13 will have on the Company’s financial statements (if any).
We have reviewed all other significant newly issued accounting pronouncements and determined that they are either not applicable to our business or that no material effect is expected on our financial position and results of operations.
NOTE 2 – REVENUE RECOGNITION
The Company recognizes revenue based on the following single principles-based, five-step model that is applied to all contracts with customers. These steps include (1) identify the contract(s) with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when each performance obligation is satisfied.
Our revenue contracts with customers may include a promise or promises to deliver services such as broadband, video or voice services. Promised services are considered distinct as the customer can benefit from the services either on their own or together with other resources that are readily available to the customer and the Company’s promise to transfer service to the customer is separately identifiable from other promises in the contract. The Company accounts for services as separate performance obligations. Each service is considered a single performance obligation as it is providing a series of distinct services that are substantially the same and have the same pattern of transfer.
50
The transaction price is determined at contract inception and reflects the amount of consideration to which we expect to be entitled in exchange for transferring service to the customer. This amount is generally equal to the market price of the services promised in the contract and may include promotional or bundling discounts. The majority of our prices are based on tariffed rates filed with regulatory bodies or standard company price lists. The transaction price excludes amounts collected on behalf of third parties such as sales taxes and regulatory fees. Conversely, nonrefundable up-front fees, such as service activation and set-up fees, which are immaterial to our overall revenues, are included in the transaction price. In determining the transaction price, we consider our enforceable rights and obligations within the contract. We do not consider the possibility of a contract being cancelled, renewed or modified, which is consistent with ASC 606-10-32-4.
The transaction price is allocated to each performance obligation based on the standalone selling price of the service, net of the related discount, as applicable.
Revenue is recognized when performance obligations are satisfied by transferring service to the customer as described below.
Significant Judgments
The Company often provides multiple services to a customer. Provision of CPE and additional service tiers may have a significant level of integration and interdependency with the subscription voice, video, Internet, or connectivity services. Judgement is required to determine whether provision of CPE, installation services, and additional service tiers are considered distinct and accounted for separately, or not distinct and accounted for together with the subscription services.
Allocation of the transaction price to the distinct performance obligations in bundled service subscriptions requires judgement. The transaction price for a bundle of services is frequently less than the sum of standalone selling prices of each individual service. Bundled discounts are allocated proportionally to the selling price of each individual service within the bundle. Standalone selling prices for the Company’s services are directly observable.
51
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the years ended December 31, 2021 and 2020:
|
Twelve Months Ended December 31, |
|||||
|
2021 |
2020 |
||||
|
Voice Service¹ |
$ |
|
|
|
|
|
Network Access¹ |
|
|
|||
|
Video Service ¹ |
|
|
|
|
|
|
Data Service ¹ |
|
|
|||
|
Directory² |
|
|
|
|
|
|
Other Contracted Revenue³ |
|
|
|||
|
Other4 |
|
|
|
|
|
|
Revenue from customers |
|
|
|
|
|
|
Subsidy and other revenue |
|
|
|
|
|
|
Total revenue |
$ |
|
|
$ |
|
|
¹ Month-to-Month contracts billed and consumed in the same month. |
|||||
|
² Directory revenue is contracted annually, however, this revenue is recognized |
|||||
|
³ This includes long-term contracts where the revenue is recognized monthly over |
|||||
|
|
|||||
|
4 This includes CPE and other equipment sales. |
|||||
|
5 This includes governmental subsidies and lease revenue outside the scope of ASC 606. |
|||||
For the year ended December 31, 2021, approximately
52
For the year ended December 31, 2020, approximately
A significant portion of our revenue is derived from customers who may generally cancel their subscriptions at any time without penalty. As such, the amount of revenue related to unsatisfied performance obligations is not necessarily indicative of the future revenue to be recognized from our existing customer base. Revenue from customers with a contractually specified term and non-cancelable service period will be recognized over the term of such contracts, which is generally
Nature of Services
Revenues are earned from our customers primarily through the connection to our fiber networks, digital and commercial TV programming, Internet services (high-speed broadband), and hosted and managed services. Revenues for these services are billed based on set rates for monthly service or based on the amount of time the customer is utilizing our facilities. The revenue for these services is recognized over time as the service is rendered.
Voice Service – We receive recurring revenue for basic local services that enable end-user customers to make and receive telephone calls within a defined local calling area for a flat monthly fee. In addition to subscribing to basic local telephone services, our customers may choose from multiple voice service plans with a variety of custom calling features such as call waiting, call forwarding, caller identification and voicemail. Our VOIP digital phone service is also available as an alternative to the traditional telephone line. Customers may generally cancel their subscriptions at any time without penalty. Each subscription service provided is accounted for as a distinct performance obligation and revenue is recognized over a one-month service period as the subscription services are delivered. Other optional services purchased by the customer are generally accounted for as a distinct performance obligation when purchased and revenue is recognized when the service is provided.
Network Access – We provide access services to other communication carriers for the use of our facilities to terminate or originate long distance calls on our network. Additionally, we bill monthly SLCs to substantially all of our customers for access to the public switched network. These monthly SLCs are regulated and approved by the FCC. In addition, network access revenue is derived from several federally administered pooling arrangements designed to provide support and distribute funding to us.
Revenues earned from other communication carriers accessing our network are based on the utilization of our network by these carriers as measured by minutes of use on the network or special access to the network by the individual carriers on a monthly basis. Revenues are billed at tariffed access rates for both interstate and intrastate calls and are recognized into revenue monthly based on the period the access was provided.
The NECA pools and redistributes the SLCs to various communication providers through the CAF. These revenues are earned and recognized into revenue on a monthly basis. Any adjustments to these amounts received by NECA are adjusted for in revenue upon receipt of the adjustment.
Video Service – We provide a variety of enhanced video services on a monthly recurring basis to our customers. We also receive monthly recurring revenue from our subscribers for providing commercial TV programming in competition with CATV, satellite dish TV and off-air TV service providers. We serve twenty-two communities with our IPTV services and five communities with our CATV services. Customers may generally cancel their subscriptions at any time without penalty. Each subscription service provided is accounted for as a distinct performance obligation and revenue is recognized over a one-month service period as the subscription services are delivered. Other optional services purchased by the customer are generally accounted for as a distinct performance obligation when purchased and revenue is recognized when the service is provided.
53
Data Service – We provide high speed Internet to business and residential customers depending on the nature of the network facilities that are available, the level of service selected and the location. Our revenue is earned based on the offering of various flat packages based on the level of service, data speeds and features. We also provide e-mail and managed services, such as web hosting and design, on-line file back up and on-line file storage. Data customers may generally cancel their subscriptions at any time without penalty. Each subscription service provided is accounted for as a distinct performance obligation and revenue is recognized over a one-month service period as the subscription services are delivered. Other optional services purchased by the customer are generally accounted for as a distinct performance obligation when purchased and revenue is recognized when the service is provided.
Directory – Our directory publishing revenue in our telephone directories recurs monthly and is recognized into revenue on a monthly basis.
Other Contracted Revenue - Managed services and certain other data customers include fiber-delivered communications and managed information technology solutions to mainly business customers, as well as high-capacity last-mile data connectivity services to wireless and wireline carriers. Services are primarily offered on a subscription basis with a contractually specified and non-cancelable service period. The non-cancelable contract terms for these customers generally range from
Other – We also generate revenue from the sales, service and installation of CPE and other services. Sales and service of CPE are billed and recognized into revenue once the sale or service is complete or delivered. These sales and services are generally short-term in nature and are completed within
Subsidy and Other Revenue outside the Scope of ASC 606 – We receive subsidies from governmental entities to operate and expand our fiber networks. In addition, we have revenue from leasing arrangements. Both of these revenue streams are outside of the scope of ASC 606.
Interstate access rates are established by a nationwide pooling of companies known as the NECA. The FCC established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of a company's actual or average costs. There has been a change in the composition of interstate access charges in recent years, shifting more of the charges to the end user and reducing the amount of access charges paid by IXC’s. We believe this trend will continue.
Intrastate access rates are filed with state regulatory commissions in Minnesota and Iowa.
The Company currently receives funding based on the A-CAM as described below, with the exception of Scott-Rice, which receives funding from the FUSF. Scott-Rice’s settlements from the pools are based on nationwide average schedules, which includes the pooling and redistribution of revenues based on a company’s actual or average costs as described below.
A-CAM
As described above, with the exception of Scott-Rice, the remainder of our companies receive funding from A-CAM.
Per the FCC Public Notice DA 19-115, the Company receives A-CAM support and has corresponding service deployment obligations under that program. The Company annually receives (i) $
54
Accounts Receivable, Contract Assets and Contract Liabilities
The following table provides information about our receivables, contracts assets and contract liabilities from revenue contracts with our customers:
| Year Ended December 31, | |||||
| 2021 | 2020 | ||||
| Accounts receivable, net | $ | |
| $ | |
| Contract assets | | | |||
| Contract liabilities |
| |
|
| |
Accounts Receivable
A receivable is recognized in the period the Company provides goods and services when the Company’s right to consideration is unconditional. Payment terms on invoiced amounts are generally
Contract Assets
Contract assets include costs that are incremental to the acquisition of a contract. Incremental costs are those that result directly from obtaining a contract or costs that would not have been incurred if the contract had not been obtained, which primarily relates to sales commissions. We defer and amortize these costs over the expected customer life as the contract obligations are satisfied. We determined that the expected customer life is the expected period of benefit as the commission on the renewal contact is commensurate with the commission on the initial contract. During the years ended December 31, 2021 and 2020, the Company recognized expenses of $
Contract Liabilities
Contract liabilities include deferred revenues related to advanced payments for services and nonrefundable, upfront service activation and set-up fees, which under the new standard are generally deferred. In addition, contract liabilities include customer deposits that are not recognized into revenue, but are instead returned to the customer after a holding period. Short-term contract liabilities include deferred revenues for advanced payments for managed services and other long-term contracts. This includes the current portion of the deferred revenues that will be recognized monthly within one year. Short-term contract liabilities are included in current liabilities under other accrued liabilities. Long-term contract liabilities include deferred revenues for advanced payments for managed services and other long-term contracts. This includes the portion longer than one year and the corresponding deferred revenues are recognized into revenue on a monthly basis based on the term of the contract. Long-term contract liabilities are included in noncurrent liabilities under other accrued liabilities. During the years ended December 31, 2021 and 2020, the Company recognized revenues of $
55
Performance Obligations
ASC 606, Revenue from Contracts with Customers, requires that the Company disclose the aggregate amount of the transaction price that is allocated to remaining performance obligations that are unsatisfied as of December 31, 2021. The guidance provides certain practical expedients that limit this requirement. The service revenue contracts of the Company meet the following practical expedients provided by ASC 606:
1. The performance obligation is part of a contract that has an original expected duration of one year or less.
2. Revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer in accordance with ASC 606-10-55-18.
The Company has elected these practical expedients. Performance obligations related to our service revenue contracts are generally satisfied over time. For services transferred over time, revenue is recognized based on amounts invoiced to the customer as the Company has concluded that the invoice amount directly corresponds with the value of services provided to the customer. Management considers this a faithful depiction of the transfer of control as services are substantially the same and have the same pattern of transfer over the life of the contract. As such, revenue related to unsatisfied performance obligations that will be billed in future periods has not been disclosed.
NOTE 3 – LEASES
Under FASB’s ASU 2016-02, “Leases,” which, together with its related clarifying ASUs, provided revised guidance for lease accounting and related disclosure requirements and established a right-to-use (ROU) model that requires lessees to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. The ASU also requires disclosures to allow financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases. These disclosures include qualitative requirements, providing additional information about the amounts recorded in the financial statements.
The following table includes the ROU and operating lease liabilities as of December 31, 2021 and 2020.
| Right of Use Asset |
| Balance December 31, 2021 |
| Balance December 31, 2020 | ||
| Operating Lease Right-Of-Use Assets |
| $ | |
| $ | |
| Operating Lease Liability | Balance | Balance December 31, 2020 | ||||
| Short-Term Operating Lease Liability | $ | |
| $ | | |
| Long-Term Operating Lease Liability |
| |
| | ||
| Total |
| $ | |
| $ | |
56
Maturity analysis under these lease agreements are as follows:
| Maturity Analysis | |||
| 2022 |
| $ | |
| 2023 | | ||
| 2024 |
|
| |
| 2025 | | ||
| 2026 |
|
| |
| Thereafter |
| | |
| Total |
|
| |
| Less Imputed interest |
| ( | |
| Present Value of Operating Leases |
| $ | |
We amortize our leases over the shorter of the term of the lease or the useful life of the asset. Lease expense for the years ended December 31, 2021 and 2020 was $
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2021 and 2020, include the following:
|
2021 |
2020 |
||||
|
Communications Plant: |
|||||
|
Land |
$ |
|
|
$ |
|
|
Buildings |
|
|
|||
|
Other Support Assets |
|
|
|
|
|
|
Central Office and Circuit Equipment |
|
|
|||
|
Cable and Wire Facilities |
|
|
|
|
|
|
Other Plant and Equipment |
|
|
|||
|
Plant Under Construction |
|
|
|
|
|
|
|
|
||||
|
Other Property |
|
|
|
|
|
|
Video Plant |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property, Plant and Equipment |
$ |
|
$ |
|
|
Depreciation is computed using the straight-line method based on the estimated service or remaining useful lives of the various classes of depreciable assets. Depreciation expense was $
NOTE 5 - GOODWILL AND INTANGIBLES
We account for goodwill and other intangible assets under GAAP. Under GAAP, goodwill and intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment (i) on at least an annual basis and (ii) when changes in circumstances indicate that the fair value of goodwill may be below its carrying value. These circumstances include, but are not limited to (i) a significant adverse change in the business climate, (ii) unanticipated competition or (iii) an adverse action or assessment by a regulator. Determining impairment involves estimating the fair value of a reporting unit using a combination of (i) the income or DCF approach and (ii) the market approach that utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied value of goodwill. We recognize impairment loss when the carrying amount of goodwill exceeds its implied fair value. Our goodwill totaled $
57
In 2021 and 2020, we engaged an independent valuation firm to aid in the completion of our annual impairment testing for existing goodwill. For 2021 and 2020, the testing results indicated no impairment charge to goodwill as the determined fair value was sufficient to pass the impairment test.
Our intangible assets subject to amortization consist of acquired customer relationships, regulatory rights and trade names. We amortize intangible assets with finite lives over their respective estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment. In addition, we periodically reassess the carrying value, useful lives and classifications of our identifiable intangible assets.
The components of our identified intangible assets are as follows:
|
December 31, 2021 |
December 31, 2020 |
||||||||||||
|
Gross Carrying Amount |
Gross Carrying Amount |
||||||||||||
|
Useful Lives |
Accumulated Amortization |
Accumulated Amortization |
|||||||||||
|
Definite-Lived Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Relationships |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||
|
Regulatory Rights |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name |
|
|
|
|
|
||||||||
|
Indefinitely-Lived Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video Franchise |
|
|
|
|
|
|
|||||||
|
Spectrum |
|
|
|
|
|
|
|
|
|
|
|
||
|
Total |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
||||||||||
|
Net Identified Intangible Assets |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
Amortization expense related to the definite-lived assets was $
| 2022 | $ | | |
| 2023 | $ | | |
| 2024 | $ | | |
| 2025 | $ | | |
| 2026 | $ | |
NOTE 6 - LONG-TERM DEBT
We have a MLA with CoBank. Nuvera and its respective subsidiaries also have security agreements under which substantially all the assets of Nuvera and its respective subsidiaries have been pledged to CoBank as collateral. In addition, Nuvera and its respective subsidiaries have guaranteed all the obligations under the credit facility. These mortgage notes are required to be paid in quarterly installments covering principal and interest, beginning in September 2018 and maturing on July 31, 2025.
58
Secured Credit Facility:
MLA RX0583
|
▪ |
|
RX0583(A)-T4 - $ |
|
|
||
|
▪ |
|
RX0583(A)-T5 - $ |
|
|
|
|
|
RX0583(A)-T4 and RX0583(A)-T5 initially bear interest at a “LIBOR Margin” rate equal to |
||
We generally use variable-rate debt to finance our operations, capital expenditures and acquisitions. These variable-rate debt obligations expose us to variability in interest payments due to changes in interest rates. The terms of our credit facility with CoBank require that we enter into interest rate agreements designed to protect us against fluctuations in interest rates, in an aggregate principal amount and for a duration determined under the credit facility.
As described in Note 7 – “Interest Rate Swaps,” on August 1, 2018 we entered into an IRSA with CoBank covering 25 percent of our existing debt balance or $
As described in Note 7 – “Interest Rate Swaps,” on August 29, 2019 we entered into a second IRSA with CoBank covering an additional $
Our remaining debt of $
There are security and loan agreements underlying our current CoBank credit facility that contain restrictions on our distributions to stockholders and investment in, or loans, to others. Also, our credit facility contains restrictions that, among other things, limits or restricts our ability to enter into guarantees and contingent liabilities, incur additional debt, issue stock, transact asset sales, transfers or dispositions, and engage in mergers and acquisitions, without CoBank approval.
59
On April 16, 2020, Nuvera received a $
The interest rate on the Note was
On February 3, 2021, the Company was notified by Citizens, the lender on the Company’s PPP Loan that Citizens had received payment in full from the United States federal government for the amount of the Company’s PPP Loan and the Company’s PPP Loan had been fully forgiven. We recognized a gain on the forgiveness of $
|
Long-term debt is as follows: |
2021 |
|
2020 |
||
|
Secured seven-year credit facility to CoBank, ACB, amortizing in quarterly installments of $ 2018), plus a notional variable rate of interest through July 31, 2025. |
$ |
|
|
$ |
|
|
|
|
|
|
||
|
|
|
|
|
||
|
Less: Unamortized Loan Fees |
|
( |
|
|
( |
|
|
|
|
|
|
|
|
Less: Amount due within one year |
|
( |
|
|
( |
|
Net of Current Portion of Unamortized Loan Fees |
|
|
|
|
|
|
Total Long Term Debt |
$ |
|
|
$ |
|
Required principal payments for the next five years are as follows:
| 2022 | $ | | |
| 2023 | $ | | |
| 2024 | $ | | |
| 2025 | $ | | |
| 2026 | $ | |
NOTE 7 – INTEREST RATE SWAPS
We assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely affect expected future cash flows and by evaluating hedging opportunities.
60
We generally use variable-rate debt to finance our operations, capital expenditures and acquisitions. These variable-rate debt obligations expose us to variability in interest payments due to changes in interest rates. The terms of our credit facility with CoBank required that we enter into interest rate agreements designed to protect us against fluctuations in interest rates, in an aggregate principal amount and for a duration determined under the credit facility.
To meet this objective, we have entered into an IRSA with CoBank covering 25 percent of our existing outstanding debt balance or $
On August 29, 2019, we entered into a second IRSA with CoBank covering an additional $
Each month, we make interest payments to CoBank under its loan agreements based on the current applicable LIBOR Rate plus the contractual LIBOR margin then in effect with respect to the loan, without reflecting our IRSAs. At the end of each calendar month, CoBank adjusts our aggregate interest payments based on the difference, if any, between the amounts paid by us during the month and the current effective interest rate. Net interest payments are reported in our consolidated income statement as interest expense.
As of December 31, 2021 we had the following IRSA in effect.
| Loan # | Maturity Date | Notional Amount | Current Effective Interest Rate (1) |
|
|
|
|
|
| RX0583-T4 | | $ | |
| RX0583-T4 | | $ | |
(1) As described in Note 6 – “Long-Term Debt,” the notes above initially bears interest at a LIBOR rate determined by the maturity of the note, plus a “LIBOR Margin” rate equal to a maximum of
Our IRSAs under our credit facilities both qualify as cash flow hedges for accounting purposes under GAAP. We reflect the effect of these hedging transactions in the financial statements. The unrealized gain/loss is reported in other comprehensive income. If we terminate our IRSAs, the cumulative change in fair value at the date of termination would be reclassified from accumulated other comprehensive income, which is classified in stockholders’ equity, into earnings on the consolidated statements of income.
The fair value of the Company’s IRSAs were determined based on valuations received from CoBank and were based on the present value of expected future cash flows using discount rates appropriate with the terms of the IRSAs. The fair value indicates an estimated amount we would be required to pay if the contracts were canceled or transferred to other parties. On December 31, 2021, the fair value liability of these swaps was $
61
NOTE 8 - INCOME TAXES
Income taxes recorded in our consolidated statements of income consists of the following:
| 2021 | 2020 | |||||
| Taxes currently payable |
|
|
|
|
|
|
| Federal | $ | | $ | | ||
| State |
|
| |
|
| |
| Deferred Income Taxes |
| |
| | ||
| Total Income Tax Expense |
| $ | |
| $ | |
We account for income taxes in accordance with GAAP, which requires an asset and liability approach to financial accounting and reporting for income taxes. As required by GAAP, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than
As of December 31, 2021 and 2020 we had $
62
A reconciliation of the beginning and ending amount of total unrecognized benefits for the years ended December 31, 2021 and 2020 are as follows:
|
2021 |
2020 |
|||||
|
Balance, beginning of year |
|
$ |
|
|
$ |
|
|
Increases related to prior year tax positions |
|
|||||
|
Decreases related to prior year tax positions |
|
|
( |
|
|
|
|
Increases related to current year tax positions |
||||||
|
Settlements |
|
|
|
|
||
|
Balance, end of year |
$ |
|
$ |
|
||
We are primarily subject to United States, Minnesota, Iowa, Nebraska, North Dakota and Wisconsin income taxes. Tax years subsequent to 2017 remain open to examination by federal and state tax authorities. We are currently undergoing an examination by the State of Minnesota. We do not expect the results of the examination to have a material effect on our ongoing financial statements. Our policy is to recognize interest and penalties related to income tax matters as income tax expense. As of December 31, 2021 and 2020 we had $
The differences between the statutory federal tax rate and the effective tax rate were as follows:
|
2021 |
2020 |
|||||
|
Statutory Tax Rate |
|
|
% |
|
|
% |
|
Effect of: |
||||||
|
State Income Taxes Net of Federal Tax Benefit |
|
|
|
|
|
|
|
Forgiveness of PPP Loan |
( |
|||||
|
Permanent Differences and Other, Net |
|
( |
|
|
( |
|
|
Effective tax rate |
|
% |
|
% |
||
Our effective income tax rate for the year ended December 31, 2021 was lower than the effective income tax rate for the year ended December 31, 2020 primarily due to the PPP loan forgiveness not being taxable at the federal and state level.
63
Deferred income taxes and unrecognized tax benefits reflected in our consolidated balance sheets are summarized as follows:
|
2021 |
2020 |
|||||
|
Deferred Tax Assets |
|
|
|
|
|
|
|
Accrued Expenses |
$ |
( |
$ |
( |
||
|
Deferred Compensation |
|
|
( |
|
|
( |
|
Other |
( |
( |
||||
|
Unrealized Loss on SWAP |
|
|
( |
|
|
( |
|
State NOL |
( |
|||||
|
Leases |
|
|
( |
|
|
( |
|
Total Deferred Tax Assets |
|
( |
|
( |
||
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities |
||||||
|
Fixed Assets |
|
|
|
|
|
|
|
Intangible Assets |
|
|
||||
|
Investments |
|
|
|
|
|
|
|
Contract Assets |
|
|
||||
|
Leases |
|
|
|
|
|
|
|
Total Deferred Tax Liabilities: |
|
|
|
|
||
|
|
|
|
|
|
|
|
|
Total Net Deferred Taxes |
$ |
|
$ |
|
||
NOTE 9 – INCENTIVE AND RETIREMENT PLANS
We have an Employee Incentive Plan for employees other than executive officers and a Management Incentive Plan for executive officers. Both plans were implemented in 2006. The Plan permits the issuance of up to
We have a 401(k) employee savings plan in effect for employees who meet age and service requirements. Our contributions to our 401(k) employee savings plan were $
NOTE 10 – COMMITMENTS AND CONTINGENCIES
We are involved in certain contractual disputes in the ordinary course of business. We do not believe the ultimate resolution of any of these existing matters will have a material adverse effect on our financial position, results of operations or cash flows. We did not experience any changes to material contractual obligations in the year ended December 31, 2021.
Our capital budget for 2022 is approximately $
NOTE 11 - NONCASH INVESTING ACTIVITIES
Noncash investing activities included $
64
NOTE 12 – OTHER INVESTMENTS
We are a co-investor with other communication companies in several partnerships and limited liability companies. These joint ventures make it possible to offer services to customers, including digital video services and fiber transport services that we would have difficulty offering on our own. These joint ventures also make it possible to invest in new technologies with a lower level of financial risk. We recognize income and losses from these investments on the equity method of accounting. For a listing of our investments, see Note 16 – “Segment Information.”
The FASB requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. As of December 31, 2021 we had not recorded any gains or losses on our investments. As of December 31, 2020, we recorded a gain on one of our investments of $
NOTE 13 - GUARANTEES
Nuvera has guaranteed a portion of a ten-year loan owed by FiberComm, LC set to mature on April 30, 2026. As of December 31, 2021, we have recorded a liability of $
NOTE 14 – DEFERRED COMPENSATION
As of December 31, 2021 and 2020, we have recorded other deferred compensation relating to executive compensation payable to certain former executives of the Company and certain former executives of past acquisitions.
NOTE 15 – RESTRICTED STOCK UNITS
Our BOD adopted the 2017 Omnibus Stock Plan effective May 25, 2017. The shareholders of the Company approved the Plan at the May 25, 2017 Annual Meeting of Shareholders. The Plan enables the Company to grant stock incentive awards to current and new employees, including officers, and to Board members and service providers. The Plan permits stock incentive awards in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, RSUs, performance stock, performance units, and other awards in stock or cash. The Plan permits the issuance of up to
Starting in 2017 and each subsequent year following 2017, our BOD and Compensation Committee granted awards to the Company’s executive officers under the Plan. We recognize share-based compensation expense for these RSUs over the vesting period of the RSUs which is determined by our BOD. Forfeitures of RSU’s are accounted for as they occur. Each executive officer received or may receive time-based RSUs and performance based RSUs. The time-based RSUs are computed as a percentage of the executive officer’s base salary based on the closing price of Company common stock on a date set by the BOD and will vest over a three-year period based on the executive officer being employed by the Company on the vesting date. The performance based RSUs are also computed as a percentage of the executive officer’s base salary based on the closing price of Company common stock on a date set by the BOD and will vest over a three-year period based on the Company attaining an average Return on Invested Capital (ROIC) over that three-year period. The ROIC target is set by the BOD. Executive officers may earn more or less performance based RSU’s based on if the actual ROIC over the time period is more or less than target. Upon vesting of either time-based or performance based RSUs, the executive officers will be able to receive Common Stock in the Company in exchange for the RSUs.
65
RSUs currently issued and outstanding are as follows:
|
|
|
| Targeted Performance-Based RSU's |
|
| Closing Stock Price |
|
|
|
| Time-Based RSU's |
|
|
|
| Vesting Date | ||
|
|
|
|
|
| ||||
| Balance at December 31, 2019 | |
| |
|
|
|
|
|
| Issued | |
| - |
| $ | |
| |
| Issued | - |
| |
| $ | |
| |
| Exercised | ( |
| ( |
| $ | |
| |
| Exercised | ( |
| - |
| $ | |
| |
| Forfeited | ( |
| ( |
|
|
|
|
|
| Balance at December 31, 2020 | |
| |
|
|
|
|
|
| Issued | |
| |
| $ | |
| |
| Exercised | - |
| ( |
| $ | |
| |
| Exercised | ( |
| - |
| $ | |
| |
| Balance at December 31, 2021 | |
| |
|
|
|
|
|
NOTE 16 – SEGMENT INFORMATION
We operate in the Communications Segment and have no other significant business segments. The Communications Segment consists of voice, data and video communication services delivered to the customer over our advanced fiber communications network. No single customer accounted for a material portion of our consolidated revenues in any of the last two years.
The Communications Segment operates the following communications companies and has investment ownership interests as follows:
Communications Segment
| ● | Communications Companies: | ||
|
| ▪ |
| Nuvera Communications, Inc., the parent company; |
|
| ▪ |
| Hutchinson Telephone Company, a wholly-owned subsidiary of Nuvera; |
|
| ▪ |
| Peoples Telephone Company, a wholly-owned subsidiary of Nuvera; |
|
| ▪ |
| Scott-Rice Telephone Co., a wholly-owned subsidiary of Nuvera; |
|
| ▪ |
| Sleepy Eye Telephone Company, a wholly-owned subsidiary of Nuvera; |
|
| ▪ |
| Western Telephone Company, a wholly-owned subsidiary of Nuvera; and |
|
| ▪ |
| Hutchinson Telecommunications, Inc., a wholly-owned subsidiary of HTC, located in Litchfield and Glencoe, Minnesota; |
|
|
| ||
| ● | Our investments and interests in the following entities include some management responsibilities: | ||
|
| ▪ |
| FiberComm, LC – |
|
| ▪ |
| Broadband Visions, LLC – |
|
| ▪ |
| Independent Emergency Services, LLC – |
|
| ▪ |
| Fiber Minnesota, LLC – |
66
NOTE 17 – BROADBAND GRANTS
In January 2020, the Company was awarded a broadband grant from DEED. The grant will provide up to
On January 29, 2021, the Company was awarded
Note 18 – Transactions with equity method investments
We receive and provide services to various partnerships and limited liability companies where we are an investor. Services received include digital video, special access and communications circuits. Services provided include BOD meeting attendance, labor, Internet help desk services and management services. Cost of services we receive from affiliated parties may not be the same as the costs of such services had they been obtained from different parties.
Total revenues from transactions with affiliates were $
NOTE 19 -- SUBSEQUENT EVENTS
In two transactions that closed on February 25, 2022 and February 28, 2022, Nuvera purchased
Nuvera’s BOD has declared a regular quarterly dividend on our common stock of $.14 per share, payable on March 15, 2022 to stockholders of record at the close of business on March 7, 2022.
We have evaluated and disclosed subsequent events through the filing date of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) or Rule 15d-15(e), as of the end of the period subject to this Report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective.
67
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that:
|
(1) |
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
|
|
||
|
(2) |
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and |
|
|
|
|
|
(3) |
|
Provide reasonable assurance regarding prevention or timely detection or unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance of preventing and detecting misstatements on a timely basis. It is possible to design into the process safeguards to reduce, though not eliminate, the risk that misstatements are not prevented or detected on a timely basis. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in the report entitled Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, management has concluded that, as of December 31, 2021, our internal control over financial reporting was effective.
Changes in Internal Control over Financial Reporting
Based upon the evaluation performed by our management, which was conducted with the participation of our Chief Executive Officer and Chief Financial Officer, there has been no change in our internal control over financial reporting during the quarter ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosures Regarding Foreign Jurisdictions That Prevent Inspection
Not Applicable.
PART III
Information Incorporated by Reference
In response to Part III, Items 10, 11, 12, 13 and 14, portions of the Company’s 2022 proxy statement for its Annual Meeting to be held on May 26, 2022 incorporated by reference into this Form 10-K. The 2022 Proxy Statement will be filed pursuant to Regulation 14A within 120 days of December 31, 2021, the last day of the Company fiscal year.
68
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 401 of Regulation S-K relating to directors and nominees of the Company is contained under “Proposal 1 – Election of Directors” in the 2022 Proxy Statement and is incorporated by reference. Information required under Item 401 about executive officers is included in Part I, Item 1 of this Annual Report on Form 10-K under “Executive Officers of the Registrant.” The information required by Item 405 of Regulation S-K is contained under “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2022 Proxy Statement and is incorporated by reference.
We have adopted a code of conduct that applies to all officers, directors and employees of the Company. This code of conduct is available on our website at www.nuvera.net and in print upon written request to Nuvera Communications, Inc., 27 North Minnesota Street, New Ulm, Minnesota 56073, Attention: Chief Financial Officer. Any amendment to, or waiver from, a provision of our code of conduct will be posted to the above-referenced website.
The information required by Item 407(d)(4) and (d)(5), under “Audit Committee,” is contained under “The Board of Directors and Committees – Audit Committee” in the 2022 Proxy Statement and is incorporated by reference. There is no disclosure required under Item 407(c)(3) regarding material changes in shareholder director nominating procedures.
Item 11. Executive Compensation
The information required by Item 402 of Regulation S-K is contained under “Executive Compensation” in the 2022 Proxy Statement and is incorporated by reference.
The information required by Regulation S-K Item 407(e)(4), “Compensation Committee Interlocks and Insider Participation,” and Item 407(e)(5), “Compensation Committee Report,” is not required because the Company is a smaller reporting company.
Item 12. Security Ownership of Beneficial Owners and Management, and Related Stockholder Matters
The information required by Item 201(d) of Regulation S-K, “Securities Authorized for Issuance under Equity Compensation Plans” is contained under “Non-Employee Director Compensation” in the 2022 Proxy Statement and is incorporated by reference.
The information required by Item 403 of Regulation S-K relating to security ownership of certain beneficial owners and management is contained under “Security Ownership of Certain Beneficial Owners and Management" in our 2022 Proxy Statement and is incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
There are no matters that require disclosure with respect to certain transactions with related persons as set forth in Item 404 of Regulation S-K.
The information required by Item 404(b) and Item 407(a) of Regulation S-K is contained under “Certain Relationship and Related Transactions” and “Corporate Governance,” respectively in the 2022 Proxy Statement and is incorporated by reference.
Item 14. Principal Accountant Fees and Services
The information relating to principal accounting fees and services required by Item 9(e) of Regulation 14A is set forth under “Proposal 2- Ratification of Independent Registered Public Accounting Firm” – “Fees Billed and Paid to Independent Registered Public Accounting Firm, – “Audit Fees,” – “Audit-Related Fees,” – “Tax Fees,” – “All Other Fees,” and – “Audit Committee Pre-Approval Policy for Services of Independent Registered Public Accounting Firm,” in the Proxy Statement and incorporated by reference.
69
Item 15. Exhibits and Financial Statement Schedules
| (a) 1. | Consolidated Financial Statements | |
| Included in Part II, Item 8, of this report: | ||
| Pages | ||
| 37-38 | ||
| Consolidated Statements of Income for the Years Ended December 31, 2021 and 2020 | 39 | |
| Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021 and 2020 | 40 | |
| Consolidated Balance Sheets as of December 31, 2021 and 2020 | 41-42 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 | 43 | |
| Consolidated Statements of Stockholders’ Equity for the Years Ended Ended December 31, 2021 and 2020 | 44 | |
|
|
|
|
|
| 45-67 | |
|
|
|
|
| (a) 2. | Consolidated Financial Statement Schedules: |
|
|
|
|
|
|
| Other schedules are omitted because they are not required or are not applicable, or the required |
|
|
|
|
|
| (a) 3. | Exhibits Required |
|
|
|
|
|
|
| See “Index to Exhibits” | 71-72 |
Item 16. Form 10-K Summary
Not Applicable.
70
EXHIBIT INDEX
| Bylaws of Nuvera Communications, Inc., as amended, December 21, 2021 | |
71
| 101.INS | XBRL Instance File |
| 101.SCH | XBRL Taxonomy Extension Schema File |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase File |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase File |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase File |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase File |
|
|
|
|
|
|
|
|
|
*Filed Herewith
+Management compensation plan or arrangement required to be filed as an exhibit
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
Dated: March 16, 2022 |
NUVERA COMMUNICATIONS, INC. (Registrant) |
|
|
By |
/s/ Glenn H. Zerbe |
|
|
Glenn H. Zerbe, Chief Executive Officer |
||
|
(Principal Executive Officer) |
||
|
By |
/s/ Curtis O. Kawlewski |
|
|
Curtis O. Kawlewski, Chief Financial Officer |
||
|
(Principal Financial Officer) |
||
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report.
| /s/ Perry L. Meyer | March 16, 2022 | |
| Perry Meyer, Chairman of the Board | ||
| /s/ Glenn H. Zerbe | March 16, 2022 | |
| Glenn H. Zerbe, President and Chief Executive Officer (Principal Executive Officer | ||
| /s/ Curtis O. Kawlewski | March 16, 2022 | |
| Curtis O. Kawlewski, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||
| /s/ Dennis E. Miller | March 16, 2022 | |
| Dennis Miller, Director | ||
| /s/ Bill D. Otis | March 16, 2022 | |
| Bill D. Otis, Director | ||
| /s/ Wesley E. Schultz | March 16, 2022 | |
| Wesley E. Schultz, Director | ||
| /s/ James J. Seifert | March 16, 2022 | |
| James J. Seifert, Director | ||
| /s/ Colleen R. Skillings | March 16, 2022 | |
| Colleen R. Skillings, Director | ||
| /s/ Suzanne M. Spellacy | March 16, 2022 | |
| Suzanne M. Spellacy, Director |
73