NUVR 10-Q
Nuvera Communications, Inc. (NUVR)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________
FORM
(Mark One)
For the quarterly period ended
For the transition period from_____to_____.
Commission File Number
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
Registrant’s telephone number, including area code: (
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No ⮽
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 and posted 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 and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ⮽ Accelerated filer ☐ Non-accelerated filer ⮽ Smaller reporting company ☐ Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £
1
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 total number of shares of the registrant’s common stock outstanding as of August 9, 2022:
2
table of contents
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4 - 10 |
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4 |
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5 |
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Consolidated Balance Sheets (unaudited) as of June 30, 2022 and December 31, 2021 |
6 -7 |
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Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2022 and 2021 |
8 |
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9-10 |
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Condensed Notes to Consolidated Financial Statements (unaudited) |
11- 30 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
30 - 44 |
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44 |
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44 |
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44 |
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44 - 52 |
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52 |
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53 |
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53 |
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53 |
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53 |
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54 |
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Exhibits |
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3
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
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NUVERA COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) |
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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OPERATING REVENUES: |
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Voice Service |
$ |
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$ |
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$ |
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$ |
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Network Access |
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Video Service |
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Data Service |
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A-CAM/FUSF |
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Other Non-Regulated |
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Total Operating Revenues |
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OPERATING EXPENSES: |
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Plant Operations (Excluding Depreciation |
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Cost of Video |
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Cost of Data |
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Cost of Other Nonregulated Services |
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Depreciation and Amortization |
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Selling, General and Administrative |
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Total Operating Expenses |
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OPERATING INCOME |
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OTHER (EXPENSE) INCOME |
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Interest Expense |
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( |
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( |
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( |
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Interest/Dividend Income |
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Interest During Construction |
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Gain on Debt Forgiveness |
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CoBank Patronage Dividends |
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Other Investment Income |
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Total Other Income (Expense) |
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( |
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INCOME BEFORE INCOME TAXES |
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INCOME TAXES |
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NET INCOME |
$ |
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$ |
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$ |
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$ |
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NET INCOME PER SHARE |
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Basic |
$ |
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$ |
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$ |
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$ |
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Diluted |
$ |
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$ |
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$ |
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$ |
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DIVIDENDS PER SHARE |
$ |
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$ |
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$ |
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$ |
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WEIGHTED AVERAGE SHARES OUTSTANDING |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these consolidated financial statements. |
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4
| NUVERA COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | |||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||
| Net Income | $ | |
| $ | |
| $ | |
| $ | |
| Other Comprehensive Gain: |
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| Unrealized Gains on Interest Rate Swaps | | | | | |||||||
| Income Tax Expense Related to Unrealized |
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| Other Comprehensive Gain: |
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| Comprehensive Income | $ | | $ | | $ | | $ | | |||
| The accompanying notes are an integral part of these consolidated financial statements. | |||||||||||
5
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NUVERA COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) |
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ASSETS |
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June 30, 2022 |
December 31, 2021 |
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CURRENT ASSETS: |
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Cash |
$ |
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$ |
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Receivables, Net of Allowance for |
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Income Taxes Receivable |
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Materials, Supplies, and Inventories |
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Prepaid Expenses and Other Current Assets |
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Total Current Assets |
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INVESTMENTS & OTHER ASSETS: |
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Goodwill |
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Intangibles |
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Other Investments |
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Right of Use Asset |
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Financial Derivative Instruments |
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Other Assets |
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Total Investments and Other Assets |
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PROPERTY, PLANT & EQUIPMENT: |
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Communications Plant |
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Other Property & Equipment |
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Video Plant |
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Total Property, Plant and Equipment |
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Less Accumulated Depreciation |
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Net Property, Plant & Equipment |
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TOTAL ASSETS |
$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements. |
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6
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NUVERA COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (continued) (Unaudited) |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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June 30, 2022 |
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December 31, 2021 |
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CURRENT LIABILITIES: |
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Current Portion of Long-Term Debt, Net of |
$ |
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$ |
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Accounts Payable |
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Accrued Income Taxes |
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Other Accrued Taxes |
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Deferred Compensation |
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Accrued Compensation |
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Other Accrued Liabilities |
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Total Current Liabilities |
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LONG-TERM DEBT, Net of Unamortized |
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NONCURRENT LIABILITIES: |
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Loan Guarantees |
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Deferred Income Taxes |
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Unrecognized Tax Benefit |
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Other Accrued Liabilities |
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Financial Derivative Instruments |
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Deferred Compensation |
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Total Noncurrent Liabilities |
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COMMITMENTS AND CONTINGENCIES: |
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STOCKHOLDERS' EQUITY: |
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Preferred Stock $ |
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Common Stock - $ |
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Accumulated Other Comprehensive Gain (Loss) |
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( |
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Unearned Compensation |
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Retained Earnings |
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Total Stockholders' Equity |
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TOTAL LIABILITIES AND |
$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements. |
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7
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NUVERA COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
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Six Months Ended |
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June 30, 2022 |
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June 30, 2021 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net Income |
$ |
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$ |
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Adjustments to Reconcile Net Income to Net Cash |
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Depreciation and Amortization |
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PPP Loan Forgiveness |
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( |
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Undistributed Earnings of Other Equity Investments |
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( |
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( |
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Noncash Patronage Refund |
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( |
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( |
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Stock Issued in Lieu of Cash Payment |
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Distributions from Equity Investments |
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Stock-based Compensation |
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Changes in Assets and Liabilities: |
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Receivables |
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( |
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Income Taxes Receivable |
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( |
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Inventory for Resale |
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( |
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( |
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Prepaid Expenses |
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( |
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( |
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Other Assets |
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( |
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( |
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Accounts Payable |
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( |
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( |
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Accrued Income Taxes |
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Other Accrued Taxes |
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( |
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( |
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Other Accrued Liabilities |
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( |
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Deferred Compensation |
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( |
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( |
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Net Cash Provided by Operating Activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Additions to Property, Plant, and Equipment, Net |
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( |
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( |
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Materials and Supplies for Construction |
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( |
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( |
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Other, Net |
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( |
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Net Cash Used in Investing Activities |
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( |
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( |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Principal Payments of Long-Term Debt |
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( |
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( |
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Loan Origination Fees |
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( |
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Changes in Revolving Credit Facility |
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Repurchase of Common Stock |
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( |
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( |
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Dividends Paid |
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( |
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( |
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Net Cash Used in Financing Activities |
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( |
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NET INCREASE IN CASH |
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( |
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( |
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CASH at Beginning of Period |
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CASH at End of Period |
$ |
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$ |
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Supplemental cash flow information: |
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Cash paid for interest |
$ |
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$ |
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Net cash paid for income taxes |
$ |
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$ |
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Certain historical numbers have changed to conform with the current year's presentation. |
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The accompanying notes are an integral part of these consolidated financial statements. |
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8
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NUVERA COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) |
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THREE MONTHS ENDED JUNE 30, 2022 |
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Accumulated Other Comprehensive Income (Loss) |
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Common Stock |
Unearned Compensation |
Retained Earnings |
Total Equity |
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Shares |
Amount |
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BALANCE on March 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Director's Stock Plan |
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Restricted Stock Grant |
( |
( |
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Non-Cash, Share-Based Compensation |
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Net Income |
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Dividends |
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( |
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( |
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Unrealized Gain on Interest Rate Swap |
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BALANCE on June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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THREE MONTHS ENDED JUNE 30, 2021 |
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Accumulated Other Comprehensive Income (Loss) |
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Common Stock |
Unearned Compensation |
Retained Earnings |
Total Equity |
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Shares |
Amount |
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BALANCE on March 31, 2021 |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Director's Stock Plan |
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Restricted Stock Grant |
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Repurchase of Common Stock |
( |
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( |
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( |
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( |
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Net Income |
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Dividends |
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( |
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( |
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Unrealized Gain on Interest Rate Swap |
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BALANCE on June 30, 2021 |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements. |
||||||||||||||||
9
|
NUVERA COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) |
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|
SIX MONTHS ENDED JUNE 30, 2022 |
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|
Accumulated Other Comprehensive Income (Loss) |
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|
Common Stock |
Unearned Compensation |
Retained Earnings |
Total Equity |
|||||||||||||
|
Shares |
Amount |
|||||||||||||||
|
BALANCE on December 31, 2021 |
|
|
$ |
|
|
$ |
( |
|
$ |
|
|
$ |
|
|
$ |
|
|
Directors' Stock Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Plan |
|
|
|
|
||||||||||||
|
Restricted Stock Grant |
|
|
|
|
|
|
|
|
|
( |
|
|
|
|
|
( |
|
Non-Cash, Share-Based Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of RSU's |
|
|
( |
|
- |
|||||||||||
|
Repurchase of Common Stock |
( |
|
|
( |
|
|
|
|
|
|
|
|
( |
|
|
( |
|
Net Income |
|
|
||||||||||||||
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
( |
|
|
( |
|
Unrealized Gain on Interest Rate Swap |
|
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE on June 30, 2022 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
SIX MONTHS ENDED JUNE 30, 2021 |
||||||||||||||||
|
Accumulated Other Comprehensive Income (Loss) |
||||||||||||||||
|
Common Stock |
Unearned Compensation |
Retained Earnings |
Total Equity |
|||||||||||||
|
Shares |
Amount |
|||||||||||||||
|
BALANCE on December 31, 2020 |
|
|
$ |
|
|
$ |
( |
|
$ |
|
|
|
|
|
$ |
|
|
Directors' Stock Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Plan |
|
|
|
|
||||||||||||
|
Restricted Stock Grant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of RSU's |
|
|
( |
|
- |
|||||||||||
|
Repurchase of Common Stock |
( |
|
|
( |
|
|
|
|
|
|
|
|
( |
|
|
( |
|
Net Income |
|
|
||||||||||||||
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
( |
|
|
( |
|
Unrealized Gain on Interest Rate Swap |
|
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE on June 30, 2021 |
|
$ |
|
$ |
( |
$ |
|
$ |
|
$ |
|
|||||
|
The accompanying notes are an integral part of these consolidated financial statements. |
||||||||||||||||
10
NUVERA COMMUNICATIONS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022 (Unaudited)
Note 1 – Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements of Nuvera Communications, Inc. and its subsidiaries (Nuvera) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, rules and regulations of the Securities and Exchange Commission (SEC) and, where applicable, conform to the accounting principles as prescribed by federal and state telephone utility regulatory authorities. Certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted or condensed pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring accruals) considered necessary for the fair presentation of the financial statements and present fairly the results of operations, financial position and cash flows for the interim periods presented as required by Regulation S-X, Rule 10-01. These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2021.
The preparation of our financial statements 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 at the date of the financial statements and during the reporting period. Actual results may differ from these estimates. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year as a whole or any other interim period.
Our consolidated financial statements report the financial condition and results of operations for Nuvera and its subsidiaries in
Revenue Recognition
See Note 2 – “Revenue Recognition” for a discussion of our revenue recognition policies.
Cost of Services (excluding depreciation and amortization)
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
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 our operations.
Depreciation and Amortization Expense
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. Depreciation expense was $
11
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 bases. 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, however, our effective income tax rate was lower than the United States tax rate in the quarter ended June 30, 2021 due to the Small Business Administration’s (SBA) Payroll Protection Program (PPP) loan forgiveness not being taxable at the federal and state level at that time.
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.
As of June 30, 2022 and December 31, 2021 we had $
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 income tax 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 June 30, 2022 and December 31, 2021 we had $
12
Earnings and Dividends Per Share
Basic and diluted net income per share are calculated as follows:
| Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | ||||||||||||||||||||
| Basic | Diluted | Basic | Diluted | Basic | Diluted | Basic | Diluted | ||||||||||||||||
| Net Income | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| Weighted-average common shares outstanding |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Net income per share | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
The weighted-average shares outstanding, basic and diluted, are calculate as follows:
| Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | ||||||||||||||||||||
| Basic | Diluted | Basic | Diluted | Basic | Diluted | Basic | Diluted | ||||||||||||||||
| Weighted-average common shares outstanding |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Unvested RSU's/Options |
| - |
|
| |
|
| - |
|
| |
|
| - |
|
| |
|
| - |
|
| |
| Weighted-average common shares outstanding |
| |
|
| |
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| |
|
| |
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| |
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| |
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| |
|
| |
Nuvera’s Board of Directors (BOD) reviews quarterly dividend declarations based on our anticipated earnings, capital requirements and our operating and financial conditions.
Recent Accounting Developments
Effective January 1, 2021 we adopted Accounting Standards Update (ASU) 2020-06, “Accounting for Convertible Instruments in an Entity’s Own Equity.” ASU 2020-06 simplifies guidance on accounting for convertible instruments and contracts in an entity’s own equity including calculating diluted earnings per share. The adoption of this guidance did not have an impact on our consolidated financial statements and related disclosures.
Effective January 1, 2021, we adopted ASU 2019-12, “Income Taxes,” ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions and adding certain requirements to the general framework in Accounting Standards Codification (ASC) 740, “Income Taxes.” The new guidance will be applied prospectively. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.
In November 2021, the Financial Accounting Standards Board (FASB) issued ASU 2021-10, “Disclosures by Business Entities about Government Assistance.” ASU 2021-10 requires disclosure by business entities of the types of government assistance received, the method of accounting for such assistance and the effects of the assistance on its financial statements. The new guidance is effective for financial statements issued for annual periods beginning after December 15, 2021, with early adoption permitted. We are currently evaluating the impact this update will have on our related disclosures.
13
In March 2020, the FASB issued ASU 2020-04, “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. We are currently evaluating the impact these updates will have on our consolidated financial statements and related disclosures.
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. We continue to evaluate the impact the adoption of ASU 2016-13 will have on our financial statements, which we expect will not have a significant impact on our consolidated financial statements.
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 contact(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.
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.
14
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 Judgements
The Company often provides multiple services to a customer. Provision of customer premise equipment (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 the 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.
15
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the three months ended June 30, 2022 and 2021:
|
|
Three Months Ended June 30, |
||||
|
|
2022 |
|
2021 |
||
|
Voice Service¹ |
$ |
|
|
$ |
|
|
Network Access¹ |
|
|
|
|
|
|
Video Service¹ |
|
|
|
|
|
|
Data Service¹ |
|
|
|
|
|
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Directory² |
|
|
|
|
|
|
Other Contracted Revenue³ |
|
|
|
|
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Other4 |
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|
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Revenue from customers |
|
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|
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|
|
|
Subsidy and other revenue outside scope of ASC 6065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
$ |
|
|
$ |
|
|
|
|||||
|
¹ Month-to-Month contracts billed and cosumed in the same month. |
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|
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|
² Directory revenue is contracted annually, however, this revenue is recognized |
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|
|
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|
³ This includes long-term contracts where the revenue is recognized monthly |
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|
|
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|
4 This includes CPE and other equipment sales. |
|||||
|
|
|||||
|
5 This includes governmental subsidies and lease revenue outside the scope of |
|||||
For the three months ended June 30, 2022, approximately
For the three months ended June 30, 2021, approximately
16
The following table summarizes revenue from contracts with customers for the six months ended June 30, 2022 and 2021:
|
|
Six Months Ended June 30, |
||||
|
|
2022 |
|
2021 |
||
|
Voice Services¹ |
$ |
|
|
$ |
|
|
Network Access¹ |
|
|
|
|
|
|
Video Service¹ |
|
|
|
|
|
|
Data Service¹ |
|
|
|
|
|
|
Directory² |
|
|
|
|
|
|
Other Contracted Revenue³ |
|
|
|
|
|
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Other4 |
|
|
|
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|
|
|
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|
|
|
|
Revenue from customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidy and other revenue outside scope of ASC 6065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
$ |
|
|
$ |
|
|
|
|||||
|
¹ Month-to-Month contracts billed and cosumed 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 |
|||||
For the six months ended June 30, 2022, approximately
For the six months ended June 30, 2021, 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
17
Nature of Services
Revenues are earned from our customers primarily through the connection to our advanced fiber networks, digital and commercial television (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 Voice over Internet Protocol (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 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.
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 National Exchange Carriers Association (NECA) pools and redistributes the SLCs to various communication providers through the Connect America Fund (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 local cable TV (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.
18
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 advanced 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 advanced 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 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 the interexchange carriers (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 Alternative Connect America Cost Model (A-CAM) as described below, with the exception of Scott-Rice Telephone Company (Scott-Rice), which receives funding from the Federal Universal Service Fund (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.
19
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) $
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:
June 30, | ||||||
| 2022 | 2021 | |||||
| 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 contract is commensurate with the commission on the initial contract. During the three months ended June 30, 2022 and 2021 the Company recognized expenses of $
20
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, contact 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 contact 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 contact liabilities are included in noncurrent liabilities under other accrued liabilities. During the three months ended June 30, 2022 and 2021, the Company recognized revenues of $
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 June 30, 2022. 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 tables includes the ROU assets and operating lease liabilities as of June 30, 2022 and December 31, 2021.
| Right of Use Assets | Balance | Balance | ||||
| Operating Lease Right-Of-Use Assets |
| $ | |
| $ | |
21
| Operating Lease Liabilities | Balance | Balance | ||||
| Short-Term Operating Lease Liabilities |
| $ | |
| $ | |
| Long-Term Operating Lease Liabilities |
| |
| | ||
| Total |
| $ | |
| $ | |
Maturity analysis under these lease agreements are as follows:
| Maturity Analysis | Balance | ||
| 2022 (remaining) |
| $ | |
| 2023 | | ||
| 2024 |
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| 2025 | | ||
| 2026 |
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| Thereafter | | ||
| Total |
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| 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 three and six months ended June 30, 2022 was $
Note 4 – 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. |
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| 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. |
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| 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.
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We have entered into interest rate swap agreements (IRSAs) with our lender, CoBank, ACB (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.
The fair value of our IRSAs is discussed in Note 7 – “Interest Rate Swaps”. The fair value of our swap agreements 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 June 30, 2022, 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.
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 $
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.
23
The components of our identified intangible assets are as follows:
| June 30, 2022 | December 31, 2021 | ||||||||||||
| Useful Lives | Gross Carrying Amount |
Accumulated | Gross Carrying Amount | Accumulated Amortization | |||||||||
| Definite-Lived Intangible Assets |
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| Customers Relationships | | $ | | $ | | $ | | $ | | ||||
| Regulatory Rights | |
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| Trade Name | | | | | | ||||||||
| Indefinitely-Lived Intangible Assets |
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| Video Franchise | | | |||||||||||
| Spectrum |
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| Total | $ | | $ | | $ | | $ | | |||||
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| Net Identified Intangible Assets | $ | | $ | | |||||||||
Amortization expense related to the definite-lived intangible assets was $
|
● (July 1 – December 31) |
$ |
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● 2023 |
$ |
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● 2024 |
$ |
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● 2025 |
$ |
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● 2026 |
$ |
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● 2027 |
$ |
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Note 6 – Secured Credit Facility
We have a master loan agreement 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.
On March 16, 2022, Nuvera and CoBank entered into (i) an Agreement Regarding Amendments to Loan Documents and (ii) an Amended and Restated Revolving Loan Promissory Note. The agreements amended our existing credit facility with CoBank. Under the Agreements, among other things, (i) the Company’s revolving loan was increased from $
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.
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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 $
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. At June 30, 2022, 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.
On April 16, 2020, Nuvera received a $
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.
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.
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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.
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 June 30, 2022, the fair value of these swaps was $
Note 8 – 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 11 – “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 June 30, 2022, we had not recorded any gains or losses on our investments.
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Note 9 – Guarantees
Nuvera has guaranteed a portion of a ten-year loan owed by FiberComm, LC, set to mature on April 30, 2026. As of June 30, 2022, we have recorded a liability of $
Note 10 – 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
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, restricted stock units (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.
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RSUs currently issued, exercised or forfeited is as follows:
| Time-Based RSU's | Targeted Performance-Based RSU's |
| Closing Stock Price | Vesting Date | |||||
| Balance at December 31, 2020 |
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| Issued | | | $ | | | ||||
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| Balance at December 31, 2021 |
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| Balance at June 30, 2022 |
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In 2022, after considerable study, discussion and interaction with our consultants, the Compensation Committee decided to replace RSUs with non-qualified stock options (Options). The Compensation Committee believes that grants of Options more directly align management long-term equity compensation with increased shareholder value creation at a time when the Company is engaged in significant investment and transformation as part of its long-term strategy. The Compensation Committee also determined to extend the grant of Options to Named Executive Officers, senior employee directors and other employee directors as key members of the Company leadership team and contributors of overall success.
In its definitive proxy statement dated April 4, 2022 for its 2022 annual meeting of shareholders to be held on May 26, 2022, filed with the SEC on April 6, 2022, Nuvera disclosed that on March 31, 2022, the Company’s BOD and Compensation Committee authorized the issuance of Options as Awards to Named Executive Officers, senior employee directors and other employee directors under the 2017 Omnibus Stock Plan, but had not yet finalized the Black-Scholes analysis determining the value of the Options to be granted and therefore the number of Options to granted. On April 11, 2022, the BOD and Compensation Committee completed its analysis. The following language supplements and updates the proxy statement disclosure:
The number of Options awarded was computed as a percentage of the employee’s base salary using a Black-Scholes formula using an exercise price equal to the closing price of Company common stock of $
| Options |
| Closing Stock Price | Vesting Date | ||||
| Balance at December 31, 2021 |
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| Issued | | $ | | | |||
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| Balance at June 30, 2022 |
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Note 11 – 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.
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The Communications Segment operates the following communications companies and has investment ownership interests as follows:
Communications Segment
| ● | Communications Companies: | ||
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| Nuvera Communications, Inc., the parent company; |
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| Hutchinson Telephone Company (HTC), a wholly-owned subsidiary of Nuvera; |
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| Peoples Telephone Company, a wholly-owned subsidiary of Nuvera; |
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| Scott-Rice Telephone Co., a wholly-owned subsidiary of Nuvera; |
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| Sleepy Eye Telephone Company, a wholly-owned subsidiary of Nuvera; |
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| Western Telephone Company, a wholly-owned subsidiary of Nuvera; and |
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| 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: | ||
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| FiberComm, LC – |
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| Broadband Visions, LLC (BBV) – |
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| Independent Emergency Services, LLC (IES) – |
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| ▪ |
| Fiber Minnesota, LLC (FM) – |
Note 12 – Commitments and Contingencies
On December 15, 2021, the Company announced plans for a fiber network initiative. The Company has made commitments to purchase materials and entered into contracts with various parties to successfully build this next-generation fiber network. As of June 30, 2022, the Company had outstanding commitments for material of approximately $
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. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for the discussion relating to commitments and contingencies.
Note 13 – Broadband Grants
In January 2020, the Company was awarded a broadband grant from the Minnesota Department of Employment and Economic Development (DEED). The grant will provide up to
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On January 29, 2021, the Company was awarded five broadband grants from the DEED. The grants will provide up to
Note 14 – Subsequent Events
On July 15, 2022, Nuvera and CoBank entered into (i) an Agreement Regarding Amendments to Loan Documents and (ii) an Amended and Restated Revolving Loan Promissory Note. The agreements amended our existing credit facility with CoBank and secured a new credit facility in the aggregate principal amount of $
We have evaluated and disclosed subsequent events through the filing date of this Quarterly Report on Form 10-Q.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
From time to time, in reports filed with the SEC, in press releases, and in other communications to shareholders or the investing public, we may make forward-looking statements concerning possible or anticipated future financial performance, business activities or plans. 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 and its subsidiaries 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. For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the federal securities laws. Shareholders and the investing public should understand that these forward-looking statements are subject to risks and uncertainties which could affect our actual results and cause actual results to differ materially from those indicated in the forward-looking statements.
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In addition, forward-looking statements speak only as of the date they are made, which is the filing date of this Form 10-Q. With the exception of the requirements set forth in the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations stated in this Form 10-Q, are based upon Nuvera’s consolidated unaudited 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 – “Summary of Significant Accounting Policies” to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2021, which is incorporated herein by reference.
Results of Operations
Overview
Nuvera has an advanced fiber communications network and offers a diverse array of communications products and services. We provide broadband Internet access, video services and managed and hosted solutions services. In addition, we provide local voice service and network access to other communications carriers for connections to our networks as well as long distance service.
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 testing 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.
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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.
Through the first six months of 2022, we have seen our overall revenues remain steady primarily 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 the first quarter of 2022 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 June 30, 2022, we have $11.3M 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 July 15, 2022, Nuvera and CoBank entered into (i) an Agreement Regarding Amendments to Loan Documents and (ii) an Amended and Restated Revolving Loan Promissory Note. The agreements amended our existing credit facility with CoBank and secured a new credit facility in the aggregate principal amount of $130.0 million. Under the Agreements, among other things, (i) the Company received a $50.0 million term loan to replace existing debt, (ii) a $50.0 delayed draw term loan, (iii) the Company’s revolving loan was increased from $20.0 million to $30.0 million, (iv) the maturity date of the term loans were set at July 15, 2029, and the maturity day of the revolving loan was set at July 15, 2027, and (iii) the Company operating subsidiaries’ agreed to extend their previous guarantees, security interests and mortgages to cover the increased amount of the revolving note. The financing was secured to facilitate the Company’s advanced fiber-build plans announced on December 15, 2021. Refer to the Company’s 8-K filing with the SEC on July 20, 2022 for further details regarding the new credit agreements with CoBank.
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● 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:
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.
In 2022, we had originally planned to upgrade more than 8,000 locations with fiber services and faster broadband speeds, however, as of June 30, 2022 we now plan to upgrade more than 10,000 locations in 2022. As of June 30, 2022, we have upgraded 2,384 of the planned 10,000 locations with these fiber services.
● On March 16, 2022, Nuvera and CoBank entered into (i) an Agreement Regarding Amendments to Loan Documents and (ii) an Amended and Restated Revolving Loan Promissory Note. The agreements amended our existing credit facility with CoBank. Under the Agreements, among other things, (i) the Company’s revolving loan was increased from $10.0 million to $20.0 million, (ii) the maturity date of the revolving loan was set at June 30, 2022, and (iii) the Company operating subsidiaries’ agreed to extend their previous guarantees, security interests and mortgages to cover the increased amount of the revolving note.
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● On January 29, 2021, the Company was awarded five broadband grants from the 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. On July 7, 2022, the Company received $396,360 for these projects.
● On April 16, 2020, Nuvera received a $2,889,000 loan under the SBA’s 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 June 30, 2022.
● Net income for the second quarter of 2022 totaled $1,700,401, which was a $742,512, or 30.39% decrease compared to the second quarter of 2021. This decrease was primarily due to decreased income taxes related to the debt forgiveness from the PPP Loan in the second quarter of 2021 described above, and a decrease in operating income, described below.
● Consolidated revenue for the second quarter of 2022 totaled $16,440,363, which was a $46,699 or 0.28% decrease compared to the second quarter of 2021. This decrease was primarily due to decreases in voice service, network access revenues, video services, FUSF subsidies and other revenues, partially offset by increases in data revenues.
Business Trends
Included below is a synopsis of business trends management believes will continue to affect our business in 2022.
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 ongoing 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 1,857 or 10.23% for the twelve months ended June 30, 2022 due to the reasons mentioned above.
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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.
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Financial results for the Communications Segment for the three and six months ended June 30, 2022 and 2021 are included below:
| Communications Segment | ||||||||||
| Three Months Ended June 30, | ||||||||||
| 2022 | 2021 | Increase (Decrease) | ||||||||
| Operating Revenues |
|
|
|
|
|
|
|
|
|
|
| Voice Service | $ | 1,447,979 | $ | 1,544,766 | $ | (96,787) | -6.27% | |||
| Network Access |
| 1,202,965 |
|
| 1,344,685 |
|
| (141,720) |
| -10.54% |
| Video Service | 3,178,388 | 3,237,723 | (59,335) | -1.83% | ||||||
| Data Service |
| 6,774,036 |
|
| 6,368,566 |
|
| 405,470 |
| 6.37% |
| A-CAM/FUSF | 2,890,500 | 2,953,966 | (63,466) | -2.15% | ||||||
| Other |
| 946,495 |
|
| 1,037,356 |
|
| (90,861) |
| -8.76% |
| Total Operating Revenues |
| 16,440,363 |
| 16,487,062 |
| (46,699) | -0.28% | |||
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of Services, Excluding Depreciation | 7,696,826 | 7,308,745 | 388,081 | 5.31% | ||||||
| Selling, General and Administrative |
| 2,645,472 |
|
| 2,554,766 |
|
| 90,706 |
| 3.55% |
| Depreciation and Amortization Expenses |
| 3,493,070 |
| 3,124,282 |
| 368,788 | 11.80% | |||
| Total Operating Expenses |
| 13,835,368 |
|
| 12,987,793 |
|
| 847,575 |
| 6.53% |
| Operating Income | $ | 2,604,995 |
| $ | 3,499,269 |
| $ | (894,274) |
| -25.56% |
| Net Income | $ | 1,700,401 |
| $ | 2,442,913 |
| $ | (742,512) |
| -30.39% |
| Capital Expenditures | $ | 5,895,400 |
| $ | 3,826,016 |
| $ | 2,069,384 |
| 54.09% |
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| Communications Segment | ||||||||||
| Six Months Ended June 30, | ||||||||||
| 2022 | 2021 | Increase (Decrease) | ||||||||
| Operating Revenues |
|
|
|
|
|
|
|
|
|
|
| Voice Service | $ | 2,916,157 | $ | 3,096,044 | $ | (179,887) | -5.81% | |||
| Network Access |
| 2,494,275 |
|
| 2,927,125 |
|
| (432,850) |
| -14.79% |
| Video Service | 6,319,880 | 6,266,600 | 53,280 | 0.85% | ||||||
| Data Service |
| 13,490,888 |
|
| 12,636,537 |
|
| 854,351 |
| 6.76% |
| A-CAM/FUSF | 5,785,087 | 5,922,161 | (137,074) | -2.31% | ||||||
| Other |
| 1,908,848 |
|
| 2,116,718 |
|
| (207,870) |
| -9.82% |
| Total Operating Revenues |
| 32,915,135 |
| 32,965,185 |
| (50,050) | -0.15% | |||
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of Services, Excluding Depreciation | 15,080,652 | 14,815,586 | 265,066 | 1.79% | ||||||
| Selling, General and Administrative |
| 5,306,935 |
|
| 5,218,656 |
|
| 88,279 |
| 1.69% |
| Depreciation and Amortization Expenses |
| 6,991,354 |
| 6,195,854 |
| 795,500 | 12.84% | |||
| Total Operating Expenses |
| 27,378,941 |
|
| 26,230,096 |
|
| 1,148,845 |
| 4.38% |
| Operating Income | $ | 5,536,194 |
| $ | 6,735,089 |
| $ | (1,198,895) |
| -17.80% |
| Net Income | $ | 4,102,007 |
| $ | 7,623,624 |
| $ | (3,521,617) |
| -46.19% |
| Capital Expenditures | $ | 10,012,147 |
| $ | 5,566,431 |
| $ | 4,445,716 |
| 79.87% |
| Key metrics |
|
|
|
|
|
|
|
|
|
|
| Access Lines | 16,300 | 18,157 | (1,857) | -10.23% | ||||||
| Video Customers |
| 9,887 |
|
| 10,470 |
|
| (583) |
| -5.57% |
| Broadband Customers | 32,741 | 31,979 | 762 | 2.38% | ||||||
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 $1,447,979, which was $96,787 or 6.27% lower in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 and was $2,916,157 which was $179,887 or 5.81% lower in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. These decreases were 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 past few years.
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.
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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 is derived from several federally administered pooling arrangements designed to provide network support and distribute funding to communications companies. Network access revenue was $1,202,965, which was $141,720 or 10.54% lower in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 and was $2,494,275, which is $432,850 or 14.79% lower in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. These decreases were 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.
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 local exchange carriers. 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 $3,178,388, which was $59,335 or 1.83% lower in the three months ended June 30, 2022 compared to the three months ended June 30, 2021. This decrease was primarily due to a decrease in video customers, partially offset by combination of rate increases introduced into several of our markets over the past few years. Video Service revenue was $6,319,880, which was $53,280 or 0.85% higher in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. This increase was primarily due to a combination of rate increases introduced into several of our markets over the past few years, partially offset by a decrease in video customers. Our video service revenues continue 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 $6,774,036, which was $405,470 or 6.37% higher in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 and was $13,490,888, which was $854,351 or 6.76% higher in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. These increases were 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. 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 A-CAM and FUSF.
A-CAM/FUSF support totaled $2,890,500, which was $63,466 or 2.15% lower in the three months ended June 30, 2022 compared to the three months ended June 30, 2021. A-CAM/FUSF support totaled $5,785,087, which was $137,074 or 2.31% lower in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. This decrease was primarily due to lower FUSF support received due to lower traffic on our network resulting from our declining access lines.
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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 $946,495, which was $90,861 or 8.76% lower in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 and was $1,908,848 which was $207,870 or 9.82% lower in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. These decreases were 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 $7,696,826, which was $388,081 or 5.31% higher in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 and was $15,080,652, which was $265,066 or 1.79% higher in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. These increases were primarily due to higher costs associated with increased maintenance and support agreements on our equipment and software, and increased cost to maintain a highly skilled workforce. We have experienced increased inflation in our operations in the first six months of 2022 and expect future inflationary pressures could affect our costs to operate our business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2,645,472, which was $90,706 or 3.55% higher in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 and was $5,306,935, which is $88,279 or 1.69% higher in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. These increases were primarily due to costs associated with our FTTP network initiative, partially offset by cost containment efforts implemented in 2022. We have experienced increased inflation in our operations in the first quarter of 2022 and expect future inflationary pressures could affect our costs to operate our business.
Depreciation and Amortization
Depreciation and amortization was $3,493,070, which was $368,788 or 11.80% higher in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 and was $6,991,354, which was $795,500 or 12.84% higher in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. These increases were primarily due to accelerated depreciation on our old copper cable networks as we transition to a new advanced FTTP network and increases in our advanced FTTP network assets, reflecting our continual investment in technology and infrastructure in order to meet our customers’ demands for products and services.
Operating Income
Operating income was $2,604,995, which was $894,274 or 25.56% lower in the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Operating income was $5,536,194, which was $1,198,895 or 17.80% lower in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. These decreases were primarily due to higher cost of services and depreciation, which is described above.
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See Consolidated Statements of Income (for discussion below)
Other Income (Expense) and Interest Expense
Interest expense was $526,408, which was $1,417 or 0.27% lower in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 and was $1,023,063, which was $70,136 or 6.42% lower in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. These decreases were primarily due to lower outstanding debt balances in connection with our term debt credit facility with CoBank, partially offset by an increase in our revolving credit agreement with CoBank.
Interest and dividend income was $59,363, which was $935 or 1.60% higher in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 and was $236,408, which was $76,578 or 47.91% higher in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. These increases were primarily due to increases in dividend income earned on our investments.
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 income for the six months ended June 30, 2022 and 2021, included a patronage credit earned with CoBank, which was a result of our debt agreements with them. The patronage credit allocated and received in 2022 was $567,468, compared to $625,490 allocated and received in 2021. 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.
Other investment income was $163,076, which was $124,181 or 319.27% higher in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 and was $287,377, which was $182,434 or 173.84% higher in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. Other investment income is primarily from our equity ownerships in several partnerships and limited liability companies.
Income Taxes
Income tax expense was $661,261, which was $25,129 or 3.95% higher in the three months ended June 30, 2022 compared to the three months ended June 30, 2021. This increase was primarily due to the State of Minnesota passing legislation making the PPP Loan forgiveness tax exempt at the state tax level, aligning it with the federal tax code as of June 30, 2021. Income tax expense was $1,595,217, which was $246,015 or 13.36% lower in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. This decrease was primarily due to decreased operating income in the first six months of 2022 compared to the first six months of 2021. The effective income tax rate for the six months ending June 30, 2022 and 2021 was approximately 28.00% and 19.45%, respectively. The effective income tax rate differs from the federal statutory income tax rate primarily due to state income taxes and other permanent differences.
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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 $153,369,034 as of June 30, 2022, reflecting 65.47% equity and 34.53% debt. This compares to a capital structure of $146,277,211 at December 31, 2021, reflecting 67.44% equity and 32.56% 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 2.06 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 new credit facility are available to finance ongoing operating requirements, including capital expenditures, business development, debt service and temporary financing of trade accounts receivable.
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.
Our primary sources of liquidity for the six months ended June 30, 2022 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. As of June 30, 2022 we had a working capital surplus of $10,271,009. In addition, as of June 30, 2022, we had $11.3 million available under our revolving credit facility to fund any short-term working capital needs. The working capital surplus as of June 30, 2022 was primarily the result of increased inventories to support our fiber-build initiative.
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 also 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.
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.
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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.
The following table summarizes our cash flow:
| Six Months Ended June 30, | |||||
| 2022 | 2021 | ||||
| Net cash provided by (used in): |
|
|
|
|
|
| Operating activities | $ | 12,586,765 | $ | 7,846,762 | |
| Investing activities |
| (14,654,687) |
|
| (8,099,382) |
| Financing activities |
| 668,645 |
| (3,473,446) | |
| Change in cash | $ | (1,399,277) |
| $ | (3,726,066) |
Cash Flows from Operating Activities
Cash generated by operations in the first six months of 2022 was $12,586,765, compared to cash generated by operations of $7,846,762 in the first six months of 2021. The increase in cash from operating activities in 2022 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 June 30, 2022 was $906,872, compared to $2,306,149 as of December 31, 2021.
Cash Flows Used in 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 $14,654,687 during the first six months of 2022 compared to $8,099,382 for the first six months of 2021. Capital expenditures relating to on-going operations were $10,012,147 for the six months ended June 30, 2022, compared to $5,566,431 for the six months ended June 30, 2021. Materials and supply expenditures increased by $4,649,328 in the first six months of 2022 compared to $2,479,951 for the first six months of 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 are financed with cash flows from our current operations and advances on our line of credit when needed. We believe that our current operations and new debt financing from CoBank will provide adequate cash flows to fund our plant additions for the remainder of this year. In addition, 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 June 30, 2022, we had $11.3 million available under our existing credit facility to fund capital expenditures and other operating needs.
Cash Flows Used in Financing Activities
Cash provided by financing activities for the six months ended June 30, 2020 was $668,645. This included long-term debt repayments of $2,305,200, loan origination fees of $49,473, changes in our revolving credit facility of $7,631,066, the repurchase of common stock of $3,187,500 and the distribution of $1,420,248 of dividends to stockholders. Cash used in financing activities for the six months ended June 30, 2021 was $3,473,446. This included long-term debt repayments of $2,305,200, draws on our revolving credit facility of $309,660, the repurchase of common stock of $72,067 and the distribution of $1,405,839 of dividends to our stockholders.
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Working Capital
We had a working capital surplus (i.e. current assets minus current liabilities) of $10,271,009 as of June 30, 2022, with current assets of approximately $16.2 million and current liabilities of approximately $5.9 million, compared to a working capital surplus of $2,545,129 as of December 31, 2021. The ratio of current assets to current liabilities was 2.74 and 1.23 as of June 30, 2022 and December 31, 2021. The working capital surplus at June 30, 2022 was primarily the result of increased inventories to support our fiber-build initiative.
At June 30, 2022 and December 31, 2021 we were in compliance with all stipulated financial ratios in our loan agreements.
Dividends and Restrictions
We declared a quarterly dividend of $0.14 per share for the first and second quarters of 2022, which totaled $711,841 for the second quarter and $708,407 for the first quarter. We declared a quarterly dividend of $0.14 per share for the second quarter of 2021 and $0.13 per share for the first quarter of 2021, which totaled $729,749 for the second quarter and $676,090 for the first quarter.
We expect to continue to pay quarterly dividends during the remainder of 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 credit facility that contain restrictions on our distributions to stockholders and investment in, or loans, to others. See below and Note 6 – “Secured Credit Facility” for additional information.
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. Our current Total Leverage Ratio as of June 30, 2022, was 2.06.
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.
Long-Term Debt
See Note 6 – “Secured Credit Facility” for information pertaining to our long-term debt.
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Recent Accounting Developments
See Note 1 – “Basis of Presentation and Consolidation” for a discussion of recent accounting developments.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for a smaller reporting company.
Item 4. 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.
Management’s Report on Internal Control over Financial Reporting
As of the end of the period covered by this Quarterly Report on Form 10-Q (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by this Quarterly Report, that our disclosure controls and procedures ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no material changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Other than the litigation incidental to our business, there are no pending material legal proceedings to which we are a party or to which any of our property is subject.
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties, including but not limited to those described below, that could adversely affect our business, financial condition, results of operations, cash flows and the trading price of our common stock.
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Risks Relating to Our Business
We expect to continue to face significant competition in all parts of our business. The communications industry is highly competitive. We face actual and potential competition from many existing and emerging companies, including other incumbent and competitive communications companies, long-distance carriers and resellers, wireless companies, Internet service providers, satellite companies and CATV companies, and, in some cases, new forms of providers who are able to offer competitive services through software applications requiring a comparatively small initial investment. Due to consolidations and strategic alliances within the industry, we cannot predict the number of competitors we will face at any given time.
The wireless business has expanded significantly and has caused many subscribers with traditional telephone and land-based Internet access services to give up those services and rely exclusively on wireless services. In addition, consumers’ options for viewing TV shows have expanded as content becomes increasingly available through alternative sources. Some providers, including TV and CATV content owners, have initiated Over-The-Top (OTT) services that deliver video content to TV, computers and other devices over the Internet. We may not be able to successfully anticipate and respond too many of the various competitive factors affecting the industry, including regulatory changes that may affect our competitors and us differently, new technologies, services and applications that may be introduced, changes in consumer preferences, demographic trends, and discount or bundled pricing strategies by competitors.
Competitors in the markets we serve enjoy certain business advantages, including size, financial resources, a more diverse product mix, brand recognition and connection to virtually all of our customers and potential customers. The largest cable operators also enjoy certain business advantages, including size, financial resources, ownership of or superior access to desirable programming and other content, a more diverse product mix, brand recognition and first-in-field advantages with a customer base that generates positive cash flow for its operations. Our competitors continue to add features, increase data speeds and adopt aggressive pricing and packaging for services comparable to the services we offer. Their success in selling services that are competitive with ours among our various customer channels could lead to revenue erosion in our business. We face intense competition in our markets for long-distance, Internet access, video service and other ancillary services that are important to our business and to our growth strategy. If we do not compete effectively we could lose customers, revenue and market share.
We must adapt to rapid technological changes. If we are unable to take advantage of technological developments, or if we adopt and implement them at a slower rate than our competitors, we may experience a decline in the demand for our services. Our industry operates in a technologically complex environment. New technologies are continually developed and existing products and services undergo constant improvement. Emerging technologies offer consumers a variety of choices for their communication and broadband needs. To remain competitive, we will need to adapt to future changes in technology to enhance our existing offerings and to introduce new or improved offerings that anticipate and respond to the varied and continually changing demands of our various customer channels. Our business and results of operations could be adversely affected if we are unable to match the benefits offered by competing technologies on a timely basis and at an acceptable cost, or if we fail to employ technologies desired by our customers before our competitors do so.
New technologies, particularly alternative methods for the distribution, access and viewing of content, have been, and will likely continue to be, developed that will further increase the number of competitors that we face and drive changes in consumer behavior. Consumers seek more control over when, where and how they consume content and are increasingly interested in communication services outside of the home and in newer services in wireless Internet technology and devices such as tablets, smartphones and mobile wireless routers that connect to such devices. These new technologies, distribution platforms and consumer behaviors may have a negative impact on our business.
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In addition, evolving technologies can reduce the costs of entry for others, resulting in greater competition and significant new advantages for competitors. Technological developments could require us to make significant new capital investments in order to remain competitive with other service providers. If we do not replace or upgrade our network and its technology on a timely basis, we may not be able to compete effectively and could lose customers. We may also be placed at a cost disadvantage in offering our services. Technology changes are also allowing individuals to bypass communications companies and cable operators entirely to make and receive calls, and to provide for the distribution and viewing of video programming without the need to subscribe to traditional voice and video products and services. Increasingly, this can be done over wireless facilities and other emerging mobile technologies in addition to traditional wired networks. Wireless companies are aggressively developing networks using next-generation data technologies, which are capable of delivering high-speed Internet service via wireless technology to a large geographic footprint. As these technologies continue to expand in availability and reliability, they could become an effective alternative to our high-speed Internet services. Although we use fiber optics in parts of our networks and are building a new FTTP network, including in our residential areas, we continue to rely on coaxial cable and copper transport media to serve customers in many areas. The facilities we use to offer our video services, including the interfaces with customers, are undergoing a rapid evolution, and depend in part on the products, expertise and capabilities of third-parties. If we cannot develop new services and products to keep pace with technological advances, or if such services and products are not widely embraced by our customers, our results of operations could be adversely impacted.
Shifts in our product mix may result in a decline in operating profitability. Margins vary among our products and services. Our profitability may be impacted by technological changes, customer demands, regulatory changes, the competitive nature of our business and changes in the product mix of our sales. These shifts may also result in our long-lived assets becoming impaired or our inventory becoming obsolete. We review long-lived assets for potential impairment if certain events or changes in circumstances indicate that impairment may be present.
Public health threats, such as the recent outbreak of COVID-19, could have a material adverse effect on our business, results of operations, cash flows and stock price. We may face risks associated with public health threats or outbreaks of epidemic, pandemic or communicable diseases, such as the outbreak of the COVID-19 and its variants. The COVID-19 pandemic has in the short-term and may in the long-term adversely impact the global economy, financial markets and supply chains. The outbreak has resulted in federal, state and local governments implementing mitigation measures, including shelter-in-place orders, travel restrictions, limitations on business, school closures, vaccination and testing requirements and other measures. Governments have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.
As a critical infrastructure provider, we have continued to operate our business and provide services to our customers. Although we are considered an essential business, the outbreak of COVID-19 and any preventive or protective actions implemented by governmental authorities may have a material adverse effect on our operations, customers and suppliers and could do so for an indefinite period of time. 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. In addition, concerns regarding the economic impact of COVID-19 have caused volatility in financial and other capital markets which has and may continue to adversely affect the market price of our common stock and our ability to access capital markets. In response to the COVID-19 pandemic, we have transitioned a substantial number of our employees to telecommuting and remote work arrangements, which may increase the risk of a security breach or cybersecurity attack on our information technology systems that could impact our business.
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We cannot reasonably estimate at this time the resulting future financial impact of COVID-19 on our business, but the prolonged effect of it could have a material adverse effect to our results of operations, financial condition and liquidity. The extent to which the COVID-19 pandemic may adversely impact our business, results of operations, financial condition and liquidity will depend on future developments, which are highly uncertain and unpredictable, including the severity and duration of the outbreak, current and new variants of COVID-19, the availability and distribution of effective treatments and vaccines, the effectiveness of actions taken to contain or mitigate its effects and any resulting economic downturn, recession or depression in the markets we serve.
We receive support from various funds established under federal and state laws, and the continued receipt of that support is not assured. A significant portion of our revenues come from network access and subsidies. An order adopted by the FCC in 2011 (2011 Order) significantly impacted the amount of support revenue we receive from the Universal Service Fund (USF), CAF and intercarrier compensation (ICC). The 2011 Order reformed core parts of the USF, broadly recast the existing ICC scheme, established the CAF to replace support revenues provided by the USF and redirected support from voice services to broadband services.
We receive subsidy payments from various federal and state universal service support programs, including high-cost support, Lifeline and E-Rate programs for schools and libraries. The total cost of the various FUSF programs has increased significantly in recent years, putting pressure on regulators to reform the programs and to limit both eligibility and support. We cannot predict future changes that may impact the subsidies we receive. However, a reduction in subsidies support may directly affect our profitability and cash flows.
A disruption in our networks and infrastructure could cause service delays or interruptions, which could cause us to lose customers and incur additional expenses. Our customers depend on reliable service over our network. The primary risks to our network infrastructure include physical damage to lines, security breaches, capacity limitations, power surges or outages, software defects and disruptions beyond our control, such as natural disasters and acts of terrorism. From time to time in the ordinary course of business, we experience short disruptions in our service due to factors such as physical damage, inclement weather and service failures of our third-party service providers. We could experience more significant disruptions in the future. Disruptions may cause service interruptions or reduced capacity for customers, either of which could cause us to lose customers and incur unexpected expenses.
A cyber-attack may lead to unauthorized access to confidential customer, personnel and business information that could adversely affect our business. Attempts by others to gain unauthorized access to organizations' information technology systems are becoming more frequent and sophisticated, and are sometimes successful. These attempts may include covertly introducing malware to companies' computers and networks, impersonating authorized users or "hacking" into systems. We seek to prevent, detect and investigate all security incidents that do occur, however we may be unable to prevent or detect a significant attack in the future. Significant information technology security failures could result in the theft, loss, damage, unauthorized use or publication of our confidential business information, which could harm our competitive position, subject us to additional regulatory scrutiny, expose us to litigation or otherwise adversely affect our business. If a security breach results in misuse of our customers' confidential information, we may incur liability as a result.
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Our operations require substantial capital expenditures and our business, financial condition, results of operations and liquidity may be impacted if funds for capital expenditures are not available when needed. We require significant capital expenditures to maintain, upgrade and enhance our network facilities and operations. While we have historically been able to fund capital expenditures from cash generated from operations and borrowings under our revolving credit facility, the other risk factors described in this section could materially reduce cash available from operations or significantly increase our capital expenditure requirements, which may result in our inability to fund the necessary level of capital expenditures to maintain, upgrade or enhance our network. This could adversely affect our business, financial condition, results of operations and liquidity.
We may be unable to obtain necessary hardware, software and operational support from third-party vendors. We depend on third-party vendors to supply us with a significant amount of hardware, software and operational support necessary to provide certain of our services, to maintain, upgrade and enhance our network facilities and operations, and to support our information and billing systems. Some of our third-party vendors are our primary source of supply for certain products and services for which there are few substitutes. The global supply chains have been and may continue to be impacted by the COVID-19 pandemic, which has caused a delay in the development, manufacturing and shipping of products and in some cases an increase in product costs. If any of these vendors should experience financial difficulties, experience supply chain issues, have demand that exceeds their capacity or can no longer meet our specifications or provide products or services we need or at reasonable prices, our ability to provide some services may be hindered, in which case our business, financial condition and results of operations may be adversely affected.
Our ability to attract and/or retain certain key management and other personnel in the future could have an adverse effect on our business. We rely on the talents and efforts of key management personnel, many of whom have been with our company or in our industry for decades. While we maintain long-term and emergency transition plans for key management personnel and believe we could either identify internal candidates or attract outside candidates to fill any vacancy created by the loss of any key management personnel, the loss of one or more of our key management personnel could have a negative impact on our business.
Acquisitions present many risks and we may be unable to realize the anticipated benefits of acquisitions. From time to time, we make acquisitions and investments or enter into other strategic transactions. In connection with these types of transactions, we may incur unanticipated expenses; fail to realize anticipated benefits; have difficulty integrating the acquired businesses; disrupt relationships with current and new employees, customers and vendors; incur significant indebtedness or have to delay or not proceed with announced transactions. The occurrence of any of the foregoing events could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may face significant challenges in combining the operations of an acquired business with ours in a timely and efficient manner. The failure to successfully integrate an acquired business and to successfully manage the challenges presented by the integration process may result in our inability to achieve anticipated benefits of the acquisition, including operational and financial synergies. Even if we are successful in integrating acquired businesses, we cannot guarantee that the integration will result in the complete realization of anticipated financial synergies or that they will be realized within the expected time frames.
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Risks Relating to Current Economic Conditions
Weak economic conditions may have a negative impact on our business, results of operations and financial condition. Downturns in the economic conditions in the markets and industries we serve could adversely affect demand for our products and services and have a negative impact on our results of operations. Economic weakness or uncertainty may make it difficult for us to obtain new customers and may cause our existing customers to reduce or discontinue their services to which they subscribe. This risk may be worsened by the expanded availability of free or lower cost services, such as streaming or OTT services or substitute services, such as wireless phones and public Wi-Fi networks. Weak economic conditions may also impact the ability of third parties to satisfy their obligations to us.
Risks Relating to Our Stock
The price of our stock may be volatile and may fluctuate substantially, which could negatively affect holders of our stock. The market price of our stock may fluctuate widely as a result of various factors including, but not limited to, period-to-period fluctuations in our operating results, the limited number of holders of our stock and the resulting limited liquidity in our stock, dilution, developments in the communications industry, the failure of securities analysts to cover our stock, changes in financial estimates by securities analysts, competitive factors, regulatory developments, labor disruptions, general market conditions and market conditions affecting the stock of communications companies. Communications companies have, in the past, experienced extreme volatility in the trading prices and volumes of their securities, which has often been unrelated to operating performance. High levels of market volatility may have a significant adverse effect on the market price of our stock. In addition, in the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert management's attention and resources, which could have a material adverse impact on our business, financial condition, results of operations, liquidity and/or the market price of our stock.
Risks Relating to Our Indebtedness and Our Capital Structure
We are expecting to have a substantial amount of debt outstanding due to our FTTP initiatives, which could adversely affect our business and restrict our ability to fund working capital and planned capital expenditures. Our substantial expected level of indebtedness could adversely impact our business, including:
● | We may be required to use a substantial portion of our cash flow from operations to make principal and interest payments on our debt, which will reduce funds available for operations, capital expenditures, future business opportunities and strategic initiatives; |
| ● | We may have limited flexibility to react to changes in our business and our industry; |
| ● | It may be more difficult for us to satisfy our other obligations; |
| ● | We may have a limited ability to borrow additional funds or to sell assets to raise funds if needed for working capital, capital expenditures, acquisitions or other purposes; |
| ● | We may become more vulnerable to general adverse economic and industry conditions, including changes in interest rates; and |
| ● | We may be at a disadvantage compared to our competitors that have less debt. |
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We cannot guarantee that we will generate sufficient revenues to service our debt and have adequate funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs or compete successfully in our markets.
We may not be able to refinance our existing debt if necessary, or we may only be able to do so at a higher interest rate. We may be unable to refinance or renew our credit facilities and our failure to repay all amounts due on the maturity dates would cause a default under the credit agreement. Alternatively, any renewal or refinancing may occur on less favorable terms. If we refinance our credit facilities on terms that are less favorable to us than the terms of our existing debt, our interest expense may increase significantly, which could impact our results of operations and impair our ability to use our funds for other purposes.
Our variable-rate debt subjects us to interest rate risk, which could impact our cost of borrowing and operating results. Certain of our debt obligations are at variable rates of interest and expose us to interest rate risk. Increases in interest rates could negatively impact our results of operations and operating cash flows. We utilize IRSAs to convert a portion of our variable-rate debt to a fixed-rate basis. However, we do not maintain interest rate hedging agreements for all of our variable-rate debt and our existing hedging agreements may not fully mitigate our interest rate risk, may prove disadvantageous or may create additional risks.
In addition, a portion of our variable-rate debt bears interest based on LIBOR. In 2017, the Financial Conduct Authority, which regulates LIBOR, announced that it intended to stop requiring banks to submit rates for the calculation of LIBOR after 2021. In November 2020, the ICE Benchmark Administration, the administrator of LIBOR, extended the cessation date for submission and publication of rates for all LIBOR tenors until June 30, 2023, except for the one-week and two-month LIBOR tenors, which ceased on December 31, 2021. As of January 1, 2022, regulated United States financial institutions are no longer permitted to enter into new contracts referencing any LIBOR settings. The United States Federal Reserve, in conjunction with the Alternative Reference Rates Committee, has proposed replacing LIBOR with the Secured Overnight Financing Rate (SOFR), a new index based on trading in overnight repurchase agreements. At this time, it is not possible to predict whether SOFR will become the most prevalent alternative reference rate in the market or what impact the transition from LIBOR to alternative reference rates may have on the interest rates for our current and future debt obligations as well as our IRSAs, which may be adversely affected. In addition, any transition process from LIBOR to an alternative rate could cause, among other things, LIBOR to perform differently than in the past, a disruption in the financial markets, or increases in benchmark rates, any of which could adversely affect our results of operations, cash flows and liquidity.
Risks Related to the Regulation of Our Business
We are subject to a complex and uncertain regulatory environment, and we face compliance costs and restrictions greater than those of many of our competitors. Our businesses are subject to regulation by the FCC and other federal, state and local entities. Rapid changes in technology and market conditions have resulted in changes in how the government addresses communications, video programming and Internet services. Many businesses that compete with our communications companies are comparatively less regulated. Some of our competitors are either not subject to utilities regulation or are subject to significantly fewer regulations. In contrast to our subsidiaries regulated as cable operators and satellite video providers, competing on-demand and OTT providers and motion picture and DVD firms have almost no regulation of their video activities. Recently, federal and state authorities have become more active in seeking to address critical issues in each of our product and service markets. The adoption of new laws or regulations, or changes to the existing regulatory framework at the federal, state or local level, could require significant and costly adjustments that could adversely affect our business plans. New regulations could impose additional costs or capital requirements, require new reporting, impair revenue opportunities, potentially impede our ability to provide services in a manner that would be attractive to our customers and potentially create barriers to enter new markets or to acquire new lines of business. We face continued regulatory uncertainty in the immediate future. Not only are these governmental entities continuing to move forward on these matters, their actions remain subject to reconsideration, appeal and legislative modification over an extended period of time, and it is unclear how their actions will ultimately impact our business. We cannot predict future developments or changes to the regulatory environment or the impact such developments or changes may have on us.
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Increased regulation of the Internet could increase our cost of doing business. Current laws and regulations governing access to, or commerce on, the Internet are limited. As the significance of the Internet continues to expand, federal, state and local governments may adopt new rules and regulations applicable to, or apply existing laws and regulations to, the Internet. During 2017, the FCC adopted an order eliminating its previous classification of Internet service as a telecommunications service regulated under Title II of the Telecommunications Act of 1996. This effectively limits the FCC’s authority over Internet Service Providers. The FCC retained rules requiring Internet Service Providers to disclose practices associated with blocking, throttling and paid prioritization of Internet traffic. The FCC order has been challenged in court and the outcome of the challenge cannot be determined at this time.
The outcome of pending matters before the FCC and the Federal Trade Commission and any potential congressional action cannot be determined at this time but could lead to increased costs for the Company in connection with our provision of Internet services, and could affect our ability to compete in the markets we serve.
We are subject to extensive laws and regulations relating to the protection of the environment, natural resources and worker health and safety. Our operations and properties are subject to federal, state and local laws and regulations relating to the protection of the environment, natural resources and worker health and safety, including laws and regulations governing and creating liability in connection with the management, storage and disposal of hazardous materials, asbestos and petroleum products. We are also subject to laws and regulations governing air emissions from our fleet vehicles. As a result, we face several risks, including:
| ● | Hazardous materials may have been released at properties that we currently own or formerly owned (perhaps through our predecessors). Under certain environmental laws, we could be held liable, without regard to fault, for the costs of investigating and remediating any actual or threatened contamination at these properties and for contamination associated with disposal by us, or by our predecessors, of hazardous materials at third-party disposal sites; |
| ● | We could incur substantial costs in the future if we acquire businesses or properties subject to environmental requirements or affected by environmental contamination. In particular, environmental laws regulating wetlands, endangered species and other land use and natural resources may increase the costs associated with future business or expansion or delay, alter or interfere with such plans; |
| ● | The presence of contamination can adversely affect the value of our properties and make it difficult to sell any affected property or to use it as collateral; and | |
|
| ||
| ● | We could be held responsible for third-party property damage claims, personal injury claims or natural resource damage claims relating to contamination found at any of our current or past properties. |
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The cost of complying with environmental requirements could be significant. Similarly, the adoption of new environmental laws or regulations, or changes in existing laws or regulations or their interpretations, could result in significant compliance costs or unanticipated environmental liabilities.
Our business may be impacted by new or changing tax laws or regulations and actions by federal, state, and/or local agencies, or by how judicial authorities apply tax laws. Our operations are subject to various federal, state and local tax laws and regulations. In connection with the products and services we sell, we calculate, collect, and remit various federal, state, and local taxes, surcharges and regulatory fees to numerous federal, state and local governmental authorities. In many cases, the application of tax laws is uncertain and subject to differing interpretations, especially when evaluated against new technologies and communications services, such as broadband Internet access and cloud related services. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. Changes in tax laws, or changes in interpretations of existing laws, could materially affect our financial position, results of operations and cash flows. For example, the Tax Cuts and Jobs Act of 2017, a major federal tax reform, that had a significant impact on our tax obligations and effective income tax rate.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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 purchases or in privately negotiated transactions in compliance with the rules of the SEC and other applicable legal requirements.
The following table summarizes stock repurchases for the program ending December 31, 2021.
| Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||
| Total Number of Shares Purchased as Part of Publicaly Announced Plans or or Programs (1) | |||||||||
| Average Price Paid per Share | |||||||||
| Period | |||||||||
| July 1, 2019 - December 30, 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 |
| $ | - |
| Total July 1, 2019 - December 31, 2021 | 26,515 | ||||||||
| (1) The total number of shares purchased includes: (i) shares purchased under the Board's authorizations | |||||||||
| described above, including market purchases and privately negotiated purchases. | |||||||||
In two transactions that closed on February 25, 2022 and February 28, 2022, Nuvera purchased 75,000 shares each from two shareholders, for a total of 150,000 shares at a price of $21.25 per share for a total purchase price of $3,187,500. The shares were purchased pursuant to a privately negotiated purchase agreement between Nuvera and the shareholders. This stock purchase was authorized by the Nuvera BOD and a waiver was obtained from CoBank to facilitate the sale. See Nuvera’s Form 8-K filed with the SEC on March 2, 2022 for more information regarding this stock purchase.
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Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit
Number Description
3.2 Bylaws of Nuvera Communications, Inc., as amended, May 26, 2022.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
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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.
| NUVERA COMMUNICATIONS, INC. | ||
| Dated: August 9, 2022 | By | /s/ Glenn H. Zerbe |
| Glenn H. Zerbe, President and Chief Executive Officer | ||
| Dated: August 9, 2022 | By | /s/ Curtis O. Kawlewski |
| Curtis O. Kawlewski, Chief Financial Officer | ||
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