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.
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, 2020, which is incorporated herein by reference.
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Results of Operations
Overview
Nuvera has a state-of-the-art; fiber-rich communications network and offers a diverse array of communications products and services. We provide local voice service and network access to other communications carriers for connections to our networks. In addition, we provide long distance service, broadband Internet access, video services, and managed and hosted solutions services.
Our operations consist primarily of providing services to customers for a monthly charge. Because many of these services are recurring in nature, backlog orders and seasonality are not significant factors. Our working capital requirements include financing the construction of our networks. We also require capital to maintain our networks and infrastructure; fund the payroll costs of our highly skilled labor force; maintain inventory to service capital projects, our network and our telephone 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.
Impact of Coronavirus (COVID-19) on Our Business
Through June 30, 2021, the COVID-19 pandemic has had significant impacts on our business. We continue to operate with some modifications because, based on the various published standards to date, the work our employees are performing, particularly with respect to providing communication services required by our customers is critical, essential and life-sustaining.
We took actions intended to protect our employees and our customers that adversely affected our results.
● First, we restricted public access to our offices and halted all customer in-location service installations and performed those installations remotely, which resulted in lower sales and installations through the third quarter of 2020. Many of our locations have re-opened to the public but with restrictions which has caused lower customer traffic and lower sales;
● Second, many of our customers either closed their locations or operated at significantly diminished capacity as a result of local and national actions taken, such as stay-at-home mandates that reduced business activity, which negatively impacted sales and increased our customer churn for our legacy voice and video products;
● Third, the COVID-19 pandemic has increased traffic on our networks as the State of Minnesota had issued executive orders requiring remote-learning for schools, the shutdown of non-essential businesses and a work-from home order for many workers in multiple industries;
● Fourth, although we have seen an increase in customers for our internet product including increased demand for higher bandwidth speeds that increase has not been able to offset the loss in customers we have experienced in our legacy voice and video products. We also expect that due to the number of job losses due to the COVID-19 pandemic that a number of our customers may have difficulty in paying for their existing services which will affect our ability to ultimately collect from and retain those customers; and
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● Fifth, social actions taken to mitigate the effects of the pandemic produced increased costs for us through significant demand for personal protection equipment and sanitation products to protect our employees and customers.
In the first six months of 2021 many of the markets in which we operate have begun to ease restrictions that were in place earlier in 2020 and a number of United States residents, including, a portion of our customers have been vaccinated in the period. This had two effects.
● The first was to improve the outlook in the sales and installation of our internet products; and
● The second was that the increased traffic on our networks has been addressed by the Company making substantial investments in 2020 to accommodate the increased traffic which we saw on our networks due to the pandemic.
In the first six months of 2021 viral infections have begun to decrease as vaccinations have become available to United States residents. However, we cannot predict when and if these vaccinations will completely eliminate the risks from COVID-19. As a result, there remains significant uncertainty concerning the magnitude of the impact and duration of the COVID-19 pandemic. Factors deriving from the COVID-19 response that have or may negatively impact sales and gross margins in the future include, but are not limited to: limitations on the ability of our suppliers and content providers to manufacture, or procure from manufactures, the products and services we sell, or to meet delivery and installation requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver our products or our inability to install our products; limitations on the ability of our customers to conduct business and purchase our products and services; and limitations on the ability of our customers to pay us on a timely basis.
In the first six months of 2021, we have seen an increase in our revenues due to internet growth mentioned above, however, we continue to see an accelerated loss in our voice service and video service customers as those customers make choices about their entertainment needs and personal finances in light of the COVID-19 pandemic. We have also experienced increased costs in the first six months of 2021 which have affected our margins. In addition, we are anticipating future supply chain issues in the inventory we use in our business and have therefore purchased a large amount of these items in order to avoid 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, 2021, we have $9.7M 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.
The full extent to which the COVID-19 pandemic and the various responses to it impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the availability and cost to access the capital markets; the effect on our customers and customer demand for and ability to pay for our services; disruptions or restrictions on our employees’ ability to work and travel; interruptions or restrictions related to the provision of our services, including impacts on content delivery networks and; and any stoppages, disruptions or increased costs associated with our operations. During the COVID-19 crisis, we may not be able to provide the same level of customer service and product installation, that our customers are used to which could negatively impact their perception of our service resulting in an increase in service cancellations. If we need to access the capital markets, there can be no assurance that financing may be available on attractive terms, if at all. We will continue to actively monitor the issues raised by the COVID-19 pandemic 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, partners and stockholders. While we are unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe that it is important to share where our company stands today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 progresses.
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Executive Summary
Highlights:
● 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. We have not received any funds for these projects as of June 30, 2021.
● 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 will forgive loans if all employees are kept on the payroll for a required period 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. We have not yet received any funds for these projects as of March 31, 2021.
● Net income for the second quarter of 2021 totaled $2,442,913, which was a $98,836, or 4.22% increase compared to the second quarter of 2020. This increase was primarily due to decreased income taxes related to the debt forgiveness from the PPP Loan described above and decreased interest expense, partially offset by a decrease in operating income, all of which are described below.
● Consolidated revenue for the second quarter of 2021 totaled $16,487,062, which was a $343,099 or 2.13% increase compared to the second quarter of 2020. This increase was primarily due to increased data and video service revenues, partially offset by decreases in voice service, network access revenues and FUSF subsidies.
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Business Trends
Included below is a synopsis of business trends management believes will continue to affect our business in 2021.
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 3,008 or 14.21% for the twelve months ended June 30, 2021 due to the reasons mentioned above.
The expansion of our state-of-the-art; fiber-rich communications network, growth in broadband customer 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 a state-of-the-art, fiber-rich 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, 2021 and 2020 are included below:
|
Communications Segment
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
2021
|
|
2020
|
|
Increase (Decrease)
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
Voice Service
|
$
|
1,544,766
|
|
$
|
1,682,358
|
|
$
|
(137,592)
|
|
-8.18%
|
|
Network Access
|
|
1,344,685
|
|
|
1,584,838
|
|
|
(240,153)
|
|
-15.15%
|
|
Video Service
|
|
3,237,723
|
|
|
3,096,144
|
|
|
141,579
|
|
4.57%
|
|
Data Service
|
|
6,368,566
|
|
|
5,830,858
|
|
|
537,708
|
|
9.22%
|
|
A-CAM/FUSF
|
|
2,953,966
|
|
|
2,994,620
|
|
|
(40,654)
|
|
-1.36%
|
|
Other
|
|
1,037,356
|
|
|
955,145
|
|
|
82,211
|
|
8.61%
|
|
Total Operating Revenues
|
|
16,487,062
|
|
|
16,143,963
|
|
|
343,099
|
|
2.13%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services, Excluding Depreciation
and Amortization
|
|
7,308,745
|
|
|
6,881,940
|
|
|
426,805
|
|
6.20%
|
|
Selling, General and Administrative
|
|
2,554,766
|
|
|
2,557,721
|
|
|
(2,955)
|
|
-0.12%
|
|
Depreciation and Amortization Expenses
|
|
3,124,282
|
|
|
3,048,424
|
|
|
75,858
|
|
2.49%
|
|
Total Operating Expenses
|
|
12,987,793
|
|
|
12,488,085
|
|
|
499,708
|
|
4.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
$
|
3,499,269
|
|
$
|
3,655,878
|
|
$
|
(156,609)
|
|
-4.28%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
$
|
2,442,913
|
|
$
|
2,344,077
|
|
$
|
98,836
|
|
4.22%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
$
|
3,826,016
|
|
$
|
2,300,017
|
|
$
|
1,525,999
|
|
66.35%
|
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Table of Contents
|
Communications Segment
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Increase (Decrease)
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
Local Service
|
$
|
3,096,044
|
|
$
|
3,431,054
|
|
$
|
(335,010)
|
|
-9.76%
|
|
Network Access
|
|
2,927,125
|
|
|
3,216,780
|
|
|
(289,655)
|
|
-9.00%
|
|
Video
|
|
6,266,600
|
|
|
6,077,738
|
|
|
188,862
|
|
3.11%
|
|
Data
|
|
12,636,537
|
|
|
11,482,376
|
|
|
1,154,161
|
|
10.05%
|
|
A-CAM/FUSF
|
|
5,922,161
|
|
|
6,093,655
|
|
|
(171,494)
|
|
-2.81%
|
|
Other
|
|
2,116,718
|
|
|
2,009,418
|
|
|
107,300
|
|
5.34%
|
|
Total Operating Revenues
|
|
32,965,185
|
|
|
32,311,021
|
|
|
654,164
|
|
2.02%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Services, Excluding Depreciation
and Amortization
|
|
14,815,586
|
|
|
13,818,437
|
|
|
997,149
|
|
7.22%
|
|
Selling, General and Administrative
|
|
5,218,656
|
|
|
5,228,589
|
|
|
(9,933)
|
|
-0.19%
|
|
Depreciation and Amortization Expenses
|
|
6,195,854
|
|
|
6,100,526
|
|
|
95,328
|
|
1.56%
|
|
Total Operating Expenses
|
|
26,230,096
|
|
|
25,147,552
|
|
|
1,082,544
|
|
4.30%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
$
|
6,735,089
|
|
$
|
7,163,469
|
|
$
|
(428,380)
|
|
-5.98%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
$
|
7,623,624
|
|
$
|
4,964,885
|
|
$
|
2,658,739
|
|
53.55%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
$
|
5,566,431
|
|
$
|
4,054,206
|
|
$
|
1,512,225
|
|
37.30%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key metrics
|
|
|
|
|
|
|
|
|
|
|
|
Access Lines
|
|
18,157
|
|
|
21,165
|
|
|
(3,008)
|
|
-14.21%
|
|
Video Customers
|
|
10,470
|
|
|
11,218
|
|
|
(748)
|
|
-6.67%
|
|
Broadband Customers
|
|
31,979
|
|
|
30,441
|
|
|
1,538
|
|
5.05%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain historical numbers have been changed to conform to the current year's presentation.
|
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 $1,544,766, which was $137,592 or 8.18% lower in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and was $3,096,044 which was $335,010 or 9.76% lower in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. These decreases were primarily due to a decrease in access lines, which continues to be impacted by the on-going effects of COVID-19, partially offset by a combination of rate increases introduced into several of our markets in the first quarters of 2021 and 2020.
The number of access lines we serve as a company have been decreasing, which is consistent with a general industry trend, as customers are increasingly utilizing other technologies, such as wireless phones and IP services. To help offset declines in voice service revenue, we implemented an overall strategy that continues to focus on selling a competitive bundle of services. Our focus on marketing competitive service bundles to our customers creates value for the customer and aids in the retention of our voice lines.
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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 $1,344,685, which is $240,153 or 15.15% lower in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and was $2,927,125, which is $289,655 or 9.00% lower in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. 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.
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 Servcice – 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 $3,237,723, which is $141,579 or 4.57% higher in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and was $6,266,600, which is $188,862 or 3.11% higher in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. These increases were primarily due to a combination of rate increases introduced into several of our markets, partially offset by a decrease in video customers, which continues to be impacted by the on-going effects of COVID-19.
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 $6,368,566, which is $537,708 or 9.22% higher in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and was $12,636,537, which is $1,154,161 or 10.05% higher in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. 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 in 2021. We expect continued growth in this area will be driven by expansion of service areas, our aggressively packaging service bundles 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 $2,953,966, which is $40,654 or 1.36% lower in the three months ended June 30, 2021 compared to the three months ended June 30, 2020. A-CAM/FUSF support totaled $5,922,161, which is $171,494 or 2.81% lower in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. This decrease was primarily due to lower FUSF support received for Scott-Rice due to 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 $1,037,356, which is $82,211 or 8.61% higher in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and was $2,116,718, which is $107,300 or 5.34% higher in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. These increases were primarily due to increases in the sales and installation of CPE.
Cost of Services (excluding Depreciation and Amortization)
Cost of services (excluding depreciation and amortization) was $7,308,745, which is $426,805 or 6.20% higher in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and was $14,815,586, which is $997,149 or 7.22% higher in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. These increases were primarily due to higher programming costs from video content providers, higher costs associated with increased maintenance and support agreements on our equipment and software, and increased cost to maintain a highly-skilled workforce.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2,554,766, which is $2,955 or 0.12% lower in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and was $5,218,656, which is $9,933 or 0.19% lower in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. These decreases were primarily due to the continuation of cost containment measures implemented in 2020 by the Company due to COVID-19.
Depreciation and Amortization
Depreciation and amortization was $3,124,282, which is $75,858 or 2.49% higher in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and was $6,195,854, which is $95,328 or 1.56% higher in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. These increases were primarily due to increases in our broadband property, plant and equipment, reflecting our continual investment in technology and infrastructure in order to meet our customers’ demands for products and services.
Operating Income
Operating income was $3,499,269, which is $156,609 or 4.28% lower in the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Operating income was $6,735,089, which is $428,380 or 5.98% lower in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. These decreases were primarily due to higher operating expenses, partially offset by higher operating revenues, all of which are described above.
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See Consolidated Statements of Income (for discussion below)
Other Income (Expense) and Interest Expense
Interest expense was $527,825, which is $82,869 or 13.57% lower in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and was $1,093,199, which is $201,158 or 15.54% lower in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. These decreases were primarily due to lower outstanding debt balances in connection with our credit facility with CoBank.
Interest and dividend income was $58,428, which is $6,092 or 11.64% higher in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and was $159,830, which is $61,301 or 62.22% higher in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. 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, 2021 and 2020, included a patronage credit earned with CoBank, which was a result of our debt agreements with them. The patronage credit allocated and received in 2021 was $625,490, compared to $647,369 allocated and received in 2020. CoBank determines and pays the patronage credit annually, generally in the first quarter of the calendar year, based on its results from the prior year. We record these patronage credits as income when they are received.
Other investment income was $38,895, which is $39,988 or 50.69% lower in the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and was $104,943, which is $55,271 or 34.50% lower in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Other investment income is primarily from our equity ownerships in several partnerships and limited liability companies.
Income Taxes
Income tax expense was $636,132, which is $275,448 or 30.22% lower in the three months ended June 30, 2021 compared to the three months ended June 30, 2020. This decrease 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. Income tax expense was $1,841,232, which is $89,549 or 4.64% lower in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. This decrease was primarily due to the PPP Loan forgiveness being tax exempt at the federal and state level. The effective income tax rate for the six months ending June 30, 2021 and 2020 was approximately 19.45% and 28.00%, 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 $144,018,800 as of June 30, 2021, reflecting 65.90% equity and 34.10% debt. This compares to a capital structure of $141,570,577 at December 31, 2020, reflecting 61.9% equity and 38.1% debt. In the communications industry, debt financing is most often based on operating cash flows. Specifically, our current use of our credit facilities is in a ratio of approximately 1.87 times debt to EBITDA (as defined in our loan documents), which is well within acceptable limits for our agreements and our industry. Our management believes adequate operating cash flows and other internal and external resources, such as our cash on hand and revolving credit facility are available to finance ongoing operating requirements, including capital expenditures, business development, debt service and temporary financing of trade accounts receivables.
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, 2021 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. As of June 30, 2021 we had a working capital surplus of $7,275,103. In addition, as of June 30, 2021, we had $9.7 million available under our revolving credit facility to fund any short-term working capital needs. The working capital surplus as of June 30, 2021 was primarily the result of increased inventories and receivables, and a lower current portion due on our long-term debt.
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 anticipate that we will be able to plan for and match future liquidity needs with future internal and available external resources.
We periodically seek to add growth initiatives by either expanding our network or our markets through organic or internal investments or through strategic acquisitions. We believe we can adjust the timing or the number of our initiatives according to any limitations which may be imposed by our capital structure or sources of financing.
Impact of COVID-19 on Our Cash Flows
The global spread of COVID-19 and the various attempts to contain it have created and are expected to create volatility with our future cash flows. Our future cash flows are expected to 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.
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The following table summarizes our cash flow:
|
|
Six Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
$
|
5,366,811
|
|
$
|
8,065,251
|
|
Investing activities
|
|
(5,619,431)
|
|
|
(3,683,496)
|
|
Financing activities
|
|
(3,473,446)
|
|
|
(340,398)
|
|
Change in cash
|
$
|
(3,726,066)
|
|
$
|
4,041,357
|
Cash Flows from Operating Activities
Cash generated by operations in the first six months of 2021 was $5,366,811, compared to cash generated by operations of $8,065,251 in the first six months of 2020. The decrease in cash flows from operating activities in 2021 was primarily due to the timing of the increase/decrease in assets and liabilities including the purchase of a large amount of inventory to avoid anticipated supply chain issues we are expecting in the second half of 2021.
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, 2021 was $4,891,594 compared to $8,617,660 as of December 31, 2020.
Cash Flows Used in Investing Activities
We operate in a capital intensive business. We continue to upgrade our local networks for changes in technology to provide advanced services to our customers.
Cash flows used in investing activities were $5,619,431 during the first six months of 2021 compared to $3,683,496 during the first six months of 2020. Capital expenditures relating to on-going operations were $5,566,431 for the six months ended June 30, 2021 compared to $4,054,206 for the six months ended June 30, 2020. 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 will provide adequate cash flows to fund our plant additions for the remainder of this year; however, funding from our revolving credit facility is available if the timing of our cash flows from operations does not match our cash flow requirements. As of June 30, 2021, we had $9.7 million available under our existing credit facility to fund capital expenditures and other operating needs.
Cash Flows Used in Financing Activities
Cash used in financing activities for the 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. Cash used in financing activities for the six months ended June 30, 2020 was $340,398. This included long-term debt repayments of $2,316,615, the issuance of debt (PPP loan funds) of $2,889,000, the repurchase of common stock of $238,612 and the distribution of $674,171 of dividends to stockholders.
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Working Capital
We had a working capital surplus (i.e. current assets minus current liabilities) of $7,275,103 as of June 30, 2021, with current assets of approximately $16.7 million and current liabilities of approximately $9.4 million, compared to a working capital surplus of $3,055,128 as of December 31, 2020. The ratio of current assets to current liabilities was 1.78 and 1.25 as of June 30, 2021 and December 31, 2020. The working capital surplus at June 30, 2021 was primarily the result of increased inventories and receivables, and a lower current portion due on our long-term debt.
At June 30, 2021 and December 31, 2020 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 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 declared a quarterly dividend of $0.13 per share for the first quarter of 2020, which totaled $674,171 for the first quarter.
We expect to continue to pay quarterly dividends during the remainder of 2021, 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. On December 31, 2020 our Total Leverage Ratio fell below 2.00, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders. Our current Total Leverage Ratio as of June 30, 2021 is 1.87.
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.