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
and Amortization | | 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
and Amortization | | 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.