Nuvera Communications, Inc. - Quarter Report: 2020 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_________________

 

FORM 10-Q

 

 (Mark One)

 

☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:

 

For the quarterly period ended September 30, 2020

 

☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:

 

For the transition period from_____to_____.

 

Commission File Number  0-3024

 

NUVERA COMMUNICATIONS, INC.

(Exact name of Registrant as specified in its charter)

 

 

27 North Minnesota Street

New Ulm, Minnesota  56073

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (507) 354-4111

 

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.  Yes ☒  No  ☐

 

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).  Yes ☒ No  ☐                      

 

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 definition 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. ☐

 

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.

 

 

The total number of shares of the registrant’s common stock outstanding as of November 9, 2020: 5,199,101.

 

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PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

        

 

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NUVERA COMMUNICATIONS, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020 (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, 2019.

 

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 one business segment: the Communications Segment. Inter-company transactions have been eliminated from the consolidated financial statements.

 

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 transport cost.

 

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 with the operations of the business.

 

Depreciation and Amortization Expense

We use the group life method (mass asset accounting) to depreciate the assets of our telephone companies. Telephone 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 $6,626,821 and $6,592,743 for the nine months ended September 30, 2020 and 2019. We amortize our definite-lived intangible assets over their estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment.

 

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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. 

 

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 September 30, 2020 and December 31, 2019 we had no unrecognized tax benefits.

 

We are primarily subject to United States, Minnesota, Iowa, Nebraska, North Dakota and Wisconsin income taxes. Tax years subsequent to 2015 remain open to examination by federal and state tax authorities. Our policy is to recognize interest and penalties related to income tax matters as income tax expense. As of September 30, 2020 and December 31, 2019 we had no interest or penalties accrued that related to income tax matters.

 

Earnings and Dividends Per Share

 

The basic and diluted net income per share are calculated as follows:

 

 

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The weighted-average shares outstanding, basic and diluted, are calculate as follows:

 

 

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

 

In March, 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments in ASU 2020-04 provide optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. The amendments apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Optional expedients for cash flow hedging relationships affected by reference rate reform are offered if certain criteria are met. The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments in ASU 2020-04 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is evaluating ASU 2020-04 and considering the possible adoption of certain expedients offered.  

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and other (Topic 350).” ASU 2017-04 simplifies the accounting for goodwill impairment and removes Step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value limited to the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. The amendments in this update should be applied on a prospective basis. ASU 2017-04 is effective for the Company beginning January 1, 2021. Early adoption is permitted. Management is evaluating the impact the adoption of ASU 2017-04 will have on the Company’s financial statements and does not expect that the new standard will have a material effect on our financial position, results of operations, or cash flows.

   

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires entities to use a new forward-looking, expected loss model to estimate credit losses. It also requires additional disclosures relating to the credit quality of trade and other receivables, including information relating to management’s estimate of credit allowances. The Company was originally required to adopt ASU 2016-13 for the fiscal periods beginning after December 15, 2019, including interim periods within those fiscal years. ASU 2016-13 has subsequently been updated by ASU 2019-10 which moves the adoption period for public companies beginning after December 15, 2022, including interim periods within that fiscal year. Early adoption as of December 15, 2018 was permitted. Management is evaluating the impact the adoption of ASU 2016-13 will have on the Company’s financial statements, if any.

 

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We have reviewed all other significant newly issued accounting pronouncements and determined that they are either not applicable to our business or that no material effect is expected on our financial position and results of operations.

 

Note 2 – Revenue Recognition

 

The Company recognizes revenue based on the following single principles-based, five-step model that is applied to all contracts with customers. These steps include (1) identify the contract(s) with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when each performance obligation is satisfied.  

 

Our revenue contracts with customers may include a promise or promises to deliver services such as broadband, video or voice services. Promised services are considered distinct as the customer can benefit from the services either on their own or together with other resources that are readily available to the customer and the Company’s promise to transfer service to the customer is separately identifiable from other promises in the contract. The Company accounts for services as separate performance obligations. Each service is considered a single performance obligation as it is providing a series of distinct services that are substantially the same and have the same pattern of transfer.

 

The transaction price is determined at contract inception and reflects the amount of consideration to which we expect to be entitled in exchange for transferring service to the customer. This amount is generally equal to the market price of the services promised in the contract and may include promotional or bundling discounts. The majority of our prices are based on tariffed rates filed with regulatory bodies or standard company price lists. The transaction price excludes amounts collected on behalf of third parties such as sales taxes and regulatory fees. Conversely, nonrefundable up-front fees, such as service activation and set-up fees, which are immaterial to our overall revenues, are included in the transaction price. In determining the transaction price, we consider our enforceable rights and obligations within the contract. We do not consider the possibility of a contract being cancelled, renewed or modified, which is consistent with ASC 606-10-32-4.

 

The transaction price is allocated to each performance obligation based on the standalone selling price of the service, net of the related discount, as applicable.

 

Revenue is recognized when performance obligations are satisfied by transferring service to the customer as described below.

 

Significant 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, data, or connectivity services. Judgement is required to determine whether provision of CPE, installation services, and additional service tiers are considered distinct and accounted for separately, or not distinct and accounted for together with the subscription services.

 

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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.

 

Disaggregation of Revenue

 

The following table summarizes revenue from contracts with customers for the three months ended September 30, 2020 and 2019:

 

 

For the three months ended September 30, 2020, approximately 77.63% of our total revenue was from month-to-month and other contracted revenue from customers. Approximately 19.64% of our total revenue was from revenue sources outside of the scope of ASC 606. The remaining 2.73% of total revenue was from other sources including CPE and equipment sales and installation.

 

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For the three months ended September 30, 2019, approximately 78.38% of our total revenue was from month-to-month and other contracted revenue from customers. Approximately 19.97% of our total revenue was from revenue sources outside of the scope of ASC 606. The remaining 1.65% of total revenue was from other sources including CPE and equipment sales and installation.

 

The following table summarizes revenue from contracts with customers for the nine months ended September 30, 2020 and 2019:

 

 

For the nine months ended September 30, 2020, approximately 78.17% of our total revenue was from month-to-month and other contracted revenue from customers. Approximately 20.01% of our total revenue was from revenue sources outside of the scope of ASC 606. The remaining 1.82% of total revenue was from other sources including CPE and equipment sales and installation.

 

For the nine months ended September 30, 2019, approximately 78.49% of our total revenue was from month-to-month and other contracted revenue from customers. Approximately 20.02% of our total revenue was from revenue sources outside of the scope of ASC 606. The remaining 1.49% of total revenue was from other sources including CPE and equipment sales and installation.

 

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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 3 to 10 years for these types of contracts.

 

Nature of Services

 

Revenues are earned from our customers primarily through the connection to our 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 Services – 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 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. 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 – 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 Internet Protocol TV (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.

 

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Data – We provide high speed Internet to business and residential customers depending on the nature of the network facilities that are available, the level of service selected and the location. Our revenue is earned based on the offering of various flat packages based on the level of service, data speeds and features. We also provide e-mail and managed services, such as web hosting and design, on-line file back up and on-line file storage. Data customers may generally cancel their subscriptions at any time without penalty. Each subscription service provided is accounted for as a distinct performance obligation and revenue is recognized over a one month service period as the subscription services are delivered. Other optional services purchased by the customer are generally accounted for as a distinct performance obligation when purchased and revenue is recognized when the service is provided.

 

Directory – Our directory publishing revenue in our telephone directories recurs monthly and is recognized into revenue on a monthly basis.  

 

Other Contracted Revenue - Managed services and certain other data customers include fiber-delivered communications and managed information technology solutions to mainly business customers, as well as high-capacity last-mile data connectivity services to wireless and wireline carriers. Services are primarily offered on a subscription basis with a contractually specified and non-cancelable service period. The non-cancelable contract terms for these customers generally range from 3 to 10 years. Each subscription service provided is accounted for as a distinct performance obligation and revenue is recognized ratably over the contract period as the subscription services are delivered. These services are billed as monthly recurring charges to customers. 

 

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 one month. Other revenues are immaterial to our total revenues.

 

Subsidy and Other Revenue outside the Scope of ASC 606 – We receive subsidies from governmental entities to operate and expand our networks. In addition, we have revenue from leasing arrangements. Both of these revenue streams are outside of the scope of ASC 606. 

 

Interstate access rates are established by a nationwide pooling of companies known as the NECA. The FCC established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of a company's actual or average costs. There has been a change in the composition of interstate access charges in recent years, shifting more of the charges to the end user and reducing the amount of access charges paid by 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 Co. (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. 

 

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A-CAM

 

As described above, with the exception of Scott-Rice, the remainder of our companies receive funding from A-CAM.

 

On February 25, 2019, the FCC issued Public Notice DA 19-115, which contained revised offers of A-CAM support and associated revised service deployment obligations. On February 27, 2019, the Company’s BOD authorized and directed the Company to accept the FCC’s revised offer of A-CAM support and the revised associated service deployment obligations. Under the revised FCC offer Notice, the Company will be entitled to annually receive (i) $596,084 for its Iowa operations, which was a $106,214 increase per year and (ii) $8,354,481 for its Minnesota operations, which was a $706,273 increase per year. The Company will receive the revised A-CAM offer over the next 10 years starting in 2019. The Company will use the additional support that it receives through the A-CAM program to continue to meet its defined broadband build-out obligations, which the Company is currently completing. A letter of acceptance to elect the revised A-CAM support was filed by the Company with the FCC on March 8, 2019. The FCC accepted the Company’s letter on March 11, 2019. In 2019, the Company received a true-up payment for support back to January 1, 2019 and an increased monthly payment representing the new revised A-CAM support offer for the next ten years.

 

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:

 

 

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 30-60 days.

 

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. In 2019, we expanded our commission plans and began deferring and amortizing these costs over the expected customer life as the contract obligations were satisfied. We determined that the expected customer life is the expected period of benefit as the commission on the new renewal contract is commensurate with the commission on the initial contract. During the three months ended September 30, 2020 and 2019 the Company recognized expenses of $21,967 and $6,681, respectively, related to deferred contract acquisition costs. During the nine months ended September 30, 2020 and 2019 the Company recognized expenses of $53,388 and $13,384, respectively, related to deferred contract acquisition costs. Short-term contract assets are included in current assets under prepaid expenses and other current assets. Long-term contract assets are included in investments and other assets under other assets.

 

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Contract Liabilities

 

Contract liabilities include deferred revenues related to advanced payments for services and nonrefundable, upfront service activation and set-up fees, which under the new standard are generally deferred. In addition, contract liabilities include customer deposits that are not recognized into revenue, but are instead returned to the customer after a holding period. Short-term contract liabilities include deferred revenues for advanced payments for managed services and other long-term contracts. This includes the current portion of the deferred revenue that will be recognized monthly within one year. Short-term contract liabilities are included in current liabilities under other accrued liabilities. Long-term contract liabilities include deferred revenues for advanced payments for managed services and other long-term contracts. This includes the portion longer than one year and the corresponding deferred revenues are recognized into revenue on a monthly basis based on the term of the contract. Long-term contract liabilities are included in noncurrent liabilities under other accrued liabilities. We recognized approximately $320,000 of contract liabilities in the three months ended September 30, 2020 and approximately $45,000 in the three months ended September 30, 2019. We recognized approximately $808,000 of contract liabilities in the nine months ended September 30, 2020 and approximately $157,000 in the nine months ended September 30, 2019.    

 

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 September 30, 2020. 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

 

In February 2016, the FASB issued 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. This guidance was effective for us on January 1, 2019. We adopted the standard using the modified retrospective method which applied to leases that exist or were entered into on or after January 1, 2019. The Company elected to utilize the package of practical expedients that allows to 1) not reassess whether any expired or existing contracts are or contain leases, 2) retain the existing classification of lease contracts as of the date of adoption and 3) not reassess initial direct costs for any existing leases. 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 and quantitative requirements, providing additional information about the amounts recorded in the financial statements.   

 

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On January 1, 2019, upon adoption of ASU 2016-02, the Company recorded an Operating Lease ROU of $599,308, a short-term operating lease liability of $100,844 and a long-term operating lease liability of $498,464. The Company used an estimated incremental borrowing rate of 6%, which approximates our fixed CoBank, ACB (CoBank) borrowing rate to determine the inception present value at January 1, 2019. The terms of our leases range from two to seventeen years.

 

The following table includes the ROU and operating lease liabilities as of September 30, 2020.

 

 

 

Maturity analysis under these lease agreements are as follows:

 

 

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 nine months ended September 30, 2020 was $130,277 and $405,213. Lease expense for the three and nine months ended September 30, 2019 was $226,357 and $294,758.

 

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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.
	Level 2		Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs that are derived principally from or corroborated by observable market data.
	Level 3		Inputs are derived from valuation techniques where one or more significant inputs or value drivers are unobservable.

 

 

   

 

We have used financial derivative instruments to manage our overall cash flow exposure to fluctuations in interest rates. We accounted for derivative instruments in accordance with GAAP that requires derivative instruments to be recorded on the balance sheet at fair value. Changes in fair value of derivative instruments must be recognized in earnings unless specific hedge accounting criteria are met, in which case, the gains and losses are included in other comprehensive income rather than in earnings.

 

We have entered into interest rate swap agreements (IRSAs) with our lender, CoBank, to manage our cash flow exposure to fluctuations in interest rates. These instruments are designated as cash flow hedges and are effective at mitigating the risk of fluctuations on interest rates in the market place. 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 agreement was determined based on Level 2 inputs.

 

Other Financial Instruments

 

Other Investments - We conducted an evaluation of our investments in all of our investees in connection with the preparation of our audited financial statements at December 31, 2019. As of September 30, 2020, 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.

 

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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 discounted cash flows 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 $49,903,029 at September 30, 2020 and December 31, 2019.   

 

In 2019 and 2018, we engaged an independent valuation firm to aid in the completion of our annual impairment testing for existing goodwill. For 2019 and 2018, the testing results indicated no impairment charge to goodwill as the determined fair value was sufficient to pass the first step of the impairment test.  

 

Our intangible assets subject to amortization consist of acquired customer relationships, regulatory rights and trade names. We amortize intangible assets with finite lives over their respective estimated useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment. In addition, we periodically reassess the carrying value, useful lives and classifications of our identifiable intangible assets.

 

The components of our identified intangible assets are as follows:

 

 

Amortization expense related to the definite-lived intangible assets was $2,492,828 and $2,492,827 for the nine months ended September 30, 2020 and 2019. Amortization expense for the remaining three months of 2020 and the five years subsequent to 2020 is estimated to be:

 

● (September 1 – December 31)		$	830,943
● 2021		$	3,323,726
● 2022		$	1,952,376
● 2023		$	1,660,295
● 2024		$	1,623,654
● 2025		$	1,618,732

 

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Note 6 – Secured Credit Facility

 

On July 31, 2018, we entered into an Amended and Restated master loan agreement (MLA) with CoBank. This MLA refinanced and replaced the existing credit facility between CoBank and Nuvera and its subsidiaries. Nuvera and its respective subsidiaries also have entered into security agreements under which substantially all the assets of Nuvera and its respective subsidiaries have been pledged to CoBank as collateral. In addition, Nuvera and its respective subsidiaries have guaranteed all the obligations under the credit facility. These mortgage notes are required to be paid in quarterly installments covering principal and interest, beginning in the year of issue and maturing on July 31, 2025.  

 

We generally use variable-rate debt to finance our operations, capital expenditures and acquisitions. These variable-rate debt obligations expose us to variability in interest payments due to changes in interest rates. The terms of our credit facility with CoBank require that we enter into interest rate agreements designed to protect us against fluctuations in interest rates, in an aggregate principal amount and for a duration determined under the credit facility.

 

As described in Note 7 – “Interest Rate Swaps,” on August 1, 2018 we entered into an IRSA with CoBank covering 25 percent of our existing debt balance or $16,137,500 of our aggregate indebtedness to CoBank at August 1, 2018. As of September 30, 2020, our IRSA covered $13,544,150, with a weighted average rate of 5.52%.

 

As described in Note 7 – “Interest Rate Swaps,” on August 29, 2019 we entered into a second IRSA with CoBank covering an additional $42,000,000 of our aggregate indebtedness to CoBank at August 29, 2019. As of September 30, 2020, our IRSA covered $37,961,835, with a weighted average rate of 3.75%.

 

Our remaining debt of $11.2 million ($9.9 million available under the revolving credit facilities and $1.2 million currently outstanding) remains subject to variable interest rates at an effective weighted average interest rate of 2.65%, as of September 30, 2020.   

 

Our loan agreements include restrictions on our ability to pay cash dividends to our stockholders. However, we are allowed to pay dividends (a) (i) in an amount up to $2,700,000 in any year if our “Total Leverage Ratio,” that is, the ratio of our “Indebtedness” to “EBITDA” (earnings before interest, taxes, depreciation and amortization – as defined in the loan documents) is greater than 2.00 to 1.00, and (ii) in any amount if our Total Leverage Ratio is less than 2.00 to 1.00, and (b) in either case, if we are not in default or potential default under the loan agreements. Our current Total Leverage Ratio at September 30, 2020 is 2.05. 

 

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 September 30, 2020, 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 $2,889,000 loan under the Small Business Administration’s (SBA) Payroll Protection Program (PPP), which was established as part of the Coronavirus Aid, Relief Economic Security Act, or the CARES Act. The PPP Loan is unsecured and is evidenced by a note in the favor of Citizens Bank Minnesota as the lender.

 

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The interest rate on the Note is 1.0% per annum. Payments of principal and interest are deferred for 180 days from the date of the Note (the deferral period). The PPP provides a mechanism for forgiveness of up to the full amount borrowed as long as Nuvera uses the loan proceeds during the 24-week period after the loan origination for eligible purposes, including U.S. payroll costs, certain benefit costs, rent and utilities costs, and maintains its employment and compensation levels, subject to certain other requirements and limitations. The amount of the loan forgiveness is subject to reduction, among other things, if Nuvera terminates employees or reduces salaries or wages during the 24-week period. Any unforgiven portion of the PPP Loan is payable over a two-year term, with payments deferred during the deferral period. Nuvera is permitted to prepay the Note at any time without payment of any premium. The Note contains customary events of default, including, among others, those relating to failure to make a payment, bankruptcy, material defaults or other indebtedness, breaches of representations, and material adverse changes. The Company has adhered to all guidelines under the terms of the Note and applied for debt forgiveness in August, 2020.  

 

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 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.

 

To meet this objective, on August 1, 2018 we entered into an IRSA with CoBank covering 25 percent of our existing outstanding debt balance or $16,137,500 of our aggregate indebtedness to CoBank at August 1, 2018. The swap effectively locked in the interest rate on 25 percent of our variable-rate debt through July 2025. Under this IRSA, we have changed the variable rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the IRSA, we pay a fixed contractual interest rate and (i) make an additional payment if the LIBOR variable rate payment is below a contractual rate or (ii) receive a payment if the LIBOR variable rate payment is above the contractual rate.

 

On August 29, 2019 we entered into a second IRSA with CoBank covering an additional $42,000,000 of our aggregate indebtedness to CoBank at August 29, 2019. The swap effectively locked in a significant portion of our variable-rate debt through July 2025. Under this IRSA, we have changed the variable rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the IRSA, we pay a fixed contractual interest rate and (i) make an additional payment if the LIBOR variable rate payment is below a contractual rate or (ii) receive a payment if the LIBOR variable rate payment is above the contractual rate.

 

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.

 

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Our IRSAs under our credit facilities qualifies as a cash flow hedges for accounting purposes under GAAP. We reflect the effect of this hedging transaction 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. At September 30, 2020, the fair value liability of the swaps were $3,033,710, which has been recorded net of deferred tax benefit of $865,821, resulting in the $2,167,889 in accumulated other comprehensive loss. 

 

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-optic 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. In the nine months ended September 30, 2020 we recorded a gain of $47,640 and in the nine months ended September 30, 2019 we recorded a loss of $104,044 on one of our investments.    

 

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 September 30, 2020, we have recorded a liability of $321,446 in connection with the guarantee on this loan. This guarantee may be exercised if FiberComm, LC does not make its required payments on this note.

                                                                           

Note 10 – Restricted Stock Units (RSU)

 

On February 24, 2017, our BOD adopted the 2017 Omnibus Stock Plan (the Plan) effective May 25, 2017. The shareholders of the Company approved the Plan at the May 25, 2017 Annual Meeting of Shareholders. The Plan enables the Company to grant stock incentive awards to current and new employees, including officers, and to Board members and service providers. The Plan permits stock incentive awards in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, RSUs, performance stock, performance units, and other awards in stock or cash. The Plan permits the issuance of up to 625,000 shares of our Common Stock in any of the above stock awards. As of September 30, 2020, 570,980 shares remain available to be issued under the Plan.

 

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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 RSUs are accounted for as they occur. Each executive officer received or will 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.

 

RSUs currently issued or forfeited is as follows:

 

 

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 local communications network. No single customer accounted for a material portion of our consolidated revenues.

 

The Communications Segment operates the following incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs) and has investment ownership interests as follows:

 

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Communications Segment

 

●	ILECs:
	▪		Nuvera Communications, Inc., the parent company;
	▪		Hutchinson Telephone Company (HTC), a wholly-owned subsidiary of Nuvera;
	▪		Peoples Telephone Company, a wholly-owned subsidiary of Nuvera;
	▪		Scott-Rice Telephone Co., a wholly-owned subsidiary of Nuvera;
	▪		Sleepy Eye Telephone Company, a wholly-owned subsidiary of Nuvera;
	▪		Western Telephone Company, a wholly-owned subsidiary of Nuvera.
●	CLECs:
	▪		Nuvera, located in Redwood Falls, Minnesota; and
	▪		Hutchinson Telecommunications, Inc., a wholly-owned subsidiary of HTC, located in Litchfield and Glencoe, Minnesota;
●	Our investments and interests in the following entities include some management responsibilities:
	▪		FiberComm, LC – 20.00% subsidiary equity ownership interest. FiberComm, LC is located in Sioux City, Iowa;
	▪		Broadband Visions, LLC (BBV) – 24.30% subsidiary equity ownership interest. BBV provides video headend and Internet services;
	▪		Independent Emergency Services, LLC (IES) – 14.29% subsidiary equity ownership interest. IES is a provider of E-911 services to the State of Minnesota as well as a number of counties located in Minnesota;
	▪		SM Broadband, LLC (SMB) – 10.00% subsidiary equity ownership interest. SMB provides network connectivity for regional businesses.

 

Note 12 – Commitments and Contingencies

 

We are involved in certain contractual disputes in the ordinary course of business. We do not believe the ultimate resolution of any of these existing matters will have a material adverse effect on our financial position, results of operations or cash flows. We did not experience any changes to material contractual obligations in the first nine months of 2020. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for the discussion relating to commitments and contingencies.

 

Note 13 – Broadband Grants

 

In November 2017, the Company was awarded a broadband grant from the Minnesota Department of Employment and Economic Development (DEED). The grant provided up to 42.6% 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 was eligible to receive $736,598 of the $1,727,998 total project costs. The Company provided the remaining 57.4% matching funds. Construction and expenditures for these projects began in 2018. We have received $650,208 for these projects as of September 30, 2020.

 

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 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 received any funds for these projects as of September 30, 2020. 

 

Note 14 – Subsequent Events

 

We have evaluated and disclosed subsequent events through the filing date of this Quarterly Report on Form 10-Q.

 

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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 are typically preceded by the words “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “targets”, “projects”, “will”, “may”, “continues”, and “should”, and variations of these words and similar expressions. 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. 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.

 

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, 2019, 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. Our businesses provide local telephone 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 the third quarter of 2020, 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 only slightly offset the loss in customers we have experienced in our legacy voice and video products. We also expect that due to number of job losses due to the COVID-19 pandemic that a number of customers may have difficulty in paying for their existing services which may affect our ability to ultimately collect from and retain those customers and;

 

●      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.

 

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At the end of the third quarter of 2020, many of the markets in which we operate had begun to ease restrictions that were in place earlier in the period. This is having two effects.

 

●      The first is to improve the outlook in the sales and installation of our internet products and;

 

●      The second is that the increased traffic on our networks has somewhat eased as we had made substantial investments in the second and third quarters of 2020 to accommodate the increased traffic we had seen on our networks due to the pandemic.

 

However, as of the date of this filing, viral infections have begun to increase again and the State of Minnesota has implemented a mandatory mask requirement for all state residents, which may result in the resumption of restrictions in certain markets in which we operate. 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.

 

With respect to liquidity, we continue to evaluate and limit costs and spending across our organization. This includes limiting or eliminating discretionary spending and non-essential capital investment expenditures. As of the end of third quarter of 2020, we have a significant portion of our $10M 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 business 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 business 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 April 16, 2020, Nuvera received a $2,889,000 loan under the SBA’s PPP. The PPP is 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 are used for payroll, rent and utilities. Nuvera has 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.

 

●      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 September 30, 2020.    

 

●      On August 29, 2019, the Company entered into a second IRSA with CoBank covering an additional $42,000,000 of our aggregate indebtedness to CoBank at August 29, 2019. The swap effectively locked in a significant portion of our variable-rate debt through July, 2025. Under this IRSA, we have changed the variable rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the IRSA, we pay a fixed contractual interest rate and (i) make an additional payment if the LIBOR variable rate payment is below a contractual rate or (ii) receive a payment if the LIBOR variable rate payment is above the contractual rate.

 

●      On August 27, 2019, the Company announced that it had hired Glenn H. Zerbe as Chief Executive Officer (CEO) of the Company effective Tuesday, September 3, 2019. Mr. Zerbe most recently served as Vice President of Sales for Frontier Communications Corporation, where he held positions of increasing responsibility since joining Frontier in 2011. Prior to his employment with Frontier, Mr. Zerbe had more than 20 years of sales, marketing and management experience in the communications industry, with companies such as Spanlink, Cisco Systems, SBC, AT&T and IBM. Mr. Zerbe replaced former CEO Bill D. Otis who announced his retirement on April 15, 2019. Mr. Otis’s actual retirement date was effective December 31, 2019. Mr. Otis will continue to provide consulting services to ensure a smooth and successful leadership transition. Mr. Otis will also continue to serve on the BOD after the effective date of his retirement. The Company recognized approximately $1.06 million of one-time expenses associated with the transition of the new CEO and payments to a former executive officer in 2019. A significant portion of these one-time expenses occurred in the third and fourth quarters of 2019.

 

●      On February 27, 2019, the Company’s BOD authorized and directed the Company to accept the FCC’s revised offer of A-CAM support and the revised associated service deployment obligations. Under the revised FCC offer Notice, the Company will be entitled to annually receive (i) $596,084 for its Iowa operations and (ii) $8,354,481 for its Minnesota operations. The Company will receive the revised A-CAM offer over the next 10 years starting in 2019. The Company will use the additional support that it receives through the A-CAM program to continue to meet its defined broadband build-out obligations, which the Company is currently completing. A letter of acceptance to elect the revised A-CAM support was filed by the Company with the FCC on March 8, 2019. The FCC accepted the Company’s letter on March 11, 2019. In the second quarter of 2019, the Company received a true-up payment for support back to January 1, 2019 and an increased monthly payment representing the new revised A-CAM support offer. 

 

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●      Net income for the third quarter of 2020 totaled $2,460,354, which was a $583,119, or 31.06% increase compared to the third quarter of 2019. This increase was primarily due to an increase in operating income and a decrease in interest expense, all of which are described below.  

 

●      Consolidated revenue for the third quarter of 2020 totaled $16,340,573, which was a $189,599 or 1.17% increase compared to the third quarter of 2019. This increase was primarily due to increases in data and other revenues, partially offset by decreases in network access and local service revenues.

 

Business Trends

 

Included below is a synopsis of business trends management believes will continue to affect our business in 2020. 

 

Voice and switched access revenues are expected to continue to be adversely impacted by future declines in access lines due to competition in the communications industry from CATV providers, VoIP providers, wireless, other competitors, emerging technologies and the on-going effects of COVID-19. As we experience access line losses, our switched access revenue will continue to decline consistent with industry-wide trends. A combination of changing minutes of use, carriers optimizing their network costs, lower demand for dedicated lines and downward rate pressures may affect our future voice and switched access revenues. Access line losses totaled 1,405 or 5.50% for the twelve months ended September 30, 2020 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 are included below:

 

 

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Revenue

 

Local Service – We receive recurring revenue for basic local 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 telephone services, our customers may choose from a variety of custom calling features such as call waiting, call forwarding, caller identification and voicemail. Local service revenue was $1,664,700, which is $121,059 or 6.78% lower in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and was $5,095,754 which is $371,116 or 6.79% lower in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. These decreases were primarily due to a decrease in access lines, which has been accelerated due to the on-going effects of COVID-19, partially offset by a combination of rate increases introduced into several of our markets in the first quarter of 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 local 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 telecommunications carriers for the use of our facilities to terminate or originate traffic on our network. Additionally, we bill SLCs to substantially all of our customers for access to the public switched network. These monthly SLCs are regulated and approved by the FCC. In addition, network access revenue was derived from several federally administered pooling arrangements designed to provide network support and distribute funding to ILECs. Network access revenue was $1,419,902, which is $397,771 or 21.88% lower in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and was $4,636,682 which is $956,413 or 17.10% lower in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. These decreases were primarily due to lower minutes of use on our network and lower special access revenues, which has been accelerated due to 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 – 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 revenue was $3,081,057, which is $64,681 or 2.14% higher in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and was $9,158,795, which is $104,556 or 1.15% higher in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. These increases were primarily due to a combination of rate increases introduced into several of our markets over the course of the last several years, partially offset by a decline in customers, which has been accelerated due to the on-going effects of COVID-19.

 

Data – 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 revenue was $5,924,036, which is $477,191 or 8.76% higher in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and was $17,406,412, which is $1,156,001 or 7.11% higher in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. These increases were primarily due to an increase in data customers. 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 – Prior to 2017, the Company received support from the FUSF based on the pooling and redistribution of revenues based on a company’s actual or average costs. With the acquisition of Scott-Rice, the company now receives FUSF for Scott-Rice based on their average costs. See Note 2 – “Revenue Recognition” for a discussion regarding FUSF.

 

A-CAM/FUSF support totaled $2,995,736, which is $24,186 or 0.80% lower in the three months ended September 30, 2020 compared to the three months ended September 30, 2019. A-CAM/FUSF support totaled $9,089,391, which is $34,133 or 0.37% lower in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. These decreases were due to lower FUSF support received for Scott-Rice.

 

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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, 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 $1,255,142, which is $190,743 or 17.92% higher in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and was $3,264,560, which is $160,936 or 5.19% higher in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. 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 $7,050,930, which is $82,751 or 1.16% lower in the three months ended September 30, 2020 compared to the three months ended September 30, 2019.  This decrease was due to cost containment measures implemented by the Company due to COVID-19. Cost of services (excluding depreciation and amortization) was $20,869,367, which is $358,408 or 1.75% higher in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This increase was primarily due to higher programming costs from video content providers, higher costs associated with increased maintenance and support agreements on our equipment and software, and the cost to maintain a highly-skilled workforce, partially offset by cost containment measures implemented by the Company due to COVID-19.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $2,308,662, which is $381,680 or 14.19% lower in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and was $7,537,251, which is $272,697 or 3.49% lower in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. These decreases were primarily due to the Company recognizing one-time expenses associated with the transition of the new CEO, which occurred primarily in the third and fourth quarters of 2019 and did not reoccur in 2020 and the implementation of cost containment measures implemented by the Company due to COVID-19.

 

Depreciation and Amortization

 

Depreciation and amortization was $3,019,123, which is $16,543 or 0.54% lower in the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This decrease was primarily due to portions of our legacy telephone network becoming fully depreciated. This decrease was partially offset by an in increase in our broadband property, plant and equipment, reflecting our continual investment in technology and infrastructure to meet our customers’ demands for products and services. Depreciation and amortization was $9,119,649, which is $34,079 or 0.38% higher in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This increase was 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 $3,961,858, which is $670,573 or 20.37% higher in the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This increase was primarily due to higher operating revenues and lower operating expenses, all of which are described above.  Operating income was $11,125,327, which is $59,959 or 0.54% lower in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This decrease was 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 $613,541, which is $213,839 or 25.84% lower in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and was $1,907,898, which is $751,871 or 28.27% lower in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. These decreases were primarily due to lower outstanding debt balances and lower interest rates in connection with our credit facility with CoBank.     

 

Interest and dividend income was $5,936, which is $16,186 or 73.17% lower in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and was $104,465, which is $28,715 or 21.56% lower in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. These decreases were primarily due to decreases in dividend income earned on our investments due to the timing of those dividend payments.  

 

Other income for the nine months ended September 30, 2020 and 2019 included a patronage credit earned with CoBank as a result of our debt agreements with them. The patronage credit allocated and received in 2020 was $647,369, compared to $403,786 allocated and received in 2019. 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 $36,956, which is $34,762 or 48.47% lower in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 and was $197,170, which is $62,465 or 24.06% lower in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Other investment income is primarily from our equity ownership in several partnerships and limited liability companies.

 

Income Taxes

 

Income tax expense was $956,801, which is $226,766 or 31.06% higher in the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This increase was primarily due to an increase in operating income and a decrease in interest expense. Income tax expense was $2,887,582, which is $271,356 or 10.37% higher in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This increase was primarily due to an increase in CoBank patronage dividends and a decrease in interest expense, partially offset by a decrease in operating income. The effective income tax rate for the nine months ending September 30, 2020 and 2019 was approximately 28.0%. 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 $140,740,323 at September 30, 2020, reflecting 60.8% equity and 39.2% debt. This compares to a capital structure of $136,342,185 at December 31, 2019, reflecting 59.2% equity and 40.8% 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 2.05 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, revolving credit facility and funds received under the PPP Loan in April (which were used to fund payroll costs), 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 the growth of our business; (iii) debt service; (iv) dividend payments on our stock and (v) potential acquisitions.

 

Our primary sources of liquidity for the nine months ended September 30, 2020 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. At September 30, 2020 we had a working capital surplus of $2,856,298. Also, at September 30, 2020, we had $9.9 million available under our revolving credit facility to fund any short-term working capital needs. The working capital surplus as of September 30, 2020 was primarily the result of increased cash balances.

 

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 our business, we believe that we will be able to meet our current and long-term cash requirements primarily through our operating cash flows and the receipt of PPP Loan funds (which were used to fund payroll costs), 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 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 have implemented a Company policy whereby we are conserving cash by eliminating discretionary spending and limiting our CapEx spending to critical projects including fulfilling our A-CAM build requirements. We are experiencing disruptions in our business as we implement these 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:

 

 

Cash Flows from Operating Activities

 

Cash generated by operations in the first nine months of 2020 was $13,624,806, compared to cash generated by operations of $17,077,198 in the first nine months of 2019. The decrease in cash from operating activities in 2020 was primarily due to the timing of receipts of receivables, other accrued liabilities and income taxes.

 

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 at September 30, 2020 was $6,891,742 compared to $2,993,000 at December 31, 2019.

 

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 $8,289,273 during the first nine months of 2020 compared to $7,688,615 during the first nine months of 2019. Capital expenditures relating to on-going operations were $7,894,696 for the nine months ended September 30, 2020 compared to $7,939,722 for the nine months ended September 30, 2019. 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 September 30, 2020, we had approximately $9.9 million available under our existing credit facility to fund capital expenditures and other operating needs.

 

Cash Flows Used in Financing Activities

 

Cash used in financing activities for the nine months ended September 30, 2020 was $1,436,791. This included long-term debt repayments of $3,469,215, the issuance of debt (PPP loan funds) of $2,889,000, draws on our revolving credit facility of $56,207, the repurchase of common stock of $238,612 and the distribution of $674,171 of dividends to stockholders. Cash used in financing activities for the nine months ended September 30, 2019 was $5,532,530. This included long-term debt repayments of $3,457,800, the repurchase of common stock of $104,802 and the distribution of $1,969,928 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 $2,856,298 as of September 30, 2020, with current assets of approximately $14.4 million and current liabilities of approximately $11.6 million, compared to a working capital deficit of $2,146,745 as of December 31, 2019. The ratio of current assets to current liabilities was 1.25 and 0.81 as of September 30, 2020 and December 31, 2019. The working capital surplus at September 30, 2020 was primarily the result of increased cash balances.  

 

At September 30, 2020 and December 31, 2019 we were in compliance with all stipulated financial ratios in our loan agreements.

 

Dividends and Restrictions

 

On May 6, 2020, the Company’s BOD decided that, given the continuing uncertainty about the severity and duration of the COVID-19 pandemic and its potential effect on the country’s economy generally and on the Company’s future sales and profitability specifically, as well as the Company’s need to preserve its liquidity and capital resources, the Company would (i) suspend declaring and paying a dividend in the second quarter of 2020 and (ii) temporarily suspend future purchases under its Stock Repurchase Program.

 

On August 25, 2020, the Company’s BOD determined that it would (i) continue to suspend declaring and paying a dividend in the third quarter of 2020 and (ii) continue to temporarily suspend future purchases under its Stock Repurchase Program. The Company will continue to monitor the COVID-19 pandemic and make decisions about future dividends and stock repurchases as more information becomes available.

 

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 declared a quarterly dividend of $0.13 per share for the second and third quarters of 2019 and $0.12 per share for the first quarter of 2019, which totaled $674,092 for the third quarter, $674,805 for the second quarter and $621,031 for the first quarter.

 

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 at September 30, 2020 is 2.05. 

 

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.

 

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Long-Term Debt

 

See Note 6 – “Secured Credit Facility” for information pertaining to our long-term debt.

 

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 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. 

 

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Item 1A. Risk Factors.

 

Not required for a smaller reporting company.

 

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 nine months ending September 30, 2020.

 

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information.

 

PPP Loan and Consent

 

On April 16, 2020, Nuvera received approximately $2.9 million in support from the U.S. federal government under the PPP established as part of the Coronavirus Aid, Relief Economic Security Act, or the CARES Act. The PPP Loan is unsecured and is evidenced by a note in the favor of Citizens Bank Minnesota as the lender.

 

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The interest rate on the Note is 1.0% per annum. Payments of principal and interest are deferred for 180 days from the date of the Note (the deferral period). The PPP provides a mechanism for forgiveness of up to the full amount borrowed as long as Nuvera uses the loan proceeds during the 24-week period after the loan origination for eligible purposes, including U.S. payroll costs, certain benefit costs, rent and utilities costs, and maintains its employment and compensation levels, subject to certain other requirements and limitations. The amount of the loan forgiveness is subject to reduction, among other things, if Nuvera terminates employees or reduces salaries or wages during the 24-week period. Any unforgiven portion of the PPP Loan is payable over a two-year term, with payments deferred during the deferral period. Nuvera is permitted to prepay the Note at any time without payment of any premium. The Note contains customary events of default, including, among others, those relating to failure to make a payment, bankruptcy, material defaults or other indebtedness, breaches of representations, and material adverse changes. The Company has adhered to all guidelines under the terms of the Note and applied for debt forgiveness in August, 2020. 

 

In connection with the PPP Loan, Nuvera also received a Consent regarding the PPP Loan, dated as of April 13, 2020 from CoBank, pursuant to Nuvera’s Second Amended and Restated Master Loan Agreement with CoBank, dated as of July 31, 2018, as amended.

 

Item 6. Exhibits.

           

Exhibit

Number            Description

 

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:  November 9, 2020	By	/s/ Glenn H. Zerbe
		Glenn H. Zerbe, President and Chief Executive Officer
Dated:  November 9, 2020	By	/s/ Curtis O. Kawlewski
		Curtis O. Kawlewski, Chief Financial Officer

 

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