UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_________________

 

FORM 10-Q

 

 

 (Mark One)

 

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

 

For the quarterly period ended SeptemberJune 30, 20172019

 

o£     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

 

NEW ULM TELECOM,NUVERA COMMUNICATIONS, INC.

(Exact name of Registrant as specified in its charter)

 

Minnesota

(State or other jurisdiction of

incorporation or organization)

41-0440990

(I.R.S. Employer

Identification No.)

 

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 S  No  £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 S 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” orand “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):  

 

£ Large accelerated filer 

£S Accelerated filer

£ Non-accelerated filer 

S 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 S

 

Securities registered pursuant to Section 12(b) of the Act:  None.

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock - $1.66 par value

NUVR

OTCQB Marketplace

The total number of shares of the registrant’s common stock outstanding as of November 14, 2017: 5,160,065.August 9, 2019: 5,190,810.

 

1


 

TABLE OF CONTENTStable of contents

PART I – FINANCIAL INFORMATION

Item 1

Financial Statements

3-8 3-9

Consolidated Statements of Income (unaudited) for the Three and NineSix Months Ended SeptemberJune 30, 20172019 and 20162018

3

Consolidated Statements of Comprehensive  Income (unaudited) for the Three and NineSix Months Ended SeptemberJune 30, 20172019 and 20162018

4

Consolidated Balance Sheets (unaudited) as of SeptemberJune 30, 20172019 and December 31, 20162018

5-6

Consolidated Statements of Cash Flows (unaudited) for the NineSix Months Ended SeptemberJune 30, 20172019 and 20162018

7

Consolidated Statements of Stockholders’ Equity (unaudited) for the Year Ended December 31, 2016Three and for the NineSix Months ended SeptemberJune 30, 20172019 and 2018

8 8-9

Condensed Notes to Consolidated Financial Statements (unaudited)

9-1910-29

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19-2929-39

Item 3

Quantitative and Qualitative Disclosures About Market Risk

2939

Item 4

Controls and Procedures

3039-40

PART II – OTHER INFORMATION

Item 1

Legal Proceedings

3040

Item 1A

Risk Factors

3040

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

3040

Item 3

Defaults Upon Senior Securities

3040

Item 4

Mine Safety Disclosures

3040

Item 5

Other Information

3140

Item 6

Exhibits Listing

3141

Signatures

3242

Exhibits

33-36

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. 1. Financial Statements

NEW ULM TELECOM, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

NUVERA COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

NUVERA COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

 

 

 

 

 

Three Months Ended

September 30,

Nine Months Ended

September 30,

Three Months Ended

June 30,

Six Months Ended

June 30,

2017

2016

2017

2016

2019

2018

2019

2018

OPERATING REVENUES:

 

 

 

 

 

 

 

 

Local Service

$

1,463,734

$

1,479,214

$

4,422,480

$

4,413,315

$

           1,827,178

$

           1,300,386

$

            3,681,111

$

             2,627,603

Network Access

1,809,143

1,860,389

 

5,197,332

 

5,446,121

           1,778,167

           1,630,637

            3,775,422

             3,295,652

Video

2,444,849

2,353,013

7,234,486

6,993,456

           3,048,826

           2,406,803

            6,037,863

             4,716,201

Data

 

2,992,250

2,966,475

9,083,545

8,631,216

           5,401,856

           3,328,998

          10,803,566

             6,582,966

A-CAM/FUSF

1,961,457

926,163

6,011,779

2,740,159

           3,365,229

           1,958,979

            6,103,602

             3,907,430

Other Non-Regulated

1,178,600

1,187,517

3,245,532

3,407,436

 

           1,047,115

           1,082,638

 

            2,039,225

             2,191,775

Total Operating Revenues

11,850,033

10,772,771

35,195,154

31,631,703

 

         16,468,371

 

         11,708,441

 

          32,440,789

 

           23,321,627

 

OPERATING EXPENSES:

Plant Operations (Excluding Depreciation

and Amortization)

 

 

2,008,823

 

 

1,935,361

 

 

6,045,984

 

 

6,056,866

Plant Operations (Excluding Depreciation
and Amortization)

           3,017,078

           2,084,011

            5,873,706

             4,100,915

Cost of Video

2,009,678

1,966,977

6,110,767

5,962,747

           2,677,029

           2,277,022

            5,262,655

             4,428,703

Cost of Data

566,843

563,034

1,665,019

1,574,562

              576,486

              588,205

            1,173,793

             1,136,508

Cost of Other Nonregulated Services

592,393

528,984

1,600,113

1,447,269

              556,161

              572,429

            1,067,124

             1,100,305

Depreciation and Amortization

2,414,445

2,444,064

7,281,747

7,326,505

           3,013,579

           2,280,354

            6,049,904

             4,536,202

Selling, General and Administrative

1,660,991

1,778,564

5,346,808

5,255,747

           2,399,875

           2,196,830

            5,119,606

             4,161,846

Total Operating Expenses

9,253,173

9,216,984

28,050,438

27,623,696

 

         12,240,208

 

           9,998,851

 

          24,546,788

 

           19,464,479

OPERATING INCOME

2,596,860

1,555,787

7,144,716

4,008,007

 

           4,228,163

 

           1,709,590

 

            7,894,001

 

             3,857,148

OTHER INCOME (EXPENSE):

 

Interest Expense

(288,258)

(350,545)

(910,024)

(1,078,833)

OTHER (EXPENSE) INCOME

Interest Expense

            (894,568)

            (286,004)

           (1,832,389)

               (572,939)

Interest/Dividend Income

22,283

16,641

95,401

91,624

                90,281

                87,656

               111,058

                141,517

Interest During Construction

16,880

3,334

48,302

15,368

                39,381

                36,913

                 76,082

                  68,758

Gain (Loss) on Investments

                        -

                       -

              (104,044)

                          -

CoBank Patronage Dividends

-

-

337,137

386,843

                        -

                       -

               403,786

                290,895

Other Investment Income

93,626

74,456

255,742

405,817

                89,405

                90,680

               187,917

                145,221

Total Other Income (Expense)

(155,469)

(256,114)

(173,442)

(179,181)

 

            (675,501)

 

              (70,755)

 

           (1,157,590)

 

                  73,452

INCOME BEFORE INCOME TAXES

2,441,391

1,299,673

6,971,274

3,828,826

           3,552,662

           1,638,835

            6,736,411

             3,930,600

INCOME TAXES

1,025,382

545,862

2,927,937

1,608,108

 

              994,742

 

              458,878

 

            1,886,191

 

             1,100,570

NET INCOME

$

1,416,009

$

753,811

$

4,043,337

$

2,220,718

$

           2,557,920

$

           1,179,957

$

            4,850,220

$

             2,830,030

BASIC AND DILUTED

NET INCOME PER SHARE

$

0.27

$

0.15

$

0.78

$

0.43

NET INCOME PER SHARE

$

0.49

$

0.23

$

0.94

$

0.55

DIVIDENDS PER SHARE

$

0.1000

$

0.0900

$

0.2950

$

0.2675

$

0.1300

$

0.1200

$

0.2500

$

0.2200

WEIGHTED AVERAGE SHARES OUTSTANDING

5,158,830

 

5,139,375

 

5,151,417

 

5,131,606

WEIGHTED AVERAGE SHARES OUTSTANDING

 

           5,187,623

 

           5,171,597

 

            5,182,439

 

             5,166,532

Certain historical numbers have been changed to conform to the current year's presentation.

Certain historical numbers have been changed to conform to the current year's presentation.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

 

NEW ULM TELECOM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2017

2016

2017

2016

Net Income

$

           1,416,009

 

$

753,811

 

$

4,043,337

 

$

2,220,718

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains (Losses) on Interest Rate Swaps

(1,256)

                69,693

41,672

(83,863)

Income Tax (Expense) Benefit Related to Unrealized

    Gains/Losses on Interest Rate Swaps

 

 

 

                    508

 

 

 

 

 

(28,205)

 

 

 

 

 

(16,865)

 

 

 

 

 

33,940

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss):

 

(748)

 

                41,488

 

24,807

 

(49,923)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

$

           1,415,261

$

               795,299

$

4,068,144

$

2,170,795

NUVERA COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three Months Ended

June 30,

Six Months Ended

June 30,

2019

2018

2019

2018

Net Income

$

         2,557,920

$

        1,179,957

$

           4,850,220

$

      2,830,030

Other Comprehensive Loss:

Unrealized Loss on Interest Rate Swaps

          (318,978)

           (22,579)

            (480,881)

         (28,178)

Income Tax Benefit Related to Unrealized 
    Loss on Interest Rate Swaps

             91,037

              6,444

             137,244

            8,043

Other Comprehensive Loss:

 

          (227,941)

 

           (16,135)

 

            (343,637)

 

         (20,135)

Comprehensive Income

$

         2,329,979

$

        1,163,822

$

           4,506,583

$

      2,809,895

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

 

NEW ULM TELECOM, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

NUVERA COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

NUVERA COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

ASSETS

ASSETS

ASSETS

September 30,

2017

December 31,

2016

June 30,

2019

December 31,

2018

CURRENT ASSETS:

 

 

 

 

Cash

$

              7,184,154

$

            1,584,769

Cash

$

2,167,181

$

616,114

Receivables, Net of Allowance for

Doubtful Accounts of $79,000 and $43,200

 

 

 

2,183,880

 

 

 

 

 

2,232,571

Receivables, Net of Allowance for
Doubtful Accounts of $108,000 and $113,000

              2,745,010

            3,977,322

Income Taxes Receivable

568,646

27,559

                          -

               305,751

Materials, Supplies, and Inventories

 

1,913,536

 

 

1,860,157

              2,783,990

            2,581,389

Financial Derivative Instruments

 

18,860

 

 

 -

Prepaid Expenses

 

618,431

 

724,891

Prepaid Expenses and Other Current Assets

 

              1,277,302

 

               770,589

Total Current Assets

 

7,470,534

 

 

5,461,292

 

            13,990,456

 

            9,219,820

INVESTMENTS & OTHER ASSETS:

 

 

 

 

 

Goodwill

            49,903,029

          49,903,029

Goodwill

39,805,349

39,805,349

Intangibles

 

16,874,427

 

 

18,726,239

            25,747,135

          27,409,020

Other Investments

7,293,872

7,345,680

              9,913,417

            9,170,093

Deferred Charges and Other Assets

 

33,680

 

66,165

 

                   68,805

 

                 21,481

Total Investments and Other Assets

 

64,007,328

 

 

65,943,433

 

            85,632,386

 

          86,503,623

PROPERTY, PLANT & EQUIPMENT:

 

 

 

 

 

Telecommunications Plant

          155,588,260

        153,138,295

Telecommunications Plant

125,288,361

122,571,148

Other Property & Equipment

 

17,506,635

 

 

16,801,894

            22,447,304

          21,705,180

Video Plant

 

10,376,067

 

10,321,263

 

            10,611,156

 

          10,541,648

Total Property, Plant and Equipment

 

153,171,063

 

 

149,694,305

          188,646,720

        185,385,123

Less Accumulated Depreciation

 

112,121,609

 

106,767,672

 

          125,009,555

 

        120,877,227

Net Property, Plant & Equipment

 

41,049,454

 

 

42,926,633

 

            63,637,165

 

          64,507,896

TOTAL ASSETS

$

112,527,316

 

$

114,331,358

$

          163,260,007

$

        160,231,339

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

 

NEW ULM TELECOM, INC.

CONSOLIDATED BALANCE SHEETS (continued)

(Unaudited)

NUVERA COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS (continued)

(Unaudited)

NUVERA COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS (continued)

(Unaudited)

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES AND STOCKHOLDERS' EQUITY

September 30,

2017

December 31,

2016

June 30,
2019

December 31,

2018

CURRENT LIABILITIES:

 

 

 

 

Current Portion of Long-Term Debt, Net of
Unamortized Loan Fees

$

            5,661,645

$

           4,511,844

Current Portion of Long-Term Debt, Net of

Unamortized Loan Fees

$

3,315,822

$

3,315,822

Accounts Payable

 

1,675,027

 

 

2,378,736

            2,652,096

           3,060,987

Accrued Income Taxes

               425,440

                        -

Other Accrued Taxes

135,477

180,215

               240,980

              229,128

Deferred Compensation

 

57,728

 

 

59,264

                 54,213

                55,201

Accrued Compensation

1,891,245

1,908,212

            2,090,590

           2,315,976

Other Accrued Liabilities

 

362,947

 

 

446,462

               724,351

              767,615

Total Current Liabilities

 

7,438,246

 

8,288,711

 

          11,849,315

 

         10,940,751

 

 

 

 

 

LONG-TERM DEBT, Net of Unamortized

Loan Fees

 

          54,813,979

 

         57,084,130

Loan Fees

 

24,682,670

 

 

28,298,064

NONCURRENT LIABILITIES:

 

 

 

 

 

Loan Guarantees

               340,538

              254,383

Loan Guarantees

185,052

213,802

Deferred Income Taxes

 

16,331,297

 

 

16,314,431

          16,003,543

         16,140,789

Other Accrued Liabilities

203,630

233,147

               658,481

              234,587

Financial Derivative Instruments

 

                       -  

 

 

22,812

               888,131

              407,250

Deferred Compensation

 

649,660

 

701,895

               550,681

 

              573,971

Total Noncurrent Liabilities

 

17,369,639

 

 

17,486,087

 

          18,441,374

 

         17,610,980

COMMITMENTS AND CONTINGENCIES:

 

                       -  

 

 

                          -  

                         -

                        -

STOCKHOLDERS' EQUITY:

 

 

 

 

 

Preferred Stock - $1.66 Par Value, 10,000,000 Shares
Authorized, None Issued

                         -

                        -

Preferred Stock - $1.66 Par Value, 10,000,000 Shares

Authorized, None Issued

                       -  

                          -  

Common Stock - $1.66 Par Value, 90,000,000 Shares

Authorized, 5,160,065 and 5,139,375 Shares Issued

and Outstanding

 

 

 

 

 

8,600,108

 

 

 

 

 

 

 

 

8,565,625

Accumulated Other Comprehensive Income (Loss)

11,227

(13,580)

Common Stock - $1.66 Par Value, 90,000,000 Shares
Authorized, 5,190,810 and 5,175,258 Shares Issued
and Outstanding

            8,651,350

           8,625,430

Accumulated Other Comprehensive Loss

             (634,658)

             (291,021)

Unearned Compensation

 

5,448

 

                          -  

               133,933

                79,784

Retained Earnings

 

54,419,978

 

 

51,706,451

          70,004,714

         66,181,285

Total Stockholders' Equity

 

63,036,761

 

60,258,496

 

          78,155,339

 

         74,595,478

 

 

 

 

 

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY

$

112,527,316

$

114,331,358

$

        163,260,007

$

       160,231,339

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


Table of Contents

 

NEW ULM TELECOM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

NUVERA COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

NUVERA COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Nine Months Ended

Six Months Ended

September 30,

 2017

  

September 30,

 2016

June 30,

2019

June 30,

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net Income

$

           4,850,220

$

         2,830,030

Net Income

$

             4,043,337

$

                     2,220,718

Adjustments to Reconcile Net Income to Net Cash

 

 

 

 

Provided by Operating Activities:

Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:

Depreciation and Amortization

 

                7,326,131

 

                        7,370,889

           6,100,238

         4,565,791

Unrealized Losses on Investments

              104,044

                      -

Undistributed Earnings of Other Equity Investments

 

                  (168,797)

 

                         (405,439)

Undistributed Earnings of Other Equity Investments

            (204,422)

          (128,372)

Noncash Patronage Refund

                        (105,145)

                           (96,711)

            (100,946)

            (76,485)

Distributions from Equity Investments

 

                          400,000

 

                           575,000

              200,000

            200,000

Stock Issued in Lieu of Cash Payment

                          147,351

                           147,238

              201,662

            146,251

Restricted Stock Compensation

 

                              5,448

 

                                    -  

Stock-based Compensation

                54,149

              31,479

Changes in Assets and Liabilities:

Receivables

 

                            70,423

 

                         (248,689)

           1,233,888

            237,184

Income Taxes Receivable

                        (541,087)

                         (143,392)

              305,751

          (213,985)

Inventories

 

                          (53,379)

 

                           441,740

            (202,601)

            371,940

Prepaid Expenses

                          183,667

                           406,361

            (413,410)

          (203,881)

Deferred Charges

 

                            10,753

 

                           (39,708)

              (48,900)

            (33,370)

Accounts Payable

                        (998,611)

                         (350,017)

            (197,775)

       (1,035,071)

Accrued Income Taxes

              425,440

          (676,508)

Other Accrued Taxes

 

                          (44,738)

 

                             56,624

                11,852

                2,392

Other Accrued Liabilities

                        (129,999)

                         (328,444)

            (393,642)

          (135,992)

Deferred Compensation

                          (53,771)

                           (57,022)

              (24,278)

            (25,554)

Net Cash Provided by Operating Activities

 

                     10,091,583

 

 

                        9,549,148

 

         11,901,270

 

         5,855,849

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Additions to Property, Plant, and Equipment, Net

                     (3,257,853)

                      (4,249,841)

         (4,119,328)

       (3,003,545)

Grants Received for Construction of Plant

              390,922

            323,319

Other, Net

 

                        (103,000)

 

                         (103,000)

            (106,959)

            (53,000)

Net Cash Used in Investing Activities

 

                     (3,360,853)

 

                      (4,352,841)

 

         (3,835,365)

 

       (2,733,226)

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

Principal Payments of Long-Term Debt

 

                     (2,025,000)

 

                      (2,025,000)

         (1,152,600)

       (1,350,000)

Changes in Revolving Credit Facility

 

                     (1,634,778)

 

                      (1,880,909)

Loan Origination Fees

              (18,084)

-

Dividends Paid

                     (1,519,885)

                      (1,372,812)

         (1,295,836)

       (1,137,037)

Net Cash Used in Financing Activities

 

                     (5,179,663)

 

 

                      (5,278,721)

 

         (2,466,520)

 

       (2,487,037)

NET INCREASE (DECREASE) IN CASH

 

                       1,551,067

 

                           (82,414)

           5,599,385

            635,586

CASH at Beginning of Period

 

                          616,114

 

 

                           551,824

 

           1,584,769

 

         1,842,092

CASH at End of Period

$

                       2,167,181

 

$

                           469,410

$

           7,184,154

$

         2,477,678

 

 

 

 

Supplemental cash flow information:

Cash paid for interest

$

897,301

 

$

                        1,047,309

$

1,803,485

$

            543,491

Net cash paid for income taxes

$

3,469,100

$

                        1,751,500

$

1,155,000

$

         1,991,000

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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NUVERA COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

THREE MONTHS ENDED JUNE 30, 2019

Accumulated

Other

Comprehensive

Income (Loss)

Common Stock

Unearned

Compensation

Retained

Earnings

Total

Equity

Shares

Amount

BALANCE on March 31, 2019

  5,181,249

  8,635,415

        (406,717)

          99,896

     67,957,596

     76,286,190

Director's Stock Plan

         9,561

       15,935

          164,003

          179,938

Restricted Stock Grant

          34,037

            34,037

Net Income

       2,557,920

       2,557,920

Dividends

         (674,805)

        (674,805)

Unrealized Loss on Interest Rate Swap

        (227,941)

        (227,941)

 

 

 

 

 

 

BALANCE on June 30, 2019

  5,190,810

  8,651,350

        (634,658)

        133,933

     70,004,714

     78,155,339

 

 

 

 

THREE MONTHS ENDED JUNE 30, 2018

Accumulated

Other

Comprehensive

Income (Loss)

Common Stock

Unearned

Compensation

Retained

Earnings

Total

Equity

Shares

Amount

BALANCE on March 31, 2018

  5,164,274

  8,607,123

           16,135

          21,792

     61,012,632

     69,657,682

Director's Stock Plan

       10,984

       18,307

          181,602

          199,909

Restricted Stock Grant

          23,307

            23,307

Net Income

       1,179,957

       1,179,957

Dividends

         (621,030)

        (621,030)

Unrealized Loss on Interest Rate Swap

          (16,135)

          (16,135)

 

 

 

 

 

 

BALANCE on June 30, 2018

  5,175,258

  8,625,430

                   -

          45,099

     61,753,161

     70,423,690

 

NEW ULM TELECOM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

YEAR ENDED DECEMBER 31, 2016 AND

NINE MONTHS ENDED SEPTEMBER 30, 2017

Accumulated

Other

Comprehensive

Income (Loss)

Common Stock

Unearned

Compensation

Retained

Earnings

Total

Equity

Shares

Amount

BALANCE on December 31, 2015

 5,116,826

 

 $

8,528,043

 

 $

 (18,687)

 

 $

-

 

 $

  50,561,016

 

 $

59,070,372

Director's Stock Plan

 12,411

 

 

20,685

 

 

 

 

 

 

 

 

  69,295

 

 

89,980

Employee Stock Plan

 10,138

16,897

  57,009

73,906

Net Income

 

 

 

 

 

 

 

 

 

 

 

2,854,487

 

 

2,854,487

Dividends

 (1,835,356)

 (1,835,356)

Unrealized Gain on Interest Rate Swap

 

 

 

 

 

 5,107

 

 

 

 

 

 

 

 

5,107

 

 

 

 

 

 

 

 

 

 

BALANCE on December 31, 2016

5,139,375

 

 

8,565,625

 

 

 (13,580)

 

 

 -  

 

 

 51,706,451

 

 

60,258,496

Director's Stock Plan

 12,668

 

 

21,113

 

 

 

 

 

 

 

 

128,840

 

 

149,953

Employee Stock Plan

  8,022

13,370

 61,235

74,605

Restricted Stock Compensation

 

 

 

 

 

 

 

 

 5,448

 

 

 

 

 

 5,448

Net Income

4,043,337

4,043,337

Dividends

 

 

 

 

 

 

 

 

 

 

 

(1,519,885)

 

 

 (1,519,885)

Unrealized Gain on Interest Rate Swap

24,807

24,807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE on September 30, 2017

  5,160,065

 $

8,600,108

 $

 11,227

 $

5,448

 $

54,419,978

 $

63,036,761

The accompanying notes are an integral part of these consolidated financial statements.

 

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NUVERA COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

SIX MONTHS ENDED JUNE 30, 2019

 

Accumulated

Other

Comprehensive

Income (Loss)

Common Stock

 

Unearned

Compensation

 

Retained

Earnings

 

Total

Equity

Shares

 

Amount

BALANCE on December 31, 2018

  5,175,258

$

  8,625,430

$

        (291,021)

$

          79,784

$

     66,181,285

$

     74,595,478

Directors' Stock Plan

         9,561

       15,935

          164,003

          179,938

Employee Stock Plan

         5,991

         9,985

          105,042

          115,027

Restricted Stock Grant

          54,149

            54,149

Net Income

       4,850,220

       4,850,220

Dividends

      (1,295,836)

     (1,295,836)

Unrealized Loss on Interest Rate Swap

        (343,637)

        (343,637)

 

 

 

 

 

 

 

 

 

 

 

BALANCE on June 30, 2019

  5,190,810

$

  8,651,350

$

        (634,658)

$

        133,933

$

     70,004,714

$

     78,155,339

SIX MONTHS ENDED JUNE 30, 2018

 

Accumulated

Other

Comprehensive

Income (Loss)

Common Stock

 

Unearned

Compensation

 

Retained

Earnings

 

Total

Equity

Shares

 

Amount

BALANCE on December 31, 2017

  5,160,065

$

  8,600,108

$

           20,135

$

          13,620

$

     59,814,870

$

     68,448,733

Directors' Stock Plan

       10,984

       18,307

          181,602

          199,909

Employee Stock Plan

         4,209

         7,015

            63,696

            70,711

Restricted Stock Grant

          31,479

            31,479

Net Income

       2,830,030

       2,830,030

Dividends

      (1,137,037)

     (1,137,037)

Unrealized Loss on Interest Rate Swap

          (20,135)

          (20,135)

 

 

 

 

 

 

 

 

 

 

 

BALANCE on June 30, 2018

  5,175,258

$

  8,625,430

$

                   -

$

          45,099

$

     61,753,161

$

     70,423,690

The accompanying notes are an integral part of these consolidated financial statements.

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NEW ULM TELECOM,NUVERA COMMUNICATIONS, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SeptemberJune 30, 20172019 (Unaudited)

 

Note 1 – Basis of Presentation and Consolidation

 

The accompanying unaudited condensed consolidated financial statements of New Ulm Telecom,Nuvera Communications, Inc. and its subsidiaries (NU Telecom)(Nuvera) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, and with the 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, 2016.2018.

 

The preparation of our financial statements in conformity with GAAP requires our management to make estimates and assumptionsjudgements that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosuresdisclosure 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 NU TelecomNuvera and its subsidiaries in one business segment: the TelecomCommunications Segment. Inter-company transactions have been eliminated from the consolidated financial statements.

 

Revenue Recognition

We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of the product has occurred orSee Note 2 – “Revenue Recognition” for a service has been provided, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured.

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 when the service is rendered.

Revenues earned from interexchange carriers (IXCs) accessing our network are based on the utilizationdiscussion 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. Revenues are billed at tariffed access rates for both interstate and intrastate calls. Revenues for these services are recognized based on the period the access is provided.

Interstate access rates are established by a nationwide pooling of companies known as the National Exchange Carriers Association (NECA). The Federal Communications Commission (FCC) established NECA in 1983 to develop and administer interstate access service rates, terms and conditions. Revenues are pooled and redistributed on the basis of a company's actual or average costs. There has been a change in the composition of interstate access charges in recent years, shifting more of the charges to the end user and reducing the amount of access charges paid by the IXC’s. We believe this trend will continue.

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New Ulm Telecom’s and Sleepy Eye Telephone Company’s (SETC) settlements from the pools were based on their actual costs to provide service, while the settlements for NU Telecom subsidiaries – Western Telephone Company, Peoples Telephone Company and Hutchinson Telephone Company (HTC) were based on nationwide average schedules. Access revenues for New Ulm Telecom and SETC include an estimate of a cost study each year that is trued-up subsequent to the end of any given year. Our management believes the estimates included in our preliminary cost study were reasonable. We cannot predict the future impact that industry or regulatory changes will have on interstate access revenues.

Intrastate access rates are filed with state regulatory commissions in Minnesota and Iowa.

Effective January 1, 2017 the Company no longer receives funding from the Federal Universal Service Fund (FUSF) based on the pooling and redistribution of revenues based on a company's actual or average costs as described above, but has instead, elected to receive funding based on the Alternative Connect America Cost Model (A-CAM) as described below.

A-CAM

The FUSF was established as part of the Telecommunications Act of 1996 and provides subsidies to telecommunications providers as means of increasing the availability and affordability of advanced telecommunications services. In 2011, significant reform was introduced, including the creation of the Connect America Fund (CAF), to help modernize the FUSF and promote support of these telecom services in the nation’s high-cost areas. In 2016, the FCC announced additional reform to further transition the CAF from supporting the provision of voice services to the provision of broadband services. On March 30, 2016, the FCC issued a Report and Order (2016 Order) that adopts the following changes to the FUSF for rate-of-return carriers:

·         Establishes a voluntary cost model;   

·         Creates specific broadband deployment obligations; 

·         Provides a mechanism for support of broadband-only deployment; 

·         Gradually reduces the authorized rate-of-return from 11.25 percent to 9.75 percent;

·         Eliminates support in those local areas served by unsubsidized competitors;

·         Establishes “glide-path” transition periods for all the new changes; and

·         Maintains the $2 billion budget established by the 2011 Transformation Order.

While the 2011 FUSF Transformation Order established CAF Phase I and CAF Phase II as high-cost support mechanisms for the price-cap carriers (i.e., the larger, national local exchange carriers (LECs) such as Verizon and AT&T), it was not as specific about how subsidies would change for the rate-of-return carriers (i.e., the smaller LECs, including all rural LECs). In contrast, the 2016 Order focused on the rate-of-return carriers, announced specific changes to existing funding mechanisms as well as a new funding mechanism, and provided rural telecommunications providers with greater certainty about future support.

One of the major changes introduced by the 2016 Order was the creation of the A-CAM, a new CAF support mechanism for rate-of-return carriers. Utilization of the A-CAM was voluntary; and rate-of-return carriers may have instead chose to continue relying on the legacy support mechanism known as interstate common line support (ICLS), but then modified and renamed CAF Broadband Loop Support. Each carrier needed to decide which support mechanism to elect, and then choose one or the other, per state.

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In our Form 10-Q for the quarter ended September 30, 2016, NU Telecom disclosed that we had elected the A-CAM for our Minnesota and Iowa operations, replacing our former ICLS. NU Telecom will receive A-CAM support for a period of ten years in exchange for meeting defined broadband build-out requirements. At the time of NU Telecom’s election, the FCC had not yet determined the final award numbers. 

Consistent with the stated disclosure in our Form 10-Q, NU Telecom notified the FCC that we would continue to elect the A-CAM program. Under the report that accompanied the FCC December 20, 2016 Public Notice, NU Telecom would annually receive (i) $391,896 for our Iowa operations and (ii) $6,118,567 for our Minnesota operations. The Company will use the annual $6.5 million that we receive through the A-CAM program to meet our defined broadband build-out obligations. The A-CAM payments will replace the Company’s former ICLS payments. In 2016 NU Telecom received $1,965,727 under the former ICLS program.

We derive revenues from the sale, installation and servicing of communication systems. In accordance with GAAP, these deliverables are accounted for separately. We recognize revenue from customer contracts for sales and installations using the completed-contract method, which recognizes income when the contract is substantially complete. We recognize rental revenues over the rental period.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 telecommunicationscommunications 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 $5,429,935$4,388,019 and $5,474,520$3,358,661 for the ninesix months ended SeptemberJune 30, 20172019 and 2016.2018. 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. 

 

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We account for income taxes in accordance with GAAP.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 positionsposition 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 SeptemberJune 30, 20172019 and December 31, 20162018 we had $0 ofno unrecognized tax benefits, which if recognized would affect the effective tax rate. benefits.

 

We are primarily subject to United States, Minnesota, Iowa, Nebraska, North Dakota and IowaWisconsin income taxes. Tax years subsequent to 20132014 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 SeptemberJune 30, 20172019 and December 31, 20162018 we had no interest or penalties accrued that related to income tax matters.

 

Recent Accounting Developments

 

In MayAugust, 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2017-092017-12 (ASU 2017-09)2017-12), “Scope of Modification Accounting).“Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-09 clarifies2017-12 amends current guidance on accounting for hedges mainly to align more closely an entity’s risk management activities and financial reporting relationships through changes to both the modification accountingdesignation and measurement guidance for stock compensation includedqualifying hedging relationships and the presentation of hedge results. In addition, amendments in Topic 718, “Compensation – Stock Compensation.” ASU 2017-09 provides guidance about which changes2017-12 simplify the application of hedge accounting by allowing effectiveness assessments to the terms or conditions ofbe performed on a share-based payment award must be award must be accounted for as a modification under Topic 718.qualitative basis after hedge inception. The new guidance is effective prospectively for annual and interim periods beginning after December 15, 2017,2018 with early adoption permitted. We plan to adopt this update effectiveThe Company adopted ASU 2017-12 as of January 1, 20182019 and will apply thisis applying the guidance to applicable transactions after adoption date.our hedging activities.

 

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 (if any).

 

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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. NU TelecomThe Company is required to adopt ASU 2016-13 on January 1, 2020. Early adoption as of January 1, 2019 is permitted. We are evaluating the effects that adoption of ASU 2016-13 will have on our financial position, results of operations and disclosures.

 

In February 2016, the FASBWe have reviewed all other significant newly issued ASU 2016-02, “Leases,” which requires the recognitionaccounting 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 lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. This change will result in an increase to recorded assets and liabilities on lessees’ financial statements, as well as changes in the categorization of rental costs, from rent expense to interest and depreciation expense. Other effects may occur depending on the types of leases and the specific terms of them utilized by particular lessees. The ASU is effective for the Company on January 1, 2019, and early application is permitted. Modified retrospective application is required. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.  operations.

 

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Table of ContentsNote 2 – Revenue Recognition

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606) (Accounting Standards Codification (ASC) 606),” and has since amended thewhich is a comprehensive revenue recognition standard with ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date,” ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” ASU 2016-12, “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,” and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” These standards replacethat supersedes nearly all existing revenue recognition rules withguidance under GAAP. ASU 2014-09 provides a single comprehensiveprinciples-based, five-step model to usebe applied to all contracts with customers, which steps are to (1) identify the contract with the customer, (2) identify the performance obligations in accountingthe 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.  

We adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective method for open contracts. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606. The Company did not have any material cumulative effect adjustments that would have affected its January 1, 2018 assets, liabilities or retained earnings. The adoption of this new standard by the Company resulted in additional disclosures around the nature and timing of the Company’s performance obligations, deferred revenue arisingcontract liabilities, deferred contract cost assets, as well as significant judgements and practical expedients used by the Company in applying the new five-step revenue model.  

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.

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

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

Significant Judgements

The Company often provides multiple services to a customer. Provision of customer premise equipment (CPE) and additional service tiers may have a significant level of integration and interdependency with the subscription voice, video, Internet, or connectivity services. Judgement is required to determine whether provision of CPE, installation services, and additional service tiers are considered distinct and accounted for separately, or not distinct and accounted for together with the subscription services.

Allocation of the transaction price to the distinct performance obligations in bundled service subscriptions requires judgement. The transaction price for a bundle of services is frequently less than the sum of standalone selling prices of each individual service. Bundled discounts are allocated proportionally to the selling price of each individual service within the bundle. Standalone selling prices for the Company’s services are directly observable.

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Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the three months ended June 30, 2019 and 2018:

Three Months Ended June 30,

2019

2018

Voice services¹

$

2,046,301

 

$

1,538,270

Network access¹

1,827,592

1,789,625

Video ¹

 

3,045,927

 

 

2,402,433

Data ¹

4,919,624

2,932,280

Directory²

 

202,829

 

 

178,773

Other contracted revenue3

 

586,962

 

 

593,422

Other4

274,413

206,325

 

 

 

 

 

 

Revenue from customers

12,903,648

9,641,128

 

 

 

 

 

 

Subsidy and other revenue

outside scope of ASC 6065

 

3,564,723

 

 

2,067,313

 

 

 

Total revenue

$

16,468,371

 

$

11,708,441

¹   Month-to-Month contracts billed and consumed in the same month.

²   Directory revenue is contracted annually, however, this revenue is recognized monthly over the contract period as the advertising is used.

³   This includes long-term contracts where the revenue is recognized monthly over the term of the contract.

4  This includes CPE and other equipment sales.

5  This includes governmental subsidies and lease revenue outside the scope of ASC 606.

For the three months ended June 30, 2019, approximately 76.69% of our total revenue was from month-to-month and other contracted revenue from customers. These standards require an entity to recognizeApproximately 21.64% of our total revenue was from revenue sources outside of the scope of ASC 606. The remaining 1.67% of total revenue was from other sources including CPE and equipment sales and installation.

For the three months ended June 30, 2018, approximately 80.58% of our total revenue was from month-to-month and other contracted revenue from customers. Approximately 17.66% of our total revenue was from revenue sources outside of the scope of ASC 606. The remaining 1.76% of total revenue was from other sources including CPE and equipment sales and installation.

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The following table summarizes revenue from contracts with customers for the six months ended June 30, 2019 and 2018:

Six Months Ended June 30,

2019

2018

Voice services¹

$

4,122,504

 

$

3,108,487

Network access¹

3,873,618

3,512,840

Video ¹

 

6,032,313

 

 

4,708,042

Data ¹

9,887,904

5,815,145

Directory²

 

404,878

 

 

350,825

Other contracted revenue3

 

1,160,304

 

 

1,150,007

Other4

458,448

423,344

 

 

 

 

 

 

Revenue from customers

25,939,969

19,068,690

 

 

 

 

 

 

Subsidy and other revenue

outside scope of ASC 6065

 

6,500,820

 

 

4,252,937

 

 

 

Total revenue

$

32,440,789

 

$

23,321,627

¹   Month-to-Month contracts billed and consumed in the same month.

²   Directory revenue is contracted annually, however, this revenue is recognized monthly over the contract period as the advertising is used.

³   This includes long-term contracts where the revenue is recognized monthly over the term of the contract.

4  This includes CPE and other equipment sales.

5  This includes governmental subsidies and lease revenue outside the scope of ASC 606.

For the six months ended June 30, 2019, approximately 78.55% of our total revenue was from month-to-month and other contracted revenue from customers. Approximately 20.04% of our total revenue was from revenue sources outside of the scope of ASC 606. The remaining 1.41% of total revenue was from other sources including CPE and equipment sales and installation.

For the six months ended June 30, 2018, approximately 79.95% of our total revenue was from month-to-month and other contracted revenue from customers. Approximately 18.24% of our total revenue was from revenue sources outside of the scope of ASC 606. The remaining 1.81% 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 which it expectsunsatisfied performance obligations is not necessarily indicative of the future revenue to be entitledrecognized 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 a variety of custom calling features such as call waiting, call forwarding, caller identification and voicemail. 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 transferuse of promised goodsour 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 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. 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. 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; 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). We believe this trend will continue.

Intrastate access rates are filed with state regulatory commissions in Minnesota and Iowa.

From January 1, 2017 through July 31, 2018 we did not receive funding from the Federal Universal Service Fund (FUSF) based on the pooling and redistribution of revenues based on a company's actual or average costs as described above, but instead, elected to receive funding based on the Alternative Connect America Cost Model (A-CAM) as described below.

With the acquisition of Scott-Rice Telephone Co. (Scott-Rice) on July 31, 2018, see Note 4 – “Acquisitions and Dispositions,” Nuvera now receives FUSF support for Scott-Rice. The remainder of the Company receives funding from A-CAM as mentioned below. Scott-Rice’s settlements from the pools are based on nationwide average schedules. 

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A-CAM

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

When Nuvera originally elected A-CAM we received annually (i) $391,896 for our Iowa operations and (ii) $6,118,567 for our Minnesota operations. The Company used the annual $6.5 million that it received through the A-CAM program to meet our defined broadband build-out obligations, which the Company is currently completing. These A-CAM payments replaced the Company’s former interstate common line support payments.

On May 7, 2018, the FCC issued Public Notice DA 18-465, which contained revised offers of A-CAM support and associated revised service deployment obligations.

On May 23, 2018, the Company’s Board of Directors (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 was entitled to annually receive (i) $489,870 for its Iowa operations, which was a $97,974 increase per year and (ii) $7,648,208 for its Minnesota operations, which was a $1,529,641 increase per year. The Company used the additional support that it received 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 May 24, 2018. The FCC accepted the Company’s letter on May 30, 2018. On August 31, 2018 the Company received approximately $3.12 million for the revised A-CAM support. This represented an 18-month true-up for support back to the original election date, and an increased monthly payment representing the new standardrevised A-CAM support offer.

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 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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The following table provides information about our receivables, contracts assets and contract liabilities from revenue contracts with our customers:

January 1,

2019

June 30,

2019

Increase/

(Decrease)

 

Contract Assets:

 

 

 

 

 

 

 

 

 

 

Short-term contract assets

$

 -

 

$

22,797

 

$

22,797

¹ 

 

Long-term contract assets

 -

 

64,942

 

64,942

¹ 

 

Contract Liabilities:

 

 

 

 

 

 

 

 

 

 

Short-term contract liabilities

288,709

 

253,473

 

(35,236)

¹

 

Long-term contract liabilities

234,587

 

212,659

 

(21,928)

¹ 

 

Receivables:

 

 

 

 

 

 

 

 

 

 

Receivables accounted for under ASC 606

3,311,629

 

2,010,035

 

(1,301,594)

²

 

Subsidy Receivables not accounted for under ASC 606

678,174

 

745,880

 

67,706

³

 

 

 

 

 

 

 

 

 

 

¹ The difference is due to the timing of the contract billings and commissions.

 

 

 

² The decrease in accounts receivable is due to the timing of receipts.

³ This receivable is for A-CAM funding.

Contract Assets

Contract assets arise from 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. Sales commissions are capitalized when paid and are recorded as a contract asset. Sales commissions are then amortized monthly over the life of the contract as the contract obligations are satisfied.

Contract Liabilities

Short-term contract liabilities include deferred revenues for advanced payments for managed services and other long-term contracts. This includes the current portion of the deferred revenues that will be recognized monthly within one year. 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 contracts.  

Receivables

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.

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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 the Companyus on January 1, 2018,2019. We adopted the standard using either a retrospective basis or athe modified retrospective basis with early adoption permitted.method which applied to leases that exist or were entered into on or after January 1, 2019. The Company planselected to adoptutilize the standard effectivepackage 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.   

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 June 30, 2019.

Right of Use Asset

Balance
June 30, 2019

Operating Lease right-of-use assets

$

       548,886

Operating Lease Liability

 Balance
June 30, 2019

Short-Term Operating Lease Liability

$

              103,063

Long-Term Operating Lease Liability

                445,823

Total

$

              548,886

Maturity analysis under these lease agreements are as follows:

Maturity Analysis

 Balance
June 30, 2019

2019 (remaining)

$

         68,401

2020

           108,308

2021

            50,397

2022

            50,397

2023

            50,397

Thereafter

 

           460,992

Total

           788,892

Less Imputed interest

 

         (240,006)

Present Value of Operating Leases

$

        548,886

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We amortize or leases over the shorter of the term of the lease or the useful life of the asset. Lease expense for the three and six months ended June 30, 2019 was $34,200 and $68,401.

Note 4 – Acquisitions and Dispositions

Scott-Rice Telephone Co. Acquisition

On July 31, 2018, the Company announced that it had completed its acquisition of Scott-Rice from Allstream Business U.S., LLC, an affiliate of Zayo Group Holdings, Inc. (Zayo) for approximately $42 million in cash. Scott-Rice provides phone, video and internet services with more than 18,000 connections, serving the communities of Prior Lake, Savage, Elko and New Market, Minnesota. The combined Nuvera/Scott-Rice Company has approximately 66,000 connections. Nuvera financed the acquisition with its principal lender, CoBank. Further information regarding the CoBank loan terms and amounts can be found on the Company’s 8-K filed with the SEC on August 3, 2018.

The allocation of the acquisition value of Scott-Rice, as determined by an independent valuation firm, is shown below:

Current assets

$

810,927

Property, plant and equipment

23,800,000

Customer relationship intangible

13,600,000

Excess costs over net assets acquired (Goodwill)

10,097,680

Current liabilities

(370,898)

Deferred income taxes

(5,532,014)

Deferred liabilities

 

(264,814)

Purchase price allocation

42,140,881

Less cash acquired

(4,388)

Total Consideration for Acquisition

$

42,136,493


The acquisition was accounted for using the acquisition method of accounting in accordance with current standards. As a result, the fair value of the consideration paid, which consists of approximately $42 million in cash, has been allocated to the fair value of the assets and liabilities received. The allocation of the purchase price to Scott-Rice’s assets and liabilities has been based on estimates of fair values. Criteria have been established in ASC 805, “Business Combinations” for determining whether intangible assets should be recognized separately from goodwill. Based upon our fair value allocation, the excess of the purchase price and acquisition costs over the fair value of the net identifiable tangible assets acquired was $23,697,680, which is not deductible for income tax purposes. The Company recorded an intangible asset related to the acquired company’s customer relationships of $13,600,000. The estimated useful life of the customer relationship intangible is fifteen years.

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Pro Forma Financial Information

On July 31, 2018, Nuvera completed the acquisition of Scott-Rice. The following pro forma results presented are for the three and six months ended June 30, 2019 and 2018, as if the acquisition had been completed on January 1, 2018. The Company planshas provided this pro forma condensed Statement of Income to adopt this standard using the modified retrospective approach. The Company is continuing to assess all potential impactsfacilitate analysis of the standard, includingStatement of Income. The pro forma statements do not reflect any effect of operating efficiencies, cost savings and other benefits anticipated by the impact to the pattern with which revenue is recognized, the impactCompany’s management as a result of the standard on current accounting policies, practices and system of internal controls, in order to identify material differences, if any that would result from applying the new requirements. In 2016, the Company commenced on an initial impact assessment process for this new standard. The Company is continuing its work toward establishing new policies and processes, and is implementing necessary changes to data and procedures necessary to comply with the new requirements. Based on the results of our assessment to date, the Company anticipates this standard will have an impact, which is not anticipated to be significant, to the consolidated financial statements. While continuing to assess all potential impacts of the standard, the Company believes the most significant impact relates to additional disclosures required for qualitative and quantitative information concerning the nature, amount, timing, and any uncertainty of revenue and cash flows from contracts with customers, the capitalization of costs of commissions, upfront contract costs, the pattern with which revenue is recognized, and other contract acquisition-based and contract fulfillment costs.acquisition.

 

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

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

Revenue

$

16,468,371

 

$

 15,454,221

 

$

32,440,789

 

$

30,792,803

Net Income

$

2,557,920

 

$

1,660,473

 

$

 4,850,220

 

$

3,793,254

Basic and Diluted Net

 

 

 

 

 

 

 

 

 

 

 

Income Per Share

$

 0.49

 

$

     0.32

 

$

0.94

 

$

0.73

Note 25 – 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.

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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 an interest rate swap agreement (IRSA) with our lender, CoBank, ACB (CoBank), to manage our cash flow exposure to fluctuations in interest rates. This instrument is designated as a cash flow hedge and is 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 this derivative is accounted for as a component of accumulated other comprehensive income (loss) for as long as the hedge remains effective.

 

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The fair value of our IRSA is discussed in Note 58 – “Interest Rate Swaps”. The fair value of our swap agreement was determined based on Level 2 inputs.

 

Other Financial Instruments

 

Other Investments - It is difficult to estimate a fair value for equity investments in companies carried on the equity or cost basiswithout a readily determinable fair value due to a lack of quoted marketobservable transaction prices. We conducted an evaluation of our investments in all of our companies in connection with the preparation of our audited financial statements at December 31, 2016. We2018. As of June 30, 2019, we believe the carrying value of our investments is not impaired.

 

Debt – We estimate the fair value of our long-term debt based on the discounted future cash flows we expect to pay using current rates of borrowing for similar types of debt. Fair value of the debt approximates carrying value.

 

Other Financial Instruments - Our financial instruments also include cash equivalents, trade accounts receivable and accounts payable where the current carrying amounts approximate fair market value.

 

Note 36 – 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. Our goodwill totaled $39,805,349$49,903,029 at SeptemberJune 30, 20172019 and December 31, 2016.2018.   

 

As required by GAAP, we do not amortize goodwill and other intangible assets with indefinite lives, but test for impairment on an annual basis or earlier if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. 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.

 

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In 20162018 and 2015,2017, we engaged an independent valuation firm to complete our annual impairment testing for existing goodwill. For 20162018 and 2015,2017, 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.

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Table of Contents

The components of our identified intangible assets are as follows:


September 30, 2017

December 31, 2016

June 30, 2019

December 31, 2018

Gross

Carrying

Amount

 

Accumulated

Amortization

Gross

Carrying

Amount

 

Accumulated

Amortization

Gross

Carrying

Amount

Gross

Carrying

Amount

Useful

Lives

Useful

Lives

Accumulated

Amortization

Accumulated

Amortization

Gross

Carrying

Amount

Gross

Carrying

Amount

Definite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customers Relationships

14-15 yrs

$

29,278,445

$

           16,832,541

$

         29,278,445

$

               15,266,227

14-15 yrs

 

$

  42,878,445

$

21,318,385

$

  42,878,445

$

19,820,843

Regulatory Rights

15 yrs

 

 

4,000,000

 

             2,599,977

 

           4,000,000

 

 

                 2,399,979

15 yrs

 

 

4,000,000

 

 

3,066,639

 

 

4,000,000

 

 

2,933,307

Trade Name

3-5 yrs

570,000

                541,500

              570,000

                    456,000

3-5 yrs

880,106

626,392

880,106 

595,381

Indefinitely-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Video Franchise

 

3,000,000

 

 -

 

           3,000,000

 

-

 

3,000,000

 

-

 

3,000,000

 

-

Total

 

 

$

36,848,445

 

$

            19,974,018

 

$

         36,848,445

 

$

               18,122,206

 

 

$

50,758,551

 

$

25,011,416

 

$

50,758,551

 

$

23,349,531

 

 

 

 

 

 

 

 

Net Identified Intangible Assets

 

 

 

 

$

            16,874,427

 

 

 

$

               18,726,239

 

 

 

 

 

$

25,747,135

 

 

 

 

$

27,409,020

 

Amortization expense related to the definite-lived intangible assets was $1,851,812$1,661,885 and $1,851,985$1,177,541 for the ninesix months ended SeptemberJune 30, 20172019 and 2016.2018. Amortization expense for the remaining threesix months of 20172019 and the five years subsequent to 20172019 is estimated to be:

 

·

(October 1 – December 31)

$

617,271

(July 1 – December 31)

$

1,661,886

·

2018

$

2,355,083

2020

$

3,323,771

·

2019

$

2,355,083

2021

$

2,323,726

·

2020

$

2,355,083

2022

$

1,952,376

·

2021

$

2,355,038

2023

$

1,660,295

·

2022

$

983,688

2024

$

1,623,654

 

Note 47 – Secured Credit Facility

 

We have a credit facility with CoBank. Under the credit facility,On July 31, 2018, we entered into aan Amended and Restated master loan agreement (MLA) with CoBank. This MLA refinanced and a series of supplements toreplaced the respective MLA.

NU Telecomexisting 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 NU TelecomNuvera and its respective subsidiaries have been pledged to CoBank as collateral. In addition, NU TelecomNuvera 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 DecemberJuly 31, 2021.2025.  

 

15As described in Note 8 – “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 Co Bank at August 1, 2018. The swap effectively locks in our 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. As of June 30, 2019, our IRSA covered $14,984,900, with a weighted average rate of 6.02%. Our remaining debt of $56.1 million ($10.0 million available under the revolving credit facilities and $46.1 million currently outstanding) remains subject to variable interest rates at an effective weighted average interest rate of 5.41%, as of June 30, 2019.   

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On December 31, 2014, NU Telecom entered into an Amended and Restated MLA with CoBank. The MLA refinanced and replaced the existing credit facility between CoBank and NU Telecom and the subsidiaries of NU Telecom. There are two loans under the MLA, which include a $35 million term loan and a $9 million revolver loan. Also, under the MLA, NU Telecom has the ability to either increase the amount of the commitment under the revolver loan by up to $6 million in a single increase, or add an incremental term loan up to $6 million.

As part of the Amended and Restated MLA with CoBank, NU Telecom needed to enter into an interest rate protection agreement in form and substance reasonably satisfactory to CoBank so as to fix or limit interest rates payable by NU Telecom at all times to at least 40% of the outstanding principal balance of the $35 million term loan for an initial average weighted life of at least three years.

 

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 $2,100,000$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 2.502.00 to 1.00, and (ii) in any amount if our Total Leverage Ratio is less than 2.502.00 to 1.00, and (b) in either case, if we are not in default or potential default under the loan agreements. On March 31, 2016 our Total Leverage Ratio fell below 2.50, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders. Our current Total Leverage Ratio at SeptemberJune 30, 20172019 is 1.58.2.16. 

 

Our credit facility requires us to comply with specified financial ratios.ratios and tests. These financial ratios include total leverage ratio, debt service coverage ratio, equity to total assets ratio and fixed coverage ratio.annual maximum aggregate capital expenditures. At SeptemberJune 30, 20172019, 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.  

As described in Note 5 – “Interest Rate Swaps”, we have entered into an IRSA that effectively fixed our interest rates and cover $14.0 million at a weighted average rate of 3.72%, as of September 30, 2017. The remaining debt of $23.3 million ($9.0 million available under the revolving credit facilities and $14.3 million currently outstanding) remains subject to variable interest rates at an effective weighted average interest rate of 3.74%, as of September 30, 2017.   

 

Note 58 – 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.

 

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To meet this objective, on June 18, 2015August 1, 2018 we entered into an IRSA with CoBank covering $14.0 million25 percent of our existing outstanding debt balance or $16,137,500 of our aggregate indebtedness to CoBank. ThisCoBank at August 1, 2018. The swap effectively locked in the interest rate on $14.0 million25 percent of our variable-rate debt through June 2018.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 IRSA. At the end of each calendar month, CoBank adjusts our aggregate interest payments based on the difference, if any, between the amounts paid by us during the month and the current effective interest rate. Net interest payments are reported in our consolidated income statement as interest expense.

 

Our IRSA under our credit facilities qualifies as a cash flow hedge 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 IRSA, 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.

 

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The fair value of the Company’s IRSA wasis determined based on valuations received from CoBank and are based on the present value of expected future cash flows using discount rates appropriate with the terms of the IRSA. The fair value indicates an estimated amount we would be required to pay if the contracts were canceled or transferred to other parties. At SeptemberJune 30, 2017,2019, the fair value receivableliability of the swap was $18,860,$888,131, which has been recorded net of deferred tax expensebenefit of $7,633,$253,473, for the $11,227$634,658 in accumulated other comprehensive income.loss.  

 

Note 69 – Other Investments 

 

We are a co-investor with other rural telephone 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. See Note 10 – “Segment Information” forFor a listing of our investments.investments, see Note 12 – “Segment Information”.

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which 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. The Company adopted ASU 2016-01 as of January 1, 2018. As of June 30, 2019, we recorded a loss on one of our investments of $104,044.  

 

Note 710 – Guarantees

 

NU TelecomNuvera has guaranteed a portion of a ten-year loan owed by FiberComm, LC, maturingoriginally set to mature on September 30, 2021. As of SeptemberJune 30, 2017,2019, we have recorded a liability of $185,052$340,538 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 8 – Deferred Compensation

AsOn September 14, 2018, FiberComm, LC opened a new construction loan on which it may draw funds, up to $4 million, to complete the construction of a data center/carrier hotel in downtown Sioux City, Iowa. On March 31, 2019, the remaining balance of the existing ten-year loan, with an original maturity date of September 30, 2017 and December 31, 2016, we have recorded other deferred compensation relating to executive compensation payable to certain former executives2021, was combined with the amount of past acquisitions.  funds drawn on the new construction loan into one note, maturing on April 30, 2026. This new note is a seven-year note, utilizing a ten-year amortization schedule, with a balloon payment due in April 2026. Nuvera has guaranteed a 50% pro rata portion (existing 20% ownership) of the new construction loan.

 

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Note 9 -11 – Restricted Stock Units (RSU)

 

On February 24, 2017, our Board of DirectorsBOD adopted the New Ulm Telecom, Inc. 2017 Omnibus Stock Plan (2017 Plan) effective May 25, 2017. The shareholders of the Company approved the plan2017 Plan at the May 25, 2017 Annual Meeting of Shareholders. The purpose of the 2017 Plan was to enable Nuvera and its subsidiaries to attract and retain talented and experienced people, closely link employee compensation with performance realized by shareholders, and reward long-term results with long-term compensation. The 2017 Plan enables the Company to grant stock incentive awards to current and new employees, including officers, and to Board members and service providers. The 2017 Plan permits stock incentive awards in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units,RSUs, performance stock, performance units, and other awards in stock or cash. The 2017 Plan permits the issuance of up to 625,000 shares of our Common Stock in any of the above stock awards.

 

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Starting in 2017 and each subsequent year following 2017, our Board of DirectorsBOD and Compensation Committee granted 6,077 shares of restricted stock units inand will grant awards to the Common Stock ofCompany’s executive officers under the Company to its executive officers.2017 Plan. We recognize share-based compensation expense for these restricted stock unitsRSUs over the vesting period of the restricted stock units,RSUs’ which wasis determined by our BoardBOD. Each executive officer received or will receive time-based RSUs and performance-based RSUs. The time-based RSUs are computed as a percentage of Directors. The 2017 restrictedthe executive officer’s base salary based on the closing price of Company common stock unitson a date set by the BOD, and will vest over a three-year period based on December 31, 2019, at which point, the executivesexecutive 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. The executive officer must also be employed by the Company on the vesting date to receive the performance-based RSUs. 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 restricted stock units.RSUs.

RSUs currently issued or forfeited is as follows:

Targeted

Performance-Based

RSU's

Closing

Stock

Price

Time-Based

RSU's

Vesting

Date

Balance at December 31, 2016

                           -

 

-

 

 

 

 

 

 Issued

6,077

-

 $

13.00

12/31/2019

 Excercised

-

 

-

 

 

 

 

 

 Forfeited

-

-

Balance at December 31, 2017

6,077

 

-

 

 

 

 

 

 Issued

4,044

5,750

 $

17.00

12/31/2020

 Excercised

-

 

-

 

 

 

 

 

 Forfeited

(1,404)

(750)

Balance at December 31, 2018

8,717

 

5,000

 

 

 

 

 

 Issued

3,172

4,781

 $

19.26

12/31/2021

 Excercised

-

 

-

 

 

 

 

 

 Forfeited

-

-

Balance at June 30, 2019

11,889

 

9,781

 

 

 

 

 

 

Note 1012 – Segment Information 

 

We operate in the TelecomCommunications Segment and have no other significant business segments. The TelecomCommunications 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.

 

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

 

TelecomCommunications Segment

 

ILECs:

 

 

New Ulm Telecom,Nuvera Communications, Inc., the parent company;

 

Hutchinson Telephone Company, a wholly-owned subsidiary of NU Telecom;Nuvera;

 

Peoples Telephone Company, a wholly-owned subsidiary of NU Telecom;Nuvera;

Scott-Rice Telephone Co., a wholly-owned subsidiary of Nuvera;

 

Sleepy Eye Telephone Company, a wholly-owned subsidiary of NU Telecom;Nuvera;

 

Western Telephone Company, a wholly-owned subsidiary of NU Telecom.Nuvera.

CLECs:

 

 

NU Telecom,Nuvera, located in Redwood Falls, Minnesota; and

 

Hutchinson Telecommunications, Inc., a wholly-owned subsidiary of HTC,Hutchinson Telephone Company, located in Litchfield and Glencoe, Minnesota.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. Broadband Visions, LLCBBV provides video headend and Internet services;

 

Independent Emergency Services, LLC (IES) – 14.29% subsidiary equity ownership interest. Independent Emergency Services, LLCIES 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) 12.50%10.00% subsidiary equity ownership interest. SM Broadband Services, LLCSMB provides network connectivity for regional businesses.

 

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Note 11 13– 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 ninesix months of 2017.2019. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 20162018 for the discussion relating to commitments and contingencies.

Note 14 – Broadband Grants

In January 2017, the Company was awarded a broadband grant from the Minnesota Department of Employment and Economic Development (DEED). The grant provided up to 45% 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 $850,486 of the $1,889,968 total project costs. The Company provided the remaining 55% matching funds. At March 31, 2019, the Company has received $765,465. These projects were completed below the awarded project costs and final documentation was provided to the DEED office in October 2018. 

In November 2017, the Company was awarded a broadband grant from the 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 not received any funds for these projects as of June 30, 2019.

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Note 1215 – Subsequent Events

 

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

 

Item 2. 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

TheFrom time to time, in reports filed with the SEC, encourages companiesin press releases, and in other communications to disclose forward-looking information so that investors can better understand a company’s future prospects andshareholders or the investing public, we may make informed investment decisions. Certain statements in this Quarterly Report on Form 10-Q, including those relating to the impact on future revenue sources, pending and future regulatory orders, continued expansion of the telecommunications network and expected changes in the sources of our revenue and cost structure resulting from our entrance into new communications markets, are forward-looking statements and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. The Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. This Quarterly Report on Form 10-Q may include forward-looking statements.concerning possible or anticipated future financial performance, business activities or plans. These statements may include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities and growth rates, acquisition and divestiture opportunities, business strategies, business and competitive outlook, and other similar forecasts and statements of expectation. Words such asare 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, are intended to identifyexpressions. For these forward-looking statements. Thesestatements, 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 thatwhich could affect our actual results and cause our actual results to differ materially from suchthose 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.

 

Because of these risks, uncertainties and assumptions and the fact that any forward-looking statements made by us and our management are based on estimates, projections, beliefs and assumptions of management, they are not guarantees of future performance and you should not place undue reliance on them. 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 NU Telecom’sNuvera’s consolidated unaudited financial statements that have been prepared in accordance with GAAP 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. 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, 2016,2018, which is incorporated herein by reference.

 

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Results of Operations

 
Overview

 

NU TelecomNuvera 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 telecommunicationscommunications 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, which consists of switches and cable, data, Internet protocol (IP) and digital TV. 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.

 

Executive Summary

 

Highlights:

·      Effective January 1, 2017On July 31, 2018, the Company no longer receives fundingannounced that it had completed its acquisition of Scott-Rice from Zayo for approximately $42 million in cash. Scott-Rice provides voice, video, and internet services with more than 18,000 connections, serving the FUSF basedcommunities of Prior Lake, Savage, Elko and New Market, Minnesota. The combined Nuvera-Scott-Rice company has approximately 66,000 connections. Nuvera financed the acquisition with its principal lender, CoBank. Further information regarding the CoBank loan terms and amounts can be found on the pooling and redistribution of revenues basedCompany’s 8-K filed with the SEC on a company's actual or average costs, but has instead, elected to receive funding based on the A-CAM. See pages 10-11 for a discussion regarding the A-CAM.August 3, 2018.

 

·      On June 18, 2015 NU Telecom entered into an IRSA with CoBank covering (i) $14.0 millionFebruary 27, 2019, the Company’s BOD authorized and directed the Company to accept the FCC’s revised offer of our aggregate indebtedness to CoBank effective June 18, 2015. This swap effectively locked inA-CAM support and the interest rate on $14.0 million of variable-rate debt through June 2018.revised associated service deployment obligations. Under the IRSA, we have changedrevised FCC offer Notice, the variable-rate cash flow exposureCompany 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 debt obligationsCompany’s letter on March 11, 2019. In the second quarter of 2019, the Company received a true-up payment for support back to fixed cash flows. UnderJanuary 1, 2019 and an increased monthly payment representing the terms of this 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.new revised A-CAM support offer.  

 

·         On December 1, 2015 the Minnesota State Department of Employment and Economic Development (DEED) announced NU Telecom as one of the companies that would receive state grants for broadband development. The State announced a total of $11 million in grants through the Border-to-Border Broadband Development Grant Program. The winners came out of a pool of 44 grant applicants requesting more than $29 million. NU Telecom was to receive $115,934 of the $244,125, or 47.5%, of the total project costs to build fiber connections to 24 homes and businesses in an area northeast of Goodhue. NU Telecom completed the project in late 2016. At September 30, 2017April 15, 2019, the Company has received $115,934 from this grant.announced that its Chief Executive Officer Bill D. Otis will be retiring after 40 years with the Company. Mr. Otis will remain with the Company in his current role until a successor is named and then will provide consulting services to ensure a smooth and successful leadership transition. Mr. Otis intends to continue to serve on the BOD after the effective date of his retirement.

 

·      On January 12, 2017 the DEED announced NU Telecom as one of the companies that will receive state grants for broadband development. NU Telecom received three of the forty-two grants announced by Lieutenant Governor Tina Smith. A total of $34 million was awarded by DEED with the aim of providing reliable, affordable high-speed internet to more than 16,000 households, more than 2,000 businesses and more than 70 community institutions throughout the state. NU Telecom will receive $850,486 of the $1,889,968, or 45%, of the total project costs to build fiber connections to homes and businesses in the rural areas of Hanska and Mazeppa and in and around Bellechester. Construction on one of the projects began in the spring of 2017 and the construction on the other two projects began in the summer of 2017. Grant funds will be received by NU Telecom as work progresses and costs are provided to DEED.  At September 30 2017 we had submitted invoices to the State totaling $51,224, which we received in early October.

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·      Net income for the thirdsecond quarter of 20172019 totaled $1,416,009,$2,557,920, which was a $662,198$1,377,963, or 87.85%116.78% increase compared to the thirdsecond quarter of 2016.2018. This increase was primarily due to an increase in operating revenues, partially offset by an increase in operating expenses, allthe acquisition of which are described below.Scott-Rice and increased A-CAM funding.

 

·      Consolidated revenue for the thirdsecond quarter of 20172019 totaled $11,850,033,$16,468,371, which was a $1,077,262$4,759,930 or 10.0%40.65% increase compared to the thirdsecond quarter of 2016.2018. This increase was primarily due to an increase in our A-CAM funding support based on the Company’s election to receive funding under A-CAM (see pages 10-11),acquisition of Scott-Rice and increased video and data revenues. These increases were partially offset by a decrease in local service, network access and other non-regulated revenues, all of which are described below.A-CAM funding.

 

Business Trends

 

Included below is a synopsis of business trends management believes will continue to affect our business in 2017.2019. 

 

Voice and switched access revenues are expected to continue to be adversely impacted by future declines in access lines due to competition in the telecommunicationscommunications industry from cable television providers (CATV), Voice over Internet Protocol (VoIP) providers, wireless, other competitors and emerging technologies. 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, and lower demand for dedicated lines and downward rate pressures may affect our future voice and switched access revenues. AccessWithout the acquisition of Scott-Rice, access line decreaseslosses would have totaled 1,9151,098 or 8.04%5.25% for the twelve months ended SeptemberJune 30, 20172019 due to the reasons mentioned above. With the acquisition of Scott-Rice, access lines increased 5,173 or 24.76% for the twelve months ended June 30, 2019.  

 

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.

 

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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 TelecomCommunications Segment are included below:

 

Telecom Segment

Communications Segment

 

 

 

Three Months Ended September 30,

Three Months Ended June 30,

2017

2016

Increase (Decrease)

2019

2018

Increase (Decrease)

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Local Service

$

1,463,734

$

1,479,214

$

(15,480)

-1.05%

$

1,827,178

$

1,300,386

$

526,792

40.51%

Network Access

 

1,809,143

 

1,860,389

 

(51,246)

 

-2.75%

 

          1,778,167

 

1,630,637

 

147,530

 

9.05%

Video

2,444,849

2,353,013

91,836

3.90%

3,048,826

2,406,803

642,023

26.68%

Data

 

2,992,250

 

2,966,475

 

25,775

 

0.87%

 

5,401,856

 

3,328,998

 

2,072,858

 

62.27%

A-CAM/FUSF

1,961,457

926,163

1,035,294

111.78%

3,365,229

1,958,979

1,406,250

71.78%

Other Non-Regulated

 

1,178,600

 

 

1,187,517

 

 

(8,917)

 

 

-0.75%

 

1,047,115

 

 

1,082,638

 

 

(35,523)

 

-3.28%

Total Operating Revenues

 

11,850,033

 

10,772,771

 

1,077,262

 

10.00%

 

16,468,371

 

11,708,441

 

4,759,930

40.65%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Services, Excluding Depreciation
and Amortization

5,177,737

4,994,356

183,381

3.67%

6,826,754

5,521,667

1,305,087

23.64%

Selling, General and Administrative

 

1,660,991

 

1,778,564

 

(117,573)

 

-6.61%

 

2,399,875

 

2,196,830

 

203,045

 

9.24%

Depreciation and Amortization Expenses

 

2,414,445

 

2,444,064

 

(29,619)

 

-1.21%

 

3,013,579

 

2,280,354

 

733,225

32.15%

Total Operating Expenses

 

9,253,173

 

 

9,216,984

 

36,189

 

 

0.39%

 

12,240,208

 

 

9,998,851

 

2,241,357

 

22.42%

Operating Income

$

2,596,860

 

$

1,555,787

 

$

1,041,073

 

 

66.92%

$

4,228,163

 

$

1,709,590

 

$

2,518,573

 

147.32%

Net Income

$

1,416,009

 

$

753,811

 

$

662,198

 

 

87.85%

$

2,557,920

 

$

1,179,957

 

$

1,377,963

 

116.78%

Capital Expenditures

$

1,583,945

 

$

1,307,492

 

$

276,453

 

 

21.14%

$

1,806,797

 

$

1,296,816

 

$

509,981

 

39.33%

Certain historical numbers have been changed to conform to the current year's presentation.

 

22Certain historical numbers have been changed to conform to the current year's presentation.

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Communications Segment

 

 

 

Nine Months Ended September 30,

Six Months Ended June 30,

2017

2016

Increase (Decrease)

2019

2018

Increase (Decrease)

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Local Service

$

4,422,480

$

4,413,315

$

9,165

0.21%

$

3,681,111

$

2,627,603

$

1,053,508

40.09%

Network Access

 

5,197,332

 

5,446,121

 

(248,789)

 

-4.57%

 

3,775,422

 

3,295,652

 

479,770

 

14.56%

Video

7,234,486

6,993,456

241,030

3.45%

6,037,863

4,716,201

1,321,662

28.02%

Data

 

9,083,545

 

8,631,216

 

452,329

 

5.24%

 

10,803,566

 

6,582,966

 

4,220,600

 

64.11%

A-CAM/FUSF

6,011,779

2,740,159

3,271,620

119.40%

6,103,602

3,907,430

2,196,172

56.21%

Other

 

3,245,532

 

 

3,407,436

 

 

(161,904)

 

-4.75%

 

2,039,225

 

 

2,191,775

 

 

(152,550)

 

-6.96%

Total Operating Revenues

 

35,195,154

 

31,631,703

 

3,563,451

11.27%

 

32,440,789

 

23,321,627

 

9,119,162

39.10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Services, Excluding Depreciation and
Amortization

15,421,883

15,041,444

380,439

2.53%

13,377,278

10,766,431

2,610,847

24.25%

Selling, General and Administrative

 

5,346,808

 

5,255,747

 

91,061

 

1.73%

 

5,119,606

 

4,161,846

 

957,760

 

23.01%

Depreciation and Amortization Expenses

 

7,281,747

 

7,326,505

 

(44,758)

-0.61%

 

6,049,904

 

4,536,202

 

1,513,702

33.37%

Total Operating Expenses

 

28,050,438

 

 

27,623,696

 

426,742

 

1.54%

 

24,546,788

 

 

19,464,479

 

5,082,309

 

26.11%

Operating Income

$

7,144,716

 

$

4,008,007

 

$

3,136,709

 

78.26%

$

7,894,001

 

$

3,857,148

 

$

4,036,853

 

104.66%

Net Income

$

4,043,337

 

$

2,220,718

 

$

1,822,619

 

82.07%

$

4,850,220

 

$

2,830,030

 

$

2,020,190

 

71.38%

Capital Expenditures

$

3,257,853

 

$

4,249,841

 

$

(991,988)

 

-23.34%

$

4,119,328

 

$

3,003,545

 

$

1,115,783

 

37.15%

Key metrics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Access Lines

21,913

23,828

                 (1,915)

-8.04%

26,069

20,896

5,173

24.76%

Video Customers

 

10,357

 

10,494

 

                    (137)

 

-1.31%

 

12,028

 

10,088

 

1,940

 

19.23%

Broadband Customers

16,236

15,548

                     688

4.43%

26,091

16,679

9,412

56.43%

Certain historical numbers have been changed to conform to the current year's presentation.

Certain historical numbers have been changed to conform to the current year's presentation.

 

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 $1,463,734,$1,827,178, which is $15,480$526,792 or 1.05% lower40.51% higher in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 2016.  This decrease2018 and was $3,681,111, which is $1,053,508 or 40.09% higher in the six months ended June 30, 2019 compared to the six months ended June 30, 2018. These increases were primarily due to the decline in access lines partially offset by rate increases implemented in severalacquisition of our markets in 2016 and 2017.  Local service revenue was $4,422,480, which is $9,165 or 0.21% higher in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. This increase was primarily due to rate increases implemented in several of our markets in 2016 and 2017, partially offset by the decline in access lines.Scott-Rice.

 

TheWithout the acquisition of Scott-Rice, 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 subscriber line charges (SLCs)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 iswas derived from several federally administered pooling arrangements designed to provide network support and distribute funding to ILECs. Network access revenue was $1,809,143,$1,778,167, which is $51,246$147,530 or 2.75% lower9.05% higher in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 and was $5,197,332,$3,775,422, which is $248,789$479,770 or 4.57% lower14.56% higher in the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016.2018. These decreasesincreases were primarily due to the acquisition of Scott-Rice, partially offset by lower minutes of use on our network.  

 

In recent years, IXCs and others have become more aggressive in disputing both interstate carrier access charges and the applicability of access charges to their network traffic. We believe that long distance and other communication providers will continue to challenge the applicability of access charges either before the FCC or directly with the LECs. We cannot predict the likelihood of future claims and cannot estimate the impact.

 

Video– 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 seventeentwenty-two communities with our IPTV services and five communities with our CATV services. Video revenue was $2,444,849,$3,048,826, which is $91,836$642,023 or 3.90%26.68% higher in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 and was $7,234,486,$6,037,863, which is $241,030$1,321,662 or 3.45%28.02% higher in the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016.2018. These increases were primarily due to the acquisition of Scott-Rice and a combination of rate increases introduced into several of our markets over the course of the last several years. Also contributing to the increase in video revenues was an increased demand for our high definition and digital video recording services.

 

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 $2,992,250,$5,401,856, which is $25,775$2,072,858 or 0.87%62.27% higher in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 and was $9,083,545,$10,803,566, which is $452,329$4,220,600 or 5.24%64.11% higher in the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016.2018. These increases were primarily due to the acquisition of Scott-Rice and an increase in data customers and increased managed services revenues.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 page 10Note 2 – “Revenue Recognition” for a discussion regarding FUSF.

 

EffectiveFrom January 1, 2017 the Company no longer receivesthrough July 31, 2018, we did not receive support from the FUSF, but hashad instead, elected to receive support based on the A-CAM. With the acquisition of Scott-Rice, the company now receives FUSF for Scott-Rice based on their average costs. The remainder of the company receives A-CAM support. See pages 10-11Note 2 – “Revenue Recognition” for a discussion regarding the A-CAM.

A-CAM/FUSF support totaled $1,961,457,$3,365,229, which is $1,035,294$1,406,250 or 111.78%71.78% higher in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 2016.2018. A-CAM/FUSF support totaled $6,011,779,$6,103,602, which is $3,271,620$2,196,172 or 119.40%56.21% higher in the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016. 2018. These increases were primarily due to the receipt of additional A-CAM funds through the additional A-CAM offers in 2018 and 2019, and the addition of 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 customer premise equipment (CPE),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 TechTrendsNuvera 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 $1,178,600,$1,047,115, which is $8,917$35,523 or 0.75%3.28% lower in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 and was $3,245,532,$2,039,225, which is $161,904$152,550 or 4.75%6.96% lower in the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016.2018. These decreases were primarily due to decreases in the sales and installation of CPE.    

 

Cost of Services (excluding Depreciation and Amortization)

 

Cost of services (excluding depreciation and amortization) was $5,177,737,$6,826,754, which is $183,381$1,305,087 or 3.67%23.64% higher in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 and was $15,421,883,$13,377,278, which is $380,439$2,610,847 or 2.53%24.25% higher in the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016.2018. These increases were primarily due to the acquisition of Scott-Rice, higher programming costs from video content providers and higher costs associated with increased maintenance and support agreements on our equipment and software.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $1,660,991,$2,399,875, which is $117,573$203,045 or 6.61% lower9.24% higher in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 2016. This decrease2018 and was $5,119,606, which is $957,760 or 23.01% higher in the six months ended June 30, 2019 compared to the six months ended June 30, 2018. These increases were primarily due to lower costs associated with professional and consulting services.  Selling, general and administrative expenses were $5,346,808, which is $91,061 or 1.73% higher in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. This increase was primarily due to higher costs associated with professional and consulting services.acquisition of Scott-Rice.  

 

Depreciation and Amortization

 

Depreciation and amortization was $2,414,445,$3,013,579, which is $29,619$733,225 or 1.21% lower32.15% higher in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 and was $7,281,747,$6,049,904, which is $44,758$1,513,702 or 0.61% lower33.37% higher in the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016.2018. These decreasesincreases were primarily due to portionsthe acquisition of our legacy telephone network becoming fully depreciated. These decreases were partially offset by increased depreciation associated withScott-Rice assets and 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 $2,596,860,$4,228,163, which is $1,041,073$2,518,573 or 66.92%147.32% higher in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 2016.2018. Operating income was $7,144,716,$7,894,001, which is $3,136,709$4,036,853 or 78.26%104.66% higher in the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016.2018. These increases were primarily due to an increase in revenues, partially offset by an increase in expenses, allthe acquisition of which are described above.Scott-Rice.

 

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See Consolidated Statements of Income on Page 3 (for discussion below)

 

Other Income (Expense) and Interest Expense and Other Income 

 

Interest expense was $288,258,$894,568, which is $62,287$608,564 or 17.77% lower212.78% higher in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 and was $910,024,$1,832,389, which is $168,809$1,259,450 or 15.65% lower219.82% higher in the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016.2018. These decreasesincreases were primarily due to lowerhigher outstanding debt balances.balances associated with the new loan we obtained to finance the Scott-Rice acquisition.     

 

Interest and dividend income was $22,283,$90,281, which is $5,642$2,625 or 33.90%2.99% higher in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 2016 and2018. This increase was $95,401, which is $3,777 or 4.12% higher in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. These increases were primarily due to an increase in interestdividend income earned on our increased cash balances.investments. Interest and dividend income was $111,058, which is $30,459 or 21.52% lower in the six months ended June 30, 2019 compared to the six months ended June 30, 2018. This decrease was primarily due to a decrease in dividend income earned on our investments due to the timing of those dividend payments.  

 

Other income for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 included a patronage credit earned with CoBank as a result of our debt agreements with them. The patronage credit allocated and received in 20172019 was $337,137,$403,786, compared to $386,843$290,895 allocated and received in 2016.2018. 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 $93,626,$89,405, which is $19,170$1,275 or 25.75% higher1.41% lower in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 and was $255,742,$187,917, which is $150,075$42,696 or 36.98% lower29.40% higher in the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016.2018. Other investment income is primarily from our equity ownership in several partnerships and limited liability companies.

 

Income Taxes

 

Income tax expense was $1,025,382,$994,742, which is $479,520$535,864 or 87.85%116.78% higher in the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 20162018 and was $2,927,937,$1,886,191, which is $1,319,829$785,621 or 82.07%71.38% higher in the ninesix months ended SeptemberJune 30, 20172019 compared to the ninesix months ended SeptemberJune 30, 2016.2018. These increases were primarily due to higher pre-tax netincreases in operating income, partially offset by increases in 2017 compared to 2016.interest expense. The effective income tax ratesrate for both the ninesix months ending SeptemberJune 30, 20172019 and 2016 were2018 was approximately 42.00%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.

 

Liquidity and Capital Resources

 

Capital Structure

 

NU Telecom’sNuvera’s total capital structure (long-term and short-term debt obligations, net of unamortized loan fees plus stockholders’ equity) was $91,035,253$138,630,963 at SeptemberJune 30, 2017,2019, reflecting 69.2%56.4% equity and 30.8%43.6% debt. This compares to a capital structure of $91,872,382$136,191,452 at December 31, 2016,2018, reflecting 65.6%54.8% equity and 34.4%45.2% debt. In the telecommunications industry, debt financing is most often based on operating cash flows. Specifically, our current use of our credit facilities is in a ratio of approximately 1.582.16 times debt to EBITDA (as defined in the loan documents), which is well within acceptable limits for our agreements and our industry. Our management believes adequate operating cash flows and other internal and external resources, such as our cash on hand and revolving credit facility, are available to finance ongoing operating requirements, including capital expenditures, business development, debt service, temporary financing of trade accounts receivable and dividends.

 

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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 ninesix months ended SeptemberJune 30, 20172019 were proceeds from cash generated from operations and cash reserves held at the beginning of the period. At SeptemberJune 30, 20172019 we had a working capital surplus of $32,288. In addition,$2,141,141. Also, at SeptemberJune 30, 2017,2019, we also had approximately $9.0$10.0 million available under our revolving credit facility to fund any short-term working capital needs. The working capital surplus as of SeptemberJune 30, 20172019 was primarily the result of increased operating cash flows which has allowed the Company to fund operations, purchase capital equipment, pay dividends, pay down debt and increase cash reserves.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 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 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. At this time, we do not anticipate our capital structure will limit our growth initiatives over the next twelve months.

 

The following table summarizes our cash flow:

 

Nine Months Ended
September 30,

Six Months Ended June 30

2017

2016

2019

2018

Net cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

$

10,091,583

$

9,549,148

$

11,901,270

$

5,855,849

Investing activities

 

(3,360,853)

 

(4,352,841)

 

(3,835,365)

 

(2,733,226)

Financing activities

 

(5,179,663)

 

(5,278,721)

 

(2,466,520)

 

(2,487,037)

Increase (Decrease) in cash

$

1,551,067

 

$

(82,414)

Increase in cash

$

5,599,385

 

$

635,586

 

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Cash Flows from Operating Activities

 

Cash generated by operations in the first ninesix months of 20172019 was $10,091,583,$11,901,270, compared to cash generated by operations of $9,549,148$5,855,849 in the first ninesix months of 2016.2018. The increase in cash from operating activities in 20172019 was primarily due to increased net income, the timingacquisition of accounts receivable receipts and prepaid expenses, partially offset by timing of payments for accounts payable, income taxes and other accrued liabilities.Scott-Rice.  

 

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 SeptemberJune 30, 20172019 was $2,167,181$7,184,154 compared to $616,114$1,584,769 at December 31, 2016.2018.

 

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 was $3,360,853$3,835,365 for the first ninesix months of 20172019 compared to $4,352,841$2,733,226 for the first ninesix months of 2016.2018. Capital expenditures relating to on-going operations were $3,257,853$4,119,328 for the ninesix months ended SeptemberJune 30, 20172019 compared to $4,249,841$3,003,545 for the ninesix months ended SeptemberJune 30, 2016.2018. We expect total plant additions in 2019 to be approximately $6.5$13.6 million, in 2017.net of broadband grants awarded by the State of Minnesota. Our investing expenditures are financed with cash flows from our current operations and advances on our line of credit. 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 SeptemberJune 30, 2017,2019, we had approximately $9.0$10.0 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 ninesix months ended SeptemberJune 30, 20172019 was $5,179,663.$2,466,520. This included long-term debt repayments of $2,025,000, net payments on our revolving credit facility$1,152,600, loan origination fees of $1,634,778$18,084 and the distribution of $1,519,885$1,295,836 of dividends to our stockholders. Cash used in financing activities for the ninesix months ended SeptemberJune 30, 20162018 was $5,278,721.$2,487,037. This included long-term debt repayments of $2,025,000, net payments on our revolving credit facility of $1,880,909$1,350,000 and the distribution of $1,372,812$1,137,037 of dividends to stockholders.

 

Working Capital

 

We had a working capital surplus (i.e. current assets minus current liabilities) of $32,288$2,141,141 as of SeptemberJune 30, 2017,2019, with current assets of approximately $7.5$14.0 million and current liabilities of approximately $7.4$11.9 million, compared to a working capital deficit of $2,827,419$1,720,931 as of December 31, 2016.2018. The ratio of current assets to current liabilities was 1.001.18 and 0.660.84 as of SeptemberJune 30, 20172019 and December 31, 2016.2018. The working capital surplus as of Septemberat June 30, 20172019 was primarily the result of increased operating cash flows which has allowed the Company to fund operations, purchase capital equipment, pay dividends, pay down debt and increase cash reserves.

balances. In addition, if it becomes necessary, we will have sufficient availability under our revolving credit facility to fund any fluctuations in working capital and other cash needs.

 

At SeptemberJune 30, 20172019 and December 31, 20162018 we were in compliance with all stipulated financial ratios in our loan agreements.

 

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Table of Contents

Dividends and Restrictions

 

We declared a quarterly dividend of $.10$0.13 per share for both the second quarter of 2019 and third quarters of 2017 and $.095$0.12 per share for the first quarter of 2017,2019, which totaled $516,007 for the third quarter, $515,636$674,805 for the second quarter and $488,242$621,031 for the first quarter. We declared a quarterly dividend of $.09$0.12 per share for both the second quarter of 2018 and third quarters of 2016 and $.0875$0.10 per share for the first quarter of 2016,2018, which totaled $462,544 per quarter$621,030 for the second quarter and third quarters and $447,724$516,007 for the first quarter.

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Table of Contents

 

We expect to continue to pay quarterly dividends during 2017,2019, but only if and to the extent declared by our Board of DirectorsBOD on a quarterly basis and subject to various restrictions on our ability to do so (described below). Dividends on our common stock are not cumulative. 

 

There are security and loan agreements underlying our current CoBank credit facility that contain restrictions on our distributions to stockholders and investment in, or loans, to others. See below and Note 47 – “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 $2,100,000$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 2.502.00 to 1.00, and (ii) in any amount if our Total Leverage Ratio is less than 2.502.00 to 1.00, and (b) in either case, if we are not in default or potential default under the loan agreements. On March 31, 2016 our Total Leverage Ratio fell below 2.50, thus eliminating any restrictions on our ability to pay cash dividends to our stockholders. Our current Total Leverage Ratio at SeptemberJune 30, 20172019 is 1.58.2.16. 

 

Our Board of DirectorsBOD reviews quarterly dividend declarations based on our anticipated earnings, capital requirements and our operating and financial conditions. The cash requirements of our current dividend payment practices are in addition to our other expected cash needs. Should our Board of DirectorsBOD determine a dividend will be declared, we expect we will have sufficient availability from our current cash flows from operations to fund our existing cash needs and the payment of our dividends. In addition, we expect we will have sufficient availability under our revolving credit facility to fund dividend payments in addition to any fluctuations in working capital and other cash needs.

 

Long-Term Debt

 

See Note 47 – “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. 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required for a smaller reporting company.

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Item 4. 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.

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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. 1. Legal Proceedings.

 

Other than routinethe litigation incidental to our business, there are no pending material legal proceedings to which we are a party or to which any of our property is subject. 

 

Item 1A. 1A. Risk Factors.

 

Not required for a smaller reporting company.

 

Item 2. 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. 4. Mine Safety Disclosures

 

Not Applicable.

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Item 5. 5. Other Information.

 

None.

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Item 6. 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.

 

 

NEW ULM TELECOM,NUVERA COMMUNICATIONS, INC.

Dated:  November 14, 2017August 9, 2019

By   

/s//s/ Bill D. Otis

Bill D. Otis, President and Chief Executive Officer

Dated:  November 14, 2017August 9, 2019

By   

/s//s/ Curtis O. Kawlewski

Curtis O. Kawlewski, Chief Financial Officer

 

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