Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]

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

 

 

 

For the quarterly period ended SeptemberJune 30, 20192020

or

[   ]

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 001-35929

 

         National Research Corporation         

(Exact name of Registrant as specified in its charter)

 

Wisconsin

47-0634000

(State or other jurisdiction of

 

47-0634000(I.R.S. Employer

(Stateincorporation or other jurisdiction oforganization)

 

(I.R.S. EmployerIdentification No.)

incorporation or organization)

1245 Q Street, Lincoln, Nebraska          68508

 

Identification No.)

 

1245 Q Street, Lincoln, Nebraska          68508(Address of principal executive offices) (Zip Code)

 

(Address of principal executive offices) (Zip Code)

 

 

(402) 475-2525

 

 

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.001 par value

NRC

The NASDAQ stock market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer     

Non-accelerated filer

☐    

Smaller reporting company

Emerging growth company

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 Act.) Yes ☐    No  ☒ 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

Common Stock, $.001 par value, outstanding as of October 25, 2019: 24,920,050July 28, 2020: 25,241,049

 

 

 

 

NATIONAL RESEARCH CORPORATION

 

FORM 10-Q INDEX

 

For the Quarter Ended SeptemberJune 30, 20192020

 

 

 

Page No.

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Income

4

 

 

Condensed Consolidated Statements of Comprehensive Income

5

 

 

Condensed Consolidated Statements of Shareholders'Shareholders’ Equity

6-86-7

 

 

Condensed Consolidated Statements of Cash Flows

98

 

 

Notes to Condensed Consolidated Financial Statements

10-239-20

 

 

 

 

 

Item 2.

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

24-3021-28

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

30

 

 

 

 

 

Item 4.1A.

Controls and ProceduresRisk Factors

30

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3130

 

 

 

 

 

Item 6.

Exhibits

3231

 

 

 

 

Signatures

3332

 

1


 

Special Note Regarding Forward-Looking Statements

 

Certain matters discussed in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), “believes,” “expects,” “may,” “could,” “anticipates,” or other words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. In this Quarterly Report on Form 10-Q, statements relatingregarding the future value and utility of, and market demand for, our service offerings, our ability to compete successfully in the future, future opportunities for growth with respect to new and existing clients, future acquisition opportunities, future consolidation in the healthcare industry, the future adequacy of our liquidity sources, future revenue sources, future capital expenditures, the future phase out of LIBOR and applicable replacement benchmark rates, future impact of recent accounting pronouncements, future customer needsthe February 2020 ransomware attack and service models, the future sufficiency of our liquidity, future interest rates on our debt, the expected time period for recognitionimpact of equity based compensation cost,the COVID-19 pandemic and future capital expenditure purchases,related government mandates and recommendations, among others, are forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties some of which cannot be predicted or quantified, which could cause actual results or outcomes to differ materially from those currently anticipated. Factors that could affect actual results or outcomes include, without limitation, the following factors:

 

 

The possibility of non-renewal oflikelihood that the COVID-19 pandemic will adversely affect our client service contractssales, earnings, financial condition and retention of key clients;liquidity;

 

The possibility of non-renewal of our client service contracts and retention of key clients;

Our ability to compete in our markets, which are highly competitive with new market entrants, and the possibility of increased price pressure and expenses;

The effects of an economic downturn;

The impact of consolidation in the healthcare industry;

The impact of federal healthcare reform legislation or other regulatory changes;

 

Our ability to compete in our markets, which are highly competitive with new market entrants,attract and the possibility of increased price pressureretain key managers and expenses;other personnel;

 

 

The effects of an economic downturn;possibility that our intellectual property and other proprietary information technology could be copied or independently developed by our competitors;

 

The impact of consolidation in the healthcare industry;

The impact of federal healthcare reform legislation or other regulatory changes;

Our ability to attract and retain key managers and other personnel;

 

The possibility thatfor failures or deficiencies in our intellectual property and other proprietary information technology could be copied or independently developed by our competitors;platform;

 

The possibility for failures or deficiencies in our information technology platform;

 

The possibility that we could be subject to cyber-attacks, security breaches or computer viruses; and

 

 

The factors set forth under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, as such section may be updated or supplemented by Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q (including this Report).

 

Shareholders, potential investors and other readers are urged to consider these and other factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included are only made as of the date of this Quarterly Report on Form 10-Q and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances, except as required by the federal securities laws.

 

2


 

PART I – Financial Information

ITEM 1. Financial Statements

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts and par value)

 

 

September 30,

2019

  

December 31,

2018

  

June 30,

2020

  

December 31,

2019

 
 

(unaudited)

      

(unaudited)

    

Assets

                

Current assets:

             

Cash and cash equivalents

 $8,358  $12,991  $11,957  $13,517 

Trade accounts receivable, less allowance for doubtful accounts of $138 and $175, respectively

  15,308   11,922 

Trade accounts receivable, less allowance for doubtful accounts of $143 and $144, respectively

 19,882  11,639 

Prepaid expenses

  2,000   2,925  2,823  2,038 

Income taxes receivable

  556   348  272  69 

Other current assets

  348   224   1,763   1,894 

Total current assets

  26,570   28,410  36,697  29,157 
         

Net property and equipment

  13,696   14,153  12,355  13,530 

Intangible assets, net

  1,822   2,102  1,541  1,728 

Goodwill

  57,896   57,831  57,829  57,935 

Deferred contract costs, net

  3,993   3,484  4,582  4,204 

Operating lease right-of-use assets

  1,805   --  1,312  1,628 

Other assets

  1,867   2,052 

Other

  2,465   2,503 

Total assets

 $107,649  $108,032  $116,781  $110,685 
 

Liabilities and Shareholders’ Equity

                

Current liabilities:

             

Current portion of notes payable, net of unamortized debt issuance costs

 $4,133  $3,667 

Current portion of notes payable

 $3,966  $4,378 

Accounts payable

  777   613  957  1,279 

Accrued wages, bonus and profit sharing

  5,192   5,798  6,830  6,086 

Accrued expenses

  3,504   2,834  2,925  3,408 

Income taxes payable

  14   636  308  366 

Dividends payable

  4,735   17,113  -  5,239 

Deferred revenue

  19,133   16,244  16,275  16,354 

Other current liabilities

  824   204   1,007   1,045 
      

Total current liabilities

  38,312   47,109  32,268  38,155 
         

Notes payable, net of current portion

  30,977   34,176 

Notes payable, net of current portion and unamortized debt issuance costs

 28,627  29,795 

Deferred income taxes

  7,210   6,276  7,727  7,399 

Other long-term liabilities

  2,175   1,388 

Other long term liabilities

  2,585   2,444 

Total liabilities

  78,674   88,949  71,207  77,793 
         

Shareholders’ equity:

             

Preferred stock, $0.01 par value, authorized 2,000,000 shares, none issued

  --   --  -  - 

Common stock, $0.001 par value; authorized 60,000,000 shares, issued 30,100,762 in 2019 and 29,917,667 in 2018, outstanding 24,920,050 in 2019 and 24,800,796 in 2018

  30   30 

Common stock, $0.001 par value; authorized 60,000,000 shares, issued 30,553,546 in 2020 and 30,151,574 in 2019, outstanding 25,235,123 in 2020 and 24,947,500 in 2019

 31  30 

Additional paid-in capital

  160,524   157,312  167,808  162,154 

Retained earnings (accumulated deficit)

  (96,817

)

  (106,339

)

 (79,165

)

 (93,357

)

Accumulated other comprehensive loss, foreign currency translation adjustment

  (2,442

)

  (2,916

)

 (2,872

)

 (2,209

)

Treasury stock, at cost; 5,180,712 Common shares in 2019 and 5,116,871 shares in 2018

  (32,320

)

  (29,004

)

Treasury stock, at cost; 5,318,423 Common shares in 2020 and 5,204,074 shares in 2019

  (40,228

)

  (33,726

)

Total shareholders’ equity

  28,975   19,083   45,574   32,892 

Total liabilities and shareholders’ equity

 $107,649  $108,032  $116,781  $110,685 

 

See accompanying notes to condensed consolidated financial statements.statements

 

3


 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except for per share amounts, unaudited)

 

 

Three months ended
September 30,

  

Nine months ended
September 30,

  

Three months ended
June 30,

  

Six months ended
June 30,

 
 

2019

  

2018

  

2019

  

2018

  

2020

  

2019

  

2020

  

2019

 
                 

Revenue

 $32,465  $30,013  $95,359  $89,047  $31,166  $31,414  $65,026  $62,894 
                 

Operating expenses:

                         

Direct, exclusive of depreciation and amortization

  12,109   11,780   35,269   35,685 

Selling, general and administrative, exclusive of depreciation and amortization

  8,706   7,679   24,732   23,486 

Direct

 11,634  11,506  24,180  23,160 

Selling, general and administrative

 8,852  8,319  17,600  16,026 

Depreciation and amortization

  1,430   1,388   4,285   3,996   1,405   1,440   2,777   2,855 

Total operating expenses

  22,245   20,847   64,286   63,167   21,891   21,265   44,557   42,041 
                 

Operating income

  10,220   9,166   31,073   25,880  9,275  10,149  20,469  20,853 
                 

Other income (expense):

                         

Interest income

  10   3   24   57  2  8  13  14 

Interest expense

  (510

)

  (544

)

  (1,613

)

  (990

)

 (450

)

 (533

)

 (914

)

 (1,103

)

Other, net

  89   (242

)

  (330

)

  222   (270

)

  (139

)

  360   (419

)

                 

Total other (expense) income

  (411

)

  (783

)

  (1,919

)

  (711

)

Total other income (expense)

  (718

)

  (664

)

  (541

)

  (1,508

)

                 

Income before income taxes

  9,809   8,383   29,154   25,169  8,557  9,485  19,928  19,345 
                 

Provision for income taxes

  1,690   1,391   5,446   2,923   842   2,092   458   3,756 
                 

Net income

 $8,119  $6,992  $23,708  $22,246  $7,715  $7,393  $19,470  $15,589 
                 

Earnings Per Share of Common Stock:

                         

Basic Earnings Per Share:

                

Common (formerly Class A)

 $0.33  $0.28  $0.95  $0.76 

Class B

 $--  $--  $--  $1.31 

Diluted Earnings Per Share:

                

Common (formerly Class A)

 $0.31  $0.27  $0.92  $0.73 

Class B

 $--  $--  $--  $1.27 

Basic Earnings Per Share

 $0.31  $0.30  $0.78  $0.63 

Diluted Earnings Per Share

 $0.30  $0.29  $0.76  $0.61 
                 

Weighted average shares and share equivalents outstanding:

                         

Common (formerly Class A) – basic

  24,827   24,671   24,794   23,184 

Class B – basic

  --   --   --   3,527 

Common (formerly Class A) – diluted

  25,741   25,526   25,624   24,083 

Class B – diluted

  --   --   --   3,628 

Basic

  25,148   24,789   25,060   24,777 

Diluted

  25,680   25,586   25,702   25,549 

 

See accompanying notes to condensed consolidated financial statements.statements

 

4


 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)

 

 

Three months ended
September 30,

  

Nine months ended

September 30,

  

Three months ended
June 30,

  

Six months ended

June 30,

 
 

2019

  

2018

  

2019

  

2018

  

2020

  

2019

  

2020

  

2019

 
                 

Net income

 $8,119  $6,992  $23,708  $22,246  $7,715  $7,393  $19,470  $15,589 

Other comprehensive income:

                         

Foreign currency translation adjustment

  (146

)

  280   474   (418

)

  461   255   (663)  620 

Other comprehensive income

 $(146

)

 $280  $474  $(418

)

 $461  $255  $(663) $620 
                 

Comprehensive Income

 $7,973  $7,272  $24,182  $21,828  $8,176  $7,648  $18,807  $16,209 

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED Consolidated Statements of Shareholders’ Equity

(In thousands except share and per share amounts, unaudited)

  

  

Common
Stock

(formerly

Class A)

  

Additional
Paid-in
Capital

  

Retained
Earnings

  

Accumulated

Other
Comprehensive
Income (Loss)

  

Treasury

Stock

  

Total

 

Balances at December 31, 2018

 $30  $157,312  $(106,339

)

 $(2,916

)

 $(29,004

)

 $19,083 

Purchase of 28,657 shares treasury stock

  --   --   --   --   (1,116

)

  (1,116

)

Issuance of 86,247 common shares for the exercise of stock options

  --   633   --   --   --   633 

Issuance of 6,005 restricted common shares

  --   --   --   --   --   -- 

Non-cash stock compensation expense

  --   302   --   --   --   302 

Dividends declared of $0.19 per common share

  --   --   (4,724

)

  --   --   (4,724

)

Other comprehensive income, foreign currency translation adjustment

  --   --   --   365   --   365 

Net income

  --   --   8,196   --   --   8,196 

Balances at March 31, 2019

 $30  $158,247  $(102,867

)

 $(2,551

)

 $(30,120

)

 $22,739 

Purchase of 2,977 shares treasury stock

  --   --   --   --   (137

)

  (137

)

Issuance of 18,000 common shares for the exercise of stock options

  --   137   --   --   --   137 

Non-cash stock compensation expense

  --   307   --   --   --   307 

Dividends declared of $0.19 per common share

  --   --   (4,727

)

  --   --   (4,727

)

Other comprehensive income, foreign currency translation adjustment

  --   --   --   255   --   255 

Net income

  --   --   7,393   --   --   7,393 

Balances at June 30, 2019

 $30 ��$158,691  $(100,201

)

 $(2,296

)

 $(30,257

)

 $25,967 

Purchase of 32,207 shares treasury stock

  --   --   --   --   (2,063)  (2,063

)

Issuance of 72,843 common shares for the exercise of stock options

  --   1,525   --   --   --   1,525 

Non-cash stock compensation expense

  --   308   --   --   --   308 

Dividends declared of $0.19 per common share

  --   --   (4,735

)

  --   --   (4,735

)

Other comprehensive income, foreign currency translation adjustment

  --   --   --   (146)  --   (146)

Net income

  --   --   8,119   --   --   8,119 

Balances at September 30, 2019

 $30  $160,524  $(96,817

)

 $(2,442

)

 $(32,320

)

 $28,975 
  

Common
Stock

  

Additional
Paid-in
Capital

  

Retained
Earnings

(Accumulated

Deficit)

  

Accumulated

Other
Comprehensive
Income (Loss)

  

Treasury

Stock

  

Total

 

Balances at December 31, 2019

 $30  $162,154  $(93,357

)

 $(2,209

)

 $(33,726

)

 $32,892 

Purchase of 75,980 shares treasury stock

  --   --   --   --   (4,425

)

  (4,425

)

Issuance of 260,481 common shares for the exercise of stock options

  --   3,145   --   --   --   3,145 

Non-cash stock compensation expense

  --   332   --   --   --   332 

Dividends declared of $0.21 per common share

  --   --   (5,278

)

  --   --   (5,278

)

Other comprehensive loss, foreign currency translation adjustment

  --   --   --   (1,124

)

  --   (1,124

)

Net income

  --   --   11,755   --   --   11,755 

Balances at March 31, 2020

 $30  $165,631  $(86,880

)

 $(3,333

)

 $(38,151

)

 $37,297 

Purchase of 38,369 shares treasury stock

  --   --   --   --   (2,077)  (2,077)

Issuance of 148,284 common shares for the exercise of stock options

  1   2,036   --   --   --   2,037 

Forfeitures of 6,793 restricted common shares

  --   --   --   --   --   -- 

Non-cash stock compensation expense

  --   141   --   --   --   141 

Other comprehensive income, foreign currency translation adjustment

  --   --   --   461   --   461 

Net income

  --   --   7,715   --   --   7,715 

Balances at June 30, 2020

 $31  $167,808  $(79,165

)

 $(2,872

)

 $(40,228

)

 $45,574 

 

See accompanying notes to condensed consolidated financial statements.

 

6


 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED Consolidated Statements of Shareholders’ Equity

(In thousands except share and per share amounts, unaudited)

  

  

Common
Stock

(formerly

Class A)

  

Class B

Common
Stock

  

Additional
Paid-in
Capital

  

Retained
Earnings

  

Accumulated

Other
Comprehensive
Income (Loss)

  

Treasury

Stock

  

Total

 

Balances at December 31, 2017

 $26  $4  $51,025  $77,574  $(1,635

)

 $(36,953

)

 $90,041 

Purchase of 30,180 shares of class A and 3,677 shares of class B treasury stock

  --   --   --   --   --   (1,272

)

  (1,272

)

Issuance of 74,769 class A and 9,296 class B common shares for the exercise of stock options

  --   --   737   --   --   --   737 

Issuance of 6,793 class A restricted common shares

  --   --   --   --   --   --   -- 

Non-cash stock compensation expense

  --   --   454   --   --   --   454 

Dividends declared of $0.10 per class A and $0.60 per class B common share

  --   --   --   (4,223

)

  --   --   (4,223

)

Cumulative effect adjustment for adoption of ASC 606, net of income tax

  --   --   --   2,735   --   --   2,735 

Other comprehensive income, foreign currency translation adjustment

  --   --   --   --   (414

)

  --   (414

)

Net income

  --   --   --   7,306   --   --   7,306 

Balances at March 31, 2018

 $26  $4  $52,216  $83,392  $(2,049

)

 $(38,225

)

 $95,364 

Purchase of 126,617 shares of class A treasury stock

  --   --   --   --   --   (4,358

)

  (4,358

)

Issuance of 270,189 class A common shares for the exercise of stock options

  --   --   4,182   --   --   --   4,182 

Forfeitures of (10,289) class A restricted common shares

  --   --   --   --   --   --   -- 

Non-cash stock compensation expense

  --   --   541   --   --   --   541 

Settlement of class B restricted common shares and stock options in connection with Recapitalization for cash of $3,271 and 90,369 class A common shares

  --   --   (2,548

)

  --   --   (723

)

  (3,271

)

Settlement of class B common shares in connection with Recapitalization (3,527,246 class B common shares exchanged for $69,099 cash and 3,527,246 class A common shares)

  4   --   118,335   --   --   (187,438

)

  (69,099

)

Retirement of 4,328,552 class B common shares in connection with Recapitalization

  --   (4

)

  (17,112

)

  (186,944

)

  --   204,060   -- 

Dividends declared of $0.17 per class A common share

  --   --   --   (4,206

)

  --   --   (4,206

)

Other comprehensive income, foreign currency translation adjustment

  --   --   --   --   (284

)

  --   (284

)

Net income

  --   --   --   7,948   --   --   7,948 

Balances at June 30, 2018

 $30  $--  $155,614  $(99,810

)

 $(2,333

)

 $(26,684

)

 $26,817 
  

Common
Stock

(formerly

Class A)

  

Additional
Paid-in
Capital

  

Retained
Earnings

(Accumulated
Deficit)

  

Accumulated

Other
Comprehensive
Income (Loss)

  

Treasury

Stock

  

Total

 

Balances at December 31, 2018

 $30  $157,312  $(106,339

)

 $(2,916

)

 $(29,004

)

 $19,083 

Purchase of 28,657 shares treasury stock

  --   --   --   --   (1,116

)

  (1,116

)

Issuance of 86,247 common shares for the exercise of stock options

  --   633   --   --   --   633 

Issuance of 6,005 restricted common shares, net of (forfeitures)

  --   --   --   --   --   -- 

Non-cash stock compensation expense

  --   302   --   --   --   302 

Dividends declared of $0.19 per common share

  --   --   (4,724

)

  --   --   (4,724

)

Other comprehensive income, foreign currency translation adjustment

  --   --   --   365   --   365 

Net income

  --   --   8,196   --   --   8,196 

Balances at March 31, 2019

 $30  $158,247  $(102,867

)

 $(2,551

)

 $(30,120

)

 $22,739 

Purchase of 2,977 shares treasury stock

  --   --   --   --   (137

)

  (137

)

Issuance of 18,000 common shares for the exercise
of stock options

  --   137   --   --   --   137 

Non-cash stock compensation expense

  --   307   --   --   --   307 

Dividends declared of $0.19 per common share

  --   --   (4,727

)

  --   --   (4,727

)

Other comprehensive income, foreign currency
translation adjustment

  --   --   --   255   --   255 

Net income

  --   --   7,393   --   --   7,393 

Balances at June 30, 2019

 $30  $158,691  $(100,201

)

 $(2,296

)

 $(30,257

)

 $25,967 

 

See accompanying notes to condensed consolidated financial statements.

 

7


NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED Consolidated Statements of Shareholders’ Equity

(In thousands, except share and per share amounts, unaudited)

  

Common
Stock

(formerly

Class A)

  

Class B

Common
Stock

  

Additional
Paid-in
Capital

  

Retained
Earnings

  

Accumulated

Other
Comprehensive
Income (Loss)

  

Treasury

Stock

  

Total

 

Balances at June 30, 2018

 $30  $--  $155,614  $(99,810

)

 $(2,333

)

 $(26,684

)

 $26,817 

Purchase of 12,771 shares of class A shares of treasury stock

  --   --   --   --   --   (511

)

  (511

)

Issuance of 36,000 class A common shares for the exercise of stock options

  --   --   510   --   --   --   510 

Non-cash stock compensation expense

  --   --   260   --   --   --   260 

Dividends declared of $0.17 per class A common share

  --   --   --   (4,209

)

  --   --   (4,209

)

Other comprehensive income, foreign currency translation adjustment

  --   --   --   --   280   --   280 

Net income

  --   --   --   6,992   --   --   6,992 

Balances at September 30, 2018

 $30  $--  $156,384  $(97,027

)

 $(2,053

)

 $(27,195

)

 $30,139 

See accompanying notes to condensed consolidated financial statements.

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

 

 

Nine months ended

  

Six months ended

 
 

September 30,

  

June 30,

 
 

2019

  

2018

  

2020

  

2019

 

Cash flows from operating activities:

             

Net income

 $23,708  $22,246  $19,470  $15,589 

Adjustments to reconcile net income to net cash provided by operating activities:

             

Depreciation and amortization

  4,285   3,996  2,777  2,855 

Deferred income taxes

  919   1,775  328  472 

Reserve for uncertain tax positions

  (262

)

  (297

)

 143  (251

)

Non-cash share-based compensation expense

  917   1,255  473  609 

Loss on disposal of property and equipment

  40   212  -  40 

Net changes in assets and liabilities:

             

Trade accounts receivable

  (3,343

)

  (1,842

)

 (8,382

)

 (3,088

)

Prepaid expenses and other current assets

  978   (1,632

)

 (557

)

 118 

Deferred contract costs, net

  (508

)

  1  (379

)

 (259

)

Operating lease assets and liability, net

  (10)  -- 

Operating lease assets and liabilities, net

 (1

)

 (4

)

Accounts payable

  69   147  (338

)

 432 

Accrued expenses, wages, bonuses and profit sharing

  138   (1,310

)

 713  (222

)

Income taxes receivable and payable

  (829

)

  (554

)

 (263

)

 (881

)

Deferred revenue

  2,872   1,939   (81

)

  696 

Net cash provided by operating activities

  28,974   25,936   13,903   16,106 
         

Cash flows from investing activities:

             

Purchases of property and equipment

  (3,429

)

  (4,858

)

  (1,427

)

  (2,280

)

Net cash used in investing activities

  (3,429

)

  (4,858

)

  (1,427

)

  (2,280

)

         

Cash flows from financing activities:

             

Payments related to Recapitalization

  --   (72,370

)

Proceeds from issuance of note payable

  --   40,000 

Borrowings on line of credit

  21,000   2,500  -  16,500 

Payments on line of credit

  (21,000

)

  (2,500

)

 -  (15,500

)

Payment of debt issuance costs

  --   (187

)

Payments on notes payable

  (2,767

)

  (2,170

)

 (1,600

)

 (1,837

)

Payments on finance lease obligations

  (223

)

  (104

)

 (124

)

 (161

)

Proceeds from the exercise of stock options

 538  - 

Payment of employee payroll tax withholdings on share-based awards exercised

  (1,021

)

  (712

)

 (1,859

)

 (483

)

Payment of dividends on common stock

  (26,564

)

  (12,650

)

  (10,517

)

  (21,837

)

Net cash used in financing activities

  (30,575

)

  (48,193

)

  (13,562

)

  (23,318

)

         

Effect of exchange rate changes on cash

  397   (345

)

  (474

)

  521 

Change in cash and cash equivalents

  (4,633

)

  (27,460

)

 (1,560

)

 (8,971

)

Cash and cash equivalents at beginning of period

  12,991   34,733   13,517   12,991 

Cash and cash equivalents at end of period

 $8,358  $7,273  $11,957  $4,020 
         

Supplemental disclosure of cash paid for:

             

Interest, net of capitalized amounts

 $1,558  $767  $884  $1,066 

Income taxes

 $5,607  $2,017  $261  $4,404 

Supplemental disclosure of non-cash investing and financing activities:

             

Common stock (formerly class A) issued in the Recapitalization in exchange for then-existing class B shares and options.

 $--  $121,371 

Finance lease obligations originated for property and equipment

 $206  $879  $105  $167 

Stock tendered to the Company for cashless exercise of stock options in connection with equity incentive plans

 $2,295  $5,429  $4,644  $770 

 

See accompanying notes to condensed consolidated financial statements.

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

  

 

(1)(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of business and basis of presentation

 

National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), is a leading provider of analytics and insights that facilitate measurement and improvement of the patient and employee experience while also increasing patient engagement and customer loyalty for healthcare organizations in the United States and Canada. Our portfolio of solutions representrepresents a unique set of capabilities that individually and collectively provide value to our clients. The solutions are offered at an enterprise level through the Voice of the Customer ("VoC") platform, The Governance Institute, and legacy Experience solutions.

 

Our six operating segments are aggregated into one reporting segment because they have similar economic characteristics and meet other aggregation criteria from the Financial Accounting Standards Board (“FASB”) guidance on segment disclosure. The six operating segments are Experience, The Governance Institute, Market Insights, Transparency, National Research Corporation Canada and Transitions, which offer a portfolio of solutions that address specific needs around market insight, experience, transparency and governance for healthcare providers, payers and other healthcare organizations.

 

Our condensed consolidated balance sheet at December 31, 2018 2019 was derived from our audited consolidated balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.

 

Information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are included in our Form 10-K10-K for the year ended December 31, 2018, 2019, filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2019.6, 2020.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

The condensed consolidated financial statements include the accounts of the Company and itsour wholly-owned subsidiary, National Research Corporation Canada, doing business as NRC Health Canada. All significant intercompany transactions and balances have been eliminated.

 

Our Canadian subsidiary uses as its functional currency the local currency of the country in which it operates. It translates its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. It translates its revenue and expenses at the average exchange rate during the period. We include translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’ equity. Gains and losses related to transactions denominated in a currency other than the functional currency of the country in which we operate and short-term intercompany accounts are included in other income (expense) in the condensed consolidated statements of income. 

 

10
9


Revenue Recognition

 

We derive a majority of our revenues from our annually renewable subscription-based service agreements with our customers, which include performance measurement and improvement services, healthcare analytics and governance education services. Such agreements are generally cancelable on short or no notice without penalty. See Note 32 for further information about our contracts with customers. We account for revenue using the following steps:

 

 

Identify the contract, or contracts, with a customercustomer;

 

Identify the performance obligations in the contractcontract;

 

Determine the transaction priceprice;

 

Allocate the transaction price to the identified performance obligations; and

 

Recognize revenue when, or as, we satisfy the performance obligations.

 

Our revenue arrangements with a client may include combinations of more than one service offering which may be executed at the same time, or within close proximity of one another. We combine contracts with the same customer into a single contract for accounting purposes when the contract is entered into at or near the same time and the contracts are negotiated together.together, consideration in one contract depends on another contract, or services in one or more contracts are a single performance obligation. For contracts that contain more than one separately identifiable performance obligation, the total transaction price is allocated to the identified performance obligations based upon the relative stand-alone selling prices of the performance obligations. The stand-alone selling prices are based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost-plus margin or residual approach. We estimate the amount of total contract consideration we expect to receive for variable arrangements based on the most likely amount we expect to earn from the arrangement based on the expected quantities of services we expect to provide and the contractual pricing based on those quantities. We only include some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We consider the sensitivity of the estimate, our relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement. Our revenue arrangements do not contain any significant financing element due to the contract terms and the timing between when consideration is received and when the service is provided.

 

Our arrangements with customers consist principally of four different types of arrangements: 1)1) subscription-based service agreements; 2) one-time2) one-time specified services performed at a single point in time; 3)3) fixed, non-subscription service agreements; and 4)4) unit-priced service agreements.

 

Subscription-based services - Services that are provided under subscription-based service agreements are usually for a twelve month period and represent a single promise to stand ready to provide reporting, tools and services throughout the subscription period as requested by the customer. These agreements are renewable at the option of the customer at the completion of the initial contract term for an agreed upon price increase each year. These agreements represent a series of distinct monthly services that are substantially the same, with the same pattern of transfer to the customer as the customer receives and consumes the benefits throughout the contract period. Accordingly, subscription services are recognized ratably over the subscription period. Subscription services are typically billed annually in advance but may also be billed on a quarterly and monthly basis.

 

One-time services – These agreements typically require us to perform a specific one-timeone-time service in a particular month. We are entitled to a fixed payment upon completion of the service. Under these arrangements, we recognize revenue at the point in time we complete the service and it is accepted by the customer.

 

Fixed, non-subscription services – These arrangements typically require us to perform an unspecified amount of services for a fixed price during a fixed period of time. Revenues are recognized over time based upon the costs incurred to date in relation to the total estimated contract costs. In determining cost estimates, management uses historical and forecasted cost information which is based on estimated volumes, external and internal costs and other factors necessary in estimating the total costs over the term of the contract. Changes in estimates are accounted for using a cumulative catch up adjustment which could impact the amount and timing of revenue for any period.

 

Unit-price services – These arrangements typically require us to perform certain services on a periodic basis as requested by the customer for a per-unit amount which is typically billed in the month following the performance of the service. Revenue under these arrangements is recognized over the time the services are performed at the per-unit amount.

 

any sales tax charged to our clients that we are required to remit to taxing authorities. We recognize contract assets or unbilled receivables related to revenue recognized for services completed but not invoiced to the clients. Unbilled receivables are classified as receivables when we have an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when we invoice clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when we have satisfied the related performance obligation.  

 

Deferred

10

Deferred Contract Costs

 

Deferred contract costs, net is stated at gross deferred costs less accumulated amortization. We defer commissions and incentives, including payroll taxes, if they are incremental and recoverable costs of obtaining a renewable customer contract. Deferred contract costs are amortized over the estimated term of the contract, including renewals, which generally ranges from three to five years. The contract term was estimated by considering factors such as historical customer attrition rates and product life. The amortization period is adjusted for significant changes in the estimated remaining term of a contract.  An impairment of deferred contract costs is recognized when the unamortized balance of deferred contract costs exceeds the remaining amount of consideration we expect to receive net of the expected future costs directly related to providing those services.  We deferred incrementalhave elected the practical expedient to expense contract costs when incurred for any nonrenewable contracts with a term of obtaining a contract of $1.0 million and $616,000 in the three-month periods ended September 30, 2019 and 2018, respectively.one year or less. We deferred incremental costs of obtaining a contract of $2.6$599,000 and $741,000 in the three months ended June 30, 2020 and 2019, respectively. The company deferred incremental costs of obtaining a contract of $2.2 million and $1.8$1.6 million in the nine-monthsix-month periods ended SeptemberJune 30, 2020 and 2019, respectively. Deferred contract costs, net of accumulated amortization was $4.6 million and $4.2 million at June 30, 2020 and December 31, 2019, and 2018, respectively. Total amortization by expense classification for the three and nine month-periodssix-months ended SeptemberJune 30, 2019 2020 and 20182019 was as follows:

 

  

Three months ended

  

Nine months ended

 
  

September 30,

2019

  

September 30,

2018

  

September 30,

2019

  

September 30,

2018

 
  

(In thousands)

 

Direct expenses

 $10  $13  $26  $73 

Selling, general and administrative expenses

  738   601   2,072   1,815 

Total

 $748  $614  $2,097  $1,888 
  

Three months

ended
June 30, 2020

  

Three months

ended
June 30, 2019

  

Six month

ended
June 30, 2020

  

Six months

ended
June 30, 2019

 
  

(In thousands)

 

Direct Expenses

 $60  $13  $178  $19 

Selling, general and administrative expenses

  851   628   1,624   1,309 

Total amortization

 $911  $641  $1,802  $1,328 

 

Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $1,000$3,000 and $12,000$1,000 for the three months ended SeptemberJune 30, 2019 2020 and 2018,2019, respectively and $22,000$4,000 and $31,000$21,000 in the ninesix months ended SeptemberJune 30, 2019 2020 and 2018,2019, respectively. We have elected the practical expedient to expense contract costs when incurred for any nonrenewable contracts with a term of one year or less.

 

Leases

Trade Accounts Receivable

 

WeTrade accounts receivable are recorded at the invoiced amount. Effective January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“Topic 842” or2016-13,Measurement of Credit Losses on Financial Instruments. This ASU requires the “New Leases Standard”) effective January 1, 2019 using a modified retrospective transition, withmeasurement of all expected credit losses for financial assets, including trade receivables, held at the cumulative-effect adjustment recorded to retained earnings asreporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The adoption of this standard did not have an impact on our condensed consolidated financial statements. The allowance for doubtful accounts is our best estimate of the effective date. As a result,amount of probable credit losses in our existing accounts receivable, determined based on our historical write-off experience, current economic conditions and reasonable and supportable forecasts about the financial resultsfuture. We review the allowance for periods priordoubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Some billing and collections efforts were delayed due to 2019the security incident in the first quarter until we received the forensic report in the second quarter, resulting in an increase in accounts receivable. Additionally, the COVID-19 pandemic has also resulted in an increase in accounts receivables as some clients have not been restated. We elected practical expedients relateddelayed payments and some invoicing was deferred during the second quarter of 2020 due to existing leases at transition to not reassess whether contracts are or contain leases, to not reassess lease classification, initial direct costs, or lease terms. Additionally, we elected the practical expedient to account for lease and non-lease components as a single lease component for all asset classifications. We have also made a policy election to not record short-term leases with a duration of 12 months or less on the balance sheet.our clients’ cash-flow issues.

 

Topic 842 requires lessees to recognize a lease liability The following table provides the activity in the allowance for doubtful accounts for the six months ended June 30, 2020 and a right-of-use (“ROU”) asset on the balance sheet for operating leases. We recorded $2.3 million of ROU assets and $2.4 million of lease liabilities related to operating leases at the date of transition. The ROU assets recorded were net of $43,000 of accrued liabilities and prepaid expenses representing previously deferred (prepaid) rent. There was no significant impact to the unaudited condensed consolidated statements of income, comprehensive income, shareholders’ equity or cash flows. Accounting for finance leases is substantially unchanged.2019 (In thousands):

  

Balance at

Beginning of

Period

  

Bad Debt

Expense

(Benefit)

  

Write-offs

  

Recoveries

  

Balance at

End of Period

 
                     

Six months ended June 30, 2020

 $144  $40  $62  $21  $143 

Six months ended June 30, 2019

 $176  $(25

)

 $37  $10  $124 

Leases

 

We determine whether a lease is included in an agreement at inception. Operating lease ROU assets are included in operating lease right-of-use assets in our consolidated balance sheet. Finance lease assets are included in property and equipment. Operating and finance lease liabilities are included in other current liabilities and other long term liabilities. Certain lease arrangements may include options to extend or terminate the lease. We include these provisions in the ROU and lease liabilities only when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term and is included in direct expenses and selling, general and administrative expenses. Our lease agreements do not contain any residual value guarantees.

 

12
11

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments during the lease term. ROU assets and lease liabilities are recorded at lease commencement based on the estimated present value of lease payments. Because the rate of interest implicit in each lease is not readily determinable, we use our estimated incremental collateralized borrowing rate at lease commencement, to calculate the present value of lease payments. When determining the appropriate incremental borrowing rate, we consider our available credit facilities, recently issued debt and public interest rate information.

 

We elected the practical expedient to account for lease and non-lease components as a single lease component for all asset classifications. We have also made a policy election to not record short-term leases with a duration of 12 months or less on the balance sheet.

Implementation Costs of Hosting Arrangements

When a software license is included in a cloud computing arrangement and we have the ability and feasibility to download the software, it is accounted for as software, included in property and equipment, and amortized. If a software license is not included or we do not have the ability or feasibility to download software included in a cloud computing arrangement, it is accounted for as a service contract, which is expensed to direct expenses or selling, general and administrative expenses during the service period. Effective January 1, 2020, we prospectively adopted ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40). This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The adoption did not significantly impact our results of operations and financial position.

Fair Value Measurements

 

Our valuation techniques are based on maximizing observable inputs and minimizing the use of unobservable inputs when measuring fair value. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The inputs are then classified into the following hierarchy: (1)(1) Level 1 Inputs—quoted prices in active markets for identical assets and liabilities; (2)(2) Level 2 Inputs—observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets, quoted prices for similar or identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; (3)(3) Level 3 Inputs—unobservable inputs.

 

The following details our financial assets within the fair value hierarchy at SeptemberJune 30, 2019 2020 and December 31, 2018:2019:

 

  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(In thousands)

 

As of September 30, 2019

                

Money market funds

 $2,605  $--  $--  $2,605 

Total cash equivalents

 $2,605  $--  $--  $2,605 
                 

As of December 31, 2018

                

Money market funds

 $1,848  $--  $--  $1,848 

Total cash equivalents

 $1,848  $--  $--  $1,848 
  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(In thousands)

 

As of June 30, 2020

                

Money Market Funds

 $3,067  $-  $-  $3,067 

Total Cash Equivalents

 $3,067  $-  $-  $3,067 
                 

As of December 31, 2019

                

Money Market Funds

 $3,662  $-  $-  $3,662 

Total Cash Equivalents

 $3,662  $-  $-  $3,662 

 

There were no transfers between levels during the three and nine-month periods-month period ended SeptemberJune 30, 2019.2020.

 

Our long-term debt described in Note 54 is recorded at historical cost. The fair value of long-term debt is classified in Level 2 of the fair value hierarchy and was estimated based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit. The following are the carrying amount and estimated fair values of long-term debt:

 

 

September 30,

2019

  

December 31,

2018

  

June 30,

2020

  

December 31,

2019

 
 

(In thousands)

  

(In thousands)

 

Total carrying amount of long-term debt

 $35,229  $37,966  $32,681  $34,281 

Estimated fair value of long-term debt

 $36,311  $38,257  $35,293  $35,205 

 

12

The carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate their fair value. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes ROU assets, property and equipment, goodwill, intangibles and cost method investments, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). As of SeptemberJune 30, 2019 2020, and December 31, 2018, 2019, there was no indication of impairment related to these assets.

 

Annually, we consider whether the recorded goodwill and indefinite lived intangibles have been impaired. However, goodwill and intangibles must be tested between annual tests if an event occurs or circumstances change to indicate that it is more likely than not that an impairment loss has been incurred (“triggering event”). We considered the current and expected future economic and market conditions, including the impact of the COVID-19 pandemic, on each of our reporting units. We also assessed our current market capitalization compared to book value, forecasts and margins in our last quantitative impairment testing. We concluded that a triggering event has not occurred which would require an interim impairment test to be performed as it is not more likely than not that an impairment loss has been incurred at June 30, 2020.

Our Canadian reporting unit generates service revenue from a relatively small number of customers with approximately 62.2% of its annual revenue concentrated in one customer contract which currently expires in March 2021. While historically we have been successful in renewing or retaining contracts with our customers, should we be unable to or choose not to renew a significant contract, it would likely result in an impairment of goodwill at this reporting unit. The carrying amount of goodwill related to our Canadian reporting unit at June 30, 2020 was $2.3 million.

Commitments and Contingencies



From time to time, we are involved in certain claims and litigation arising in the normal course of business. Management assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. Legal fees, net of estimated insurance recoveries, are expensed as incurred. There were no outstanding claims at June 30, 2020.

 

$775,000 was recorded in 2019 after we became aware that a state sales tax liability was both probable and estimable as of December 31, 2019, due to sales taxes that should have been collected from customers in 2019 and certain previous years. In addition, we incurred additional sales tax expense in the three and six-month periods ended June 30, 2020 of $8,000 and $58,000, respectively. We are working through voluntary disclosure agreements with certain states and began remitting sales tax in the second quarter of 2020. We began collecting sales tax in July 2020. State and local jurisdictions have differing rules and regulations governing sales, use, and other taxes and these rules and regulations can be complex and subject to varying interpretations that may change over time. As a result, we could face the possibility of tax assessment and audits, and our liability for these taxes and associated interest and penalties could exceed our original estimates. In July 2020, we received a revenue ruling from the state of Washington noting that our services are not subject to retail sales tax, and therefore, will be reversing $268,000 of sales tax accrual for the state of Washington in the third quarter of 2020.

 

We received $2.4 million in insurance recoveries in the three-month period ended June 30, 2020, and $400,000 was paid directly to certain vendors from the insurer related to the February incident. These were recorded in selling general and administrative expenses. A final loss claim was submitted to insurance during the three-month period ended June 30, 2020, and an insurance recovery will be recorded when it is probable of collection. Due to insurance recoveries, the February incident has not had and we do not expect it to have a significant impact on our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

 

In June 2016, December 2019, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses2019-12, Simplifying the Accounting for Income Taxes (Topic 326):  Measurement740). Among other clarifications and simplifications related to income tax accounting, this ASU simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes and the recognition of Credit Losses on Financial Instruments.  This ASU will require the measurement of all expected credit lossesdeferred tax liabilities for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.outside basis differences.  The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. We believe our adoption will not significantly impact our results of operations and financial position.  

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40). This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The guidance is to be applied either retrospectively or prospectively and is effective for annual reporting periods beginning after December 15, 2019 2020 and interim periods within those fiscal years.  Early adoption is permitted.permitted in interim or annual periods with any adjustments reflected as of the beginning of the annual period that includes that interim period.  Additionally, entities that elect early adoption must adopt all the amendments in the same period.  Amendments are to be applied prospectively, except for certain amendments that are to be applied either retrospectively or with a modified retrospective approach through a cumulative effect adjustment recorded to retained earnings.  We are currently evaluatingbelieve the method of adoption andwill not significantly impact that this guidance will have upon our results of operations and financial position and have not yet determined whether early adoption will be elected.position.

 

In March 2020, FASB issued ASU No.2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", which provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We expect to apply the optional expedient for contract modification to account for the change in the reference rate on impacted credit facilities prospectively by adjusting the effective interest rate.

13

 

(2)(2)

RECAPITALIZATION

On April 16, 2018, our shareholders approved, among other things, an amendment to our Amended and Restated Articles of Incorporation (the “Articles”) to effect a recapitalization (the “Recapitalization”) pursuant to which each share of our then-existing class B common stock was exchanged for one share of the our then-existing Class A common stock plus $19.59 in cash, without interest. On April 17, 2018, we filed an amendment to our Articles effecting the Recapitalization, followed by an amendment and restatement of our Articles, which resulted in the elimination of our class B common stock and the reclassification of our class A common stock as a share of Common Stock, par value $0.001 per share (“Common Stock”). We issued 3,617,615 shares of Common Stock and paid $72.4 million in exchange for all class B shares outstanding and to settle outstanding share-based awards for class B common stock.

(3)

CONTRACTS WITH CUSTOMERS

 

The following table disaggregates revenue for the three and six-month periods ending June 30, 2020 and 2019based on timing of revenue recognition (In(in thousands):

 

 

Three months ended

  

Nine months ended

  

Three months ended

  

Six months ended

 
 

September 30,

2019

  

September 30,

2018

  

September 30,

2019

  

September 30,

2018

  

June 30, 2020

  

June 30, 2019

  

June 30, 2020

  

June 30, 2019

 

Subscription services recognized ratably over time

 $28,629  $26,328  $84,460  $77,746  $29,572  $27,918  $59,993  $55,831 

Services recognized at a point in time

  1,606   807   4,231   2,923  191  1,625  1,287  2,625 

Fixed, non-subscription recognized over time

  1,043   973   2,083   2,561  158  506  675  1,040 

Unit price services recognized over time

  1,187   1,905   4,585   5,817   1,245   1,365   3,071   3,398 

Total revenue

  32,465   30,013   95,359   89,047  $31,166  $31,414  $65,026  $62,894 

 

Our solutions within the digital VoC platform accounted for 63.8%72.9% and 51.2%62.1% of total revenue, in the three-monththree-month periods ending SeptemberJune 30, 2019 2020 and 2018,2019, respectively, and 61.3%70.9% and 48.7%60.0% of total revenue in the nine-monthsix-month periods ending SeptemberJune 30, 2019 2020 and 2018,2019, respectively. The remaining revenue consists of legacy Experience and Governance Solutions.  

 

The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers:customers (In thousands):

 

  

September 30,

2019

  

December 31,

2018

 
  

(In thousands)

 

Accounts receivable

 $15,308  $11,922 

Contract assets included in other current assets

 $133  $53 

Deferred revenue

 $(19,133

)

 $(16,244

)

  

June 30,

2020

  

December 31,

2019

 

Accounts receivables

 $19,882  $11,639 

Contract assets included in other current assets

 $120  $103 

Deferred Revenue

 $(16,275

)

 $(16,354

)

 

Significant changes in contract assets and contract liabilities during the nine monthsthree and six-months ended SeptemberJune 30, 2019 2020 and 20182019 are as follows (in thousands):

 

 

Nine months ended
September 30, 2019

  

Nine months ended
September 30, 2018

  

Six months ended
June 30, 2020

  

Six months ended
June 30, 2019

 
 

Contract

Asset

  

Deferred

Revenue

  

Contract

Asset

  

Deferred

Revenue

  

Contract

Asset

  

Deferred

Revenue

  

Contract

Asset

  

Deferred

Revenue

 
 

Increase (Decrease)

  

Increase (Decrease)

 

Revenue recognized that was included in deferred revenue at beginning of year due to completion of services

 $-  $(15,214

)

 $-  $(15,377

)

 $-  $(11,934

)

 $-  $(12,226

)

Increases due to invoicing of client, net of amounts recognized as revenue

  -   17,829   -   17,522  -  11,821  -  12,751 

Decreases due to completion of services (or portion of services) and transferred to accounts receivable

  (51

)

  -   (71

)

  -  (85

)

 -  (46

)

 - 

Change due to cumulative catch-up adjustments arising from changes in expected contract consideration

      274       (145

)

    34     219 

Decreases due to impairment

  -   -   -   -  -  -  -  - 

Increases due to revenue recognized in the period with additional performance obligations before invoicing

  131   -   65   -  102  -  223  - 

 

We have elected to applyapplied the practical expedient to not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Total remaining contract revenue for contracts with original duration of greater than one year expected to be recognized in the future related to performance obligations that are unsatisfied at SeptemberJune 30, 2019 2020 approximated $1,252,000,$281,000, of which $308,000, $889,000$161,000 and $55,000 will$120,000 are expected to be recognized during the remainder of 2019, 2020 and 2021, respectively.

 

14

 

(43)

INCOME TAXES

 

The effective tax rate for the three-monththree-month period ended SeptemberJune 30, 2019 increased2020 decreased to 17.2%9.8% compared to 16.6%22.1% for the same period in 2018 primarily due to a tax depreciation method change election for software development costs creating an income tax benefit of $308,000 in 2018, additional withholding on unrepatriated Canadian earnings of $90,0002019 and higher projected state taxes. These were partially offset by increased tax benefits from the exercise of options and dividends paid to non-vested shareholders of $459,000. The effective tax rate for the nine-monthsix-month period ended SeptemberJune 30, 2019 increased2020 decreased to 18.7%2.3% compared to 11.6%19.4% for the same period in 2018. The effective tax rate for the nine-month period ended September 30, 2019 was higher mainly due to income tax benefits from the Recapitalization due to accelerated vesting of restricted stock and settlement of stock options of $1.1 million, a tax depreciation method change election for software development costs creating an income tax benefit of $308,000 in 2018 and a $247,000 reduction in tax benefits primarily from the exercise and vesting of options and dividends paid to non-vested shareholders compared to 2018. In addition, there was additional withholding on unrepatriated Canadian earnings of $90,000. This wasshared-based compensation awards partially offset by less non-deductible fees of $154,000 primarily relatedhigher state income taxes since we are filing in more states.

In March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the Recapitalization.coronavirus outbreak which, among other things, contains numerous income tax provisions. As a result of the CARES Act, we have deferred $237,000 of employer social security tax payments into future years. We have had no other impacts to our consolidated financial statements or related disclosures from the CARES Act.

 

 

 

(54)

NOTES PAYABLE

 

Our long-term debt consists of the following (In thousands):following:  

 

  

September 30,

2019

  

December 31,

2018

 

Term Loans

 $35,229  $37,996 

Less: current portion

  (4,133

)

  (3,667

)

Less: unamortized debt issuance costs

  (119

)

  (153

)

Notes payable, net of current portion

 $30,977  $34,176 

  

June 30,

2020

  

December 31,

2019

 
  

(In thousands)

 

Term Loans

 $32,681  $34,281 

Less: current portion

  (3,966

)

  (4,378

)

Less: unamortized debt issuance costs

  (88

)

  (108

)

Notes payable, net of current portion

 $28,627  $29,795 

 

Our credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) was amended and restated on May 28, 2020 and includes (i) a $15,000,000$30,000,000 revolving credit facility (the “Line of Credit”), (ii) a $40,000,000$33,002,069 term loan (the “Term Loan”) and (iii) a $15,000,000 delayed draw-dawn term facility (the “Delayed Draw Term Loan”). The and, together with the Line of Credit and the Term Loan, was used to fund, in part, the cash payment to the holders of the class B common stock in connection with the Recapitalization and certain costs of the Recapitalization.“Credit Facilities”). The Delayed Draw Term Loan may be used to fund any permitted future business acquisitions or repurchases of our Common Stock and the Line of Credit iscan be used to fund ongoing working capital needs and for other general corporate purposes. The amendment increased the Line of Credit from $15,000,000 to $30,000,000.

 

The amended Term Loan is payable inrevised the remaining payments for the existing balance outstanding of $33,002,069 to monthly installments of $462,988 through April 2020 and $526,362 thereafter, May 2025, with a balloon payment due at maturity in April 2023. May 2025. The Term Loan bears interest at a fixed rate per annum of 5%.

 

Borrowings under the Line of Credit and the Delayed Draw Term Loan, if any, bear interest at a floating rate equal to the 30-day30-day London Interbank Offered Rate plus 225 basis points (4.33%(2.43% at SeptemberJune 30, 2019)2020). Interest on the Line of Credit accrues and is payable monthly. Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in April 2021. May 2023. As of SeptemberJune 30, 2020, and December 31, 2019, there were no borrowings outstanding under the Line of Credit and we had the availability to borrow $15.0 million.did not have a balance. There were no borrowings outstanding under the Line of Credit at December 31, 2018. The weighted average interest rate on borrowings on the Line of Credit for the three and nine-monthsix-month periods ended SeptemberJune 30, 2019 was 4.62% and 4.72%, respectively. 2020. There have been no0 borrowings on the Delayed Draw Term Loan since origination.

We are obligated to pay ongoing unused commitment fees quarterly in arrears pursuant to the Line of Credit and the Delayed Draw Term Loan facility at a rate of 0.20% per annum based on the actual daily unused portions of the Line of Credit and the Delayed Draw Term Loan facility, respectively.

 

The Credit Agreement is collateralized by substantially all of our assets, subject to permitted liens and other agreed exceptions, and contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our Common Stock and acquisitions, subject in each case to certain exceptions. Theexceptions.. Pursuant to the Credit Agreement, also contains certain financial covenants with respectwe are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the term(s) of the Credit Facilities, which calculation excludes, unless our liquidity falls below a specified threshold, (i) any cash dividend in a fiscal quarter that, together with all other cash dividends paid or declared during such fiscal quarter, exceeds $5,500,000 in total cash dividends paid or declared, (ii) the portion of the purchase price for any permitted share repurchase of our shares paid with cash on hand, and (iii) the portion of any acquisition consideration for a maximumpermitted acquisition paid with cash on hand. We are also required to maintain a cash flow leverage ratio of 3.00x. The special dividend paid on January 15, 2019, is excluded from3.00x or less for all testing periods throughout the calculationterm(s) of the fixed charge coverage ratio pursuant to a consent received from the lender. Credit Facilities.

As of SeptemberJune 30, 2019, 2020, we were in compliance with theseour financial covenants.

 

15

 

(65)

SHARE-BASED COMPENSATION

 

We measure and recognize compensation expense for all share-based payments based on the grant-date fair value of those awards. All of our existing stock option awards and unvested stock awards have been determined to be equity-classified awards. We account for forfeitures as they occur. We completed a Recapitalization in April 2018 which, among other things, settled all then-existing outstanding class B share-based awards and resulted in the elimination of the class B common stock. As a result, we accelerated vesting of all outstanding class B share based awards, resulting in accelerated share-based compensation of $331,000 in the nine-month period ended September 30, 2018. All outstanding class B share-based awards were then settled for the same stock to cash proportion of the class B common stock, less the exercise price, if any, which approximated the awards’ intrinsic values.

 

The Our 2001 Equity Incentive Plan provided for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 1,800,000 shares of our former class A common stock and 300,000 shares of our former class B commonCommon stock. Stock options granted could have been either nonqualified or incentive stock options. Stock options vest over one to five years following the date of grant and option terms are generally five to ten years following the date of grant. Due to the expiration of the 2001 Equity Incentive Plan at December 31, 2015, there were no0 shares of stock available for future grants.

 

The Our 2004 Non-Employee Director Stock Plan, as amended (the “2004“2004 Director Plan”), is a nonqualified plan that provides for the granting of options with respect to 3,000,000 shares of the our Common Stock and, prior to the Recapitalization, 500,000 shares of our former class B common stock.Stock. The 2004 Director Plan provides for grants of nonqualified stock options to each of our non-employee directors.directors who we do not employ. Beginning in 2018, on the date of each annual meeting of our shareholders, options to purchase shares of Common Stock equal to an aggregate grant date fair value of $100,000 are granted to each non-employee director that is elected or retained as a director at each such meeting. Stock options vest approximately one year following the date of grant and option terms are generally the earlier of ten years following the date of grant, or three years infrom the case of termination of the outside director’s service.

 

The Our 2006 Equity Incentive Plan (the “2006“2006 Equity Incentive Plan”), as amended, provides for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 1,800,000 shares of our Common Stock and, prior to the Recapitalization, 300,000 shares of our former class B common stock.Stock. Stock options granted may be either incentive stock options or nonqualified stock options. Vesting terms vary with each grant and option terms are generally five to ten years following the date of grant.

 

WeDuring the six months ended June 30, 2020 and 2019, we granted options to purchase 100,61570,471 and 116,276100,615 shares of our Common Stock, during the nine-month periods ended September 30, 2019 and 2018, respectively. Options to purchase shares of common stock wereare typically granted with exercise prices equal to the fair value of the common stock on the date of grant. We do, in certain limited situations, grant options with exercise prices that exceed the fair value of the common shares on the date of grant. The fair value of the stock options granted was estimated using a Black-Scholes valuation model with the following weighted average assumptions:

 

 

2019

  

2018

  

2020

  

2019

 

Expected dividend yield at date of grant

  2.60

%

  2.59

%

 1.84

%

 2.60

%

Expected stock price volatility

  34.01

%

  32.47

%

 33.62

%

 34.01

%

Risk-free interest rate

  2.38

%

  2.51

%

 1.35

%

 2.38

%

Expected life of options (in years)

  7.5   7.3  7.4  7.5 

 

The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was based on historical monthly price changes of our stock based on the expected life of the options at the date of grant. The expected life of options is the average number of years we estimate that options will be outstanding. We consider groups of associates that have similar historical exercise behavior separately for valuation purposes.

 

16

The following table summarizes stock option activity under the 2001 and 2006 Equity Incentive Plans and the 2004 Director Plan for the nine-monthsix-month period ended SeptemberJune 30, 2019:2020:

 

 

Number of
Options

  

Weighted

Average
Exercise

Price

  

Weighted

Average

Remaining

Contractual

Terms

(Years)

  

Aggregate

Intrinsic

Value

(In

thousands)

  

Number of
Options

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Terms

(Years)

  

Aggregate

Intrinsic

Value

(In

thousands)

 

Outstanding at December 31, 2018

  1,373,209  $15.99         

Outstanding at December 31, 2019

 1,245,922  $18.08  4.45  $59,631 

Granted

  100,615  $41.64          70,471  $62.23      

Exercised

  (177,090

)

 $12.96      $6,548  (408,765

)

 $12.68     $17,810 

Forfeited

  --  $--           (15,490) $48.42      

Outstanding at September 30, 2019

  1,296,734  $18.39   4.81  $51,038 

Exercisable at September 30, 2019

  858,349  $15.02   3.52  $36,675 

Outstanding at June 30, 2020

  892,138  $23.51  5.77  $31,281 

Exercisable at June 30, 2020

  492,484  $17.55  4.58  $20.022 

 

As of SeptemberJune 30, 2019, 2020, the total unrecognized compensation cost related to non-vested stock option awards was approximately $1.7$2.1 million which was expected to be recognized over a weighted average period of 2.983.2 years.

There was $538,000 of cash received from stock options exercised for the three months ended June 30, 2020 and no cash was received from the exercise of options in the same period of 2019. We recognized $216,000 and $235,000 of non-cash compensation for three months ended June 30, 2020 and 2019, respectively, and $498,000 and $464,000 of non-cash compensation for the six months ended June 30, 2020 and 2019, respectively, related to options, which is included in direct fixed and selling, general and administrative expenses.

During the six months ended June 30, 2019, we granted 6,005 non-vested shares of Common Stock under the 2006 Equity Incentive Plan. No shares were granted during the six months ended June 30, 2020. As of June 30, 2020, we had 42,761 non-vested shares of Common Stock outstanding under the 2006 Equity Incentive Plan. These shares vest over five years following the date of grant and holders thereof are entitled to receive dividends from the date of grant, whether or not vested. The fair value of the awards is calculated as the fair market value of the shares on the date of grant. We recognized ($75,000) and $73,000 of non-cash compensation for the three months ended June 30, 2020 and 2019, respectively, and ($26,000) and $145,000 of non-cash compensation for the six months ended June 30, 2020 and 2019, respectively, related to this non-vested stock, which is included in direct fixed and selling, general and administrative expenses. During the six months ended June 30 2020, 34,622 shares vested and 6,793 shares were forfeited.

 

The following table summarizes information regarding non-vested stock granted to associates under the 2006 Equity Incentive Plan for the nine-monthsix-month period ended SeptemberJune 30, 2019:2020:

 

 

Common Shares

Outstanding

  

Weighted

Average

Grant Date Fair

Value

Per Share

  

Common

Shares

Outstanding

  

Weighted

Average

Grant Date Fair

Value

Per Share

 

Outstanding at December 31, 2018

  78,171  $15.61 

Outstanding at December 31, 2019

 84,176  $17.23 

Granted

  6,005   38.30  -  - 

Vested

  --   --  (34,622

)

 13.17 

Forfeited

  --  $--   (6,793

)

 $36.80 

Outstanding at September 30, 2019

  84,176  $17.23 

Outstanding at June 30, 2020

  42,761  $17.40 

 

As of SeptemberJune 30, 2019, 2020, the total unrecognized compensation cost related to non-vested stock awards was approximately $484,000$187,000 and is expected to be recognized over a weighted average period of 3.033.05 years.

 

17

 

(76)

GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following represents a summary of changes in ourthe carrying amount of goodwill for the nine monthssix-month period ended SeptemberJune 30, 2019:2020:
 

  (In thousands) 

Balance as of December 31, 2018

 $57,831 

Foreign currency translation

  65 

Balance as of September 30, 2019

 $57,896 
  

(In thousands)

 

Balance as of December 31, 2019

 $57,935 

Foreign currency translation

  (106

)

Balance as of June 30, 2020

 $57,829 

 

Intangible assets consisted of the following:

 

  

September 30,

2019

  

December 31,

2018

 
  

(In thousands)

 

Non-amortizing other intangible assets:

        

Trade name

 $1,191  $1,191 

Amortizing other intangible assets:

        

Customer related

  9,334   9,327 

Technology

  1,360   1,360 

Trade name

  1,572   1,572 

Total other intangible assets

  13,457   13,450 

Accumulated amortization

  (11,635

)

  (11,348

)

Other intangible assets, net

 $1,822  $2,102 
  

June 30,

2020

  

December 31,

2019

 
  

(In thousands)

 

Non-amortizing intangible assets:

        

Indefinite trade name

 $1,191  $1,191 

Amortizing intangible assets:

        

Customer related

  9,326   9,338 

Technology

  1,360   1,360 

Trade names

  1,572   1,572 

Total amortizing intangible assets

  12,258   12,270 

Accumulated amortization

  (11,908

)

  (11,733

)

Other intangible assets, net

 $1,541  $1,728 

 

  

 

 

(87)

PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

September 30,

2019

  

December 31,

2018

  

June 30,

2020

  

December 31,

2019

 
 

(In thousands)

  

(In thousands)

 

Property and equipment at cost

 $48,245  $44,730 

Property and equipment

 $43,477  $42,078 

Accumulated depreciation

  (34,549

)

  (30,577

)

  (31,122

)

  (28,548

)

Property and equipment, net

 $13,696  $14,153  $12,355  $13,530 

 

 

 

(9)(8)

EARNINGS PER SHARE

 

Prior to the Recapitalization, net income per share of our former class A common stock and former class B common stock was computed using the two-class method. Basic net income per share was computed by allocating undistributed earnings to common shares and using the weighted-average number of common shares outstanding during the period.

 

Diluted net income per share was computed using the weighted-average number of common shares and, if dilutive, the potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method.

 

18

The liquidation rights and the rights upon the consummation of an extraordinary transaction were the same for the holders of our former class A common stock and former class B common stock. Other than share distributions and liquidation rights, the amount of any dividend or other distribution payable on each share of former class A common stock was equal to one-sixth (1/6th) of the amount of any such dividend or other distribution payable on each share of former class B common stock. As a result, the undistributed earnings for each period were allocated based on the contractual participation rights of the former class A and former class B common stock as if the earnings for the year had been distributed.

As described in Note 2, we completed a Recapitalization in April 2018, resulting in the elimination of the class B common stock and settlement of all then-existing outstanding class B share-based awards and reclassification of all class A common stock to Common Stock. The Recapitalization was effective on April 17, 2018. Therefore, income was allocated between the former class A and class B stock using the two-class method through April 16, 2018, and fully allocated to the Common Stock (formerly class A) following the Recapitalization.

We had 27,28457,719 and 107,51283,225 options of Common Stock (former class A shares) for the three-monththree-month periods ended SeptemberJune 30, 2019 2020 and 2018,2019, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive. We had 52,789 and 143,247 options of Common Stock for the six-month periods ended June 30, 2020 and 2019, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive.

 

  

Three months Ended

September 30, 2019

  

Three months Ended

September 30, 2018

 
  

Common Stock

  

Common Stock

(formerly Class A)

 
  

(In thousands, except per share data)

 

Numerator for net income per share - basic:

        

Net income

 $8,119  $6,992 

Allocation of distributed and undistributed income to unvested restricted stock shareholders

  (27

)

  (22

)

Net income attributable to common shareholders

 $8,092  $6,970 

Denominator for net income per share - basic:

        

Weighted average common shares outstanding - basic

  24,827   24,671 

Net income per share – basic

 $0.33  $0.28 

Numerator for net income per share - diluted:

        

Net income attributable to common shareholders for basic computation

 $8,092  $6,970 

Denominator for net income per share - diluted:

        

Weighted average common shares outstanding - basic

  24,827   24,671 

Weighted average effect of dilutive securities – stock options

  914   855 

Denominator for diluted earnings per share – adjusted weighted average shares

  25,741   25,526 

Net income per share – diluted

 $0.31  $0.27 

We had 12,493 and 88,572 options of Common Stock (former class A shares) for the nine-month periods ended September 30, 2019 and 2018, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive

 

Nine Months

Ended

September 30,

2019

  

Nine Months Ended
September 30, 2018

  

For the Three Months Ended June 30

  

For the Six Months Ended June 30

 
 

Common

Stock

  

Common

Stock (formerly

Class A)

  

Class B

Common

Stock

  

2020

  

2019

  

2020

  

2019

 
 

(In thousands, except per share data)

  

(In thousands, except per share data)

 

Numerator for net income per share - basic:

            

Numerator for net income per share – basic:

 $7,715  $7,393  $19,470  $15,589 

Net income

 $23,708  $17,622  $4,624          

Allocation of distributed and undistributed income to unvested restricted stock shareholders

  (80

)

  (61

)

  (18

)

  (15

)

  (25

)

  (38

)

  (53

)

Net income attributable to common shareholders

 $23,628  $17,561  $4,606   7,700   7,368   19,432   15,536 

Denominator for net income per share - basic:

            

Weighted average common shares outstanding - basic

  24,794   23,184   3,527 

Denominator for net income per share – basic:

         

Weighted average common shares outstanding – basic

  25,148   24,789   25,060   24,777 

Net income per share – basic

 $0.95  $0.76  $1.31  $0.31  $0.30  $0.78  $0.63 

Numerator for net income per share - diluted:

            

Numerator for net income per share – diluted:

         

Net income attributable to common shareholders for basic computation

 $23,628  $17,561  $4,606   7,700   7,368   19,432   15,536 

Denominator for net income per share - diluted:

            

Weighted average common shares outstanding - basic

  24,794   23,184   3,527 

Denominator for net income per share – diluted:

         

Weighted average common shares outstanding – basic

 25,148  24,789  25,060  24,777 

Weighted average effect of dilutive securities – stock options

  830   899   101   532   797   642   772 

Denominator for diluted earnings per share – adjusted weighted average shares

  25,624   24,083   3,628   25,680   25,586   25,702   25,549 

Net income per share – diluted

 $0.92  $0.73  $1.27 

Net income per share - diluted

 $0.30  $0.29  $0.76  $0.61 

 

 

(10)

LEASES

We lease printing equipment in the United States, and office space in Canada, California, Georgia, Washington, and Tennessee. The leases remaining terms as of September 30, 2019 range from less than one year to 5.9 years.

Certain equipment and office lease agreements include provisions for periodic adjustments to rates and charges. The rates and charges are adjusted based on actual usage or actual costs for internet, common area maintenance, taxes or insurance, as determined by the lessor and are considered variable lease costs.

The components of lease expense for the three and nine-month periods ended September 30, 2019 included:

 

 

  

Three months ended

September 30, 2019

  

Nine months ended
September 30, 2019

 
  

(In thousands)

 

Operating leases

 $196  $601 

Finance leases:

        

Asset amortization

  65   189 

Interest on lease liabilities

  11   31 

Variable lease cost

  29   72 

Short-term lease cost

  10   29 

Total net lease cost

 $311  $922 

Supplemental balance sheet information related to leases (in thousands):     

  

September 30,

2019

  

January 1,

2019

 

Operating leases:

        

Operating ROU assets

 $1,805  $2,308 (1)
         

Current operating lease liabilities

  589   699 (1)

Noncurrent operating lease liabilities

  1,248   1,652 (1)

Total operating lease liabilities

 $1,837  $2,351 (1)

(1) Represents the December 31, 2018 balance recorded at implementation of Topic 842

  

September 30,

2019

  

December 31,

2018

 

Finance leases:

        

Furniture and equipment

 $1,095  $1,062 

Computer Equipment

  551   487 

Computer Software

  224   224 

Property and equipment under finance lease, gross

  1,870   1,773 

Less accumulated amortization

  (959

)

  (839

)

Property and equipment under finance lease, net

 $911  $934 
         

Current obligations of finance leases

 $235  $204 

Noncurrent obligations of finance leases

  629   676 

Total finance lease liabilities

 $864  $880 
         

Weighted average remaining lease term (in years):

        

Operating leases

  4.22     

Finance leases

  3.77     
         

Weighted average discount rate:

        

Operating leases

  4.81

%

    

Finance leases

  4.68

%

    

Supplemental cash flow and other information related to leases was as follows (in thousands):

  

Nine months ended

September 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

    

Operating cash flows from operating leases

 $601 

Operating cash flows from finance leases

  31 

Financing cash flows from finance leases

  223 
     

ROU assets obtained in exchange for operating lease liabilities

  16 

ROU assets obtained in exchange for finance lease liabilities

  206 

Undiscounted payments under non-cancelable operating leases and finance leases at September 30, 2019 are as follows (in thousands):

  

Finance Leases

  

Operating Leases

 

Remainder 2019

 $70  $191 

2020

  263   597 

2021

  257   452 

2022

  208   225 

2023

  125   246 

Thereafter

  13   321 

Total minimum lease payments

  936   2,032 

Less: Amount representing interest

  (72

)

  (195

)

Present value of minimum lease payments

  864   1,837 

Less: Current maturities

  (235

)

  (589

)

Lease obligations, net of current portion

 $629  $1,248 

Undiscounted payments under non-cancelable operating leases and finance leases at December 31, 2018 were as follows (in thousands):

Year Ending December 31,

 

Finance Leases

  

Operating Leases

 

2019

 $258  $882 

2020

  241   672 

2021

  214   564 

2022

  168   273 

2023

  85   262 

Total minimum lease payments

  966     

Less: Amount representing interest

  (86

)

    

Present value of minimum lease payments

  880     

Less: Current maturities

  (204

)

    

Capital lease obligations, net of current portion

 $676     

(11) (9

RELATED PARTY

 

OneUntil January 2020, one of our directors also servesserved as an officer and board memberdirector of Ameritas Life Insurance Corp. (“Ameritas”). and continues to serve on the board of directors of Ameritas. In connection with our regular assessment of our insurance-based associate benefits, which is conducted by an independent insurance broker, and the costs associated therewith, we purchase dental and vision insurance for certain of our associates from Ameritas. The total value of these purchases was $61,000$42,000 and $54,000$67,000 in the three-monththree-month periods ended SeptemberJune 30, 2019 2020 and 2018,2019, respectively and $187,000$114,000 and $148,000$127,000 in the nine-monthsix-month periods ended SeptemberJune 30, 2019 2020 and 2018, 2019, respectively.

A director, who served on our board through May 2020, also served as a board member of IMA Financial Group. In connection with our regular assessment of our liability coverage, during 2020 we began purchasing directors and officers and employment practices liability insurance through IMA Financial Group. These purchases totaled $478,000 in the three and six-month periods ended June 30, 2020, respectively.

 

During 2017, we acquired a cost method investment in convertible preferred stock of Practicing Excellence.com, Inc., a privately-held Delaware Corporation (“PX”), which is included in other non-current assets and is carried at cost, adjusted for changes resulting from observable price changes in orderly transactions of the same investment in PX, if any.  We also have an agreement with PX which commenced in 2016 under which we act as a reseller of PX services and receivePX receives a portion of the revenues. OurThe total revenue earned from the PX reseller agreement was $170,000$83,000 and $87,000 agreement$170,000 in the three-monththree-month periods ended SeptemberJune 30, 2019 2020 and 2018,2019, respectively, and $493,000$166,000 and $195,000$323,000 in nine-monthsix-month periods ended SeptemberJune 30, 2019 2020 and 2018,2019, respectively. We will no longer earn revenue under this agreement after June 30, 2021.

 

19

 

(12) (10

SEGMENT INFORMATION

 

Our The Company’s six operating segments are aggregated into one reporting segment because they have similar economic characteristics and meet the other aggregation criteria from the FASB guidance on segment disclosure. The six operating segments are Experience, The Governance Institute, Market Insights, Transparency, National Research Corporation Canada and Transitions, which offer a portfolio of solutions that address specific needs around market insight, experience, transparency and governance for healthcare providers, payers and other healthcare organizations. The table below presents entity-wide information regarding ourthe Company’s assets, after elimination of intercompany balances by geographic area:

 

 

September 30, 2019

  

December 31, 2018

  

June 30, 2020

  

December 31, 2019

 
 

(In thousands)

  

(In thousands)

 

Long-lived assets:

             

United States

 $78,490  $77,331  $77,621  $78,906 

Canada

  2,589   2,291   2,463   2,622 

Total

 $81,079  $79,622  $80,084  $81,528 

Total assets:

             

United States

 $92,849  $91,080  $101,134  $95,668 

Canada

  14,800   16,952   15,647   15,017 

Total

 $107,649  $108,032  $116,781  $110,685 

  

23
20

 

ITEM 2.

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

The following discussion of our results of operations and financial conditions should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

 

We are a leading provider of analytics and insights that facilitate measurement and improvement of the patient and employee experience while also increasing patient engagement and customer loyalty for healthcare organizations. Our solutions enable our clients to understand the voice of the customer with greater clarity, immediacy and depth. Our heritage, proprietary methods, and holistic approach enable our partners to better understand the people they care for and design experiences that inspire loyalty and trust, while also facilitating regulatory compliance and the shift to population-based health management. Our ability to measure what matters most and systematically capture, analyze and deliver insights based on self-reported information from patients, families and consumers is critical in today’s healthcare market. We believe that access to and analysis of our extensive consumer-driven information is becoming more valuable as healthcare providers increasingly need to more deeply understand and engage the people they serve to build customer loyalty.

 

Our portfolio of subscription-based solutions provides actionable information and analysis to healthcare organizations across a range of mission-critical, constituent-related elements, including patient experience, service recovery, care transitions, health risk assessments, employee engagement, reputation management, and brand loyalty. We partner with clients across the continuum of healthcare services. Our clients include integrated health systems, post-acute providers and payer organizations. We believe this cross-continuum positioning is a unique and an increasingly important capability as evolving payment models drive healthcare providers and payers towards a more collaborative and integrated service model.

 

The outbreak of COVID-19, and the associated responses, have impacted our business in a variety of ways.  Governments have implemented business and travel restrictions, recommended social distancing and other guidelines, and temporarily suspended the requirement for certain healthcare organizations to periodically assess the performance of the care they provide (although many providers continue to do so). Many businesses, including many of our clients, have de-emphasized external business opportunities and restricted in-person meetings while shifting their attention toward addressing COVID-19 planning, business disruptions, higher costs, and revenue shortfalls. At NRC, our workforce remains intact and highly engaged.  The vast majority of our associates are working remotely, and to date we have been capable of providing our services without significant disruption. Historically, we have relied on national travel as part of our sales efforts, but as a result of the pandemic we have placed an indefinite hold on all company related travel. The duration and severity of the COVID-19 pandemic and associated responses on our business, including the impact on our revenue, expenses, and cash flows, cannot be predicted at this time.  Some clients cost reducing measures have included and could continue to include reducing or eliminating the services they purchase from us. Based on the foregoing, we do not expect our recent revenue and earnings growth to be indicative of future expectations.  We do, however, expect to have adequate sources of liquidity to meet our current and expected needs for the foreseeable future.

We received $2.4 million in insurance recoveries in the three-month period ended June 30, 2020, and $400,000 was paid directly to certain vendors from the insurer related to the February incident. These were recorded in selling general and administrative expenses. A final loss claim was submitted to insurance during the three-month period ended June 30, 2020, and an insurance recovery will be recorded when it is probable of collection. Due to insurance recoveries, the February incident has not had and we do not expect it to have a significant impact on our consolidated financial statements or liquidity.

Results of Operations

 

The following table and graphs set forth, for the periods indicated, selectselected financial information derived from our condensed consolidated financial statements, including amounts expressed as a percentage of total revenue.revenue and the percentage change in such items versus the prior comparable period (please note that all columns may not add up to 100% due to rounding). The trends illustrated in the following table and graphs may not necessarily be indicative of future results. The discussion that follows the tableinformation should be read in conjunction with the condensedour consolidated financial statements.

 

  

Three months ended

  

Nine months ended

 
  

September 30,

  

September 30,

 
  

2019

  

2018

  

2019

  

2018

 
                 

Revenue:

  100.0

%

  100.0

%

  100.0

%

  100.0

%

                 

Operating expenses:

                

Direct

  37.3   39.3   37.0   40.1 

Selling, general and administrative

  26.8   25.6   25.9   26.4 

Depreciation and amortization

  4.4   4.6   4.5   4.4 

Total operating expenses

  68.5   69.5   67.4   70.9 
                 

Operating income

  31.5

%

  30.5

%

  32.6

%

  29.1

%

 

  

Three months ended June 30,

  

Six months ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Revenue:

  100.0

%

  100.0

%

  100.0

%

  100.0

%

                 

Operating expenses:

                

Direct

  37.3   36.6   37.2   36.8 

Selling, general and administrative

  28.4   26.5   27.1   25.5 

Depreciation and amortization

  4.5   4.6   4.3   4.5 

Total operating expenses

  70.2   67.7   68.6   66.8 
                 

Operating income

  29.8

%

  32.3

%

  31.4

%

  33.2

%

 

 

Three Months Ended SeptemberJune 30 2019, 2020, Compared to Three Months Ended SeptemberJune 30 2018, 2019

 

Revenue. Revenue for the three-month period ended SeptemberJune 30, 2019, increased 8.2%2020, decreased 0.8% to $32.5$31.2 million, compared to $30.0$31.4 million, in the three-month period ended SeptemberJune 30, 2018.2019. The decrease was due to revenue reductions from COVID-19 as some clients have reduced or eliminated services they purchase from us as cost reducing measures, partially offset by growth in overall contract value.

Direct expenses. Direct expenses increased 1.1% to $11.6 million for the three-month periods ended June 30, 2020, compared to $11.5 million for the same period in 2019. This was due to an increase in fixed expenses of $1.1 million, partially offset by a decrease in variable expenses of $1.0 million. Fixed expenses increased primarily as a result of increased salary and benefit costs and contracted services in the customer service and information technology areas partially offset by lower travel and meal costs due to restricted travel associated with COVID-19. Variable expenses decreased due to less postage, printing, and paper costs, primarily resulting from increased use of digital survey methodologies and decreased conference expenses due to rescheduling of a conference on account of COVID-19. Direct expenses as a percentage of revenue were 37.3% in the three-month period ended June 30, 2020 and 36.6% for the same period in 2019 as expenses increased by 1.1% while revenue for the same period decreased by 0.8% in the June 30, 2020 period compared to the same period in 2019.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 6.4% to $8.9 million for the three-month period ended June 30, 2020, compared to $8.3 million for the same period in 2019, primarily due to an increase in salary and benefit costs of $487,000, increased software and platform hosting expenses of $382,000, additional contracted services of $125,000, increased company incentive event costs of $75,000, higher building repair costs of $41,000 and increased business insurance costs of $34,000. These were partially offset by lower travel and meals costs of $447,000 due to restricted travel associated with COVID-19 and lower marketing costs of $161,000. Selling, general and administrative expenses as a percentage of revenue were 28.4% in the three-month periods ended June 30, 2020 and 26.5% for the same period in 2019 as expenses increased by 6.4% and revenue decreased by 0.8% in the June 30, 2020 period compared to the same period in 2019.

Depreciation and amortization. Depreciation and amortization was $1.4 million for the three-month period ended June 30, 2020 and 2019. Depreciation and amortization expense as a percentage of revenue was 4.5% for the three-month period ended June 30, 2020, and 4.6% for the same period in 2019.

Other income (expense). Other expense, net increased to $718,000 for the three-month period ended June 30, 2020, compared to other expense, net of $664,000 for the same period in 2019, primarily due to foreign exchange rate changes, partially offset by decreased interest expense. Interest expense decreased to $450,000 in the 2020 period from $533,000 for the same period in 2019 primarily due to the declining balance on our Term Loan and no borrowings on our Line of Credit during the 2020 period. Other non-interest expense increased to $270,000 in the 2020 period compared to other expense of $139,000 for the same period of 2019 primarily due to revaluation on intercompany transactions due to changes in the foreign exchange rate.

Income tax provision. Income tax provision was $842,000 for the three-month period ended June 30, 2020, compared to $2.1 million for the same period in 2019. The effective tax rate for the three-month period ended June 30, 2020 decreased to 9.8% compared to 22.1% primarily due to increased tax benefits of $1.1 million from the exercise and vesting of share-based compensation awards, partially offset by higher state income taxes since we are filing in more states. 

Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019

Revenue. Revenue for the six-month period ended June 30, 2020, increased 3.4% to $65.0 million, compared to $62.9 million in the six-month period ended June 30, 2019. The increase was due to new customer sales, as well as increases in sales to the existing client base. Revenue growth was partially offset by revenue reductions due to COVID-19 as some clients have reduced or eliminated the services they purchase from us as cost reducing measures.

 

Direct expenses. Direct expenses which represent direct costs of fulfilling our performance obligations, increased 2.8%4.4% to $12.1$24.2 million for the three-monthsix-month period ended SeptemberJune 30, 2019,2020, compared to $11.8$23.2 million in the same period in 2018.2019. This was primarily due to an increase in fixed expenses of $744,000$2.6 million, partially offset by a decrease in variable expenses of $416,000. Variable expenses decreased due to less postage, printing and paper costs due to lower volumes and increased use of digital survey methodologies.$1.6 million. Fixed expenses increased primarily due to higheras a result of increased salary and benefit and contracted services costs in the customer service and information technology areas, and higher company incentive event costs. Direct expenses as a percentage of revenue were 37.3% in the three-month periods ended September 30, 2019 and 39.3% for the same period in 2018 as direct expenses increased by 2.8% while revenue increased by 8.2%.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 13.4% to $8.7 million for the three-month period ended September 30, 2019, compared to $7.7 million for the same period in 2018, primarily due to higher salary and benefit costs of $488,000, increased legal and accounting expenses of $293,000, higher increased software license fees and platform hosting expenses of $221,000, additional marketing program costs of $133,000, higher insurance costs of $71,000 and additional travel costs of $56,000. These were partially offset by lower contracted services of $334,000. Selling, generaldecreased travel and administrative expenses as a percentage of revenue were 26.8% in the three-month period ended September 30, 2019 and 25.6% for the same period in 2018 as selling, general and administrative expenses increased by 13.4% while revenues increased by 8.2%.

Depreciation and amortization. Depreciation and amortization increased 3.0% to $1.4 million for the three-month period ended September 30, 2019meal costs due to increased amortizationrestricted travel from additional computer software investments, partially offset by an intangible asset that was fully amortized prior to the 2019 period. Depreciation and amortization expenses as a percentage of revenue was 4.4% for the three-month period ended September 30, 2019, and 4.6% for the same period in 2018.

Other income (expense). OtherCOVID-19. Variable expense net was $411,000 for the three-month period ended September 30, 2019, compared to $783,000 for the same period in 2018.  This decrease in other expense was primarily due to revaluation on intercompany transactions due to changes in the foreign exchange rate.

Provision for income taxes. Provision for income taxes was $1.7 million (17.2% effective tax rate) for the three-month period ended September 30, 2019, compared to $1.4 million (16.6% effective tax rate) for the same period in 2018. The effective tax rate for the three-month period ended September 30, 2019, was higher mainly due to a tax depreciation method change election for software development costs creating an income tax benefit of $308,000 in the 2018 period, additional withholding on unrepatriated Canadian earnings of $90,000 in the 2019 period, and higher projected state taxes in the 2019 period. These were partially offset by increased tax benefits from the exercise of options and dividends paid to non-vested shareholders of $459,000.

 

Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018

Revenue. Revenue for the nine-month period ended September 30, 2019, increased 7.1% to $95.4 million, compared to $89.0 million in the nine-month period ended September 30, 2018. The increase was due to new customer sales and increases in sales to the existing client base.

Direct expenses. Direct expenses, which represent direct costs of fulfilling our performance obligations, decreased 1.2% to $35.3 million for the nine-month period ended September 30, 2019, compared to $35.7 million in the same period in 2018. This was due to a decrease in variable expenses of $2.0 million, partially offset by an increase in fixed expenses of $1.6 million. Variable expenses decreased mainly due to less postage, printing and paper costs due to lower volumes and increased use of digital survey methodologies. FixedDirect expenses increased primarily as a result of increased salary and benefit costs in the customer service and information technology areas partially offset by lower contracted services. Direct expenses decreased as a percentage of revenue to 37.0%37.2% in the nine-monthsix-month period ended SeptemberJune 30, 2019,2020, compared to 40.1%36.8% during the same period of 20182019, as expenses decreasedincreased by 1.2%4.4% while revenue for the same period increased by 7.1%3.4%.

 

Selling, general and administrative expenses. Selling, general and administrative expenses increased 5.3%9.8% to $24.7$17.6 million for the nine-monthsix-month period ended SeptemberJune 30, 2019,2020, compared to $23.5$16.0 million for the same period in 20182019, primarily due to increasedan increase in salary and benefit costs of $750,000, higher$1.0 million, an increase in software license fees and platform hosting expenses of $772,000, additional travel$558,000, an increase in company incentive event costs of $204,000, increased marketing program expenses of $143,000 and higher$178,000, an increase in business insurance costs of $214,000.$168,000, additional legal and accounting costs of $156,000 primarily due to an insurance refund of legal expenses associated with litigation related to our April 2018 recapitalization (the “Recapitalization”) in the same period in 2019, an increase in contracted services of $130,000, higher bad debt expense of $65,000 and sales tax expense of $58,000. These were partially offset by a reductiondecrease in legaltravel and accountingmeals costs of $410,000 mainly$572,000 due to restricted travel associated with the RecapitalizationCOVID-19 and a decrease in the 2018 period, the Tax Cut and Jobs Act and adoption of ASC 606 in the 2018 period, as well as decreased contracted services of $327,000, lower bad debt expense of $55,000 and decreased repairs and maintenancemarketing costs of $40,000 in the 2019 period.$184,000. Selling, general, and administrative expenses increased as a percentage of revenue were 25.9% into 27.1% for the nine-month periodssix-month period ended SeptemberJune 30, 2019 and 26.4%2020, from 25.5% for the same period in 20182019 as selling, general and administrative expenses increased by 5.3%9.8% while revenuesrevenue increased by 7.1%.3.4% in the 2020 period compared to the 2019 period.

 

Depreciation and amortization. Depreciation and amortization expenses increased 7.2%decreased 2.7% to $4.3$2.8 million for the nine-monthsix-month period ended SeptemberJune 30, 2019,2020, compared to $4.0$2.9 million for the same period in 20182019, due to increased amortizationdecreased depreciation from additional computer software investments, partially offset by an intangible asset that was fully amortized prior to the 2019 period.equipment investments. Depreciation and amortization expenses as a percentage of revenue was 4.5% and 4.4%were 4.3% for the nine-month periodssix-month period ended SeptemberJune 30, 20192020 and 2018, respectively.4.5% for the same period in 2019.

 

Other income (expense). Other expense, net was $1.9 milliondecreased to $541,000 for the nine-monthsix-month period ended SeptemberJune 30, 2019,2020, compared to $711,000$1.5 million of other expense, net for the same period in 2018.2019. Interest expense increased $623,000decreased $190,000 primarily due to additional interest related to the term loan originated in April 2018declining balance on our Term Loan and no borrowings on our Line of Credit during the line2020 period. Other non-interest income(expense), net changed to other income of credit. Other$360,000 for the six-month period ended June 30, 2020 compared to other expense net increased $552,000of $779,000 for the same period in 2019 primarily due to revaluation of intercompany transactions for changes in the foreign exchange ratesrates.

 

Provision for income taxes. Income tax provisionProvision for income taxes. Income tax provision was $5.4 million (18.7% effective tax rate)$458,000 for the nine-monthsix-month period ended SeptemberJune 30, 2019,2020, compared to $2.9$3.8 million (11.6% effective tax rate) for the same period in 2018.2019. The effective tax rate for the nine-monthsix-month period ended SeptemberJune 30, 2020, decreased to a 2.3% effective tax rate from a 19.4% effective tax rate for the same period in 2019 was higher mainlyprimarily due to incomeincreased tax benefits from the Recapitalization due to accelerated vesting of restricted stock and settlement of stock options of $1.1$3.7 million a tax depreciation method change election for software development costs creating an income tax benefit of $308,000 in 2018 and a $247,000 reduction in tax benefits from the exercise and vesting of options and dividends paid to non-vested shareholders compared to 2018. In addition, there was additional withholding on unrepatriated Canadian earnings of $90,000 in the 2019 period. This wasshare-based compensation awards, partially offset by less non-deductible fees of $154,000 primarily related to the Recapitalizationhigher state income taxes since we are filing in the 2018 period.more states.

 

 

Liquidity and Capital Resources

 

We believe that our existing sources of liquidity, including cash and cash equivalents, borrowing availability, and operating cash flows, will be sufficient to meet our projected capitalcurrent and debt maturityexpected needs and dividend policy for the foreseeable future,future.  Cash dividends in the aggregate amount of $10.5 million paid in the six-month period ended June 30, 2020 were funded with cash on hand. No dividends were declared in the three-month period ended June 30, 2020. Our board of directors considers whether to declare a dividend and therefore we feel that our working capital deficit has little impactthe amount of any dividends declared on our liquidity. Requirements for working capital, capital expenditures, and debt maturities will continue to be funded by operations and our borrowing arrangements.a quarterly basis. 

 

As of SeptemberJune 30, 2019,2020, our principal sources of liquidity included $8.4$12.0 million of cash and cash equivalents, up to $15.0$30 million of unused borrowings under our lineLine of creditCredit and up to $15.0$15 million on our delayed draw term note.Delayed Draw Term Loan. Of this cash, $3.0$3.3 million was held in Canada. On May 28, 2020, the credit agreement with FNB was amended. As part of this amendment the Line of Credit was expanded from $15 million to $30 million. The delayed draw term noteDelayed Draw Term Loan can only be used to fund permitted future business acquisitions or repurchasing our Common Stock.

 

Working Capital

 

We had a working capital balance of $4.4 million and deficit of $11.7 million and $18.7$9.0 million on SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.

The change was primarily due to a decrease in dividends payable of $12.4 million, an increaseincreases in trade accounts receivable of $3.4$8.2 million, aprepaid expenses of $784,000, and income taxes receivable of $198,000; and decreases in dividends payable of $5.2 million, accrued expenses of $483,000, current portion of notes payable of $412,000 and accounts payable of $322,000. These were partially offset by decrease in income taxes payablecash and cash equivalents of $622,000$1.6 million and a decreasean increase in accrued wages, bonus and profit sharing of $606,000 million. These were partially offset by a decrease in cash and cash equivalents of $4.6 million, a $2.9 million increase in deferred revenue, an increase in accrued expenses of $670,000 and an increase in the current portion of operating lease liability included in other current liabilities of $589,000 (mainly due to the adoption of the New Leases Standard). Dividends payable decreased due to a special dividend, in addition to a quarterly dividend declaration, that was declared in 2018 and paid in January 2019. $744,000.

Trade accounts receivable increased due to the timing of billings and collections on new and renewal contracts. Accrued expenses changedThe COVID-19 pandemic has also resulted in an increase in accounts receivables as some clients have delayed payments and some invoicing was deferred during the second quarter of 2020 due to the timing of payment for services and supplies.our clients’ cash-flow issues. Accrued wages, bonus and profit sharing decreasedincreased due to the payment of 2018 annual bonuses in the three-month period ended March 31, 2019.increased payroll accruals. Income taxes payablereceivable changed due to the timing of income tax payments. Accounts payable, accrued expenses and prepaid expenses changed due to timing of payment for services and supplies. Dividends payable varies due to the timing of dividends being declared and paid. The current portion of notes payable decreased due to the changes in the payment terms due to amending the Term Loan. Our working capital is significantly impacted by our large deferred revenue balances which will vary based on the timing and frequency of billings on annual agreements. The deferred revenue balances as of SeptemberJune 30, 20192020, and December 31, 2018,2019, were $19.1$16.3 million and $16.2$16.4 million, respectively.

 

The deferred revenue balance is primarily due to timing of initial billings on new and renewal contracts. We typically invoice clients for services before they have been completed. Billed amounts are recorded as billings in excess of revenue earned, or deferred revenue, inon our consolidated financial statements, and are recognized as income when earned. In addition, when work is performed in advance of billing, we record this work as contract assetsrevenue earned in excess of billings, or unbilled revenue. Substantially all deferred revenue and all unbilled revenue will be earned and billed, respectively, within 12 months of the respective period ends.

 

Cash Flow Analysis

 

A summary of operating, investing, and financing activities is shown in the following table:

 

 

Six Months Ended June 30,

 
 

Nine Months Ended September 30,

    
 

2019

  

2018

  

2020

  

2019

 
 

(In thousands)

  

(In thousands)

 

Provided by operating activities

 $28,974  $25,936  $13,903  $16,106 

Used in investing activities

  (3,429

)

  (4,858

)

 (1,427

)

 (2,280

)

Used in financing activities

  (30,575

)

  (48,193

)

 (13,562

)

 (23,318

)

Effect of exchange rate change on cash

  397   (345

)

 (474

)

 521 

Net change in cash and cash equivalents

  (4,633

)

  (27,460

)

 (1,560

)

 (8,971

)

Cash and cash equivalents at end of period

 $8,358  $7,273  $11,957  $4,020 

 

Cash Flows from Operating Activities

 

Cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, deferred income taxes, share-based compensation and related taxes, reserve for uncertain tax positions loss on disposal of property and equipment and the effect of working capital changes.

 

Net cash provided by operating activities was $29.0$13.9 million for the nine-monthsix-month period ended SeptemberJune 30, 2019,2020, which included net income of $23.7$19.5 million, plus non-cash charges (benefits) for deferred income taxes, depreciation and amortization, reserve for uncertain tax positions and share-based compensation and related taxes totaling $3.7 million. Net changes in assets and liabilities decreased cash flows from operating activities by $9.3 million, primarily due to increases in trade accounts receivable, prepaid and other current assets, and deferred contract costs, as well as decreases in accounts payable, income taxes receivable and payable, which fluctuate due to the timing of payments of prepaids, accounts payable, accrued expenses, direct and incremental costs directly related to sales and timing of income tax payments. Deferred revenue also decreased, which will vary based on the timing and frequency of billings on annual agreements. These decreases to cash flows were partially offset by increases in accrued expenses, wages, bonuses, and profit sharing.

Net cash provided by operating activities was $16.1 million for the six-month period ended June 30, 2019, which included net income of $15.6 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, reserve for uncertain tax positions, non-cash share-based compensation expense, and loss on disposal of property and equipment totaling $5.9 million. Net changes in assets and liabilities decreased cash flows from operating activities by $633,000, primarily due to increases in trade accounts receivable, deferred contract costs, net, and income taxes receivable and payable. These were partially offset by increases in deferred revenue and decreases in prepaid expenses and other current assets.

Net cash provided by operating activities was $25.9 million for the nine months ended September 30, 2018, which included net income of $22.2 million, plus non-cash charges (benefits) for deferred income taxes, depreciation and amortization, reserve for uncertain tax positions, stock compensation and loss on disposal of property and equipment, totaling $6.9$3.7 million. Net changes in assets and liabilities decreased cash flows from operating activities by $3.2 million, primarily due to increases in trade accounts receivable, deferred contract costs and decreases in accrued expense, wages, bonus and profit sharing, and increases in trade accounts receivable, prepaid expenses and other current assets, and income taxes receivablepayable and payable,receivable which fluctuate with the timing of income tax payments. These werepayments, partially offset by a decreasedecreases in prepaids and other current assets and increases in accounts payable and deferred revenue which fluctuates due to timing and frequency of billings on new and renewal contract.revenue.

 

Cash Flows from Investing Activities

 

Net cash of $3.4$1.4 million and $4.9$2.3 million was used for investing activities in each of the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. These expenditures consisted mainly of computer software classified in property and equipment. We expect similar capital expenditure purchases for the remainder of 20192020, consisting primarily of computer software and hardware and other equipment, to be funded through cash generated from operations.

 

Cash Flows from Financing Activities


Net cash used in financing activities was $13.6 million in the six months ended June 30, 2020. Cash was used to repay borrowings under the term notes totaling $1.6 million and for finance lease obligations of $124,000. Cash was also used to pay $10.5 million of dividends on our common stock, and to pay payroll tax withholdings related to share-based compensation of $1.9 million. These decreases to cash flows were partially offset by proceeds from the exercise of stock options of $538,000.

 

Net cash used in financing activities was $30.6$23.3 million in the ninesix months ended SeptemberJune 30, 2019. Cash was used to repay borrowings on the lineLine of creditCredit of $21.0$15.5 million, repay borrowings under the note payableTerm Loan totaling $2.8$1.8 million, and for finance lease obligations of $223,000.$161,000. Cash was also used to pay $26.6$21.8 million of dividends on common stock, and to pay payroll tax withholdings related to share-based compensation of $1.0 million.$483,000. Cash was provided from proceeds of the lineLine of creditCredit of $21.0 million.

Net cash used in financing activities was $48.2 million in the nine months ended September 30, 2018. Cash was used for the Recapitalization of $72.4 million (see Note 2), to repay borrowings under the term notes totaling $2.2 million, to repay borrowings on the line of credit of $2.5 million, to pay loan origination fees on the Credit Agreement of $187,000 and for capital lease obligations of $104,000. Cash was also used to pay $12.7 million of dividends on common stock, and to pay payroll tax withholdings related to share-based compensation of $712,000. Cash was provided from proceeds of the new term loan of $40 million and the line of credit for $2.5$16.5 million.

 

The effect of changes in foreign exchange rates (decreased)decreased cash and cash equivalents by $474,000 in the six months ended June 30, 2020 and increased cash and cash equivalents by $397,000$521,000 in the ninesix months ended SeptemberJune 30, 2019 and $(345,000) in the nine months ended September 30, 2018.2019.

 

Capital Expenditures

 

Cash paid for capital expenditures was $3.4$1.4 million for the ninesix months ended SeptemberJune 30, 2019.2020. These expenditures consisted mainly of computer software classified in property and equipment. We expect similarslightly higher capital expenditure purchases for the remainder of 20192020 consisting primarily of computer software and hardware and other equipmentbuilding improvements to be funded through cash generated from operations.

 

Debt and Equity

 

Our credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) provides forwas amended and restated on May 28, 2020 and includes (i) a $15,000,000$30,000,000 revolving credit facility (the “Line of Credit”), (ii) a $40,000,000$33,002,069 term loan (the “Term Loan”) and (iii) a $15,000,000 delayed draw-downdraw-dawn term facility (the “Delayed Draw Term Loan” and, together with the Line of Credit and the Term Loan, the “Credit Facilities”). The Term Loan was used to fund, in part, the cash payment to the holders of the class B common stock in connection with the Recapitalization and certain costs of the Recapitalization. The Delayed Draw Term Loan may be used to fund any permitted future business acquisitions or repurchases of our Common Stock and the Line of Credit iscan be used to fund ongoing working capital needs and for other general corporate purposes.

Credit from $15,000,000 to $30,000,000.

 

The amended Term Loan is payable inrevised the remaining payments for the existing balance outstanding of $33,002,069 to monthly installments of $462,988 through April 2020 and $526,362 thereafter,May 2025, with a balloon payment due at maturity in April 2023.May 2025. The Term Loan bears interest at a fixed rate per annum of 5%.

 

Borrowings under the Line of Credit and the Delayed Draw Term Loan, if any, bear interest at a floating rate equal to the 30 day30-day London Interbank Offered Rate (“LIBOR”) plus 225 basis points (4.33%(2.43% at SeptemberJune 30, 2019)2020). Interest on the Line of Credit accrues and is payable monthly. Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in April 2021. At SeptemberMay 2023. As of June 30, 2020, and December 31, 2019, the Line of Credit did not have an outstandinga balance. The weighted averageThere were no borrowings on the Line of Credit for the nine-month periodthree and six-month periods ended SeptemberJune 30, 2019 was $4.9 million. The weighted average interest rate on2020. There have been no borrowings on the Line of Credit for the nine-month period ended September 30, 2019 was 4.72%. Delayed Draw Term Loan since origination.

We are also obligated to pay ongoing unused commitment fees quarterly in arrears pursuant to the Line of Credit and the Delayed Draw Term Loan facility at a rate of 0.20% per annum based on the actual daily unused portions of the Line of Credit and the Delayed Draw Term Loan facility, respectively.

 

InThe Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the event thatincurrence of indebtedness and liens, repurchases of our Common Stock and acquisitions, subject in each case to certain exceptions. Pursuant to the Delayed Draw Term Loan is used, interest-only payments will be due throughCredit Agreement, we are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the calendar year in which the Delayed Draw Term Loan is drawn upon. After that, amortization will occur at the then current Term Loan rate and schedule with principal and accrued interest amounts outstanding under the Delayed Draw Term Loan due and payable monthly during the termterm(s) of the Delayed Draw Term Loan,Credit Facilities, which expirescalculation excludes, unless our liquidity falls below a specified threshold, (i) any cash dividend in a fiscal quarter that, together with all other cash dividends paid or declared during such fiscal quarter, exceeds $5,500,000 in total cash dividends paid or declared, (ii) the portion of the purchase price for any permitted share repurchase of our shares paid with cash on April 18, 2023.  There have been no borrowingshand, and (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand. We are also required to maintain a cash flow leverage ratio of 3.00x or less for all testing periods throughout the Delayed Draw Term Loan since origination.term(s) of the Credit Facilities. As of June 30, 2020, we were in compliance with our financial covenants.

 

All obligations under the Credit Facilities are to be guaranteed by each of our direct and indirect wholly owned domestic subsidiaries, if any, and, to the extent required by the Credit Agreement, direct and indirect wholly owned foreign subsidiaries (each, a “guarantor”).

 

The Credit Facilities are secured, subject to permitted liens and other agreed upon exceptions, by a first-priority lien on and perfected security interest in substantially all of our and theour guarantors’ present and future assets (including, without limitation, fee-owned real property, and limited, in the case of the equity interests of foreign subsidiaries, to 65% of the outstanding equity interests of such subsidiaries).

The Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our Common Stock and acquisitions, subject in each case to certain exceptions. The Credit Agreement also contains certain financial covenants with respect to minimum fixed charge coverage ratio and maximum cash flow leverage ratio. Pursuant to the Credit Agreement, we are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the terms of the Credit Facilities. The special dividend paid on January 15, 2019, is excluded from the calculation of the fixed charge coverage ratio pursuant to a consent received from the lender. We are also required to comply with a maximum cash flow leverage ratio of 3.00x for all testing periods throughout the terms of the Credit Facilities. As of September 30, 2019, we were in compliance with these financial covenants. 

 

LIBOR is currently expected to be phased out in 2021. We are required to pay interest on borrowings under our Line of Credit and Delayed Draw Term Loan at floating rates based on LIBOR. Future debt that we may incur may also require that we pay interest based upon LIBOR. Under the terms of our Credit Agreement with FNB, if LIBOR becomes unavailable during the term of the agreement, FNB may, in its reasonable discretion and in a manner consistent with market practice, designate a substitute index. We currently expect that the determination of interest under our Credit Agreement would be revised as to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that if LIBOR is phased out or transitioned, the changes to the determination of interest under our agreements would approximate the current calculation in accordance with LIBOR. We do not know what standard, if any, will replace LIBOR if it is phased out or transitioned.

 

We have finance leases for computer equipment, office equipment, printing and inserting equipment. The balance of the finance leases as of SeptemberJune 30, 20192020 was $863,000.$767,000.

 

Shareholders’ equity increased $9.9$12.7 million to $29.0$45.6 million at SeptemberJune 30, 2019,2020, from $19.1$32.9 million at December 31, 2018.2019. The increase was mainly due to net income of $23.7$19.5 million and share-based compensation of $917,000 and changes in the cumulative currency translation adjustment of $474,000.$473,000. This was partially offset by dividends declared of $14.2$5.3 million, and share repurchases exceeding the cost of stock options exercised of $1.0 million.$1.3 million and changes in the cumulative translation adjustment of $663,000.

 

$775,000 was recorded in 2019 after we became aware that a state sales tax liability was both probable and estimable as of December 31, 2019, due to sales taxes that should have been collected from customers in 2019 and certain previous years. In addition, we incurred additional sales tax expense in the three and six-month periods ended June 30, 2020 of $8,000 and $58,000, respectively. We are working through voluntary disclosure agreements with certain states and began remitting sales tax in the second quarter of 2020. We began collecting sales tax in July 2020. State and local jurisdictions have differing rules and regulations governing sales, use, and other taxes and these rules and regulations can be complex and subject to varying interpretations that may change over time. As a result, we could face the possibility of tax assessment and audits, and our liability for these taxes and associated interest and penalties could exceed our original estimates. In July 2020, we received a revenue ruling from the state of Washington noting that our services are not subject to retail sales tax, and therefore, will be reversing $268,000 of sales tax accrual for the state of Washington in the third quarter of 2020.

 

Contractual Obligations

 

We had contractual obligations to make payments in the following amounts in the future as of SeptemberJune 30, 2019:2020:

 

Contractual Obligations(1)

 

Total

Payments

  

Remainder
of 2019

  

One to

Three Years

  

Three to

Five Years

  

After

Five Years

  

Total

Payments

  

Less than

One Year

  

One to

Three Years

  

Three to

Five Years

  

After

Five Years

 

(In thousands)

                               

Operating leases(2)

 $2,032  $191  $1,049  $471  $321  $1,643  $410  $671  $445  $117 

Finance leases

  936   70   520   333   13  779  188  455  136  -- 

Uncertain tax positions(3)(2)

  --   --   --   --   --  --  --  --  --  -- 

Line of credit

  --   --             

Long term debt

  40,226   1,389   12,379   26,458   -- 

Long-term debt

  38,322   2,777   11,112   11,112   13,321 

Total

 $43,194  $1,650  $13,948  $27,262  $334  $40,744  $3,375  $12,238  $11,693  $13,438 

 

(1)

Amounts are inclusive of interest payments, where applicable.

(2)

Excludes variable costs such as taxes, insurance, and maintenance which vary from year to year. 

(3)

We have $298,000$742,000 in liabilities associated with uncertain tax positions. We are unable to reasonably estimate the expected cash settlement dates of these uncertain tax positions. We are unable to reasonably estimate the expected cash settlement dates of these uncertain tax positions with the taxing authorities.

 

We generally do not make unconditional, non-cancelable purchase commitments. We enter into purchase orders in the normal course of business, but these purchase obligations do not exceed one year.

Stock Repurchase Program

Our Board of Directors authorized the repurchase of up to 2,250,000 then-existing class A shares and 375,000 then-existing class B shares of common stock in the open market or in privately negotiated transactions under a stock repurchase program that was originally approved in February 2006 and subsequently amended in May 2013. In connection with the Recapitalization in April 2018, theour Board of Directors further amended the stock repurchase program to eliminate the repurchase of the former class B common stock. As of SeptemberJune 30, 2019,2020, the remaining number of shares of Common Stock that could be purchased under this authorization was 280,491 shares. 


Critical Accounting Estimates

 

There have been no changes to our critical accounting estimates described in the Annual Report on Form 10-K for the year ended December 31, 20182019 that have a material impact on our Condensed Consolidated Financial Statements and the related Notes.

 

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

 

There are no material changes to the disclosures regarding our market risk exposures made in ourits Annual Report on Form 10-K for the year ended December 31, 2018.2019.

 

 

ITEM 4.

Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, havehas evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that, as of the end of such period, our disclosure controls and procedures were effective.

 

On January 1, 2019, we adopted the New Leases Standard, Topic 842 (see Note 1 to the Condensed Consolidated Financial Statements). We implemented internal controls to ensure we adequately evaluated our vendor contracts and properly assessed the impact of the new accounting standard on our financial statements. We also implemented changes to our business processes related to lease arrangements and the control activities within them. The changes included training within business operations management, ongoing vendor contract review and monitoring, and gathering of information for disclosures.

There have been no other changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended SeptemberJune 30, 2019,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II – Other Information

 

ITEM 1.

Legal Proceedings

 

From time to time, we are involved in certain claims and litigation arising in the normal course of business. Management assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. Based on our knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution ofThere were no outstanding claims and pending litigation, taking into account existing reserves, will not have a materially adverse effect on our consolidated financial statements.

at June 30, 2020.

 

ITEM 1A.

Risk Factors

 

There have been no material changes to ourThe significant risk factors set forthknown to us that could materially adversely affect our business, financial condition, or operating results are described in Part I, Item 2:  Management’s Discussion and analysis of Financial Condition and Results of Operations and in Part I, Item 1A of our Annual Reportannual report on Form 10-K for the year ended December 31, 2018.2019, and in Part II, Item 1A of our quarterly report on Form 10-Q for the quarter ended March 31, 2020.

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

In February 2006 and subsequently amended in May 2013, our Board of Directors authorized the repurchase of 2,250,000 shares of class A common stock and 375,000 shares of class B common stock in the open market or in privately negotiated transactions. In connection with the Recapitalization in April 2018, theour Board of Directors further amended the stock repurchase program to eliminate the repurchase of the former class B common stock. Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares of Common Stock authorized for repurchase thereunder. No Common Stock was repurchased under that authorization during the three-month period ended SeptemberJune 30, 2019.2020. The remaining shares of Common Stock that may be purchased under that authorization are 280,491.

Our Credit Agreement provides that, in order for us to pay dividends, there must be no default or event of default existing or that would result from such payment and we must show that we would comply with the Credit Agreement’s fixed charge coverage ratio and consolidated cash flow leverage ratio after giving pro forma effect to such payment.

 

 

ITEM 6.

Exhibits

 

The exhibits listed in the exhibit index below are filed as part of this Quarterly Report on Form 10-Q.

 

EXHIBIT INDEX  

 

Exhibit

Number

Exhibit Description

(3.1)

Amended and Restated Articles of Incorporation of National Research Corporation, effective as of 5:01 pm, CT, on April 17, 2018 [Incorporated by reference to Exhibit 3.3 to National Research Corporation’s Current Report on Form 8-K dated April 16, 2018 and filed on April 20, 2018 (File No. 001-35929)] 

(3.2)

By-Laws of National Research Corporation, as amended to date [Incorporated by reference to Exhibit (3.2)3.1 to National Research Corporation’s Current Report on Form 8-K dated October 26, 2015March 19, 2020 and filed on October 28, 2015March 23, 2020 (File No. 001-35929)]

(4.1)

Amended and Restated Articles of Incorporation of National Research Corporation, effective as of 5:01 pm, CT, on April 17, 2018 [Incorporated by reference to Exhibit 3.3 to National Research Corporation’s Current Report on Form 8-K dated April 16, 2018 and filed on April 20, 2018 (File No. 001-35929)] 

(4.2)

By-Laws of National Research Corporation, as amended to date [Incorporated by reference to Exhibit (3.2)3.1 to National Research Corporation’s Current Report on Form 8-K dated October 26, 2015March 19, 2020 and filed on October 28, 2015March 23, 2020 (File No. 001-35929)]

(10.1)

Amended and Restated Credit Agreement dated May 28, 2020, between National Research Corporation and First National Bank of Omaha

(10.2)Form of Grant used in connection with the National Research Corporation 2004 Non-Employee Director Stock Plan, as amended
  

(31.1)

Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.

(31.2)

Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.

(32)

Written Statement of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

(101)*

Financial statements from the Quarterly Report on Form 10-Q of National Research Corporation for the quarter ended SeptemberJune 30, 2019,2020, formatted in Inline eXtensible Business Reporting Language (XBRL)(iXBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Notes to Condensed Consolidated Financial Statements, and (vi) document and entity information.

(104)Cover Page Interactive Data File (formatted in the Inline XBRL and contained in Exhibit 101).

 

*

In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

 

SIGNATURES

 

Pursuant to the requirements 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.

 

 

 

NATIONAL RESEARCH CORPORATION

 

 

 

 

 

 

 

 

Date: November 8, 2019August 7, 2020

By:

/s/ Michael D. Hays 

 

 

 

Michael D. Hays

 

 

 

Chief Executive Officer (Principal

Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

Date: November 8, 2019August 7, 2020 

By:

/s/ Kevin R. Karas

 

 

 

Kevin R. Karas

Senior Vice President Finance,

Treasurer, Secretary and Chief

Financial Officer (Principal Financial

(Principal Financial and Accounting Officer)

 

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