美國
證券交易委員會
華盛頓特區20549
表格
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根據1934年證券交易法第13或15(d)條款的季度報告。 |
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截至2024年6月30日季度結束 |
或
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根據1934年證券交易法第13或15(d)條款的過渡報告 |
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從________到________的過渡期間 |
委員會檔案編號
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（依照公司章程規定指定的登記證券名稱）
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(依據所在地或其他管轄區) |
(國稅局雇主識別號碼) |
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的註冊地或組織地點) |
識別號碼) |
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(主要行政辦公室的地址)（郵政編碼） |
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(註冊人電話號碼，包括區號) |
根據該法案第12(b)條規定登記的證券:
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每個班級的標題 |
交易標的（s） |
每個註冊交易所的名稱 |
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輝瑞公司面臨數起分開的訴訟，這些訴訟仍在進行中，需等待第三項索賠條款的裁決。2023年9月，我們與輝瑞公司同意合併2022和2023年的訴訟，並將審判日期從2024年11月推遲至2025年上半年，具體時間將由法院確定。 |
請勾選以下項目，以判定在過去12個月(或更短期間，該註冊人被要求提交報告)內所有根據1934年證券交易法第13條或第15(d)條要求提供報告的報告是否已經提交，並且該註冊人在過去90天中是否受到提交報告的要求。
請在核對號勾選方塊以指出是否在過去12個月（或註冊人所需提交此類檔案的較短期間內）按照Regulation S-t的405條款的規定，已電子方式提交所需提交的每個互動數據檔案。
通過勾選來表明申報人是大幅度加快申報人，加快申報人，非加快申報人，較小的報告公司或新興成長公司。參見《交易所法》第120億2條中«大幅度加快申報人»、«加快申報人»、«較小的報告公司»和«新興成長公司»的定義。
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大型加速歸檔人 |
☐ |
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☒ |
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非加速歸檔人 |
☐ |
小型報告公司 |
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新興成長型企業 |
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如果一家新興成長型企業，請勾選，以示組織已選擇不使用納斯達克交易所根據交易所法案第13(a)條提供的任何新的或修訂的財務會計準則的延伸過渡期。 ☐
請勾選，以示組織是否屬於外殼公司（根據法律第120億2條定義）是的
指出每個發行人普通股類別截至最近實際日期的流通股數。
普通股，每股面值 $.001，截至2024年10月25日尚未發行。
基本報表
截至2024年9月30日季度結束
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頁面 的修改主要是針對匯率調整和所得稅已付信息改進所得稅披露，以回應投資者對所得稅信息更多的透明度要求。 |
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第一部分。 |
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項目 1。 |
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项目2。 |
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项目3。 |
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項目 4。 |
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第二部分。 |
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項目 1。 |
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项目1A。 |
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项目2。 |
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项目5。 |
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第6項。 |
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關於前瞻性聲明的特別說明
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,” “estimates,” “plans,” “intends,” or the use of words such as “would,” “will,” “may,” “could,” “goal,” “focus,” or “should,” 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 regarding the value and utility of, and market demand for, our service offerings, future opportunities for growth with respect to new and existing clients, our future ability to compete and the types of firms with which we will compete, future consolidation in the healthcare industry, future adequacy of our liquidity sources, future revenue sources, future revenue growth, future revenue estimates used to calculate recurring contract value, the expected impact of economic factors, including interest rates and inflation, future capital expenditures including, without limitation, our headquarters renovation costs, and the timing, amount, and sources of cash to fund such capital expenditures, future stock repurchases and dividends, the expected impact of pending claims and contingencies, the future outcome of uncertain tax positions, our future use of owned and leased real property, future use of AI and the cost associated therewith, and the expected impact of global conflicts, among others, are forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties 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:
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The possibility of non-renewal of our client service contracts, reductions in services purchased or prices, and failure to retain key clients; |
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Our ability to compete in our markets, which are highly competitive with new market entrants, and the possibility of increased price pressure and expenses; |
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The likelihood that a pandemic will adversely affect our operations, sales, earnings, financial condition or liquidity; |
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The likelihood that global conflicts will adversely affect our operations, sales, earnings, financial condition and liquidity; |
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The effects of an economic downturn; |
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The impact of consolidation in the healthcare industry; |
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The impact of federal healthcare reform legislation or other regulatory changes; |
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Our ability to attract and retain key managers and other personnel; |
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The possibility that our intellectual property and other proprietary information technology could be copied or independently developed by our competitors; |
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Our ability to maintain effective internal controls; |
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The possibility for failures or deficiencies in our information technology platform; |
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The possibility that we or our third-party providers could be subject to cyber-attacks, security breaches or computer viruses; and |
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The factors set forth under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K, 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) and various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission. |
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.
PART I – Financial Information
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts and par value)
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September 30, |
December 31, 2023 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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Trade accounts receivable, less allowance for doubtful accounts of $ |
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Prepaid expenses |
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Income taxes receivable |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Intangible assets, net |
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Goodwill |
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Other noncurrent assets |
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Total assets |
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Liabilities and Shareholders’ Equity |
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Current liabilities: |
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Current portion of notes payable, net of unamortized debt issuance costs |
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Line of credit |
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Accounts payable |
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Accrued wages and bonuses |
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Accrued expenses |
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Dividends payable |
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Deferred revenue |
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Income taxes payable |
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Contingent consideration |
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Other current liabilities |
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Total current liabilities |
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Notes payable, net of current portion and unamortized debt issuance costs |
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Deferred income taxes |
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Contingent consideration, net of current portion |
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Other long-term liabilities |
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Total liabilities |
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Shareholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings (accumulated deficit) |
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Treasury stock, at cost; |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
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See accompanying notes to condensed consolidated financial statements
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share amounts, unaudited)
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Three months ended |
Nine months ended |
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2024 |
2023 |
2024 |
2023 |
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Revenue |
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Operating expenses: |
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Direct |
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Selling, general and administrative |
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Depreciation and amortization |
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Total operating expenses |
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Operating income |
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Other income (expense): |
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Interest income |
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Interest expense |
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Other, net |
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Total other income (expense) |
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Income before income taxes |
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Provision for income taxes |
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Net income |
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Earnings Per Share of Common Stock: |
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Basic Earnings Per Share |
$ | $ | $ | $ | ||||||||||||
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Diluted Earnings Per Share |
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Weighted average shares and share equivalents outstanding: |
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Basic |
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Diluted |
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See accompanying notes to condensed consolidated financial statements
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands except share and per share amounts, unaudited)
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Additional |
Retained (Deficit) |
Treasury Stock |
Total |
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Balances at December 31, 2023 |
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Purchase of |
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Issuance of |
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Dividends declared of $ |
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Net income |
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Balances at March 31, 2024 |
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Non-cash stock compensation (benefit) |
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Net income |
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Balances at June 30, 2024 |
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Purchase of |
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Dividends declared of $ |
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Net income |
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Balances at September 30, 2024 |
$ | $ | $ | ( |
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See accompanying notes to condensed consolidated financial statements.
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands except share and per share amounts, unaudited)
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Common |
Additional |
Retained (Deficit) |
Treasury Stock |
Total |
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Balances at December 31, 2022 |
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Purchase of |
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Issuance of |
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Dividends declared of $ |
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Net income |
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Balances at March 31, 2023 |
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Purchase of |
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Issuance of |
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Dividends declared of $ |
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Net income |
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Balances at June 30, 2023 |
$ | $ | $ | ( |
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Purchase of |
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Non-cash stock compensation expense |
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Dividends declared of $ |
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Net income |
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Balances at September 30, 2023 |
$ | $ | $ | ( |
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See accompanying notes to condensed consolidated financial statements.
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
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Nine months ended |
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September 30 |
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2024 |
2023 |
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Cash flows from operating activities: |
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Net income |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Deferred income taxes |
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Reserve for uncertain tax positions |
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Non-cash share-based compensation expense |
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Change in fair value of contingent consideration |
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Net changes in assets and liabilities: |
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Trade accounts receivable |
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Prepaid expenses and other current assets |
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Deferred contract costs, net |
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Operating lease assets and liabilities, net |
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Accounts payable |
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Accrued expenses, wages and bonuses |
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Income taxes receivable and payable |
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Deferred revenue |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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Acquisitions, net of cash acquired |
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Proceeds from the sale of property and equipment |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Payments on notes payable |
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Borrowings on notes payable |
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Borrowings on line of credit |
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Payments on line of credit |
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Payments on finance lease obligations |
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Payment of debt issuance costs |
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Proceeds from the exercise of share-based awards |
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Payment of payroll tax withholdings on share-based awards exercised |
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Repurchase of shares for treasury |
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Payment of dividends on common stock |
( |
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Net cash used in financing activities |
( |
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Change in cash and cash equivalents |
( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ | $ | ||||||
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Supplemental disclosure of cash paid for: |
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Interest expense, net of capitalized amounts |
$ | $ | ||||||
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Income taxes |
$ | $ | ||||||
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Supplemental disclosure of non-cash investing and financing activities: |
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Stock tendered to the Company for cashless exercise of stock options in connection with equity incentive plans |
$ | $ | ||||||
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Purchase of property and equipment in accounts payable and accrued expenses |
$ | $ | ||||||
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Repurchase of shares for treasury in accounts payable and accrued expenses |
$ | $ | ||||||
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Contingent consideration recorded in connection with acquisition |
$ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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(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. Our purpose is to humanize healthcare and support organizations in their understanding of each person they serve not as point-in-time insights, but as an ongoing relationship. We believe that understanding the story is the key to unlocking the highest-quality and truly personalized care. Our end-to-end solutions enable health care organizations to understand what matters most to each person they serve – before, during, after, and outside of clinical encounters – to gain a longitudinal understanding of how life and health intersect, with the goal of developing lasting, trusting relationships. Our portfolio of solutions represents a unique set of capabilities that individually and collectively provide value to our clients.
Our condensed consolidated balance sheet at December 31, 2023 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-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”) on February 27, 2024.
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 our wholly-owned subsidiary, National Research Corporation Canada, until it was formally dissolved in August 2024. All significant intercompany transactions and balances have been eliminated.
Our Canadian subsidiary used Canadian dollars as its functional currency. We translated its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. We translated its revenue and expenses at the average exchange rate during the period. During December 2022, we substantially liquidated our investment in Canada. As a result, currency translation changes were recognized in Other income (expense), net in our Condensed Consolidated Statements of Income. In the three-month period ended June 30, 2024 we repatriated the remaining cash from Canada.
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 3 for further information about our contracts with customers. We account for revenue using the following steps:
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Identify the contract, or contracts, with a customer; |
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Identify the performance obligations in the contract; |
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Determine the transaction price; |
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Allocate the transaction price to the identified performance obligations; and |
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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. 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. The majority of our revenue arrangements are for a twelve-month period but we also have multi-year arrangements. 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. We typically bill customers annually or quarterly in advance of services but may also bill monthly.
Our arrangements with customers consist principally of four different types of arrangements: 1) subscription-based service agreements; 2) one-time specified services performed at a single point in time; 3) fixed, non-subscription service agreements; and 4) unit-priced service agreements.
Subscription-based services - Services that are provided under subscription-based service agreements 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.
One-time services – These agreements typically require us to perform a specific one-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 months following the performance of the service. Revenue under these arrangements is recognized over the time the services are performed at the per-unit amount.
Revenue is presented net of 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 Contract Costs
Deferred contract costs, net is stated at gross deferred costs less accumulated amortization. We defer commissions and incentives, including payroll taxes, and certain implementation costs 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 to 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 have elected the practical expedient to expense contract costs when incurred for any nonrenewable contracts with a term of one year or less. We deferred incremental costs of obtaining a contract of $
|
Three months ended |
Three months ended |
Nine months ended |
Nine months ended |
|||||||||||||
|
(In thousands) |
||||||||||||||||
|
Direct Expenses |
$ | $ | $ | $ | ||||||||||||
|
Selling, general and administrative expenses |
||||||||||||||||
|
Total amortization |
$ | $ | $ | $ | ||||||||||||
Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is our best estimate of the 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 future. We review the allowance for doubtful 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.
The following table provides the activity in the allowance for doubtful accounts for the nine-month periods ended September 30, 2024 and 2023 (In thousands):
|
Balance at Beginning of Period |
Bad Debt Expense (Benefit) |
Write-offs |
Recoveries |
Balance at End of Period |
||||||||||||||||
|
Nine months ended September 30, 2024 |
$ | $ | ( |
) | $ | $ | $ | |||||||||||||
|
Nine months ended September 30, 2023 |
$ | $ | $ | $ | $ | |||||||||||||||
Leases
We determine whether a lease is included in an agreement at inception. We recognize a lease liability and a right-of-use (“ROU”) asset on the balance sheet for our operating leases under which we are lessee. Operating lease ROU assets are included in operating lease right-of-use assets in our condensed 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 asset 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.
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.
Due to remote working arrangements, we reassessed our office needs and subleased our Seattle location under an agreement considered to be an operating lease beginning in May 2021. We have not been legally released from our primary obligations under the original lease and therefore we continue to account for the original lease separately. Rent income from the sublessee is included in the statement of operations on a straight-line basis as an offset to rent expense associated with the original operating lease included in other expenses.
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) Level 1 Inputs—quoted prices in active markets for identical assets and liabilities; (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) Level 3 Inputs—unobservable inputs. There were no transfers between levels during the nine months ended September 30, 2024.
The following details our assets and liabilities measured at fair value on a recurring basis:
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
|
(In thousands) |
||||||||||||||||
|
As of September 30, 2024 |
||||||||||||||||
|
Financial Assets: |
||||||||||||||||
|
Money Market Funds |
$ | $ | $ | $ | ||||||||||||
|
Total Cash Equivalents |
$ | $ | $ | $ | ||||||||||||
|
Financial Liabilities: |
||||||||||||||||
|
Contingent Consideration Liability |
$ | $ | $ | |||||||||||||
|
As of December 31, 2023 |
||||||||||||||||
|
Financial Assets: |
||||||||||||||||
|
Money Market Funds |
$ | $ | $ | $ | ||||||||||||
|
Total Cash Equivalents |
$ | $ | $ | $ | ||||||||||||
Our contingent consideration liability relates to potential future payments to the former owners of Nobl Health (“Nobl”) which was acquired in the third quarter of 2024 (See Note 2). The potential future payments are contingent upon the achievement of certain customer contract metrics. Contingent consideration was recognized at the date of acquisition and is remeasured at each reporting date at its estimated fair value. The remeasured fair value could differ materially from the initial estimates and uses significant unobservable inputs classified as Level 3 inputs. We measured fair value using a discounted cash flow model based on the present value of expected future payments, which considers the likelihood of meeting contract thresholds at future payment dates. Significant increases or decreases to any of the inputs in isolation could result in a significantly higher or lower liability. The change to the contingent consideration liability from the acquisition date, at each reporting date and the final amount paid, which is capped at $
Our long-term debt described in Note 4 is recorded at historical cost. The fair value of fixed rate long-term debt in 2023 was 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 fair value of our variable rate long-term debt is believed to approximate the carrying value because we believe the current rate reasonably estimates the current market rate for our debt.
The following are the carrying amount and estimated fair values of long-term debt:
|
September 30, |
December 31, 2023 |
|||||||
|
(In thousands) |
||||||||
|
Total carrying amount of long-term debt |
$ | $ | ||||||
|
Estimated fair value of long-term debt |
$ | $ | ||||||
The carrying amounts of accounts receivable, line of credit, 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 September 30, 2024 and December 31, 2023, there was 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”).
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. We do not believe the final disposition of claims at September 30, 2024 will have a material adverse effect on our consolidated financial position, results of operations or liquidity.
|
(2) |
ACQUISITION |
On July 15, 2024, we entered a Stock Purchase Agreement to acquire all outstanding equity interests of Nobl, a provider of innovative rounding solutions for healthcare organizations, for cash delivered at closing of $
Total consideration paid for Nobl is as follows:
|
($ in thousands) |
||||
|
Cash paid |
$ | |||
|
Estimated fair value of Contingent Consideration |
||||
|
Fair value of total consideration transferred |
$ | |||
The acquisition was accounted for as a business combination, using the acquisition method of accounting, which requires the allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The fair values assigned to the intangible assets acquired were determined based on management’s estimates and assumptions, as well as other information compiled by management, including third-party valuations that utilize customary valuation procedures and techniques. These values are preliminary, pending final measurement of tax accounts, current liabilities and goodwill. The following table summarizes the preliminary fair value of assets acquired and liabilities assumed at the acquisition date.
|
Recognized Amounts of Assets Acquired and Liabilities Assumed |
||||
|
($ in thousands) |
||||
|
Cash |
$ | |||
|
Other current assets |
||||
|
Property and equipment |
||||
|
Customer related intangible |
||||
|
Technology |
||||
|
In process research & development |
||||
|
Goodwill |
||||
|
Other long-term assets |
||||
|
Total assets acquired |
$ | |||
|
Current liabilities |
||||
|
Other long-term liabilities |
||||
|
Total liabilities assumed |
||||
|
Net assets acquired |
$ | |||
Customer related and developed technology intangible assets are being amortized over their estimated useful lives of
In process research and development (“IPR&D”) consists of Nobl’s development activities related to a significant upgrade to Nobl’s proprietary platform. Once the project is completed, the carrying value of the IPR&D will be reclassified to software and amortized over the estimated useful life of the asset.
The financial results associated with the Nobl assets we acquired and liabilities we assumed are included in our consolidated financial statements from the date of acquisition, although the amounts are insignificant for 2024. Pro-forma information has not been presented because the amounts for 2024 are insignificant. Acquisition-related costs of $
|
(3) |
CONTRACTS WITH CUSTOMERS |
The following table disaggregates revenue for the three- and nine-month periods ended September 30, 2024 and 2023 based on timing of revenue recognition (in thousands):
|
Three months ended September 30, |
Nine months ended |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
Subscription services recognized ratably over time |
$ | $ | $ | $ | ||||||||||||
|
Services recognized at a point in time |
||||||||||||||||
|
Fixed, non-subscription recognized over time |
||||||||||||||||
|
Unit price services recognized over time |
||||||||||||||||
|
Total revenue |
$ | $ | $ | $ | ||||||||||||
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers (In thousands):
|
September 30, 2024 |
December 31, 2023 |
|||||||
|
Accounts receivables |
$ | $ | ||||||
|
Contract assets included in other current assets |
$ | $ | ||||||
|
Deferred Revenue, current portion |
$ | $ | ||||||
|
Noncurrent Deferred Revenue included in other long-term liabilities |
$ | |||||||
Significant changes in contract assets and contract liabilities during the nine-month periods ended September 30, 2024 and 2023 are as follows (in thousands):
|
2024 |
2023 |
|||||||||||||||
|
Contract Asset |
Deferred Revenue |
Contract Asset |
Deferred Revenue |
|||||||||||||
|
Increase (Decrease) |
||||||||||||||||
|
Revenue recognized that was included in deferred revenue at beginning of year due to completion of services |
$ | - | $ | ( |
) | $ | - | $ | ( |
) | ||||||
|
Increases due to invoicing of client, net of amounts recognized as revenue |
- | - | ||||||||||||||
|
Increases due to acquisition |
- | |||||||||||||||
|
Decreases due to completion of services (or portion of services) and transferred to accounts receivable |
( |
) | - | ( |
) | - | ||||||||||
|
Change due to cumulative catch-up adjustments arising from changes in expected contract consideration |
- | ( |
) | - | ( |
) | ||||||||||
|
Increases due to revenue recognized in the period with additional performance obligations before invoicing |
- | - | ||||||||||||||
We have elected to apply 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 September 30, 2024 approximated $
|
(4) |
INCOME TAXES |
The effective tax rate for each of the three-month periods ended September 30, 2024 and 2023 was
|
(5) |
CREDIT AGREEMENT |
Our long-term debt consists of the following:
|
September 30, |
December 31, 2023 |
|||||||
|
(In thousands) |
||||||||
|
Term Loan |
$ | $ | ||||||
|
Delayed Draw Term Loan |
||||||||
|
Less: current portion |
( |
) | ( |
) | ||||
|
Less: unamortized debt issuance costs |
( |
) | ( |
) | ||||
|
Notes payable, net of current portion |
$ | $ | ||||||
Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) includes (i) a $
Our Credit Facilities were amended on August 5, 2024, which (i) extended the maturity of the Line of Credit, (ii) extended the commitment date until which FNB will make loans available under the Delayed Draw Term Loan, (iii) revised the payments on the current balances of the Term Loan and the Delayed Draw Term Loan and any future balances on the Delayed Draw Term Loan to monthly installments amortized over ten-year periods, (iv) revised the interest rate on the Term Loan from a fixed
Borrowings under the Term Loan, Delayed Draw Term Loan and Line of Credit, if any, accrue interest at a floating rate equal to the plus
Principal payments on our amended Term Loan are due in monthly installments of $
Principal payments are due on the Delayed Draw Term Loan in monthly installments of $
Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in May 2027. As of September 30, 2024, we had $
We are obligated to pay ongoing unused commitment fees quarterly in arrears at a rate of
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. Pursuant to the Credit Agreement, we are required to maintain a minimum fixed charge coverage ratio of
|
(6) |
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 refer to our restricted stock awards as “non-vested” stock in these condensed consolidated financial statements.
Our 2004 Non-Employee Director Stock Plan, as amended (the “2004 Director Plan”), is a nonqualified plan that provides for the granting of options with respect to
Our 2006 Equity Incentive Plan (the “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
Performance-Based Stock Option Awards
We grant stock options to selected executives with vesting contingent upon meeting certain Company-wide performance goals. The performance goals for options issued in 2024 are based on reaching a total recurring contract value target, measured at the end of the performance period, December 31, 2026. Vesting is also dependent upon remaining in our employment through the performance period. The performance awards issued in 2024 have a -year contractual term. We recognize compensation expense prospectively from the date it is deemed probable that the performance goal will be met through the end of the performance period. We did not recognize compensation expense related to performance-based awards in 2024 since achieving the performance goals was not deemed probable. We granted
The fair value of performance-based stock options granted was estimated using a Black-Scholes valuation model with the following weighted average assumptions:
|
2024 |
||||
|
Expected dividend yield at date of grant |
% | |||
|
Expected stock price volatility |
% | |||
|
Risk-free interest rate |
% | |||
|
Expected life of options (in years) |
||||
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.
The following table summarizes performance-based stock option activity under the 2006 Equity Incentive Plan for the nine-month period ended September 30, 2024:
|
Number of |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Terms (Years) |
Aggregate Intrinsic Value (In thousands) |
|||||||||||||
|
Outstanding at December 31, 2023 |
$ | |||||||||||||||
|
Granted |
$ | |||||||||||||||
|
Exercised |
$ | |||||||||||||||
|
Forfeited |
$ | |||||||||||||||
|
Outstanding at September 30, 2024 |
$ | $ | ||||||||||||||
|
Exercisable at September 30, 2024 |
$ | - | $ | - | ||||||||||||
Service-Based Stock Option Awards
We also grant stock options to directors and selected executives with vesting based on specified service periods. Vesting terms vary with each grant and option awards are generally to years following the date of grant. We recognize compensation expense on a straight-line basis over the service period specified in the award. We granted
The fair value of service-based stock options granted in 2024 was estimated using a Black-Scholes valuation model with the following weighted average assumptions:
|
2024 |
||||
|
Expected dividend yield at date of grant |
% | |||
|
Expected stock price volatility |
% | |||
|
Risk-free interest rate |
% | |||
|
Expected life of options (in years) |
||||
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.
The following table summarizes service-based stock option activity under the 2006 Equity Incentive Plan and the 2004 Director Plan for the nine-month period ended September 30, 2024:
|
Number of |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Terms (Years) |
Aggregate Intrinsic Value (In thousands) |
|||||||||||||
|
Outstanding at December 31, 2023 |
$ | |||||||||||||||
|
Granted |
$ | |||||||||||||||
|
Exercised |
$ | |||||||||||||||
|
Forfeited |
$ | |||||||||||||||
|
Outstanding at September 30, 2024 |
$ | $ | ||||||||||||||
|
Exercisable at September 30, 2024 |
$ | $ | ||||||||||||||
There was $
As of September 30, 2024, the total unrecognized compensation cost related to non-vested performance-based and service-based stock option awards was approximately $
Non-vested Stock Awards
No non-vested shares of common stock were granted under the 2006 Equity Incentive Plan during the nine-month periods ended September 30, 2024 and 2023. As of September 30, 2024, there were non-vested shares of common stock outstanding and related remaining unrecognized compensation cost to recognize. We recognized non-cash compensation benefit of $
|
Common Stock Outstanding |
Weighted Average Grant Date Fair Value Per Share |
|||||||
|
Outstanding at December 31, 2023 |
$ | |||||||
|
Granted |
||||||||
|
Vested |
||||||||
|
Forfeited |
( |
) | ||||||
|
Outstanding at September 30, 2024 |
$ | |||||||
|
(7) |
GOODWILL AND OTHER INTANGIBLE ASSETS |
The following represents the carrying amount of goodwill:
|
Gross |
Accumulated Impairment |
Net |
||||||||||
|
(In thousands) |
||||||||||||
|
Balance at December 31, 2023 |
$ | $ | ( |
) | $ | |||||||
|
Goodwill acquired |
||||||||||||
|
Balance at September 30, 2024 |
$ | $ | ( |
) | $ | |||||||
Intangible assets consisted of the following:
|
September 30, |
December 31, |
|||||||
|
(In thousands) |
||||||||
|
Non-amortizing intangible assets: |
||||||||
|
Indefinite trade name |
$ | $ | ||||||
|
Amortizing intangible assets: |
||||||||
|
Customer related |
||||||||
|
Technology |
||||||||
|
Trade names |
||||||||
|
Total amortizing intangible assets |
||||||||
|
Accumulated amortization |
( |
) | ( |
) | ||||
|
Other intangible assets, net |
$ | $ | ||||||
|
(8) |
PROPERTY AND EQUIPMENT |
|
September 30, |
December 31, 2023 |
|||||||
|
(In thousands) |
||||||||
|
Property and equipment |
$ | $ | ||||||
|
Accumulated depreciation |
||||||||
|
Property and equipment, net |
$ | $ | ||||||
|
EARNINGS PER SHARE |
Basic net income per share was computed using the weighted-average shares of common stock outstanding during the period.
Diluted net income per share was computed using the weighted-average shares of common stock and, if dilutive, the potential common stock outstanding during the period. Potential shares of common stock consist of the incremental common stock 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.
We had
|
For the Three Months Ended September 30 |
For the Nine Months Ended September 30 |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
(In thousands, except per share data) |
||||||||||||||||
|
Numerator for net income per share – basic: |
||||||||||||||||
|
Net income |
$ | $ | $ | $ | ||||||||||||
|
Allocation of distributed and undistributed income to unvested restricted stock shareholders |
( |
) | ( |
) | ( |
) | ||||||||||
|
Net income attributable to common shareholders |
||||||||||||||||
|
Denominator for net income per share – basic: |
||||||||||||||||
|
Weighted average common shares outstanding – basic |
||||||||||||||||
|
Net income per share – basic |
$ | $ | $ | $ | ||||||||||||
|
Numerator for net income per share – diluted: |
||||||||||||||||
|
Net income attributable to common shareholders for basic computation |
||||||||||||||||
|
Denominator for net income per share – diluted: |
||||||||||||||||
|
Weighted average common shares outstanding – basic |
||||||||||||||||
|
Weighted average effect of dilutive securities – stock options |
||||||||||||||||
|
Denominator for diluted earnings per share – adjusted weighted average shares |
||||||||||||||||
|
Net income per share – diluted |
$ | $ | $ | $ | ||||||||||||
|
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.
Our purpose is to humanize healthcare and support organizations in their understanding of each unique individual. Our commitment to Human Understanding® helps leading healthcare systems get to know each person they serve not as point-in-time insights, but as an ongoing relationship. Our end-to-end solutions enable our clients to understand what matters most to each person they serve – before, during, after, and beyond clinical encounters – to gain a longitudinal understanding of how life and health intersect, with the goal of developing lasting, trusting relationships. 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 access to and analysis of our extensive consumer-driven information is increasingly valuable as healthcare providers need to better understand and engage the people they serve to create long-term relationships and build 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, employee engagement, reputation management, and brand loyalty. We partner with clients across the continuum of healthcare services and 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.
Results of Operations
The following tables set forth, for the periods indicated, selected financial information derived from our condensed consolidated financial statements and the percentage change in such items versus the prior comparable period, as well as other key financial metrics. The discussion that follows the information should be read in conjunction with our condensed consolidated financial statements.
Three Months Ended September 30, 2024, Compared to Three Months Ended September 30, 2023
|
(In thousands, except percentages) |
Percentage Increase (Decrease) |
|||||||||||
|
2024 |
2023 |
2024 over 2023 |
||||||||||
|
Revenue |
$ | 35,819 | $ | 37,945 | (6 | ) | ||||||
|
Direct expenses |
15,305 | 14,633 | 5 | |||||||||
|
Selling, general, and administrative |
10,988 | 11,802 | (7 | ) | ||||||||
|
Depreciation and amortization |
1,546 | 1,555 | (1 | ) | ||||||||
|
Operating income |
7,980 | 9,955 | (20 | ) | ||||||||
|
Total other income (expense) |
(684 | ) | 84 | (914 | ) | |||||||
|
Provision for income taxes |
1,608 | 2,163 | (26 | ) | ||||||||
|
Effective Tax Rate |
22 | % | 22 | % | - | |||||||
|
Operating margin |
22 | % | 26 | % | (4 | ) | ||||||
Revenue. Revenue in the 2024 period decreased compared to the 2023 period by $2.1 million. This was mainly from decreased US recurring revenue in our existing client base. Of this decrease, 26% was from our non-core solutions.
Direct expenses. Variable expenses increased $452,000 in the 2024 period compared to the 2023 period primarily from higher conference expenses partially offset by decreased data collection expenses. Variable expenses as a percentage of revenue were 18% and 16% in the 2024 and 2023 periods, respectively. Fixed expenses increased $220,000 primarily due to higher contracted services to support investments in our Human Understanding solutions partially offset by decreased salary and benefit costs from workforce changes and automation and state tax incentive adjustments. We have increased investments and will continue to invest in providing innovative AI solutions to our clients.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased in the 2024 period compared to the 2023 period primarily due to decreased marketing expenses of $890,000, less web hosting and other software services of $204,000, decreased legal fees of $142,000 and less consulting fees of $141,000 partially offset by increased salary and benefit costs of $669,000 from investments in strategic leadership, product development and sales teams. We expect these investment levels to continue with the goal of driving efficiencies and savings in overall costs.
Depreciation and amortization. Depreciation and amortization expenses decreased $9,000 due to less building, furniture and computer equipment depreciation partially offset by increased software investment amortization and intangible amortization from the Nobl acquisition.
Operating income and margin. Operating income and margin decreased in the 2024 period compared to the 2023 period primarily due to the decline in revenue.
Total other income (expense). Total other expense increased in the 2024 period compared to the 2023 period primarily due to lower interest income of $222,000 from decreased money market funds investments and higher interest expense of $546,000 mainly from borrowings on our Line of Credit and Delayed Draw Term Loan, as well as the increased interest rate on our Term Loan. Other expense is expected to increase in future periods due to additional borrowings on our Delayed Draw Term Loan and the August 2024 amendment to our Credit Agreement, which extended the maturity of our debt and revised the interest rate on our Term Note to SOFR plus 2.35%.
Provision for income taxes and effective tax rate. Provision for income taxes decreased in the 2024 period compared to the 2023 period primarily due to decreased taxable income. The effective tax rate remained consistent between periods.
Nine Months Ended September 30, 2024, Compared to Nine Months Ended September 30, 2023
|
(In thousands, except percentages) |
Percentage Increase (Decrease) |
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|
2024 |
2023 |
2024 over 2023 |
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|
Revenue |
$ | 106,154 | $ | 110,579 | (4 | ) | ||||||
|
Direct expenses |
42,583 | 42,222 | 1 | |||||||||
|
Selling, general, and administrative |
33,459 | 35,552 | (6 | ) | ||||||||
|
Depreciation and amortization |
4,506 | 4,469 | 1 | |||||||||
|
Operating income |
25,606 | 28,336 | (10 | ) | ||||||||
|
Total other income (expense) |
(1,791 | ) | 158 | (1,234 | ) | |||||||
|
Provision for income taxes |
5,592 | 6,381 | (12 | ) | ||||||||
|
Effective Tax Rate |
23 | % | 22 | % | 1 | |||||||
|
Operating margin |
24 | % | 26 | % | (2 | ) | ||||||
|
Recurring Contact Value |
$ | 131,596 | $ | 144,346 | (9 | ) | ||||||
|
Cash provided by operating activities |
28,246 | 26,405 | 7 | |||||||||
Revenue. Revenue in the 2024 period decreased compared to the 2023 period by $4.4 million. This was mainly from decreased US recurring revenue in our existing client base. Of this decrease, 28% was from our non-core solutions.
Direct expenses. Variable expenses increased $494,000 in the 2024 period compared to the 2023 period primarily from higher conference expenses partially offset by decreased data collection expenses. Variable expenses as a percentage of revenue were 16% and 15% in the 2024 and 2023 periods, respectively. Fixed expenses decreased $133,000 primarily due to decreased salary and benefit costs from workforce changes and automation partially offset by increased contracted services to support investments in our Human Understanding® solutions. We have increased investments and will continue to invest in providing innovative AI solutions to our clients.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased in the 2024 period compared to the 2023 period primarily due to decreased marketing expenses of $1.4 million, less web hosting and other software services of $217,000, lower bad debt expense of $172,000 and decreased training costs of $171,000. We increased investments in strategic leadership, product development and sales during the year. We expect these investment levels to continue with the goal of driving efficiencies and savings in overall costs.
Depreciation and amortization. Depreciation and amortization expenses increased $37,000 in the 2024 period compared to the 2023 period primarily due to increased software investment amortization and intangible amortization from the Nobl acquisition.
Operating income and margin. Operating income and operating margin decreased in the 2024 period compared to the 2023 period primarily due to the decline in revenue exceeding the decline in operating expenses.
Total other income (expense). Total other expense increased in the 2024 period compared to the 2023 period primarily due to lower interest income of $676,000 from decreased money market funds investments and higher interest expense of $1.3 million mainly from borrowings on our Line of Credit and Delayed Draw Term Loan, as well as the increased interest rate on our Term Loan. Other expense is expected to increase in future periods due to additional borrowings on our Delayed Draw Term Loan and the August 2024 amendment to our Credit Agreement, which extended the maturity of our debt and revised the interest rate on our Term Note to SOFR plus 2.35%.
Provision for income taxes and effective tax rate. Provision for income taxes decreased in the 2024 period compared to the 2023 period primarily due to decreased taxable income. The effective tax rate increased mainly due to decreased tax benefits of $55,000 from the exercise of share-based compensation awards and higher state income taxes of approximately $241,000 which fluctuate based on various apportionment factors and rates for the states in which we operate.
Recurring Contract Value. Recurring contract value declined in 2024 compared to 2023 primarily due to the lack of growth in new contracts to replace losses. Our retention rate remained fairly consistent in comparison to prior years. Our recurring contract value metric represents the total revenue projected under all renewable contracts for their respective next annual renewal periods, assuming no upsells, downsells, price increases, or cancellations, measured as of the most recent quarter end.
Liquidity and Capital Resources
Our Board of Directors has established priorities for capital allocation, which prioritize funding of innovation and growth investments, including merger and acquisition activity as well as internal projects. The secondary priority is capital allocation for quarterly dividends and share repurchases.
As of September 30, 2024, our principal sources of liquidity included $3.5 million of cash and cash equivalents, up to $25 million of unused borrowings under our Line of Credit and an additional $39 million on our Delayed Draw Term Loan. The Delayed Draw Term Loan can only be used to fund dividends, capital expenditures, permitted future business acquisitions or repurchasing our common stock.
Our 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, change in fair value of contingent consideration and the effect of working capital changes. Cash provided by operating activities increased primarily due to working capital changes, mainly consisting of changes in trade accounts receivable due to timing of invoicing and payments, accrued expenses, wages and bonuses mainly due to the timing of payments and changes in prepaid expenses and other current assets primarily due to the timing of our annual business insurance and other service agreements partially offset by changes in income taxes receivable and payable due to the timing of payments. Cash provided by operating activities was also partially offset by decreased net income net of non-cash items.
See the Condensed Consolidated Statements of Cash Flows included in this report for the detail of our operating cash flows.
We had a working capital deficit of $23.6 million and $11.8 million on September 30, 2024 and December 31, 2023, respectively. The change was primarily due to decreases in cash and cash equivalents and trade accounts receivable and increases in the borrowings outstanding on our Line of Credit and Delayed Draw Term Loan, accrued expenses, accounts payable, accrued wages and bonuses, deferred revenue and contingent consideration due to the acquisition. These were partially offset by increases in prepaid expenses primarily due to the timing of our annual business insurance payment and other service agreements, increases in income taxes receivable due to timing of payments and decreased current portion of notes payable due to the amendment of our credit agreement . Cash and cash equivalents decreased mainly due to the repurchase of shares of our common stock for treasury and cash paid to fund the Nobl acquisition, which was also funded by borrowings on our Line of Credit and Delayed Draw Term Loan. Accrued expenses, accounts payable and accrued wages and bonuses increased primarily due to the timing of payments. Trade accounts receivable decreased due to timing of billing and collections, as well as decreases in our overall recurring contract value. 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. Notwithstanding our working capital deficit on September 30, 2024, 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 capital and debt maturity needs for the foreseeable future.
Cash used in investing activities primarily consisted of payments for the acquisition of Nobl Health and purchases of property and equipment including computer software and hardware, building improvements, and furniture and equipment.
Cash used in financing activities consisted of payments for borrowings under the Term Loan, Delayed Draw Term Loan, Line of Credit and finance lease obligations. We also used cash to repurchase shares of our common stock for treasury, to pay dividends on common stock and for payment of payroll tax withholdings on options exercised. This was partially offset by cash provided from borrowings on the Line of Credit and Delayed Draw Down Term loan.
Our material cash requirements include the following contractual and other obligations:
Cash dividends of $8.6 million were paid in the nine months ended September 30, 2024. Dividends of $2.8 million were declared in the three months ended September 30, 2024 and paid in October 2024. The dividends were paid from cash on hand and borrowings on our Line of Credit. Our board of directors considers whether to declare a dividend and the amount of any dividends declared on a quarterly basis.
We paid cash of $11.0 million for capital expenditures in the nine months ended September 30, 2024. These expenditures consisted mainly of computer software development for our Human Understanding® solutions and building renovations to our headquarters. We estimate future costs related to our headquarters building renovations to be $2.5 million in 2024 and $4.7 million in 2025, which we expect to fund through operating cash flows and borrowings on the Line of Credit or Delayed Draw Term Loan.
Debt
Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) includes (i) a $30.0 million revolving credit facility (the “Line of Credit”), (ii) a $23.4 million term loan (the “Term Loan”) and (iii) a $75.0 million delayed draw-down term facility (the “Delayed Draw Term Loan” and, together with the Line of Credit and the Term Loan, the “Credit Facilities”). We may use the Delayed Draw Term Loan through May 2026 to fund dividends, any permitted future business acquisitions, capital expenditures or repurchases of our common stock. The Line of Credit is available to fund ongoing working capital needs and for other general corporate purposes.
Our Credit Facilities were amended on August 5, 2024, which (i) extended the maturity of the Line of Credit, (ii) extended the commitment date until which FNB will make loans available under the Delayed Draw Term Loan, (iii) revised the payments on the current balances of the Term Loan and Delayed Draw Term Loan and any future balances on the Delayed Draw Term Loan to monthly installments amortized over ten-year periods, (iv) revised the interest rate on the Term Loan from a 5% fixed rate to a floating rate based on the 30-day Secured Overnight Financing Rate (“SOFR”), (v) extended the use of the Delayed Draw Term Loan to include dividends, stock repurchases, acquisitions, and capital expenditures and (vi) increased the allowable building renovations excluded from the fixed charge coverage ratio covenant.
Borrowings under the Term Loan, Delayed Draw Term Loan and Line of Credit, if any, accrue interest at a floating rate equal to the SOFR plus 235 basis points (7.55% at September 30, 2024), which is payable monthly.
The outstanding balance on the Term Loan was $14.5 million at September 30, 2024. Principal payments were due in monthly installments of $92,800 through May 2027 and a balloon payment for the remaining balance of $11.6 million is due May 28, 2027.
The outstanding balance on the Delayed Draw Term Loan was $34.2 million at September 30, 2024. Principal payments are due on the Delayed Draw Term Loan in monthly installments of $220,882 through May 2027 and a balloon payment for the remaining balance of $27.1 million is due in May 28, 2027. We had the availability to borrow an additional $39 million on the Delayed Draw Term Loan at September 30, 2024.
Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in May 2027. As of September 30, 2024, we had $5.0 million of borrowings outstanding and the availability to borrow $25.0 million on the Line of Credit. The weighted average borrowings on the Line of Credit for the three-month periods ended September 30, 2024 and 2023 were $8.0 million and $543,000, respectively. The weighted average borrowings on the Line of Credit for the nine-month periods ended September 30, 2024 and 2023 were $9.0 million and $183,000, respectively. The weighted average interest rate on borrowings on the Line of Credit during the three-month periods ended September 30, 2024 and 2023 were 7.65% and 7.68%, respectively. The weighted average interest on borrowings on the Line of Credit during the nine-month periods ended September 30, 2024 was 7.67% and 7.68%, respectively.
We are obligated to pay ongoing unused commitment fees quarterly in arrears 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.
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. 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 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 $5.5 million 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, (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand, and (iv) up to $27.5 million of costs associated with our building renovation from or after January 1, 2023. We are also required to maintain a cash flow leverage ratio of 3.00x or less for all testing periods throughout the term(s) of the Credit Facilities. 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. As of September 30, 2024, we were in compliance with our financial covenants.
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 our 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).
Leases
We have lease arrangements for certain computer, office, printing and inserting equipment as well as office and data center space. As of September 30, 2024, we had fixed lease payments of $674,000 and $10,000 for operating and finance leases, respectively payable within 12 months.
Taxes
The liability for gross unrecognized tax benefits related to uncertain tax positions was $2.2 million as of September 30, 2024. See Note 4, "Income Taxes", to the Condensed Consolidated Financial Statements contained in this report for income tax related information.
In June 2024, a final deemed dividend was paid from our Canadian subsidiary and the deemed repatriation tax payable imposed by the U.S. Tax Cuts and Jobs Act of 2017 of $8,000 was paid.
Stock Repurchase Program
In May 2022, our Board of Directors authorized the repurchase of 2,500,000 shares of common stock (the “2022 Program”). Under the 2022 Program we are authorized to repurchase from time-to-time shares of our outstanding common stock on the open market or in privately negotiated transactions. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions as well as corporate and regulatory considerations. The 2022 Program may be suspended, modified, or discontinued at any time and we have no obligation to repurchase any amount of common stock in connection with the 2022 Program. The 2022 Program has no set expiration date.
During the three months ended September 30, 2024, we repurchased 395,217 shares of our common stock under the 2022 Program. As of September 30, 2024, the remaining number of shares of common stock that could be purchased under the 2022 Program was 700,633 shares.
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, 2023 that have a material impact on our Condensed Consolidated Financial Statements and the related Notes.
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Quantitative and Qualitative Disclosures about Market Risk |
There are no material changes to the disclosures regarding our market risk exposures made in its Annual Report on Form 10-K for the year ended December 31, 2023.
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Controls and Procedures |
Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, has 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 our Chief Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.
We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and Principal Financial Officer, does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been detected.
There have been no 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 September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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. For additional information, see Note 1, under the heading “Commitments and Contingencies,” to our condensed consolidated financial statements. Regardless of the final outcome, any legal proceedings, claims, inquiries and investigations, however, can impose a significant burden on management and employees, may include costly defense and settlement costs, and could cause harm to our reputation and brand, and other factors.
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Risk Factors |
The significant risk factors known to us that could materially adversely affect our business, financial condition, or operating results are described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023.
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Unregistered Sales of Equity Securities and Use of Proceeds |
In May 2022 our Board of Directors authorized the 2022 Program.
Our Credit Agreement provides that, in order for us to pay dividends or repurchase our common stock, 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.
The table below summarizes repurchases of common stock during the three months ended September 30, 2024.
|
Period |
Total Number of Shares Purchased |
Average Price Paid per Share (1) |
Total Number of Shares Purchased as Announced Plans |
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
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|
Jul 1 – Jul 31, 2024 |
- | $ | - | - | 1,095,850 | |||||||||||
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Aug 1 – Aug 31, 2024 |
243,242 | $ | 21.41 | 243,242 | 852.608 | |||||||||||
|
Sep 1 – Sep 30, 2024 |
151,975 | $ | 21.98 | 151,975 | 700,633 | |||||||||||
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Total |
395,217 | $ | 21.63 | 395,217 | ||||||||||||
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(1) |
The average price paid per share includes commission paid on stock repurchases and excludes excise tax incurred on stock repurchases. For the quarter ended September 30, 2024, commission paid totaled $7,904 and excise tax expense totaled $85,490. |
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(2) |
Shares were repurchased pursuant to the 2022 Program. |
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Other Information |
During the third quarter of 2024, director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement.
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Exhibits |
The exhibits listed in the exhibit index below are filed as part of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
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Exhibit |
Exhibit Description |
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(3.1) |
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(3.2) |
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(4.1) |
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|
(4.2) |
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(10.1)** |
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(31.1)** |
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(31.2)** |
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(32)*** |
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(101) ** |
Financial statements from the Quarterly Report on Form 10-Q of National Research Corporation for the quarter ended September 30, 2024, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Shareholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Notes to Condensed Consolidated Financial Statements, and (vi) document and entity information. |
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(104) ** |
Cover Page Interactive Data File (formatted in the Inline XBRL and contained in Exhibit 101). |
** Filed herewith
*** Furnished herewith
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.
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NATIONAL RESEARCH CORPORATION |
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Date: November 8, 2024 |
By: |
/s/ Michael D. Hays |
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Michael D. Hays |
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Chief Executive Officer (Principal Executive Officer) |
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Date: November 8, 2024 |
By: |
/s/ Linda A. Stacy |
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Linda A. Stacy Secretary, Principal Financial Officer, and Principal Accounting Officer (Principal Financial and Accounting Officer) |
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