Nrc Health 10-Q for FY2023 Q3
Nrc Health (NRC)
About this 10-Q
Nrc Health filed this 10-Q on November 9, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $37.95M
- up 0.7% from $37.69M a year earlier
- Net income
- $7.88M
- down 5.1% from net income of $8.3M a year earlier
- Diluted EPS
- $0.32
- down 3.0% from $0.33 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended |
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
| National Research Corporation |
(Exact name of Registrant as specified in its charter)
| | | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| | ||
| (Address of principal executive offices) (Zip Code) |
| ( | ||
| (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 |
| | | The |
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.
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).
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 | ☐ | | ☒ |
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes
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 November 3, 2023:
NATIONAL RESEARCH CORPORATION
For the Quarter Ended September 30, 2023
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| PART I. |
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| Item 1. |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. |
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| Item 4. |
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| PART II. |
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| Item 1A. |
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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,” “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 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, the expected impact of global conflicts, and the expected impact of the COVID-19 pandemic or other similar outbreak, 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:
| ● |
The possibility of non-renewal of our client service contracts, reductions in services purchased or prices, and failure to retain key clients; |
| ● |
The likelihood that the COVID-19 or other similar outbreak will adversely affect our operations, sales, earnings, financial condition and liquidity; |
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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 ongoing 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; |
| ● |
The impact of federal healthcare reform legislation or other regulatory changes; |
| ● |
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; |
| ● |
The possibility for failures or deficiencies in our information technology platform; |
| ● |
The possibility that we or our third-party providers 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, 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)
| September 30, 2023 | December 31, 2022 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade accounts receivable, less allowance for doubtful accounts of $ and $, respectively | ||||||||
| Prepaid expenses | ||||||||
| Income taxes receivable | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Net property and equipment | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Deferred contract costs, net | ||||||||
| Deferred income taxes | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of notes payable | $ | $ | ||||||
| Line of credit | ||||||||
| Accounts payable | ||||||||
| Accrued wages and bonuses | ||||||||
| Accrued expenses | ||||||||
| Dividends payable | ||||||||
| Deferred revenue | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Notes payable, net of current portion and unamortized debt issuance costs | ||||||||
| Deferred income taxes | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, $ par value, authorized shares, issued | ||||||||
| Common stock, $ par value; authorized shares, issued in 2023 and in 2022, outstanding in 2023 and in 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings (accumulated deficit) | ( | ) | ( | ) | ||||
| Treasury stock, at cost; and common stock in 2023 and 2022, respectively | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
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)
| Three months ended |
Nine months ended |
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| 2023 |
2022 |
2023 |
2022 |
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| Revenue |
$ | $ | $ | $ | ||||||||||||
| 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 |
$ | $ | $ | $ | ||||||||||||
| Earnings Per Share of Common Stock: |
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| Basic Earnings Per Share |
$ | $ | $ | $ | ||||||||||||
| Diluted Earnings Per Share |
$ | $ | $ | $ | ||||||||||||
| 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 COMPREHENSIVE INCOME
(In thousands, unaudited)
| Three months ended |
Nine months ended September 30, |
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| 2023 |
2022 |
2023 |
2022 |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss): |
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| Foreign currency translation adjustment |
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| Other comprehensive income (loss) |
$ | $ | ( |
) |
$ | $ | ( |
) |
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| Comprehensive Income |
$ | $ | $ | $ | ||||||||||||
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)
| Common | Additional | Retained (Deficit) | Treasury Stock | Total | ||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Purchase of 49,296 shares treasury stock | ( | ) | ( | ) | ||||||||||||||||
| Issuance of shares of common stock for the exercise of stock options | ||||||||||||||||||||
| Non-cash stock compensation expense | ||||||||||||||||||||
| Dividends declared of $ per share of common stock | ( | ) | ( | ) | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Balances at March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Purchase of 43,723 shares treasury stock | ( | ) | ( | ) | ||||||||||||||||
| Issuance of shares of common stock for the exercise of stock options | ||||||||||||||||||||
| Non-cash stock compensation expense | ||||||||||||||||||||
| Dividends declared of $ per share of common stock | ( | ) | ( | ) | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Balances at June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Purchase of shares treasury stock | ( | ) | ( | ) | ||||||||||||||||
| Non-cash stock compensation expense | ||||||||||||||||||||
| Dividends declared of $ per share of common stock | ( | ) | ( | ) | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Balances at September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
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)
| Common | Additional | Retained (Deficit) | Accumulated Other | Treasury Stock | Total | |||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||
| Purchase of shares treasury stock | ( | ) | ( | ) | ||||||||||||||||||||
| Non-cash stock compensation expense | ||||||||||||||||||||||||
| Dividends declared of $ per common share | ( | ) | ( | ) | ||||||||||||||||||||
| Other comprehensive income, foreign currency translation adjustment | ||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Balances at March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||
| Purchase of shares treasury stock | ( | ) | ( | ) | ||||||||||||||||||||
| Non-cash stock compensation expense | ||||||||||||||||||||||||
| Dividends declared of $ per common share | ( | ) | ( | ) | ||||||||||||||||||||
| Other comprehensive income (loss), foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Balances at June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||
| Purchase of shares treasury stock | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance of common shares for the exercise of stock options | ||||||||||||||||||||||||
| Non-cash stock compensation expense | ||||||||||||||||||||||||
| Dividends declared of $ per common share | ( | ) | ( | ) | ||||||||||||||||||||
| Other comprehensive income (loss), foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Balances at September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||
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 |
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| September 30, |
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| 2023 |
2022 |
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| Cash flows from operating activities: |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation, amortization and impairment |
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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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| Loss on disposal of property and equipment |
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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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| 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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| Borrowings on line of credit |
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| Payments on notes payable |
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| Payment of debt issuance costs |
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| Payments on finance lease obligations |
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| Proceeds from the exercise of share-based awards |
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| Payment of employee payroll tax withholdings on share-based awards exercised |
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| Repurchase of shares for treasury |
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| Payment of deferred acquisition consideration |
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| Payments of dividends on common stock |
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| Net cash used in financing activities |
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| Effect of exchange rate changes on cash and cash equivalents |
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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 |
$ | $ | ||||||
| Supplemental disclosure of cash paid for: |
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| Interest expense, net of capitalized amounts |
$ | $ | ||||||
| Income taxes |
$ | $ | ||||||
| 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 |
$ | $ | ||||||
| Purchase of property and equipment in accounts payable and accrued expenses |
$ | $ | ||||||
| Repurchase of shares for treasury in accounts payable and accrued expenses |
$ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| (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, 2022 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, 2022, filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2023.
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. All significant intercompany transactions and balances have been eliminated.
Our Canadian subsidiary uses Canadian dollars as its functional currency. We translate its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. We translate its revenue and expenses at the average exchange rate during the period. We included foreign currency translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’ equity through December 2022. During December 2022, we substantially liquidated our investment in Canada. As a result, we reclassified the cumulative foreign currency translation adjustment balance into earnings in 2022. Currency translation changes after 2022 are recognized in Other income (expense), net in our Condensed Consolidated Statements of Income.
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 2 for further information about our contracts with customers. We account for revenue using the following steps:
| ● | Identify the contract, or contracts, with a customer; | |
| ● | Identify the performance obligations in the contract; | |
| ● | Determine the transaction price; | |
| ● | 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. 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) 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 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 either annually or quarterly in advance but may also be billed on a monthly basis.
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 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.
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 2023 | Three months ended 2022 | Nine months ended 2023 | Nine months ended 2022 | |||||||||||||
| (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, 2023 and 2022 (In thousands):
| Balance at Beginning of Period | Bad Debt Expense (Benefit) | Write-offs | Recoveries | Balance at End of Period | ||||||||||||||||
| Nine months ended September 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Nine months ended September 30, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
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.
The following details our financial assets within the fair value hierarchy at September 30, 2023 and December 31, 2022:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| As of September 30, 2023 | ||||||||||||||||
| Money Market Funds | $ | $ | - | $ | - | $ | ||||||||||
| Total Cash Equivalents | $ | $ | - | $ | - | $ | ||||||||||
| As of December 31, 2022 | ||||||||||||||||
| Money Market Funds | $ | $ | - | $ | - | $ | ||||||||||
| Total Cash Equivalents | $ | $ | - | $ | - | $ | ||||||||||
There were no transfers between levels during the nine months ended September 30, 2023.
Our long-term debt described in Note 4 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, | December 31, 2022 | |||||||
| (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, 2023 and December 31, 2022, 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, 2023 will have a material adverse effect on our consolidated financial position, results of operations or liquidity.
| (2) | CONTRACTS WITH CUSTOMERS |
The following table disaggregates revenue for the three- and nine-month periods ended September 30, 2023 and 2022 based on timing of revenue recognition (in thousands):
| Three months ended September 30, | Nine months ended | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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, 2023 | December 31, 2022 | |||||||
| Accounts receivables | $ | $ | ||||||
| Contract assets included in other current assets | $ | $ | ||||||
| Deferred Revenue | $ | $ | ||||||
Significant changes in contract assets and contract liabilities during the nine-month periods ended September 30, 2023 and 2022 are as follows (in thousands):
| 2023 | 2022 | |||||||||||||||
| 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 | - | - | ||||||||||||||
| 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, 2023 approximated $
| (3) | INCOME TAXES |
The effective tax rate for the three-month period ended September 30, 2023 decreased to
The effective tax rate for the nine-month period ended September 30, 2023 decreased to
| (4) | NOTES PAYABLE |
Our long-term debt consists of the following:
| September 30, | December 31, 2022 | |||||||
| (In thousands) | ||||||||
| Term Loans | $ | $ | ||||||
| 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 $
The Term Loan is payable in monthly installments of $
Borrowings under the Line of Credit and the Delayed Draw Term Loan, if any, bear interest at a floating rate equal to the 30-day Secured Overnight Financing Rate (“SOFR”) plus
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
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. In June 2023, the Credit Agreement was amended to exclude our costs associated with our building renovation from or after January 1, 2023 from the fixed charge coverage ratio calculation. Pursuant to the amended Credit Agreement, we are required to maintain a minimum fixed charge coverage ratio of 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) | 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
During the nine-month periods ended September 30, 2023 and 2022, we granted options to purchase
| 2023 | 2022 | |||||||
| 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 stock option activity under the 2006 Equity Incentive Plans and the 2004 Director Plan for the nine-month periods ended September 30, 2023:
| Number of | Weighted Average Exercise Price | Weighted Average Remaining Contractual Terms (Years) | Aggregate Intrinsic Value (In thousands) | |||||||||||||
| Outstanding at December 31, 2022 | $ | |||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | $ | |||||||||||||||
| Forfeited | $ | |||||||||||||||
| Outstanding at September 30, 2023 | $ | $ | ||||||||||||||
| Exercisable at September 30, 2023 | $ | $ | ||||||||||||||
As of September 30, 2023, the total unrecognized compensation cost related to non-vested stock option awards was approximately $
There was $
| Common Stock Outstanding | Weighted Average Grant Date Fair Value Per Share | |||||||
| Outstanding at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Forfeited | ( | ) | ||||||
| Outstanding at September 30, 2023 | $ | |||||||
As of September 30, 2023, the total unrecognized compensation cost related to non-vested stock awards was approximately $
| (6) | GOODWILL AND OTHER INTANGIBLE ASSETS |
The following represents the carrying amount of goodwill at September 30, 2023:
| Gross | Accumulated Impairment | Net | ||||||||||
| (In thousands) | ||||||||||||
| Balance at September 30, 2023 | $ | $ | ||||||||||
Intangible assets consisted of the following:
| September 30, | December 31, 2022 | |||||||
| (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 | $ | $ | ||||||
| (7) | PROPERTY AND EQUIPMENT |
| September 30, | December 31, 2022 | |||||||
| (In thousands) | ||||||||
| Property and equipment | $ | $ | ||||||
| Accumulated depreciation | ||||||||
| Property and equipment, net | $ | $ | ||||||
| (8) | 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 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (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 | $ | $ | $ | $ | ||||||||||||
| GEOGRAPHIC INFORMATION |
The tables below present entity-wide information regarding our revenue and assets by geographic area (in thousands):
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue: | ||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Canada | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| September 30, | December 31, 2022 | |||||||
| Long-lived assets: | ||||||||
| United States | $ | $ | ||||||
| Canada | ||||||||
| Total | $ | $ | ||||||
| Total assets: | ||||||||
| United States | $ | $ | ||||||
| Canada | ||||||||
| Total | $ | $ | ||||||
| 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.
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, 2023, Compared to Three Months Ended September 30, 2022
| (In thousands, except percentages) |
Percentage Increase (Decrease) |
|||||||||||
| 2023 |
2022 |
2023 over 2022 |
||||||||||
| Revenue |
$ | 37,945 | $ | 37,691 | 0.7 | |||||||
| Direct expenses |
14,633 | 14,524 | 0.8 | |||||||||
| Selling, general, and administrative |
11,802 | 10,762 | 9.7 | |||||||||
| Depreciation and amortization |
1,555 | 1,296 | 20.0 | |||||||||
| Operating income |
9,955 | 11,109 | (10.4 | ) |
||||||||
| Total other income (expense) |
84 | (262 | ) |
132.1 | ||||||||
| Provision for income taxes |
2,163 | 2,549 | (15.1 | ) |
||||||||
| Effective Tax Rate |
21.5 | % |
23.5 | % |
(2.0 | ) |
||||||
| Operating margin |
26.2 | % |
29.5 | % |
(3.3 | ) |
||||||
Revenue. Revenue in the 2023 period increased compared to the 2022 period with increased US revenue of $255,000. US recurring revenue in our existing client base increased $331,000. US recurring revenue from new customer sales decreased $282,000 and increased for non-recurring revenues of $205,000.
Direct expenses. Variable expenses increased $392,000 in the 2023 period compared to the 2022 period primarily from higher survey and other subscription services, as well as increased conference expenses mainly due to higher expenses per conference. Variable expenses as a percentage of revenue were 16.3% and 15.3% in the 2023 and 2022 periods, respectively. Fixed expenses decreased $283,000 primarily due to decreased salary and benefit costs from workforce reduction and automation partially offset by increased contracted services to support our Human Understanding solutions, increased sales tax expense from state tax incentive plan changes, and higher travel costs.
Selling, general and administrative expenses. Selling, general and administrative expenses increased in the 2023 period compared to the 2022 period primarily due to growth in marketing initiative expenses of $343,000 to expand brand recognition and support sales development, increased salary and benefit costs of $304,000 in sales and client support, increased legal fees of $241,000, and additional cyber security and various software services of $242,000.
Depreciation and amortization. Depreciation and amortization expenses increased in the 2023 period compared to the 2022 period primarily due to shortening the estimated useful lives of certain building assets and increased software investment amortization.
Operating income and margin. Operating income and margin decreased in the 2023 period compared to the 2022 period primarily due to growth in marketing initiative expenses and other costs exceeding growth in revenue.
Total other income (expense). Total other income (expense) increased in the 2023 period compared to the 2022 period primarily due to higher interest income of $241,000 from additional money market funds investments and lower interest expense from the declining balance on our term loan of $128,000. In future periods we expect total other income (expense) to decrease due to an expected decrease in interest income resulting from reduced money market fund investments and increased interest expense due to borrowings on our line of credit.
Provision for income taxes and effective tax rate. Provision for income taxes decreased in the 2023 period compared to the 2022 period primarily due to decreased taxable income. The effective tax rate decreased primarily due to lower state income taxes of $313,000 which fluctuate based on various apportionment factors and rates for the states we operate in partially offset by decreased tax benefits of $138,000 from the exercise of share-based compensation awards.
Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022
| (In thousands, except percentages) |
Percentage Increase (Decrease) |
|||||||||||
| 2023 |
2022 |
2023 over 2022 |
||||||||||
| Revenue |
$ | 110,579 | $ | 113,424 | (2.5 | ) |
||||||
| Direct expenses |
42,222 | 43,062 | (2.0 | ) |
||||||||
| Selling, general, and administrative |
35,552 | 32,159 | 10.6 | |||||||||
| Depreciation and amortization |
4,469 | 3,902 | 14.5 | |||||||||
| Operating income |
28,336 | 34,301 | (17.4 | ) |
||||||||
| Total other income (expense) |
158 | (958 | ) |
116.5 | ||||||||
| Provision for income taxes |
6,381 | 8,184 | (22.0 | ) |
||||||||
| Effective Tax Rate |
22.4 | % |
24.5 | % |
(2.1 | ) |
||||||
| Operating margin |
25.6 | % |
30.2 | % |
(4.6 | ) |
||||||
| Recurring Contact Value |
$ | 144,346 | $ | 148,036 | (2.5 | ) |
||||||
| Cash provided by operating activities |
26,405 | 28,161 | (6.2 | ) |
||||||||
Revenue. Revenue in the 2023 period decreased compared to the 2022 period with reductions in US revenue of $2.1 million and Canadian revenue of $793,000 due to the closure of our Canadian office. US recurring revenue in our existing client base decreased $1.1 million which included $439,000 attributed to elimination of a non-core solution. US recurring revenue from new customer sales decreased $1.2 million and increased for non-recurring revenues of $225,000. We do not expect Canadian revenues in the future due to the closure of the Canadian office.
Direct expenses. Variable expenses increased $243,000 in the 2023 period compared to the 2022 period primarily from higher survey and other subscription services partially offset by lower conference expenses due to one less large conference being held. Variable expenses as a percentage of revenue were 15.0% and 14.4% in the 2023 and 2022 periods, respectively. Fixed expenses decreased $1.1 million primarily due to decreased salary and benefit costs from workforce reduction and automation partially offset by increased contracted services to support our Human Understanding solutions and higher travel costs.
Selling, general and administrative expenses. Selling, general and administrative expenses increased in the 2023 period compared to the 2022 period primarily due to growth in marketing initiative expenses of $2.6 million to expand brand recognition and support sales development, increased salary and benefit costs of $1.4 million in sales and client support, increased travel costs of $425,000, additional cyber security and various software services of $570,000 partially offset by a reduction in innovation investments of $941,000 and decreased building demolition costs of $605,000 related to the remodel of our headquarters.
Depreciation and amortization. Depreciation and amortization expenses increased in the 2023 period compared to the 2022 period primarily due to additional depreciation expense from shortening the estimated useful lives of certain building assets and increased software investment amortization.
Operating income and margin. Operating income and margin decreased in the 2023 period compared to the 2022 period primarily due to a decline in revenue and growth in marketing initiatives and other costs.
Total other income (expense). Total other income (expense) increased in the 2023 period compared to the 2022 period primarily due to higher interest income of $745,000 from additional money market funds investments and lower interest expense from the declining balance on our term loan of $330,000. In future periods we expect total other income (expense) to decrease due to an expected decrease in interest income resulting from reduced money market fund investments and increased interest expense due to borrowings on our line of credit.
Provision for income taxes and effective tax rate. Provision for income taxes decreased in the 2023 period compared to the 2022 period primarily due to decreased taxable income. The effective tax rate decreased primarily due to lower state income taxes of approximately $572,000 which fluctuate based on various apportionment factors and rates for the states we operate in and increased tax benefits of $110,000 from the exercise of share-based compensation awards.
Recurring Contract Value. Recurring contract value declined in 2023 compared to 2022 primarily from our strategy to focus on our core digital solutions and a decline in new client sales. 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. 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.
As of September 30, 2023, our principal sources of liquidity included $3.8 million of cash and cash equivalents, up to $25 million of unused borrowings under our line of credit and up to $75 million on our delayed draw term note. Of this cash, $189,000 was held in Canada. The delayed draw term note can only be used to fund 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 and the effect of working capital changes. Cash provided by operating activities decreased mainly due to decreased net income net of non-cash items. Cash provided by operating activities also decreased due to working capital changes, mainly consisting of changes in prepaid expenses and other current assets primarily due to the timing of our annual business insurance payment and other annual service agreements, partially offset by changes in trade accounts receivable and deferred revenue primarily due to timing of initial billings on new and renewal contracts and changes in accounts payable due to timing of payments.
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 $16.1 million and surplus of $10.3 million on September 30, 2023 and December 31, 2022, respectively. The change was primarily due to decreases in cash and cash equivalents and other current assets and increases in the line of credit, accrued expenses, and deferred revenue, partially offset by increases in prepaid expenses. Cash and cash equivalents decreased and the line of credit increased mainly due to dividends paid and repurchases of shares of our common stock for treasury. Other current assets decreased due to state tax incentive adjustments and receipts received. Accrued expenses and prepaid expenses fluctuated due to the timing of payments. 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.
Cash used in investing activities primarily consisted of purchases of property and equipment including computer software and hardware, building improvements and furniture and equipment partially offset by the proceeds from the sale of property and equipment.
Cash used in financing activities consisted of payments for borrowings under the term note and finance lease obligations. We also used cash to repurchase shares of our common stock for treasury and to pay dividends on common stock. This was partially offset by cash provided from the proceeds from the exercise of share-based awards and borrowings on the line of credit.
Our material cash requirements include the following contractual and other obligations:
Dividends
Cash dividends of $33.4 million were paid in the nine months ended September 30, 2023, including $24.6 million related to a special dividend of $1.00 per share declared and paid during September 2023. Dividends of $2.9 million were declared in the three months ended September 30, 2023 and paid in October 2023. The dividends were paid from cash on hand and borrowings on the line of credit. Our board of directors considers whether to declare a dividend and the amount of any dividends declared on a quarterly basis.
Capital Expenditures
We paid cash of $12.0 million for capital expenditures in the nine months ended September 30, 2023. 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 $2.6 million and $12.3 million in 2023 and 2024, respectively, which we expect to fund through operating cash flows and borrowings on the line of credit.
Debt
Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) includes (i) a $30,000,000 revolving credit facility (the “Line of Credit”), (ii) a $23,412,383 term loan (the “Term Loan”) and (iii) a $75,000,000 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 to fund any permitted future business acquisitions or repurchases of our common stock and the Line of Credit to fund ongoing working capital needs and for other general corporate purposes.
The Term Loan has an outstanding balance of $18.9 million and is payable in monthly installments of $462,988 through May 2027. 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-day Secured Overnight Financing Rate (“SOFR”) plus 235 basis points (7.66% at September 30, 2023). 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 May 2025. As of September 30, 2023, we had $5,000,000 of borrowings outstanding and the availability to borrow $25,000,000 on the Line of Credit. The weighted average borrowings on the Line of Credit for the three and nine-month periods ended September 30, 2023 was $543,000 and $183,000, respectively. The weighted average interest rate on borrowings on the Line of Credit for the three and nine-month periods ended September 30, 2023 was 7.68%. There have been no 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. In June 2023, the Credit Agreement was amended to exclude our costs associated with our building renovation from or after January 1, 2023 from the fixed charge coverage ratio calculation. Pursuant to the amended 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 $5,500,000 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, (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand, and (iv) up to $25 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, 2023, 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, 2023, we had fixed lease payments of $598,000 and $32,000 for operating and finance leases, respectively payable within 12 months.
Taxes
The liability for gross unrecognized tax benefits related to uncertain tax positions was $1.8 million as of September 30, 2023. See Note 3, "Income Taxes", to the Condensed Consolidated Financial Statements contained in this report for income tax related information.
As of September 30, 2023, the balance of the deemed repatriation tax payable imposed by the U.S. Tax Cuts and Jobs Act of 2017 was $10,000, which we expect to pay in early 2024. Withholding tax of $72,000 was paid in the nine-month period ended September 30, 2023, due to the deemed dividend and return of capital processed in 2022.
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, 2023, we repurchased 7,384 shares of our common stock under the 2022 Program for an aggregate of $310,000. As of September 30, 2023, the remaining number of shares of common stock that could be purchased under the 2022 Program was 1,824,041 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, 2022 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 its Annual Report on Form 10-K for the year ended December 31, 2022.
| ITEM 4. |
Controls and Procedures |
Our management, with the participation of our Chief Executive Officer and Chief 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 Chief 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 Chief 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, 2023, 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. 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.
| ITEM 1A. |
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 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022.
| ITEM 2. |
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, 2023.
| Period |
Total Number of Shares Purchased |
Average Price Paid per Share (1) |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) |
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
| Jul 1 – Jul 31, 2023 |
1,698 | 42.02 | 1,698 | 1,829,727 | ||||||||||||
| Aug 1 – Aug 31, 2023 |
575 | 41.97 | 575 | 1,829,152 | ||||||||||||
| Sep 1 – Sep 30, 2023 |
5,111 | 41.94 | 5,111 | 1,824,041 | ||||||||||||
| Total |
7,384 | 7,384 | ||||||||||||||
| (1) |
The average price paid per share excludes excise tax incurred on stock repurchases. For the quarter ended September 30, 2023, excise tax expense totaled $3,000. |
| (2) |
Shares were repurchased pursuant to the 2022 Program. |
| ITEM 5. | Other Information |
During the third quarter of 2023, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement.
| 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 |
Exhibit Description |
| (3.1) |
|
| (3.2) |
|
| (4.1) |
|
| (4.2) |
|
| (31.1)** |
|
| (31.2)** |
|
| (32)*** |
|
| (101) ** |
Financial statements from the Quarterly Report on Form 10-Q of National Research Corporation for the quarter ended September 30, 2023, 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 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). |
** 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.
| NATIONAL RESEARCH CORPORATION |
|||
| Date: November 9, 2023 |
By: |
/s/ Michael D. Hays |
|
| Michael D. Hays |
|||
| Chief Executive Officer (Principal Executive Officer) |
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| Date: November 9, 2023 |
By: |
/s/ Kevin R. Karas |
|
| Kevin R. Karas Senior Vice President Finance, Treasurer, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer) |
|||
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
I, Michael D. Hays, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of National Research Corporation; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: November 9, 2023 |
/s/ Michael D. Hays |
|
|
Michael D. Hays Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
I, Kevin R. Karas, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of National Research Corporation; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Date: November 9, 2023 |
/s/ Kevin R. Karas |
|
|
Kevin R. Karas Chief Financial Officer |
Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the accompanying Quarterly Report on Form 10-Q of National Research Corporation (the “Company”) for the three-month period ended September 30, 2023 (the “Report”), I, Michael D. Hays, Chief Executive Officer of the Company, and I, Kevin R. Karas, Chief Financial Officer, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, based on my knowledge, that:
|
1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
|
2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
/s/ Michael D. Hays |
||
|
Michael D. Hays Chief Executive Officer |
||
|
/s/ Kevin R. Karas |
||
|
Kevin R. Karas Chief Financial Officer |
||
|
Date: November 9, 2023 |
A signed original of this written statement required by Section 906 has been provided to National Research Corporation and will be retained by National Research Corporation and furnished to the Securities and Exchange Commission or its staff upon request.