NRC 10-K
Nrc Health (NRC)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year 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
(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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes
Aggregate market value of the common stock held by non-affiliates of the registrant at June 30, 2024: $
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 February 28, 2025:
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2025 Annual Meeting of Shareholders are incorporated by reference into Part III.
|
Page |
||
|
Item 1. |
||
|
Item 1A. |
||
|
Item 1B. |
||
|
Item 1C. |
||
|
Item 2. |
||
|
Item 3. |
||
|
Item 4. |
||
|
Item 5. |
||
|
Item 6. |
||
|
Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
|
Item 7A. |
||
|
Item 8. |
||
|
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
|
|
Item 9A. |
||
|
Item 9B. |
||
|
Item 9C. |
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
|
|
Item 10. |
||
|
Item 11. |
||
|
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
|
|
Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
|
|
Item 14. |
||
|
Item 15. |
||
|
Item 16. |
||
|
Business |
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K 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,” “creates,” “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 Annual Report on Form 10-K, 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, expenses, and margins, 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, the expected impact of the appointment of Trent Green as our Chief Executive Officer and as a director, both effective June 1, 2025, 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:
|
● |
The possibility of non-renewal of our client service contracts, reductions in services purchased or prices, and failure to retain key clients; |
|
● |
Our ability to compete in our markets, which are highly competitive with new market entrants, and the possibility of increased price pressure and expenses; |
|
● |
The possibility that our solutions and technology do not perform as expected |
|
● |
The possibility that our acquisitions and partnerships do not achieve the increased demand/profitability expected; |
|
● |
The likelihood that a pandemic will adversely affect our operations, sales, earnings, financial condition and liquidity; |
|
● |
The likelihood that global conflicts will adversely affect our operations, sales, earnings, financial condition and liquidity; |
|
● |
The effects of an economic downturn; |
|
● |
The impact of consolidation in the healthcare industry; |
|
● |
The impact of federal healthcare and budget legislation, executive orders, cost-saving measures, and other regulatory changes; |
|
● |
Our ability to attract and retain key managers and other personnel; |
|
● |
The possibility that our intellectual property and other proprietary information technology could be copied or independently developed by our competitors; |
|
● |
Our ability to maintain effective internal controls; |
|
● |
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 this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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.
General
For more than 40 years, NRC Health has led the charge to humanize healthcare and support organizations in their understanding of each unique individual. NRC Health’s 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. Guided by its uniquely empathic heritage, NRC Health’s patient-focused approach, unmatched market research, and emphasis on consumer preferences are transforming the healthcare experience, creating strong outcomes for patients and entire healthcare systems.
Our expertise is Human Understanding®. We believe that every healthcare encounter is fundamentally a human experience. That’s why our holistic healthcare experience management framework is designed to drive the most human healthcare experiences for everyone. Patients. Consumers. Employees. Communities. Our comprehensive platform is a next-generation suite of Artificial Intelligence (“AI”)-enabled products that create a natural way to collect, analyze, and deliver feedback. By leveraging advanced technology and deep insights, we ensure each interaction becomes a meaningful moment of connection and care.
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 expertise includes the efficient capture, transmittal, analysis, and interpretation of critical data elements from millions of healthcare consumers. Using our solutions, our partners gain insights into what people think and how they feel about their organizations in real-time, allowing them to build on their strengths and implement service recovery with greater speed and personalization. We also provide legacy experience-based solutions and shared intelligence from industry thought leaders and the nation’s largest member network focused on healthcare governance and strategy to member boards and executives.
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, rounding, 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.
We have a broad and diversified client base that is distributed primarily across the United States. Our ten largest clients collectively accounted for 17%, 15%, and 15% of our total revenue in 2024, 2023 and 2022, respectively.
We believe we have achieved a market leadership position through our more than 40 years of industry innovation and experience, as well as our long-term, recurring revenue relationships (solutions that are used or required by a client each year) with many of the healthcare industry’s largest organizations. Since our founding in 1981, we have focused on meeting the evolving information needs of the healthcare industry through internal product development, as well as select acquisitions. We are a Delaware corporation headquartered in Lincoln, Nebraska.
Human Understanding Solutions
Healthcare experiences are human experiences. NRC Health has built a comprehensive experience management stack to create a game-changing platform with the goal of driving the most human healthcare experiences for everyone – from patients and caregivers to consumers and communities.
Our digital solutions consist of four primary solution categories – Patient Experience, Consumer Experience, Employee Experience, and Market Experience –which can be implemented both collectively as an enterprise solution or individually to meet specific needs within the organization.
Market Experience Solutions – Our Marketing solutions are subscription-based services that allow for improved tracking of awareness, perception, and consistency of healthcare brands; real-time assessment of competitive differentiators; and enhanced segmentation tools to evaluate the needs, wants, and behaviors of communities through real-time competitive assessments and enhanced segmentation tools. Market Insights is the largest U.S. healthcare consumer database of its kind, measuring the opinions and behaviors of approximately 300,000 healthcare consumers across the contiguous United States annually. Market Insights is a syndicated survey that provides clients with an independent third-party source of information that is used to understand consumer perception and preferences and optimize marketing strategies. Our Marketing solutions provide clients with on-demand tools to measure brand value and build brand equity in their markets, evaluate and optimize advertising efficacy and consumer recall, and tailor research to obtain the real time voice of customer feedback to support branding and loyalty initiatives.
Patient Experience Solutions – Our Experience solutions are provided on a subscription basis via a cross-continuum multi-mode digital platform that collects and measures data and then delivers business intelligence that our clients utilize to improve patient experience, engagement, and loyalty. Patient experience data can also be collected on a periodic basis using Consumer Assessment of Healthcare Providers and Systems (“CAHPS”) compliant email, mail and telephone survey methods for regulatory compliance purposes and to monitor and measure improvement in CAHPS survey scores. CAHPS survey data can be collected and measured as an integrated service within our digital platform or independently as a legacy service offering. Our Experience solutions provide healthcare systems with the ability to receive and act on customer and employee feedback across all care settings in real-time. Experience solutions include patient experience, employee engagement, health risk assessments, care transition, and improvement tools. These solutions enable clients to comply with regulatory requirements and to improve their reimbursement under value-based purchasing models. More importantly, our Experience solutions provide quantitative and qualitative real-time feedback, improvement plans, and coaching insights. By illuminating the complete care journey in real time, our clients can ensure each individual receives the care, respect, and experience they deserve. Developing a longitudinal profile of what healthcare customers want and need allows for organizational improvement and increased customer loyalty.
Our Experience solutions also include tools to drive effective communication between healthcare providers and patients in the critical 24-72 hours post discharge using an automated discharge call workflow supported by our digital platform. Through preference-based communications and real-time alerts, these solutions enable organizations to identify and manage high-risk patients to reduce readmissions, increase patient satisfaction and support safe care transitions. Tracking, trending, and benchmarking tools isolate the key areas for process improvement allowing organizations to implement changes and reduce future readmissions.
Reputation Solutions – Our Reputation solutions allow healthcare organizations to share a picture of their organization and ensure that timely and relevant content informs better consumer decision-making. Our star ratings tools enable our partners to publish a five-star rating metric and verified patient feedback derived from actual patient survey data to complement their online physician information. Sharing this feedback not only results in better-informed consumer decision-making but also has the ability to drive new patient acquisition and grow online physician reputation. Our reputation monitoring tool alerts our partners to ratings and reviews on third-party websites and provides workflows for response and service recovery. These solutions raise physician awareness of survey results and provide access to improvement resources and educational development opportunities designed to improve the way care is delivered.
Employee Experience Solutions – Our Employee Experience solutions give care teams the tools to make a difference and unite around a shared sense of purpose. These tools support healthcare organizations attract and retain the best talent and give leaders the information, tools and support they need to create engagement and open communication throughout the employee lifecycle. Real-time department level reporting and analytics with configurable action plans help measure improvement at every level and support next-best actions in the moment.
Consumer Experience Solutions – Our Consumer Experience solutions help to reduce healthcare friction and build loyalty, to win and retain more patients. Our goal is to support healthcare organizations ensure that encounters beyond the clinical setting complement an exceptional care experience, rather than tarnish it. Our solutions capture feedback across the healthcare journey, drive choice to build volume, and co-design experiences and services with scalable feedback through Community Insights. Community Insights brings the voice of the consumer into strategic and operational decision-making. Through actionable insights and custom research studies in just a few weeks, healthcare leaders can inform the most pressing healthcare business challenges, and identify customer behaviors, needs, expectations, and experiences to enable Human Understanding®.
Huey AI - Healthcare experiences are human experiences. Huey, our AI engine built for Human Understanding®, serves as a healthcare experience management companion. It’s embedded in our new suite of advanced solutions on our integrated experience platform. At every turn Huey is there with the goal of making healthcare a more intentional and human experience for healthcare organizations and the people they serve.
The Governance Institute
Our Governance solutions, branded as The Governance Institute (“TGI”), serves not-for-profit health system boards of directors, executives, and physician leadership. TGI’s subscription-based, value-driven membership services are provided through national conferences, publications, advisory services, and an online portal designed to improve the effectiveness of hospital and healthcare systems by continually strengthening their board governance, strategic planning, medical leadership, management performance and customer loyalty. TGI also conducts research studies and tracks industry trends showcasing emerging healthcare trends and best practice solutions of healthcare system boards across the country. TGI thought leadership helps our client board members and executives inform and guide their organization’s strategic priorities in alignment with the rapidly changing healthcare market.
Markets
Growth Strategy
We believe that the value proposition of our current solutions, on the whole positions us to benefit from multiple growth opportunities. We believe that we can grow revenue and earnings through (1) increasing scope of services and sales of our existing solutions to our existing clients (or cross-selling), (2) winning additional new clients through market share growth in existing market segments, (3) developing and introducing new solutions to new and existing clients, and (4) pursuing acquisitions of, or investments in, firms providing products, solutions or technologies which complement ours.
Increasing contract value with existing clients. Our growth team actively identifies and pursues cross-sell opportunities for clients to add additional solutions in order to accelerate our growth. Organic contract value growth is also realized by the increased scope of solution adoption as the size of client organizations increase from market expansion and consolidation.
Adding new clients. We believe that there is an opportunity to add new clients across all solutions. Our sales organization is actively identifying and engaging new client prospects with a focus on demonstrating the economic value derived from adopting the portfolio of solutions in alignment with the prospect’s strategic objectives.
Adding new solutions. The need for effective solutions in the market segments that we serve is evolving to align with emerging healthcare consumerism trends. The evolving market creates an opportunity for us to introduce new solutions that leverage and extend our existing core competencies. We believe that there is an opportunity to drive sales growth with both existing and new clients, across all the market segments that we serve, through the introduction of new solutions.
Pursue strategic acquisitions and investments. We have historically complemented our organic growth with strategic acquisitions, having completed eight such transactions since 2001. These transactions have added new capabilities and access to market segments that are adjacent and complementary to our existing solutions and market segments. We believe that additional strategic acquisition and/or investment opportunities will exist from time to time to complement our organic growth by further expanding our service capabilities, technology offerings and end markets.
We generate the majority of our revenue from the renewal of subscription-based client service agreements, supplemented by sales of additional solutions to existing clients and the addition of new clients. Our sales activities are carried out by our growth team staffed with professional, trained sales associates.
We engage in marketing activities that generate demand for our solutions, engage existing clients and enhance our brand visibility in the marketplace. Strategic campaigns and programs focus on (1) ensuring coverage of prospective clients via targeted advertising and account-based campaigns, (2) elevating client value evidence and success stories to an executive level profile, (3) engaging key stakeholders with content, programming and events and (4) amplifying thought leadership through public and media relations programs that include earning placement in national media and trade publications, securing podium presentations at key industry events, and winning awards on behalf of us and our executives.
Competition
The healthcare information and market research services industry is highly competitive. We have traditionally competed with healthcare organizations’ internal marketing, market research, and/or quality improvement departments which create their own performance measurement tools, and with other research firms which provide survey-based healthcare market research and/or performance assessment. Our primary competitors among such research firms include Press Ganey and Qualtrics, both of which we believe have significantly higher annual revenue than us, and several other organizations that we believe have less annual revenue than us. We also compete with market research firms and technology solutions which provide survey-based, general market research or voice of the customer feedback capabilities and firms that provide services or products that complement healthcare performance assessments such as healthcare software or information systems.
We believe the primary competitive factors within our market include quality and focus of service, timeliness of delivery, unique service capabilities, the ability to release innovative solution updates, breadth of solutions, credibility of provider, industry experience, and price. We believe that our focus on the healthcare industry, extensive portfolio of solutions, motivated sales force, and relationships with leading healthcare providers position us to compete in this market.
Although only a few of these competitors have offered specific services that compete directly with our solutions, many of these competitors have substantially greater financial, information gathering, and marketing resources than us and could decide to increase their resource commitments to our market. There are relatively few barriers to entry into our market, and we expect increased competition in our market which could adversely affect our operating results through pricing pressure, increased marketing expenditures, and market share losses, among other factors. There can be no assurance that we will continue to compete successfully against existing or new competitors.
We believe that our competitive strengths include the following:
A leading provider of patient experience solutions for healthcare providers and other healthcare organizations. Our history is based on capturing the voice of the consumer in healthcare markets. Our solutions build on the “Eight Dimensions of Patient-Centered Care,” a philosophy developed by noted patient advocate Harvey Picker, who believed patients’ experiences are integral to quality healthcare. This foundation has been enhanced through our digital platform offering that provides the delivery of data and insights on a real time basis to understand what matters most to each individual. Based on our more than 40 years of experience, we are able to deliver unique and relevant healthcare domain expertise to the clients we serve.
Established client base of leading healthcare organizations. Our client portfolio encompasses a majority of the leading healthcare systems across the United States. Over 250 of the top 400 healthcare systems based on net patient revenue are currently using one or more of our solutions. Our client base provides a unique network effect to share best practices among existing clients and to attract new clients. Our existing client base also provides a significant organic growth opportunity to upsell and cross sell additional solutions.
Highly scalable and visible revenue model. Our solutions are offered primarily through fixed price, subscription-based service agreements. The solutions we provide are also recurring in nature, which enables an ongoing relationship with our clients and favorable retention. This combination of subscription-based revenue, a base of ongoing client renewals and automated platforms creates a highly visible and scalable revenue model.
Comprehensive portfolio of solutions. 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. 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 each individual. 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.
Exclusive focus on healthcare. We focus exclusively on healthcare and serving the unique needs of healthcare organizations across the continuum, which we believe gives us a distinct competitive advantage compared to other survey and analytics software providers. Our value proposition incorporates the benefits to clients derived from our deep subject matter expertise that has been built from helping healthcare organizations over the past 40 years. Our platform includes features and capabilities built specifically for healthcare providers, including a library of performance improvement content which can be tailored to the provider based on their specific customer feedback profile.
Experienced senior management team led by our founder. Our senior management team has extensive industry and leadership experience. Michael D. Hays, our Chief Executive Officer and President, founded NRC Health in 1981. Prior to launching the Company, Mr. Hays served as Vice President and as a Director of SRI Research Center, Inc. (now known as the Gallup Organization). Helen Hrdy was appointed as our Chief Operating Officer in October 2024. Prior to this position Ms. Hrdy served as our Chief Customer Officer since January 2024, Chief Growth Officer for three years and our Senior Vice President, Customer Success, for eight years. Andy Monnich has served as our Chief Corporate Development Officer since January 2024. Mr. Monnich has worked in product and corporate development in the healthcare, financial services, and education industries, including for The Company as Senior Vice President - Strategy and Corporate Development, as Managing Director and Co-Founder of Connect, and as Chief Strategy Officer at Practicing Excellence. On February 26, 2025, our Board of Directors appointed Trent Green as our Chief Executive Officer and to serve as a director, both effective June 1, 2025. Mr. Green brings more than 25 years of healthcare leadership experience, most recently serving as Chief Executive Officer of Amazon One Medical and previously as Chief Operating Officer of Legacy Health. Upon the effectiveness of Mr. Green's appointment as Chief Executive Officer, Mr. Hays will transition to the role of Chairman.
Resources
Our success depends in part upon our data collection processes, research methods, data analysis techniques and internal systems, and procedures that we have developed specifically to serve clients in the healthcare industry. We have no patents for most of our intellectual property. Consequently, we rely on a combination of copyright and trade secret laws and associate nondisclosure agreements to protect our systems, survey instruments and procedures. There can be no assurance that the steps we have taken to protect our rights will be adequate to prevent misappropriation of such rights or that third parties will not independently develop functionally equivalent or superior systems or procedures. We believe that our systems and procedures and other proprietary rights do not infringe upon the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims against us in the future or that any such claims will not result in protracted and costly litigation, regardless of the merits of such claims or whether we are ultimately successful in defending against such claims.
Government Regulation
According to the Centers for Medicare and Medicaid Services (“CMS”), health expenditures in the United States were approximately $4.9 trillion in 2023, or $14,570 per person. In total, health spending accounted for 18% of the nation’s Gross Domestic Product in 2023. Addressing this growing expenditure burden continues to be a major policy priority at both federal and state levels. In addition, increased co-pays and deductibles in healthcare plans have focused even more consumer attention on health spending and affordability. In the public sector, Medicare provides health coverage for individuals aged 65 and older, while Medicaid provides coverage for low-income families and other individuals in need. Both programs are administered by the CMS. With the aging of the U.S. population, Medicare enrollment has increased significantly. In addition, longer life spans and greater prevalence of chronic illnesses among both the Medicare and Medicaid populations have placed tremendous demands on the health care system.
An increasing percentage of Medicare reimbursement and reimbursement from commercial payers has been determined under value payment models, based on factors such as patient readmission rates and provider adherence to certain quality-related protocols. At the same time, many hospitals and other providers are creating new models of care delivery to improve patient experience, reduce cost and provide better clinical outcomes. These new models are based on sharing financial risk and managing the health and behaviors of large populations of patients and consumers. This transformation towards value-based payment models and increased engagement of healthcare consumers is resulting in a greater need for existing healthcare providers to deliver more customer-centric healthcare. At the same time, organizations that have successfully developed effective customer service models and brand loyalty in other industry verticals are entering the healthcare services market.
We believe that our current portfolio of solutions is uniquely aligned to address these healthcare market trends and related business opportunities. We provide tools and solutions to capture, interpret and improve the CAHPS data required by CMS as well as real time feedback that enables clients to better understand what matters most to people at key moments in their relationship with a health organization. Our solutions enable our clients to both satisfy patient survey compliance requirements and design experiences to build loyalty and improve the wellbeing of the people and communities they care for.
Human Capital
As of December 31, 2024, we employed a total of 368 associates. None of our associates are represented by a collective bargaining unit. Most of our associates work remotely. Our goal is to help customers bring Human Understanding® to healthcare, for their patients and communities. Our associates are at the heart of achieving that goal so we promise that same Human Understanding® to each other. We focus less on titles and more on the unique skills and perspectives each person brings to the organization. Our employment practices are based on the qualifications of each individual and appropriate job-related standards. We consider our relationships with our associates to be good.
We believe living Human Understanding® in the workplace is the job of every associate. Each associate is asked to take charge of their own education, self-awareness, opportunity, and growth in the topics of diversity, equity, inclusion & belonging. All leaders are expected to support associates in development efforts and be role models in inclusive behavior, leading their teams with Human Understanding®. We believe each associate and applicant should feel understood and welcomed.
The Associate Experience team and Associate Lifecycle Belonging committee coordinate activities and opportunities for everyone on these topics, and act as advocates of a workplace culture full of Human Understanding®. As we focus on Human Understanding® in the workplace, we have considered what creating and cultivating a workplace full of Human Understanding® means. We have realized that demonstrating Human Understanding® as associates is so much larger than just honoring and recognizing personal characteristics such as race, age, gender, marital status, background, or creed. Our passions, pastimes, families, pets, politics, and communities impact how we see the world. This in turn impacts how we understand or misunderstand one another. We acknowledge that our efforts will be ongoing and must continually be re-evaluated.
Available Information
More information regarding NRC Health is available on our website at www.nrchealth.com. We are not including the information contained on or available through our website as part of, or incorporating such information by reference into, this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports are made available to the public at no charge through a link appearing on our website. We provide access to such materials through our website as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission (the “SEC”). Reports and amendments posted on our website do not include access to exhibits and supplemental schedules electronically filed with the reports or amendments. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
|
Risk Factors |
You should carefully consider each of the risks described below, together with all of the other information contained in this Annual Report on Form 10-K, before making an investment decision with respect to our securities. If any of the following risks develop into actual events, our business, financial condition or results of operations could be materially and adversely affected and you may lose all or part of your investment.
Risks Related to our Business
We depend on contract renewals, including retention of key clients, for a large share of our revenue and our operating results could be adversely affected.
We expect that a substantial portion of our revenue for the foreseeable future will continue to be derived from renewable service contracts. The majority of our contracts are renewable annually at the option of our clients. Client contracts are generally cancelable on short notice without penalty; however we are entitled to payment for services through the cancellation date. To the extent that clients fail to renew or defer their renewals, we anticipate our results may be materially adversely affected. We rely on a limited number of key clients for a substantial portion of our revenue. Our ten largest clients collectively accounted for 17%, 15%, and 15% of our total revenue in 2024, 2023 and 2022, respectively. Our ability to secure renewals depends on, among other things, our ability to gather and analyze performance data in a consistent, high-quality, and timely fashion. In addition, the service needs of our clients are affected by accreditation requirements, enrollment in managed care plans, the level of use of satisfaction measures in healthcare organizations’ overall management and compensation programs, the size of operating budgets, clients’ operating performance, industry and economic conditions, and changes in management or ownership. As these factors are beyond our control, we cannot ensure that we will be able to maintain our renewal rates. Any material decline in renewal rates from existing levels would have an adverse effect on our revenue and a corresponding effect on our operating and net income.
We operate in a highly competitive market and could experience increased price pressure and expenses as a result.
The healthcare analytics and market research services industry is highly competitive. We have traditionally competed with healthcare organizations’ internal marketing, market research and/or quality improvement departments that create their own performance measurement tools, and with other firms that provide survey-based healthcare market research and/or performance assessment. Our primary competitors include Press Ganey and Qualtrics, both of which we believe has significantly higher annual revenue than us, and several other firms that provide similar services in the market we serve. We also compete with market research firms and technology solutions which provide survey-based, general market research or voice of the customer feedback capabilities and firms that provide services or products that complement healthcare performance assessments, such as healthcare software or information systems. Although only a few of these competitors have offered specific services that compete directly with our services, many of these competitors have substantially greater financial, information gathering, and marketing resources than us and could decide to increase their resource commitments to our market. Furthermore, we do not have a publicly traded group of peers, which makes it difficult to compare and benchmark performance to other similar companies. There are relatively few barriers to entry into our market, and we expect increased competition in our market which could adversely affect our operating results through pricing pressure, increased marketing expenditures, and market share losses, among other factors. There can be no assurance that we will continue to compete successfully against existing or new competitors.
Because our clients are concentrated in the healthcare industry, our revenue and operating results may be adversely affected by changes in regulations, a business downturn or consolidation with respect to the healthcare industry.
Substantially all of our revenue is derived from clients in the healthcare industry. As a result, our business, financial condition and results of operations are influenced by conditions affecting this industry, including changing political, economic, competitive and regulatory influences that may affect the procurement practices and operation of healthcare providers and payers. The healthcare industry is extensively regulated by both state and federal government. Future legislative changes, including additional provisions to control healthcare costs, improve healthcare quality and expand access to health insurance, could result in lower reimbursement rates and otherwise change the environment in which providers and payers operate. Recently, members of the U.S. House of Representatives have started to weigh a series of legislative proposals targeting Medicaid, Medicare, and other entitlement programs as part of a broader campaign to reduce federal spending, President Trump has issued a number of executive orders intended to reduce government spending, and we expect there will be continued proposals targeting reimbursement methodologies and the number of individuals eligible for government healthcare programs. There have also been proposals calling for repeal or reform of the Affordable Care Act. Any of these or related actions by state or federal governments could significantly reduce federal or state spending on the Medicaid and Medicare programs, constitute a fundamental change in the federal role in healthcare, change the nature of the entitlements offered by Medicaid and Medicare, or reduce or delay the payments made to both non-profit and for profit healthcare systems by Medicaid and Medicare, any of which could have a material effect on the revenues of our customers, resulting in harm to the demand for our solutions and our ability to collect subscriptions and fees owed to us, which could negatively impact our business, financial condition, cash flows, and results of operations.
In addition, large private purchasers of healthcare services are placing increasing cost pressure on providers. Healthcare providers may react to these cost pressures and other uncertainties by curtailing or deferring purchases, including purchases of our services. Moreover, there has been consolidation of companies in the healthcare industry, a trend which we believe will continue to grow. Consolidation in this industry, including the potential acquisition of certain of our clients, could adversely affect aggregate client budgets for our services, could result in clients performing more marketing, market research and/or quality improvement functions internally or could result in the termination of a client’s relationship with us. The impact of these developments on the healthcare industry is difficult to predict and could have an adverse effect on our revenue and a corresponding effect on our operating and net income.
We could be negatively impacted by outbreaks or pandemics.
In May 2023, the federal government lifted its Federal Public Health Emergency Declaration related to COVID-19. However, the continued spread of COVID-19, including its variants, together with any other outbreak of other contagious diseases or public heath environments could adversely affect our business, results of operations, financial condition, and stock price. While the risk of such similar outbreaks is unpredictable, and the extent of such risk is highly uncertain, the possibility of future outbreaks remains a risk that could have a material adverse effect on our business and it may also have the effect of heightening many of the other risks described in this Part I, Item 1A of this Form 10-K.
We could be negatively impacted by the global conflicts or similar events.
Global conflicts or any expansion of such conflicts, could adversely affect our business and operations. From time-to-time we outsource certain software development services to third parties outside of the United States, including in the Ukraine. Historically, our contractors located in areas of conflict (including in the Ukraine) have been able to continue their work. However, those services could be more negatively impacted in the future.
Civil unrest, political instability or uncertainty, military activities (including the conflicts in the Ukraine and the Middle East, and as a result of any escalation of tensions between China and Taiwan), utility service breakdowns or broad-based sanctions, should they continue for the long term or escalate, could interrupt our contractors’ ability to provide services and require our associates to perform the services or replace the contractors which could have an adverse effect on our operations and financial performance, including higher volatility in foreign currency exchange rates, increased use of less cost-efficient resources and negative impacts to our business resulting from deteriorating general economic conditions. Further, we cannot predict the impact of the military actions and any heightened military conflict or geopolitical instability that may follow, including additional sanctions or countersanctions, heightened inflation, cyber disruptions or attacks, higher energy costs, and supply chain disruptions.
In addition, the new administration has stated its intention to impose new or increased tariff rates on imported goods from a number of countries, including China, Canada, Mexico, and the EU. Such trade policies and tariff implementations, and any related retaliatory trade policies and tariff implementations by foreign government may result in increased costs and worsening economic conditions and could have an adverse impact on our results of operations.
General economic factors could adversely impact our profitability.
Negative changes in general economic conditions, in the geographic areas in which we operate may reduce our profitability. An economic downturn, a rise in interest rates, and inflationary pressures can reduce the demand for our services and result in terminations as well as slower client payments or client defaults on receivables. Additionally, in recent years, we experienced increased costs including salary and benefits costs in sales and client support, software costs, contracted services, costs associated with our building improvements and equipment purchases and we expect inflationary pressures to continue in 2025. Inflation may increase our costs without a corresponding increase in our contract revenue due to fixed contract arrangements, which could result in decreased margins and profitability.
We face several risks relating to our ability to collect the data on which our business relies.
Our ability to provide timely and accurate performance measurement and improvement services to our clients depends on our ability to collect large quantities of high-quality data through surveys. If survey operations are disrupted and we are unable to process surveys in a timely manner, then our revenue and net income could be negatively impacted. We outsource certain operations and engage third parties to perform work needed to fulfill our client services. For example, we use vendors to perform certain outreach and data collection services related to our survey operations. If any of these vendors cease to operate or fail to adequately perform the contracted services and alternative resources and processes are not utilized in a timely manner, our business could be adversely affected. The loss of any of our key vendors could impair our ability to perform our client services and result in lower revenues and income. It would also be time-consuming and expensive to replace, either directly or through other vendors, the services performed by these vendors, which could adversely impact revenues, expenses and net income. Furthermore, our ability to monitor and direct our vendors’ activities is limited. If their actions and business practices violate policies, regulations or procedures otherwise considered illegal, we could be subject to reputational damage or litigation which would adversely affect our business.
If receptivity to our survey methods by respondents declines, or, for some other reason, their willingness to complete and return surveys declines, or if we, for any reason, cannot rely on the integrity of the data we receive, then our revenue could be adversely affected with a corresponding effect on our operating and net income.
If intellectual property and other proprietary information technology were copied or independently developed by our competitors, our operating results could be negatively affected.
Our success depends in part upon our data collection process, research methods, data analysis techniques, and internal systems and procedures that we have developed specifically to serve clients in the healthcare industry. We do not hold patents for our intellectual property. Consequently, we rely on a combination of copyright, trade secret laws and associate nondisclosure agreements to protect our systems, survey instruments and procedures. We cannot assure you that the steps we have taken to protect our rights will be adequate to prevent misappropriation of such rights, or that third parties will not independently develop functionally equivalent or superior systems or procedures. We believe that our systems and procedures and other proprietary rights do not infringe upon the proprietary rights of third parties. We cannot assure you, however, that third parties will not assert infringement claims against us in the future, or that any such claims will not result in protracted and costly litigation, regardless of the merits of such claims, or whether we are ultimately successful in defending against such claims.
Failures, interruptions or deficiencies in our information technology and communications systems could negatively impact our business and operating results.
Our ability to provide timely and accurate performance measurement and improvement service to our clients is dependent, to a significant extent, upon the technology that we develop internally as well as the efficient and uninterrupted operation of our information technology and communication systems, and those of our external service providers. Investment in the enhancement of existing and development of new information technology processes is costly and affects our ability to successfully serve our clients. The failure or deficiency of the technology we develop and implement could negatively impact the willingness or ability for our clients to use our services and our ability to perform our services. Our failure to anticipate clients’ expectations and needs, adapt to emerging technological trends, or design efficient and effective information technology platforms, could result in lower utilization, loss of customers, damage to customer relationships, reduced revenue and profits, refunds to customers and damage to our reputation. Although we have procedures to monitor the efficacy of our information technology platforms, the procedures may not prevent failures or deficiencies in the information technology platforms we develop and implement, we may not adapt quickly enough and may incur significant costs and delays that could harm our business. Additional costs will be incurred to further develop and improve our information technology platforms.
In addition, changing technologies including AI and other emerging technologies may become significant to operational results in the future. Although we plan to continue to invest in research and development, including through acquisitions, in order to enhance our technology and new and existing solutions. However, if we are unable to successfully anticipate, develop, implement and utilize such emerging technologies as effectively as competitors or our customers are able to use AI as a replacement to our services, our results of operations may be negatively affected. Additionally, while AI and other technologies may offer substantial benefits, they may also introduce additional risks and raise ethical, technological, legal, regulatory, and other issues that may negatively affect the demand for our solutions.
Our systems and those of our external service providers could be exposed to damage or interruption from fire, natural disasters, which may increase in frequency and severity due to climate change, energy loss, telecommunication failure, security breach and computer viruses. An operational failure or outage in our information technology and communication systems or those of our external service providers, could result in loss of customers, damage to customer relationships, reduced revenue and profits, refunds of customer charges and damage to our reputation and may result in additional expense to repair or replace damaged equipment and recover data loss resulting from the interruption. Although we have taken steps to prevent system failures and have back-up systems and procedures to prevent or reduce disruptions, such steps may not prevent an interruption of services and our disaster recovery planning may not account for all contingencies. Additionally, our insurance may not adequately compensate us for all losses or failures that may occur. Any one of the above situations could have a material adverse effect on our business, financial condition, results of operations and reputation.
If we or our third-party service providers sustain cyber-attacks or other privacy or data security incidents that result in security breaches that disrupt our operations or result in the unintended dissemination of protected personal information or proprietary or confidential information or AI impacts our demand for, or providing of, services, we could suffer a loss of revenue and increased costs, exposure to significant liability, reputational harm and other serious negative consequences.
In connection with our client services, we and our third-party service providers receive, process, store and transmit sensitive business information and, in certain circumstances, personal medical information of our clients’ patients, electronically over the internet. We or our third-party service providers may become the target of attempted cyber-attacks and other security threats and may be subject to breaches of the information technology systems we use. Experienced computer programmers and hackers may be able to penetrate our security controls and access, misappropriate or otherwise compromise protected personal information or proprietary or confidential information or that of third parties, create system disruptions or cause system shutdowns that could negatively affect our operations. They also may be able to develop and deploy viruses, worms, ransomware, and other malicious software programs that attack our systems or otherwise exploit any security vulnerabilities
In addition, the risk of cyber-attacks has increased in connection with the military conflict between Russia and Ukraine and the resulting geopolitical conflict. In light of those and other geopolitical events, nation-state actors or their supporters may launch retaliatory cyber-attacks and may attempt to cause supply chain and other third-party service provider disruptions, or take other geopolitically motivated retaliatory actions that may disrupt our business operations, result in data compromise, or both. Nation-state actors have in the past carried out, and may in the future carry out, cyber-attacks to achieve their aims and goals, which may include espionage, information operations, monetary gain, ransomware, disruption, and destruction. In February 2022, the U.S. Cybersecurity and Infrastructure Security Agency issued a “Shields Up” alert for American organizations noting the potential for Russia’s cyber-attacks on Ukrainian government and critical infrastructure organizations to impact organizations both within and beyond the United States, particularly in the wake of sanctions imposed by the United States and its allies, which is still in effect. These circumstances increase the likelihood of cyber-attacks and/or security breaches.
We were the target of a cyber-attack in 2020, which resulted in temporary suspension of our services to clients. One of our third-party service providers was the target of a cyber-attack in December 2022, which resulted in a temporary suspension of certain services to our clients. In both instances no protected data was compromised or exfiltrated. We, and our service providers, will likely continue to be the target of other attempted cyber-attacks and security threats. Such cyber-attacks may subject us to litigation and regulatory risk, civil and criminal penalties, additional costs and diversion of management attention due to investigation, remediation efforts and engagement of third-party consultants and legal counsel in connection with such incidents, payment of “ransoms” to regain access to our systems and information, loss of clients, damage to client relationships, reduced revenue and profits, refunds of client charges and damage to our reputation, any of which could have a material adverse effect on our business, cash flows, financial condition and results of operations. While we have contingency plans and insurance coverage for potential liabilities of this nature, they may not be sufficient to cover all claims and liabilities and in some cases are subject to deductibles and layers of self-insured retention. Any system failure, inability to upgrade or update, or security breach (including cyber-attacks) related to our information technology systems may also impact third parties that we rely on in our business and could result in a hinderance to the services provided by the Company or such third parties, as the case may be, and may have a material adverse effect on our business.
We cannot ensure that we or our third-party service providers will be able to identify, prevent or contain the effects of cyber-attacks or other cybersecurity risks that bypass our security measures or disrupt our information technology systems or business. We have security technologies, processes and procedures in place to protect against cybersecurity risks and security breaches. However, hardware, software or applications we develop or procure from third parties may contain defects in design, manufacturer defects or other problems that could unexpectedly compromise information security. In addition, because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently, are becoming increasingly sophisticated, and may not immediately produce signs of intrusion, we may be unable to anticipate these techniques, timely discover or counter them or implement adequate preventative measures.
In addition, we use third-party technology, systems and services for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to clients, back-office support, and other functions that in some cases involve processing, storing and transmitting large amounts of data for our business. These third-party providers may also experience security breaches or interruptions to their information technology hardware and software infrastructure and communications systems that could adversely impact us.
Under the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, implementing regulations promulgated by the U.S. Department of Health and Human Services, or “HHS,” including what are referred to as the “Privacy Rule” and the “Security Rule” (collectively, “HIPAA”), we face potential liability related to the privacy of health information we obtain. We are required through our contracts with our clients and by HIPAA to protect the privacy and security of certain health information and to make certain disclosures to our clients or to the public if this information is unlawfully accessed.
Changes in privacy and information security laws and standards may require that we incur significant expense to ensure compliance due to increased technology investment and operational procedures. Noncompliance with any privacy or security laws and regulations, including, without limitation, HIPPA, or any security breach, cyber-attack or cybersecurity breach, and any incident involving the misappropriation, loss or other unauthorized disclosure or use of, or access to, sensitive or confidential information, whether by us or by one of our third-party service providers, could require us to expend significant resources to continue to modify or enhance our protective measures and to remediate any damage. In addition, this could negatively affect our operations, cause system disruptions, damage our reputation, cause client losses and contract breaches, and could also result in regulatory enforcement actions, material fines and penalties, litigation or other actions that could have a material adverse effect on our business, cash flows, financial condition and results of operations. Even if cyber-attacks or other cybersecurity breaches do not result in noncompliance with privacy or security laws, the perception that such noncompliance may have occurred by our clients or in the news media may have an adverse impact on our stock price and could result in damage to our reputation or loss of clients, which could have a material adverse effect on our business, cash flows, financial condition and results of operations.
New solution offerings involve inherent risk.
We have made substantial investments to develop new solution offerings and technologies, including AI enhanced offerings. We expect to continue investing significant resources in developing new technologies, tools, features, and solutions. At the same time, our competitors are rapidly developing their technologies and services, and our offerings may not be able to compete effectively. Our new solutions have a high degree of risk, as each involves strategies and technologies which we have limited or no prior development or operating experience. There can be no assurance that customer demand for such initiatives will exist or be sustained at the levels that we anticipate, or that they will generate sufficient revenue to offset any new expenses or liabilities associated with these new investments. Further, our development efforts with respect to new solution offerings and technologies could distract management from current operations and will divert capital and other resources from our more established solution offerings and technologies. Even if we are successful in developing new solution offerings or technologies, regulatory authorities may subject us to new rules or restrictions in response to our innovations that could increase our expenses or prevent us from successfully commercializing new solution offerings or technologies. At the same time, if we do not realize the expected benefits of our investments, our business, financial condition and operating results may be harmed. If we do not invest in commercially successful and innovative technologies, we may not realize the expected benefits of those investments. No assurance can be given that such strategies and offerings will be successful and will not harm our reputation, financial condition, and operating results.
Some of our employees work remotely, which may increase the cybersecurity risks to our business, including an increased demand for information technology resources, increased risk of phishing, and other cybersecurity risks.
We have, and will continue to have, a portion of our employee population that works from home full-time or under flexible work arrangements, and we have provided associates with expanded remote network access options which enable them to work outside of our corporate infrastructure and, in some cases, use their own personal devices, which exposes us to additional cybersecurity risks. Our employees working remotely may expose us to cybersecurity risks through: (i) unauthorized access to sensitive information as a result of increased remote access, including our employees’ use of Company-owned and personal devices and videoconferencing functions and applications to remotely handle, access, discuss, or transmit confidential information, and (ii) increased exposure to phishing and other scams as cybercriminals may, among other things, install malicious software and access sensitive information. We believe that the increased number of employees working remotely has incrementally increased our cyber risk profile, but we are unable to predict the extent or impacts of those risks at this time. A significant disruption of our information technology systems, unauthorized access to or loss of confidential information, or legal claims resulting from our violation of privacy laws could each have a material adverse effect on our business.
Reputational harm could have a material adverse effect on our business, financial condition and results of operations.
Our ability to maintain a positive reputation is critical to selling our services. Our reputation could be adversely impacted by any of the following (whether or not valid): the failure to maintain high ethical and social standards; the failure to perform our client services in a timely manner; violations of laws and regulations; failure to adequately preserve information security; and the failure to maintain an effective system of internal controls or to provide accurate and timely financial information. Damage to our reputation or loss of our clients’ confidence in our services for any of these, or any other reasons, could adversely impact our business, revenues, financial condition, and results of operations, as well as require additional resources to rebuild our reputation.
Our operations are subject to laws and regulations that impose significant compliance costs and create reputational and legal risk.
Due to the nature of the services we offer, we are subject to significant commercial, trade and privacy regulations. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted, which could have a material and negative impact on our business and our results of operation. For example, recent years have seen an increase in the development or enforcement of legislation related to healthcare reform, privacy, trade compliance and anti-corruption. Additionally, some of the services we provide include information our clients need to fulfill regulatory reporting requirements. If our services result in errors or omissions in our clients’ regulatory reporting, we may be subject to loss of clients, reputational harm or litigation, each potentially adversely impacting our business. Furthermore, although we maintain a variety of internal policies and controls designed to educate, discourage, prevent and detect violations of such laws, we cannot guarantee that such actions will be effective or sufficient or that individual employees will not engage in inappropriate behavior in breach of our policies. Such conduct, or even an allegation of misbehavior, could result in material adverse reputational harm, costly investigations, severe criminal or civil sanctions, or could disrupt our business, and could negatively affect our results of operations or financial condition.
Ineffective internal controls could have a negative impact on our business, results of operations, and our reputation.
Our internal controls over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, failure or interruption of information technology systems, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, including with the implementation of our internal controls in acquired companies, our business and operating results could be harmed and we could fail to meet our financial reporting obligations, which also could have a negative impact on our reputation.
Our growth strategy includes future acquisitions, partnerships and/or investments which involve inherent risk.
In order to expand services or technologies to existing clients and increase our client base, we have historically, and may in the future, make strategic business acquisitions, partnerships with other organizations and/or investments that we believe complement our business.
Acquisitions have inherent risks which may have material adverse effects on our business, financial condition, or results of operations, including, among other things: (1) failure to successfully integrate the purchased operations, technologies, products or services and maintain uniform standard controls, policies and procedures; (2) substantial unanticipated integration costs; (3) loss of key associates including those of the acquired business; (4) diversion of management’s attention from other operations; (5) failure to retain the customers of the acquired business; (6) failure to achieve any projected synergies and performance targets; (7) additional debt and/or assumption of known or unknown liabilities; (8) dilutive issuances of equity securities; and (9) a write-off of goodwill, software development costs, client lists, other intangibles and amortization of expenses. If we fail to successfully complete acquisitions or integrate acquired businesses, we may not achieve projected results and there may be a material adverse effect on our business, financial condition and results of operations. In addition, volatility in the equity markets could impair our financial position in general terms and our ability to effectively capitalize on potential merger and acquisition opportunities.
We have established a strategic partnership and intend to continue to establish strategic partnerships with third parties to enhance our solution offering. We currently depend on our partner’s technology to perform certain services for our customers. As a result, these services may not be provided in the manner or on the time schedule we currently expect, which may negatively impact our business operations. In addition, we cannot control the amount and timing of resources our partners may devote to their technology enhancements. Furthermore, there is no assurance that our partner-provided services will be purchased by our customers. Our partners may terminate their agreements with us for cause under certain circumstances and may elect not to renew our agreements, which could discontinue our ability to use their technologies and could result in our partners pursuing competing solutions. If our partners terminate or breach our agreements with them or otherwise fail to complete their obligations in a timely manner, it may have a detrimental effect on our financial position by reducing or eliminating the potential for us to receive technology access and perform our contractual obligations to our customers. These factors could have a material adverse effect on our business, financial condition and results of operations.
If we are unable to achieve a proper revenue to cost ratio our profitability could decrease
Our ability to achieve our goals and earnings growth depends on our ability to grow our revenue and achieve the appropriate cost structure for our revenues. Our revenue and margins have decreased in recent years. We have invested in product development, leadership and recruiting in an effort to increase revenue. During the second quarter of 2025 we expect to recognize compensation expense of $4.9 million (based on the price of our common stock on February 28, 2025) for Mr. Green's signing bonus. In addition, we expect to recognize compensation expense of approximately $608,000 (based on the price of our common stock on February 28, 2025) per quarter for Mr. Green's equity grant beginning in June 2025 and continuing through the third anniversary of the grant. In light of Mr. Green's hiring and compensation, we expect to terminate the existing long-term incentive program for our executive leadership team with the consent of the impacted participants and adopt a new incentive program during the second quarter of 2025, which could result in additional expenses. We have also adjusted spending in certain areas to reduce costs. If we are unsuccessful in increasing our revenue or we do not reduce costs sufficiently, our margins will continue to be compressed.
Risks Related to our Common Stock
Our principal shareholders effectively control the Company.
A majority of our common stock and voting power was historically owned and/or held by Michael D. Hays, our Chief Executive Officer and President. However, over the years Mr. Hays, for estate planning purposes, gifted and/or transferred almost all of his directly owned shares to trusts for the benefit of his family. Currently, the principal holder of shares previously owned by Mr. Hays is the Common Property Trust (the “Trust”).
As of February 28, 2025, approximately 37.5% of our outstanding common stock was owned by the Trust and approximately 46.8% of our outstanding common stock was held by the Trust and other entities controlled by trustees or special power holders for the benefit of members of Mr. Hays’ family. As a result, the Trust and these other entities, through the trustees or special power holders, have the power to indirectly control decisions such as whether to issue additional shares or declare and pay dividends and can control matters requiring shareholder approval, including the election of directors and the approval of significant corporate matters such as change of control transactions. The effects of such influence could be to delay or prevent a change of control of the Company unless the terms are approved by the Trust and these other entities.
The market price of our common stock may be volatile and shareholders may be unable to resell shares at or above the price at which the shares were acquired.
The market price and trading volume of our common stock has historically been and may continue to be highly volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases that are in response to factors beyond our control, including, but not limited to:
|
● |
Variations in our financial performance and that of similar companies; |
|
|
● |
Regulatory and other developments that may impact the demand for our services; |
|
|
● |
Reaction to our press releases, public announcements and filings with the SEC; |
|
|
● |
Client, market and industry perception of our services and performance; |
|
|
● |
Actions of our competitors; |
|
|
● |
Changes in earnings estimates or recommendations by analysts who follow our stock; |
|
|
● |
Loss of key personnel; |
|
|
● |
Investor, management team or large shareholder sales of our stock; |
|
|
● |
Changes in accounting principles; and |
|
|
● |
Variations in general market, economic and political conditions or financial markets. |
Any of these factors, among others, may result in changes in the trading volume and/or market price of our common stock. Following periods of volatility in the market price of securities, shareholders have often filed securities class-action lawsuits. Our involvement in a class-action lawsuit would result in substantial legal fees and divert our senior management’s attention from operating our business, which could harm our business and net income.
General Risk Factors
Our operating results may fluctuate and this may cause our stock price to decline.
Our overall operating results may fluctuate as a result of a variety of factors, including the size and timing of orders from clients, client demand for our services (which, in turn, is affected by factors such as accreditation requirements, enrollment in managed care plans, operating budgets and clients’ operating performance), the hiring and training of additional staff, expense increases, and industry and general economic conditions. Because a significant portion of our overhead is fixed in the short-term, particularly some costs associated with owning and occupying our building and full-time personnel expenses, our results of operations may be materially adversely affected in any particular period if revenue falls below our expectations. These factors, among others, make it possible that in some future period our operating results may be below the expectations of securities analysts and investors which would have a material adverse effect on the market price of our common stock.
Our business and operating results could be adversely affected if we are unable to attract or retain key managers and other personnel.
Our future performance may depend, to a significant extent, upon the efforts and ability of our key personnel who have expertise in gathering, interpreting and marketing survey-based performance information for healthcare markets. Although client relationships are managed at many levels within our company, the loss of the services of Michael D. Hays, our Chief Executive Officer and President, or one or more of our other executive officers, could have a material adverse effect, at least in the short to medium term, on most significant aspects of our business, including strategic planning, product development, and sales and customer relations. Our success will also depend on our ability to hire, train and retain skilled personnel in all areas of our business. Competition for qualified personnel in our industry is intense, and many of the companies that compete with us for qualified personnel have substantially greater financial and other resources than us. Furthermore, we expect competition for qualified personnel to become more intense as competition in our industry increases. We cannot assure you that we will be able to recruit, retain and motivate a sufficient number of qualified personnel to compete successfully. While we expect Mr. Green will begin serving as our Chief Executive Officer and as a director on June 1, 2025, his start date may be delayed or may never occur.
In December 2024, Linda Stacy left her position as our Principal Accounting Officer, in January 2025, Christophe Louvion, left his position as our Chief Product Technology Officer, and in March 2025, Jason Hahn left his position as Chief Revenue Officer. While Ms. Stacy has been temporarily appointed as Interim Principal Financial Officer, these departures or departures of other key executive may result in lack of continuity, operational issues and we may not realize the expected benefits and results from compensation structures we have put in place.
Like many other companies, we experienced higher attrition rates in the last several years. We may incur higher costs to attract, train and retain these associates. Attrition in our sales and service areas can also impact our ability to retain and attract new business. We may need to develop or adapt to new ways of doing business that challenge our leadership, our associate training, our human resources, and our business practices, and we cannot assure you that we will be successful in doing so. The short and long-term costs associated with these potential changes are difficult to quantify.
Increases in income tax rates, changes in income tax laws or regulations, or unfavorable resolutions of tax matters could adversely impact our profitability.
We are subject to income tax in the United States. Our overall effective income tax rate is a function of the federal and local tax rates and the geographic mix of our income before taxes in the jurisdictions in which we operate. The new administration has indicated a desire to amend the federal tax laws. Changes in tax rates could negatively impact our net income. Tax laws and regulations, including rates of taxation, are subject to revisions by individual taxing jurisdictions. It is possible that these types of changes could materially impact our net income and cash flows. Significant judgment is required in determining our annual income tax expense and in evaluating our tax positions. Although we believe our tax estimates are reasonable, the final determination of tax audits could materially differ from our historical income tax provisions, estimates and accruals and could materially adversely impact our financial statements for the period or periods which the statute of limitations is open.
Failure to comply with public company regulations could adversely impact our profitability.
As a public company, we are subject to the reporting requirements of the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act Wall Street Reform and Consumer Protection Act, the listing requirements of NASDAQ and other applicable securities rules and regulations. Additionally, laws, regulations and standards relating to corporate governance and public disclosure are subject to varying interpretations and continue to develop and change. If we misinterpret or fail to comply with these rules and regulations, our legal and financial compliance costs and net income may be adversely affected.
We may change our dividend policy at any time.
We have historically paid quarterly dividends to holders of our common stock. Although we expect to continue to pay dividends to holders of our common stock, the declaration and amount of any future dividends is subject to approval of our Board of Directors and various risks and uncertainties, including, but not limited to, our cash flow and cash needs, compliance with applicable law, restrictions on the payment of dividends under existing or future financing arrangements, changes in tax laws relating to corporate dividends, and deterioration in our financial condition or results of operations. Accordingly, our dividend policy may change at any time without notice, and our Board of Directors may determine to terminate payment of dividends, or reduce the amount or frequency of dividend payments, and we may not pay dividends at our historical rates or at all.
|
Unresolved Staff Comments |
We have no unresolved staff comments to report pursuant to this item.
|
Cybersecurity |
We a robust information security program to safeguard our information and systems as well as third parties that create, receive, or transmit our information or are critical to our operations. The controls within the program are constantly updated to adapt to technological advancements, regulatory changes, and operational needs, ensuring that we uphold our strict standards and unwavering commitment to maintaining confidentiality, integrity, and availability of our valuable information assets.
Risk management & strategy
Our cybersecurity risk management procedures encompass comprehensive administrative, technical, and physical security measures. Our Security Team meets, subscribes to intelligence sources, and actively participates in professional organizations to stay informed and have reliable access to the latest information on emerging threats and vulnerabilities. We utilize both internal tools and -party resources to perform risk and vulnerability assessments, as well as penetration testing. This includes a comprehensive managed security service that operates 24/7, dedicated to scanning and analyzing potential threats. Our Contractors and Parties Policy requires certain vendors to undergo annual reviews including security assessments and site visits. Additionally, our subcontractor agreements require that they report any security incidents. Risk assessment results and recommendations are documented in our risk register, reported, and closely monitored by our security team. Annually, we engage independent auditors to issue a System and Organization Control (SOC) 2 - Type II report based on their examination of our critical systems used to provide services to our clients for the suitability of design and operating effectiveness of controls.
Governance
The Board of Directors has the responsibility to oversee our enterprise risk management framework and associated policies and procedures. The Audit Committee of the Board has been assigned the responsibility to inquire of management, the independent accountants and the internal auditor about significant risks and exposures, including risks and exposures relating to data privacy, information security, and cybersecurity, and assess the steps management has taken to minimize such risks and exposures; and to make recommendations to the Board, as and when appropriate, as to the scope, direction, investment levels, and execution of the our data privacy, information security and .
|
Properties |
Our headquarters is located in an owned office building in Lincoln, Nebraska, of which 62,000 square feet have been used for operations. Our credit facilities are secured by this property and our other assets. We are currently renovating the building and expect renovations to be complete in 2025.We are leasing 19,300 square feet of space in Lincoln, Nebraska for our mail survey processing operations that were previously housed at our headquarters.
|
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 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.
|
Mine Safety Disclosures |
Not applicable.
|
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
We have one class of outstanding capital stock, which is our common stock, par value $.001 per share. Our common stock trades on the NASDAQ Global Select Market under the symbol “NRC”.
Cash dividends in the aggregate amount of $11.3 million, $36.3 million, and $20.9 million were declared in 2024, 2023 and 2022 respectively. The payment and amount of future dividends, if any, is at the discretion of our Board of Directors and will depend on our future earnings, financial condition, general business conditions, alternative uses of our earnings and cash and other factors.
On February 28, 2025, there were approximately 10 shareholders of record and approximately 13,981 beneficial owners of our common stock.
In May 2022, our Board of Directors authorized the repurchase of 2,500,000 shares of common stock (the “2022 Program”). The 2022 Program has no set expiration date.
The table below summarizes repurchases of common stock during the three-month period ended December 31, 2024.
|
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 |
||||||||||||
|
Oct 1 – Oct 31, 2024 |
24,186 | 18.18 | 24,186 | 676,447 | ||||||||||||
|
Nov 1 – Nov 30, 2024 |
114,762 | 18.84 | 114,762 | 561,685 | ||||||||||||
|
Dec 1 – Dec 31, 2024 |
253,976 | 18.28 | 253,976 | 307,709 | ||||||||||||
|
Total |
392,924 | 392,924 | ||||||||||||||
|
(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 December 31, 2024, commission paid totaled $7,858 and excise tax expense totaled $72,452. |
|
|
(2) |
Shares were repurchased pursuant to the 2022 program. |
See Item 12 in Part III of this Annual Report on Form 10-K for certain information concerning shares of our common stock authorized for issuance under our equity compensation plans.
The following graph compares the cumulative 5-year total return provided shareholders on our common stock relative to the cumulative total returns of the NASDAQ Composite Index and the Russell 2000 Index. Because of the uniqueness of our markets and products and lack of publicly traded peers, we do not believe that a combination of peer issuers can be selected on an industry or line-of-business basis to provide a meaningful basis for comparing shareholder return. Accordingly, the Russell 2000 Index, which is comprised of issuers with generally similar market capitalizations to that of the Company, is included in the graph as permitted by applicable regulations. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on December 31, 2019, and our relative performance is tracked through December 31, 2024.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
|
12/19 |
12/20 |
12/21 |
12/22 |
12/23 |
12/24 |
|||||||||||||||||||
|
National Research Corporation Common Stock |
100.00 | 65.14 | 63.94 | 58.70 | 64.34 | 29.28 | ||||||||||||||||||
|
NASDAQ Composite |
100.00 | 144.92 | 177.06 | 119.45 | 172.77 | 223.87 | ||||||||||||||||||
|
Russell 2000 |
100.00 | 119.96 | 137.74 | 109.59 | 128.14 | 142.93 | ||||||||||||||||||
|
[Reserved] |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis provides a summary of significant factors relevant to our financial performance and condition. It should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Form 10-K. This section of this Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Overview
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.
On February 26, 2025, our Board of Directors appointed Trent Green as our Chief Executive Officer and to serve as a director, both effective June 1, 2025. Mr. Green brings more than 25 years of healthcare leadership experience, most recently serving as Chief Executive Officer of Amazon One Medical and previously as Chief Operating Officer of Legacy Health. Upon the effectiveness of Mr. Green’s appointment as Chief Executive Officer, Mr. Hays will transition to the role of Chairman.
Critical Accounting Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The following areas are considered critical accounting estimates because they involve significant judgments or assumptions, involve complex or uncertain matters or they are susceptible to change and the impact could be material to our financial condition or operating results:
|
● |
Revenue recognition; and |
|
|
● |
Valuation of goodwill and identifiable intangible assets. |
Revenue Recognition
We derive a majority of our revenue from annually renewable subscription-based service agreements with our customers. Such agreements are generally cancelable on short or no notice without penalty. We also derive revenue from fixed, non-subscription arrangements. Our revenue recognition policy requires management to estimate, among other factors, the future contract consideration we expect to receive under variable consideration subscription arrangements as well as future total estimated contract costs over the contract term with respect to fixed, non-subscription arrangements. If management made different judgments and estimates, then the amount and timing of revenue for any period could differ from the reported revenue. See Notes 1 and 3 to our consolidated financial statements for a description of our revenue recognition policies.
Valuation of Goodwill and Identifiable Intangible Assets
Intangible assets include customer relationships, trade names, technology, and goodwill. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment with other long-lived assets in the related asset group whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We review intangible assets with indefinite lives for impairment annually as of October 1 and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. This review requires management to assess qualitative factors to determine whether an impairment may have occurred, which inherently involves management’s judgment. This assessment also requires a determination of the fair value of the asset, which often includes several significant estimates and assumptions, including future cash flow estimates, determination of appropriate discount rates, and other assumptions that management believed reasonable under the circumstances. Changes in these estimates and assumptions could materially affect the determination of fair value and/or impairment of goodwill or other intangible assets. See Notes 1 and 6 to our consolidated financial statements for a description of our goodwill and intangible asset valuation and impairment policies and associated impacts for the reported periods. At December 31, 2024, we assessed our current market capitalization compared to book value, forecasts and margins in our last quantitative impairment testing. We concluded that it is not more likely than not that an impairment loss had been incurred at December 31, 2024.
Key Financial Metrics and Results of Operations
The following table sets forth, for the periods indicated, selected financial information derived from our 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 consolidated financial statements.
|
(In thousands, except percentages) |
Percentage Increase (Decrease) |
|||||||||||||||||||
|
2024 |
2023 |
2022 |
2024 over 2023 |
2023 over 2022 |
||||||||||||||||
|
Revenue |
$ | 143,060 | $ | 148,580 | $ | 151,568 | (4 | ) | (2 | ) | ||||||||||
|
Direct expenses |
56,933 | 56,015 | 57,049 | 2 | (2 | ) | ||||||||||||||
|
Selling, general, and administrative |
44,911 | 46,621 | 42,699 | (4 | ) | 9 | ||||||||||||||
|
Depreciation, amortization and impairment |
6,022 | 5,899 | 5,277 | 2 | 12 | |||||||||||||||
|
Operating income |
35,194 | 40,045 | 46,543 | (12 | ) | (14 | ) | |||||||||||||
|
Total other income (expense) |
(2,504 | ) | (83 | ) | (3,728 | ) | 2,917 | (98 | ) | |||||||||||
|
Provision for income taxes |
7,907 | 8,991 | 11,015 | (12 | ) | (18 | ) | |||||||||||||
|
Effective Tax Rate |
24 | % | 22 | % | 26 | % | (2 | ) | (4 | ) | ||||||||||
|
Operating Margin |
25 | % | 27 | % | 31 | % | (2 | ) | (4 | ) | ||||||||||
|
Recurring Contract Value |
133,218 | 141,855 | 146,839 | (6 | ) | (3 | ) | |||||||||||||
|
Cash provided by operating activities |
34,625 | 38,113 | 36,265 | (10 | ) | 5 | ||||||||||||||
Revenue. Revenue in 2024 decreased compared to 2023 by $5.5 million. This was mainly from decreased recurring revenue in our existing client base. Of this decrease, 34% was from our non-core solutions. We view total Recurring Contract Value, or TRCV, a measure of revenue under all renewable contracts for their respective annual renewal periods, as a leading indicator of revenue expectations. TRCV declined for several quarters prior to the fourth quarter of 2024, when it increased slightly. We believe the expansion of our product and services portfolio during 2024, along with a broader sales effort, led to improved sales and retention in the fourth quarter compared with the prior several quarters. There is a lag between changes in TRCV (next twelve months) and revenue (trailing twelve months). Generally, if we are able to sustain growth in TRCV, we would expect revenue growth to follow within the next few quarters (and vice versa). However, intervening events may affect this general expectation.
Direct expenses. Variable expenses increased $23,000 in the 2024 period compared to the 2023 period primarily from higher conference expenses partially offset by decreased hourly labor and data collection expenses. Variable expenses as a percentage of revenue were 16% and 15% in the 2024 and 2023 periods, respectively. Fixed expenses increased $895,000 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. During the fourth quarter of 2024, we reduced our workforce to align with lower revenue, which is expected to lower these fixed expenses in future periods. We expect to continue to invest in providing innovative solutions to our clients, which could cause direct expenses to fluctuate as a percentage of revenue.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased in the 2024 period compared to the 2023 period primarily due to decreases in marketing expenses of $2.0 million, web hosting and other software services of $287,000, consulting fees of $304,000, professional development and training of $200,000, and bad debt expense of $175,000 partially offset by increased salary and benefit costs of $1.2 million from investments in strategic leadership, product development and sales teams and increased recruiting expenses of $255,000. While we continue to invest in product development and sales, our goal is to drive efficiencies and savings in overall costs to offset such investments. We expect a substantial portion of the benefits of our lower expense run rate for the fourth quarter of 2024 to continue into 2025, partially offset by increased compensation expense of our new CEO, including an expected charge during the second quarter of 2025, of approximately $4.9 million (based on the price of our common stock at February 28, 2025) for Mr. Green's signing bonus and quarterly non-cash charges of approximately $608,000 (based on the price of our common stock on February 28, 2025) for Mr. Green's equity grant beginning in June 2025 and continuing through the third anniversary of the grant. In light of Mr. Green's hiring and compensation, we expect to terminate the existing long-term incentive program for our executive leadership team with the consent of the impacted participants and adopt a new incentive program during the second quarter of 2025, which could result in additional expenses.
Depreciation, amortization and impairment. Depreciation, amortization and impairment expenses increased in 2024 compared to the 2023 period due to increased software investment amortization and intangible amortization from the Nobl acquisition partially offset by less building, furniture and computer equipment depreciation. We expect our depreciation and amortization to increase slightly given continued software and intangible amortization, as well as depreciation on the building renovations when completed in 2025.
Operating income and margin. Operating income and margin decreased in 2024 compared to 2023 primarily due to the decline in revenue while direct expenses and depreciation and amortization increased. In the near term, we expect operating income and margin to increase due to revenue and cost initiatives, excluding the impact of the compensation charge described above.
Total other income (expense). Total other expense increased in the 2024 period compared to the 2023 period primarily due to higher interest expense of $1.7 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, and lower interest income of $695,000 from decreased money market funds investments. Other expense is expected to increase in future periods due to additional borrowings on our Delayed Draw Term Loan. Additionally, starting in August 2024 the Term Note changed from a fixed interest rate of 5% per annum to a floating rate. All borrowings currently bear interest at a floating rate, which is currently equal to the one-month Term SOFR plus a percentage per annum determined by our cash flow leverage ratio, ranging from 2.25% to 2.75%.
Provision for income taxes and effective tax rate. Provision for income taxes decreased in 2024 compared to 2023 primarily due to decreased taxable income. The effective tax rate increased primarily due to an increase in the effective rate related to state income taxes which fluctuates based on various apportionment factors and rates for the states we operate in, increased provision for uncertain tax positions and decreased tax benefits from the share-based compensation awards. See Note 7, “Income Taxes,” to our Consolidated Financial Statements contained in this report for additional information on the change in the effective tax rates.
Recurring Contact 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 decreased 4% in 2024 compared to 2023. 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 December 31, 2024, our principal sources of liquidity included $4.2 million of cash and cash equivalents, up to $30 million of unused borrowings under our Line of Credit and an additional $24 million on our Delayed Draw Term Loan.
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, loss on disposal of property and equipment and the effect of working capital changes. Cash provided by operating activities decreased primarily due to decreased net income net of non-cash items, partially offset by working capital changes. Working capital changes mainly consisted of changes in deferred contract costs primarily due to the timing of commissions and incentives and related amortization and changes in prepaid expenses and other current and noncurrent assets primarily due to the timing of our annual business insurance and other service agreements.
See the Consolidated Statements of Cash Flows included in this report for the detail of our operating cash flows.
We had a working capital deficit of $16.3 million and $11.8 million on December 31, 2024 and December 31, 2023, respectively. The change was primarily due to decreases in cash and cash equivalents and trade accounts receivable, and prepaid expenses due to the timing of our annual business insurance payment and other service agreements and increases in accrued wages, accrued expenses and deferred revenue. These changes were partially offset by the decrease in the current portion of notes payable due to the amendment of our credit agreement in 2024. 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. Trade accounts receivable decreased due to timing of billing and collections, as well as decreases in our overall recurring contract value. Accrued expenses and accrued wages and bonuses increased primarily due to the accrual of annual incentives and 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. Notwithstanding our working capital deficit on December 31, 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:
Dividends
Cash dividends in the aggregate amount of $11.3 million, $36.3 million and $20.9 million were declared in 2024, 2023 and 2022 respectively. Dividends were paid from cash on hand and borrowings on our line of credit. The payment and amount of future dividends, if any, is at the discretion of our Board of Directors and will depend on our future earnings, financial condition, general business conditions, alternative uses of our earnings and cash and other factors.
Capital Expenditures
We paid cash of $15.4 million for capital expenditures in the year ended December 31, 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 $5.8 million in 2025, which we expect to fund through operating cash flows and borrowings on the Line of Credit and Delayed Draw Term Loan.
Debt
As of December 31, 2024, our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) included (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”). As of December 31, 2024, we could use the Delayed Draw Term Loan to fund dividends, any permitted future business acquisitions, capital expenditures or repurchases of our common stock. As of December 31, 2024, the Line of Credit was available to fund ongoing working capital needs and for other general corporate purposes.
As of December 31, 2024, borrowings on the Term Loan, Delayed Draw Term Loan and Line of Credit, accrued interest at a floating rate equal to the SOFR plus 235 basis points (6.9% at December 31, 2024), which is payable monthly.
The outstanding balance on the Term Loan was $14.3 million at December 31, 2024. As of December 31, 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 was due May 28, 2027.
The outstanding balance on the Delayed Draw Term Loan was $48.5 million at December 31, 2024. As of December 31, 2024, principal payments were due on the Delayed Draw Term Loan in monthly installments of $318,790 through May 2027 and a balloon payment for the remaining balance of $39.4 million was due in May 28, 2027. We had the availability to borrow an additional $24 million on the Delayed Draw Term Loan at December 31, 2024.
As of December 31, 2024, principal amounts outstanding under the Line of Credit were due and payable in full, at maturity, in May 2027. As of December 31, 2024, we had no borrowings outstanding and the availability to borrow $30.0 million on the Line of Credit. The weighted average borrowings on the Line of Credit for the years ended December 31, 2024 and 2023 were $8.5 million and $1.7 million, respectively. The weighted average interest rate on borrowings on the Line of Credit during the years ended December 31, 2024 and 2023 were 7.52% and 7.67%, respectively.
As of December 31, 2024, we were 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.
Pursuant to the Credit Agreement, we were 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 excluded, unless our liquidity fell below a specified threshold, (i) any cash dividends in a fiscal quarter that, together with all other cash dividends paid or declared during such fiscal quarter, exceeded $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 were 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. As of December 31, 2024, we were in compliance with our financial covenants.
The Credit Facilities were 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).
In February 2025, we entered a new credit agreement (the “New Credit Agreement”) with a group of lenders and FNB that amends and restates the terms of our existing Credit Facility, as amended. The New Credit Agreement provides for (i) a $30,000,000 revolving credit facility (the “Revolving Loan”) and (ii) a $110,000,000 delayed draw-down term facility (“the “New Delayed Draw Term Loan” and, together with the Revolving Loan, the “New Credit Facilities”). The New Delayed Draw Term Loan includes an accordion feature that, so long as no event of default exists or would exist after giving effect to such increase, allows us to request an increase in the New Delayed Draw Term Loan of up to the lesser of (x) $25,000,000 and (y) our EBITDA as of the preceding four fiscal quarters, exercisable in increments of $10,000,000 (or the remaining available amount of the accordion, if less).
Interest accrues and is payable monthly on the New Delayed Draw Term Loan and the Revolving Loan at a floating rate equal to the one-month Term SOFR plus a percentage per annum determined by our cash flow leverage ratio, ranging from 2.25% to 2.75%. Principal amounts outstanding under the Revolving Loan are due and payable in full at maturity at February 6, 2028. Principal amounts outstanding under the New Delayed Draw Term Loan are due and payable monthly during the term of the New Delayed Draw Term Loan, in equal monthly installments to amortize the aggregate outstanding principal balance by (i) 5% during each of the first three years and (ii) 7.5% during each of the fourth and fifth years following the date of such loan. All outstanding principal and interest on the New Delayed Draw Term Loan are due and payable in full at the maturity date, February 6, 2030. The Delayed Draw Term Loan can only be used to refinance certain existing term indebtedness, fund dividends, capital expenditures, permitted future business acquisitions, or repurchasing our common stock.
We are obligated to pay ongoing unused commitment fees quarterly in arrears at a percentage per annum determined by our cash flow leverage ratio, ranging from 0.15% to 0.30%, based on the actual daily unused portions of the Revolving Loan and the New Delayed Draw Term Loan, respectively.
The New 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 present and future assets (including, without limitation, fee-owned real property).
The New Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our Common Stock and acquisitions, subject in each case to certain exceptions. The New Credit Agreement also contains certain financial covenants with respect to minimum fixed charge coverage ratio and maximum cash flow leverage ratio. We are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the terms of the New Credit Facilities, which calculation excludes certain specified items, unless our liquidity falls below a specified threshold. We are also required to maintain a cash flow leverage ratio of 3.50x or less for all testing periods throughout the terms of the New Credit Facilities.
Leases
We have lease arrangements for certain computer, office, printing and inserting equipment as well as office and data center space. As of December 31, 2024, we had fixed lease payments of $624,000 and $10,000 for operating and finance leases, respectively payable within 12 months. A summary of our operating and finance lease obligations as of December 31, 2024 can be found in Note 10, "Leases", to the Consolidated Financial Statements contained in this report.
Taxes
The liability for gross unrecognized tax benefits related to uncertain tax positions was $2.2 million as of December 31, 2024. See Note 7, "Income Taxes", to the Consolidated Financial Statements contained in this report for income tax related information.
Purchase Commitments
We generally do not make unconditional, non-cancelable purchase commitments. We enter into purchase orders in the normal course of business, but these purchase obligations do not exceed one year.
Stock Repurchase Program
In May 2022, our Board of Directors approved the 2022 Program with a repurchase authorization of 2,500,000 shares of common stock. 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 2024, we repurchased 1,154,595 shares of our common stock for an aggregate of $30.8 million under the 2022 Program. As of December 31, 2024, the remaining number of shares of common stock that could be purchased under the 2022 Program was 307,709 shares.
Recent Accounting Pronouncements
There are no recently issued accounting pronouncements we believe will have a material impact on our financial position, results of operations or cash flows.
|
Quantitative and Qualitative Disclosure About Market Risk |
Our primary market risk exposure is interest rate risk. Our future income, cash flows and fair values of financial instruments are impacted by changes in market interest rates. We have not purchased or used any derivative instruments or entered any hedging transactions. We are exposed to interest rate risk with our variable rate Term Loan, Delayed Draw Term Note and Line of Credit and our contingent consideration liability.
Borrowings under our Term Loan, Delayed Draw Term Loan and Line of Credit, if any, bear interest at a floating rate equal to the 30-day SOFR plus 235 basis points. Interest rate changes for borrowings under our Term Loan, Delayed Draw Term Note and Line of Credit do not affect the fair value of the related debt but affect future earnings and cash flows. Borrowings under the Delayed Draw Term Note, and Line of Credit may not exceed $75 million and $30.0 million, respectively. We had $48.5 million of borrowings outstanding under the Delayed Draw Term Note and no borrowings outstanding on our Line of Credit at December 31, 2024. The outstanding balance on the Term Loan was $14.3 million at December 31, 2024. The change in interest expense resulting from a hypothetical change of 100 basis points of the benchmark index rate applied to the maximum borrowings available under the Line of Credit and the balance outstanding under the Term Loan and Delayed Draw Term Loan at December 31, 2024 would increase or decrease future earnings and cash flows by approximately $592,000 annually.
Our contingent consideration liability associated with our Nobl acquisition is adjusted to fair value at each reporting date, using a discounted cash flow model. Interest rate changes would impact the fair value of our contingent consideration liability but do not impact cash flow or total future expense. At December 31, 2024, the carrying amount of our contingent consideration liability was $859,000. Based on a sensitivity analysis, a hypothetical one percent per annum change in market interest rates as of December 31, 2024, would impact the estimated fair value and carrying amount of our contingent consideration liability at December 31, 2024 by approximately $5,000.
|
Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
National Research Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of National Research Corporation and subsidiary (the Company) as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2024, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Sufficiency of audit evidence over new and modified subscription-based service agreement terms
As discussed in Notes 1 and 3 to the consolidated financial statements, revenue consists of service arrangement contracts with customers that can include more than one separately identifiable performance obligation. The Company’s revenue for the year ended December 31, 2024 included $134.2 million for subscription-based service agreements, a portion of which was revenue from new and modified subscription-based service agreements, that was recognized ratably over the subscription period and which agreements are renewable at the option of the customer. Subscription-based service agreements represent a single promise to stand ready to provide reporting, tools and services throughout the subscription period.
We identified the evaluation of the sufficiency of audit evidence over the key terms within new and modified subscription-based service agreements as a critical audit matter. Specifically, the nature and extent of procedures performed over the key terms within the new and modified subscription-based service agreements required subjective auditor judgment as recognition of revenue by the Company is dependent on the accuracy of the key terms within the related information technology (IT) application used to calculate revenue. The key terms within the new subscription-based service agreements included the description of service, transaction price, renewal price and contract term, and the key terms within the modified subscription-based service agreements were the transaction price and contract term.
The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over the accuracy of key terms within the IT application, including the identification of key terms. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s subscription-based service revenue process, including controls related to the key terms within the new and modified subscription-based service agreements. We also tested certain internal controls over the accurate input of the underlying key terms of the subscription-based service agreement into the related IT application. For a sample of revenue transactions, we compared the key terms used in the revenue calculation to the underlying contract with the customer. We evaluated the sufficiency of audit evidence obtained over the key terms within new and modified subscription-based service agreements by assessing the results of procedures performed, including the appropriateness of the nature and extent of audit effort.
/s/
We have served as the Company’s auditor since 1997.
March 17,
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
|
2024 |
2023 |
|||||||
|
Assets |
||||||||
|
Current assets: |
||||||||
|
Cash and cash equivalents |
$ | $ | ||||||
|
Trade accounts receivable, less allowance for doubtful accounts of $ |
||||||||
|
Prepaid expenses |
||||||||
|
Income taxes receivable |
||||||||
|
Other current assets |
||||||||
|
Total current assets |
||||||||
|
Net property and equipment |
||||||||
|
Intangible assets, net |
||||||||
|
Goodwill |
||||||||
|
Operating lease right-of-use assets |
||||||||
|
Deferred contract costs, net |
||||||||
|
Other noncurrent assets |
||||||||
|
Total assets |
$ | $ | ||||||
|
Liabilities and Shareholders’ Equity |
||||||||
|
Current liabilities: |
||||||||
|
Current portion of notes payable, net of unamortized debt issuance costs |
$ | $ | ||||||
|
Accounts payable |
||||||||
|
Accrued wages and bonuses |
||||||||
|
Accrued expenses |
||||||||
|
Dividends payable |
||||||||
|
Deferred revenue |
||||||||
|
Income Taxes Payable |
||||||||
|
Contingent consideration |
||||||||
|
Other current liabilities |
||||||||
|
Total current liabilities |
||||||||
|
Notes payable, net of current portion and unamortized debt issuance costs |
||||||||
|
Deferred income taxes |
||||||||
|
Contingent consideration, net of current portion |
||||||||
|
Other long-term liabilities |
||||||||
|
Total liabilities |
||||||||
|
Shareholders’ equity: |
||||||||
|
Preferred stock, $ |
||||||||
|
Common stock, $ |
||||||||
|
Additional paid-in capital |
||||||||
|
Retained earnings (accumulated deficit) |
( |
) |
( |
) |
||||
|
Accumulated other comprehensive loss, foreign currency translation adjustment |
||||||||
|
Treasury stock, at cost; |
( |
) |
( |
) |
||||
|
Total shareholders’ equity |
||||||||
|
Total liabilities and shareholders’ equity |
$ | $ | ||||||
See accompanying notes to consolidated financial statements.
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share amounts)
|
2024 |
2023 |
2022 |
||||||||||
|
Revenue |
$ | $ | $ | |||||||||
|
Operating expenses: |
||||||||||||
|
Direct |
||||||||||||
|
Selling, general and administrative |
||||||||||||
|
Depreciation, amortization and impairment |
||||||||||||
|
Total operating expenses |
||||||||||||
|
Operating income |
||||||||||||
|
Other income (expense): |
||||||||||||
|
Interest income |
||||||||||||
|
Interest expense |
( |
) |
( |
) |
( |
) |
||||||
|
Reclassification of cumulative foreign currency translation adjustment into earnings |
— | (2,569 | ) | |||||||||
|
Other, net |
( |
) |
( |
) | ( |
) | ||||||
|
Total other income (expense) |
( |
) |
( |
) |
( |
) |
||||||
|
Income before income taxes |
||||||||||||
|
Provision for income taxes |
||||||||||||
|
Net income |
$ | $ | $ | |||||||||
|
Earnings per share of common stock: |
||||||||||||
|
Basic earnings per share |
$ | $ | $ | |||||||||
|
Diluted earnings per share |
$ | $ | $ | |||||||||
|
Weighted average shares and share equivalents outstanding |
||||||||||||
|
Basic |
||||||||||||
|
Diluted |
||||||||||||
See accompanying notes to consolidated financial statements.
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
2024 |
2023 |
2022 |
||||||||||
|
Net income |
$ | $ | $ | |||||||||
|
Other comprehensive income (loss): |
||||||||||||
|
Cumulative foreign currency translation adjustment |
$ |
$ |
$ | ( |
) | |||||||
|
Reclassification of cumulative foreign currency translation into earnings |
||||||||||||
|
Other comprehensive income (loss) |
$ | $ | $ | |||||||||
|
Comprehensive income |
$ | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands except share and per share amounts)
|
Common Stock |
Additional Paid-in Capital |
Retained Earnings (Accumulated Deficit) |
Accumulated Other Comprehensive Income (Loss) |
Treasury Stock |
Total |
|||||||||||||||||||
|
Balances at December 31, 2021 |
$ | $ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
$ | ||||||||||||
|
Purchase of |
( |
) |
( |
) |
||||||||||||||||||||
|
Issuance of |
||||||||||||||||||||||||
|
Non-cash stock compensation expense |
||||||||||||||||||||||||
|
Dividends declared of $ |
( |
) |
( |
) |
||||||||||||||||||||
|
Other comprehensive income, foreign currency translation adjustment |
( |
) | ( |
) | ||||||||||||||||||||
|
Reclassification of cumulative foreign currency translation adjustment into earnings |
||||||||||||||||||||||||
|
Net income |
||||||||||||||||||||||||
|
Balances at December 31, 2022 |
$ | $ | $ | ( |
) |
$ |
$ |
( |
) |
$ |
||||||||||||||
|
Purchase of |
( |
) |
( |
) |
||||||||||||||||||||
|
Issuance of |
||||||||||||||||||||||||
|
Non-cash stock compensation expense |
||||||||||||||||||||||||
|
Dividends declared of $ |
( |
) |
( |
) |
||||||||||||||||||||
|
Net income |
||||||||||||||||||||||||
|
Balances at December 31, 2023 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||
|
Purchase of |
( |
) | ( |
) | ||||||||||||||||||||
|
Issuance of |
||||||||||||||||||||||||
|
Non-cash stock compensation expense |
||||||||||||||||||||||||
|
Dividends declared of $ |
( |
) | ( |
) | ||||||||||||||||||||
|
Net income |
||||||||||||||||||||||||
|
Balances at December 31, 2024 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||
See accompanying notes to consolidated financial statements.
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
2024 |
2023 |
2022 |
||||||||||
|
Cash flows from operating activities: |
||||||||||||
|
Net income |
$ | $ | $ | |||||||||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
|
Depreciation, amortization and impairment |
||||||||||||
|
Reclassification of cumulative translation adjustment into earnings |
||||||||||||
|
Deferred income taxes |
( |
) |
( |
) |
( |
) |
||||||
|
Reserve for uncertain tax positions |
||||||||||||
|
Loss on disposal of property and equipment |
||||||||||||
|
Non-cash share-based compensation expense |
||||||||||||
|
Change in fair value of contingent consideration |
||||||||||||
|
Change in assets and liabilities: |
||||||||||||
|
Trade accounts receivable |
( |
) | ||||||||||
|
Prepaid expenses and other current and long-term assets |
( |
) | ||||||||||
|
Operating lease assets and liability, net |
( |
) |
( |
) |
( |
) | ||||||
|
Deferred contract costs, net |
( |
) | ||||||||||
|
Accounts payable |
( |
) | ( |
) | ||||||||
|
Accrued expenses, wages and bonuses |
( |
) | ( |
) | ||||||||
|
Income taxes receivable and payable |
||||||||||||
|
Deferred revenue |
( |
) | ( |
) | ||||||||
|
Net cash provided by operating activities |
||||||||||||
|
Cash flows from investing activities: |
||||||||||||
|
Purchases of property and equipment |
( |
) |
( |
) |
( |
) |
||||||
|
Acquisition consideration, net of cash acquired |
( |
) | ||||||||||
|
Proceeds from the sale of property and equipment |
||||||||||||
|
Net cash used in investing activities |
( |
) |
( |
) |
( |
) |
||||||
|
Cash flows from financing activities: |
||||||||||||
|
Payments on notes payable |
( |
) |
( |
) |
( |
) |
||||||
|
Payment of debt issuance costs |
( |
) |
( |
) | ( |
) | ||||||
|
Borrowings on notes payable |
||||||||||||
|
Borrowings on line of credit |
||||||||||||
|
Payments on line of credit |
( |
) |
( |
) | ||||||||
|
Payments on finance lease obligations |
( |
) |
( |
) | ( |
) | ||||||
|
Proceeds from the exercise of stock options |
||||||||||||
|
Payment of payroll tax withholdings on share-based awards exercised |
( |
) | ( |
) | ||||||||
|
Payment of deferred acquisition consideration |
( |
) | ||||||||||
|
Repurchase of shares for treasury |
( |
) | ( |
) | ( |
) | ||||||
|
Payment of dividends on common stock |
( |
) |
( |
) | ( |
) | ||||||
|
Net cash used in financing activities |
( |
) | ( |
) | ( |
) | ||||||
|
Effect of exchange rate changes on cash |
( |
) | ( |
) | ||||||||
|
Net increase (decrease) in cash and cash equivalents |
( |
) | ( |
) | ( |
) | ||||||
|
Cash and cash equivalents at beginning of period |
||||||||||||
|
Cash and cash equivalents at end of period |
$ | $ | $ | |||||||||
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands)
|
2024 |
2023 |
2022 |
||||||||||
|
Supplemental disclosure of cash paid for: |
||||||||||||
|
Interest expense, net of capitalized amounts |
$ | $ | $ | |||||||||
|
Income taxes |
$ | $ | $ | |||||||||
|
Supplemental disclosure of non-cash investing and financing activities: |
||||||||||||
|
Purchase of property and equipment in accounts payable and accrued expenses |
$ | $ | $ | |||||||||
|
Stock tendered to the Company for cashless exercise of stock options in connection with equity incentive plans |
$ | $ | $ | |||||||||
|
Repurchase of shares for treasury in accounts payable and accrued expenses |
$ | $ | $ | |||||||||
|
Contingent consideration recorded in connection with acquisition |
$ | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiary, National Research Corporation Canada, until it was dissolved in August 2024. All significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
Translation of Foreign Currencies
Gains and losses related to transactions denominated in a currency other than the functional currency of the country in which we operate and short-term intercompany accounts are included in other income (expense) in the consolidated statements of income. 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. We included foreign currency translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’ equity. During December 2022, we substantially liquidated our investment in Canada. As a result, we reclassified the cumulative foreign currency translation adjustment balance into earnings and recognized a net cumulative foreign currency translation loss of $
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:
|
● |
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, 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 $
|
2024 |
2023 |
2022 |
||||||||||
|
(In thousands) |
||||||||||||
|
Direct expenses |
$ | $ | $ | |||||||||
|
Selling, general and administrative expenses |
$ | $ | $ | |||||||||
|
Total amortization |
$ | $ | $ | |||||||||
Impairment of deferred contract costs due to lost clients for the years December 31, 2024, 2023 and 2022 were $
Trade Accounts Receivable
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 years ended December 31, 2024, 2023 and 2022 (in thousands):
|
Balance at Beginning of Period |
Bad Debt Expense (Benefit) |
Write-offs |
Recoveries |
Balance at End of Period |
||||||||||||||||
|
Year Ended December 31, 2022 |
$ | $ | $ | $ | $ | |||||||||||||||
|
Year Ended December 31, 2023 |
$ | $ | $ | $ | $ | |||||||||||||||
|
Year Ended December 31, 2024 |
$ | $ | ( |
) | $ | $ | $ | |||||||||||||
Property and Equipment
Property and equipment is stated at cost. Major expenditures to purchase property or to substantially increase useful lives of property are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in income.
We capitalize certain costs incurred in connection with obtaining or developing internal-use software, including payroll and payroll-related costs for employees who are directly associated with the internal-use software projects and external direct costs of materials and services. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs incurred during the preliminary project and post-implementation stages, as well as software maintenance and training costs are expensed as incurred. We capitalized approximately $
When a software license is included in a cloud computing arrangement and we have the legal right, ability and feasibility to download the software, it is accounted for as software, included in property and equipment, and amortized. If a software license is not included or we do not have the ability or feasibility to download software included in a cloud computing arrangement, it is accounted for as a service contract, which is expensed to direct expenses or selling, general and administrative expenses during the service period.
We provide for depreciation and amortization of property and equipment using annual rates which are sufficient to amortize the cost of depreciable assets over their estimated useful lives. We use the straight-line method of depreciation and amortization over estimated useful lives of to years for furniture and equipment, to years for computer equipment, to years for capitalized software, and to years for our office building and related improvements. Software licenses are amortized over the term of the license.
Impairment of Long-Lived Assets and Amortizing Intangible Assets
Long-lived assets, including property and equipment and purchased intangible assets subject to depreciation or amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. significant impairments were recorded during the years ended December 31, 2024, 2023, or 2022.
Among others, management believes the following circumstances are important indicators of potential impairment of such assets and as a result may trigger an impairment review:
|
● |
Significant underperformance in comparison to historical or projected operating results; |
|
|
● |
Significant changes in the manner or use of acquired assets or our overall strategy; |
|
|
● |
Significant negative trends in our industry or the overall economy; |
|
|
● |
A significant decline in the market price for our common stock for a sustained period; and |
|
|
● |
Our market capitalization falling below the book value of our net assets. |
Goodwill and Intangible Assets
Intangible assets include customer relationships, trade names, technology, and goodwill. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We review intangible assets with indefinite lives for impairment annually as of October 1 and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
When performing the impairment assessment, we will first assess qualitative factors to determine whether it is necessary to determine the fair value of the intangible assets with indefinite lives. If we believe, as a result of the qualitative assessment, that it is more likely than not that the fair value of an indefinite-lived intangible is less than its carrying amount, we calculate the fair value using a market or income approach. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, then the intangible asset is written-down to its fair value. We did recognize any impairments related to indefinite-lived intangibles during 2024, 2023 or 2022.
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. All of our goodwill is allocated to our reporting unit, which is the same as our operating segment. Goodwill is reviewed for impairment at least annually, as of October 1, and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.
We review goodwill for impairment by first assessing qualitative factors to determine whether any impairment may exist. If we believe, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative analysis will be performed, and the fair value of the reporting unit is compared with its carrying value (including goodwill). If the carrying value of the reporting unit exceeds the fair value, then goodwill is written down by this difference. We performed a qualitative analysis as of October 1, 2024 and determined the fair value of our reporting unit likely exceeded the carrying value. At December 31, 2024, we assessed our current market capitalization compared to book value, forecasts and margins in our last quantitative impairment testing. We concluded that it is not more likely than not that an impairment loss had been incurred at December 31, 2024. impairments were recorded during the years ended December 31, 2024, 2023, or 2022.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under that method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances, if any, are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. We use the deferral method of accounting for our investment tax credits related to state tax incentives. During the years ended December 31, 2024, 2023, and 2022, we recorded income tax benefits relating to these tax credits of $
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Share-Based Compensation
All of our existing stock option awards and non-vested stock awards have been determined to be equity-classified awards. The compensation expense on share-based payments is recognized based on the grant-date fair value of those awards. We recognize the excess tax benefits and tax deficiencies in the income statement when options are exercised. Amounts recognized in the financial statements with respect to these plans are as follows:
|
2024 |
2023 |
2022 |
||||||||||
|
(In thousands) |
||||||||||||
|
Amounts charged against income, before income tax benefit |
$ | $ | $ | |||||||||
|
Amount of related income tax benefit |
( |
) | ( |
) | ( |
) | ||||||
|
Net (benefit) expense to net income |
$ | $ | $ | |||||||||
We refer to our restricted stock awards as “non-vested” stock in these consolidated financial statements.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents were $
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 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 are 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. There were ROU asset impairment charges in 2024, 2023 or 2022.
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 and liabilities measured at fair value on a recurring basis within the fair value hierarchy (in thousands):
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
|
As of December 31, 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 |
$ | $ | $ | $ | ||||||||||||
There were no transfers between levels during the years ended December 31, 2024 and 2023.
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 8 is recorded at historical cost. 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 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 following are the carrying amount and estimated fair values of long-term debt (in thousands):
|
Level 1 |
Level 2 |
Total Fair Value |
Carrying Amount |
|||||||||||||
|
As of December 31, 2024 |
||||||||||||||||
|
Variable rate long-term debt |
$ | $ | $ | $ | ||||||||||||
|
As of December 31, 2023 |
||||||||||||||||
|
Fixed rate long-term debt |
$ | $ | $ | $ | ||||||||||||
|
Variable rate long-term debt |
||||||||||||||||
|
Total long-term debt |
$ | $ | $ | $ | ||||||||||||
The carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate their fair value. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes ROU assets, property and equipment, goodwill, intangibles and cost method investments, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). As of December 31, 2024 and 2023, there was indication of impairment related to these assets.
Commitments and Contingencies
From time to time, we are involved in certain claims and litigation arising in the normal course of business. Management assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. Legal fees, net of estimated insurance recoveries, are expensed as incurred. We do not believe the final disposition of claims at December 31, 2024 will have a material adverse effect on our consolidated financial position, results of operations or liquidity.
We are self-insured for group medical and dental insurance. We carry excess loss coverage in the amount of $
Earnings Per Share
Basic net income per share was computed using the weighted-average number of common shares outstanding during the period.
Diluted net income per share was computed using the weighted-average number of common shares and, if dilutive, the potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method.
We had
The following table reconciles income and shares used to compute basic and diluted earnings per share:
|
2024 |
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 |
$ | $ | $ | |||||||||
|
(2) |
Acquisitions |
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. The following table summarizes the final amounts of 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 years ended December 31, 2024, 2023 and 2022 based on timing of revenue recognition (in thousands):
|
2024 |
2023 |
2022 |
||||||||||
|
Subscription services recognized ratably over time |
$ | $ | $ | |||||||||
|
Fixed, non-subscription recognized over time |
||||||||||||
|
Services recognized at a point in 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):
|
December 31, 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 years ended December 31, 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 December 31, 2024 approximated $
|
(4) |
Equity Investments |
We make equity investments to promote business and strategic objectives. For investments that do not have a readily determinable fair value, we apply either cost or equity method of accounting depending on the nature of our investment and our ability to exercise significant influence. Investments are periodically analyzed to determine whether or not there are any indicators of impairment and written down to fair value if the investment has incurred an other than temporary impairment. Our investment of $
|
(5) |
Property and Equipment |
At December 31, 2024, and 2023, property and equipment consisted of the following:
|
2024 |
2023 |
|||||||
|
(In thousands) |
||||||||
|
Furniture and equipment |
$ | $ | ||||||
|
Computer equipment |
||||||||
|
Computer software |
||||||||
|
Building |
||||||||
|
Leaseholds |
||||||||
|
Land |
||||||||
|
Property and equipment at cost |
||||||||
|
Less accumulated depreciation and amortization |
||||||||
|
Net property and equipment |
$ | $ | ||||||
Work in progress included in computer equipment, computer software and building at December 31, 2024 was $
|
(6) |
Goodwill and Intangible Assets |
The following are the changes to the carrying amount of goodwill during the year ending December 31, 2024:
|
Gross |
Accumulated Impairment |
Net |
||||||||||
|
(In thousands) |
||||||||||||
|
Balance at December 31, 2023 |
$ | $ | ( |
) | $ | |||||||
|
Goodwill acquired |
||||||||||||
|
Balance at December 31, 2024 |
$ | $ | ( |
) | $ | |||||||
Intangible assets consisted of the following at December 31, 2024:
|
Useful Life |
Gross |
Accumulated Amortization |
Net |
|||||||||||||||
|
(In years) |
(In thousands) |
|||||||||||||||||
|
Non-amortizing intangible assets: |
||||||||||||||||||
|
Indefinite trade name |
||||||||||||||||||
|
Amortizing intangible assets: |
||||||||||||||||||
|
Customer related |
- | |||||||||||||||||
|
Technology |
- | |||||||||||||||||
|
Trade names |
||||||||||||||||||
|
Total amortizing intangible assets |
||||||||||||||||||
|
Total intangible assets other than goodwill |
$ | $ | $ | |||||||||||||||
Goodwill and intangible assets consisted of the following at December 31, 2023:
|
Gross |
Accumulated Impairment |
Net |
||||||||||
|
(In thousands) |
||||||||||||
|
Goodwill |
$ | $ | ( |
) | $ | |||||||
|
Useful Life |
Gross |
Accumulated Amortization |
Net |
|||||||||||||||
|
(In years) |
(In thousands) |
|||||||||||||||||
|
Non-amortizing intangible assets: |
||||||||||||||||||
|
Indefinite trade name |
||||||||||||||||||
|
Amortizing intangible assets: |
||||||||||||||||||
|
Customer related |
- | |||||||||||||||||
|
Technology |
- | |||||||||||||||||
|
Trade names |
||||||||||||||||||
|
Total amortizing intangible assets |
||||||||||||||||||
|
Total intangible assets other than goodwill |
$ | $ | $ | |||||||||||||||
There were changes in goodwill during the year ending December 2023.
Aggregate amortization expense for customer related intangibles, trade names, and technology for the years ended December 31, 2024, 2023 and 2022 was $
|
(7) |
Income Taxes |
For the years ended December 31, 2024, 2023, and 2022, income before income taxes consists of the following:
|
2024 |
2023 |
2022 |
||||||||||
|
(In thousands) |
||||||||||||
|
U.S. Operations |
$ | $ | $ | |||||||||
|
Foreign Operations |
( |
) | ( |
) | ||||||||
|
Income before income taxes |
$ | $ | $ | |||||||||
Income tax expense consisted of the following components:
|
2024 |
2023 |
2022 |
||||||||||
|
(In thousands) |
||||||||||||
|
Federal: |
||||||||||||
|
Current |
$ | $ | $ | |||||||||
|
Deferred |
( |
) |
( |
) |
( |
) | ||||||
|
Total |
$ | $ | $ | |||||||||
|
Foreign: |
||||||||||||
|
Current |
$ |
$ |
( |
) | $ | ( |
) | |||||
|
Deferred |
||||||||||||
|
Total |
$ |
$ |
( |
) | $ | ( |
) | |||||
|
State: |
||||||||||||
|
Current |
$ | $ | $ | |||||||||
|
Deferred |
( |
) | ( |
) | ||||||||
|
Total |
$ | $ | $ | |||||||||
|
Total |
$ | $ | $ | |||||||||
As a result of the Tax Cuts and Jobs Act (the “Tax Act”), we determined that we would no longer indefinitely reinvest the earnings of our Canadian subsidiary. Our Canadian subsidiary declared a deemed dividend to the Company of $
We qualify for tax incentives through the Nebraska Advantage LB312 Act (“NAA”). The NAA provides direct refunds of sales tax on qualified property, as well as investment credits and employment credits that can be claimed through credits of Nebraska income tax, employment tax, and sales tax on non-qualified property. For the year ended December 31, 2024, 2023 and 2022, the amortization of credits reduced operating expenses by approximately $
We do not expect that Canada's enactment of Pillar Two will have a material impact to our income tax expense since all Canadian operations have ceased in 2022 and the company legally dissolved in August 2024. Pillar Two legislation has not been enacted in the other jurisdictions in which we operate, such as the United States, and we will continue to monitor our potential exposure as more jurisdictions adopt these provisions.
The differences between income taxes expected at the U.S. federal statutory income tax rate of
|
2024 |
2023 |
2022 |
||||||||||
|
(In thousands) |
||||||||||||
|
Expected federal income taxes |
$ | $ | $ | |||||||||
|
Foreign tax rate differential |
( |
) | ( |
) | ( |
) | ||||||
|
State income taxes, net of federal benefit and state tax credits |
||||||||||||
|
Share-based compensation |
( |
) |
( |
) |
( |
) |
||||||
|
Federal tax credits |
( |
) |
( |
) |
( |
) |
||||||
|
Uncertain tax positions |
||||||||||||
|
Reclassification of cumulative translation adjustment into earnings |
||||||||||||
|
Withholding tax on repatriation of foreign earnings |
( |
) | ||||||||||
|
Non-deductible expenses |
||||||||||||
|
Other |
( |
) | ||||||||||
| $ | $ | $ | ||||||||||
Deferred tax assets and liabilities at December 31, 2024 and 2023, were comprised of the following:
|
2024 |
2023 |
|||||||
|
(In thousands) |
||||||||
|
Deferred tax assets: |
||||||||
|
Allowance for doubtful accounts |
$ | $ | ||||||
|
Accrued expenses |
||||||||
|
Share-based compensation |
||||||||
|
Accrued bonuses |
||||||||
|
Uncertain tax positions |
||||||||
|
Research & experimental expenditures |
||||||||
|
Lease liabilities |
||||||||
|
Gross deferred tax assets |
||||||||
|
Less valuation allowance |
— | — | ||||||
|
Deferred tax assets |
||||||||
|
Deferred tax liabilities: |
||||||||
|
Prepaid expenses |
||||||||
|
Deferred contract costs |
||||||||
|
Property and equipment |
||||||||
|
Intangible assets |
||||||||
|
Right of Use Asset |
||||||||
|
Other |
||||||||
|
Deferred tax liabilities |
||||||||
|
Net deferred tax liabilities |
$ | ( |
) |
$ | ( |
) |
||
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into U.S. law. The IRA includes implementation of a new alternative minimum tax, an excise tax on stock buybacks, and significant tax incentives for energy and climate initiatives, among other provisions. As a result of the IRA, we accrued excise taxes that increased the cost of treasury stock we acquired by $
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider projected future taxable income, carry-back opportunities, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences.
The Tax Act amended Section 174 rules for the federal tax treatment of research or experimental (“R&E”) expenditures paid or incurred during the taxable year. The revised Section 174 rules require taxpayers to capitalize and amortize specified R&E expenditures over a period of years (attributable to domestic research) or
We had an unrecognized tax benefit at December 31, 2024 and 2023, of $
|
(In thousands) |
||||
|
Balance of unrecognized tax benefits at December 31, 2022 |
$ | |||
|
Reductions due to lapse of applicable statute of limitations |
( |
) |
||
|
Reductions due to tax positions of prior years |
||||
|
Reductions due to settlement with taxing authorities |
||||
|
Additions based on tax positions related to the current year |
||||
|
Balance of unrecognized tax benefits at December 31, 2023 |
$ | |||
|
Reductions due to lapse of applicable statute of limitations |
( |
) |
||
|
Additions due to tax positions of prior years |
||||
|
Reductions due to settlement with taxing authorities |
||||
|
Additions based on tax positions related to the current year |
||||
|
Balance of unrecognized tax benefits at December 31, 2024 |
$ | |||
We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and until our Canadian subsidiary was dissolved in Canada federal and provincial jurisdictions. Tax years and forward remain subject to U.S. federal examination. Tax years and forward remain subject to state examination. Tax years and forward remain subject to Canadian federal and provincial examination.
|
(8) |
Credit Agreement |
Our long-term debt consists of the following:
|
2024 |
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 SOFR 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 December 31, 2024, we had the availability to borrow $
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. Pursuant to the Credit Agreement, we are required to maintain a minimum fixed charge coverage ratio of
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
Scheduled maturities of notes payable at December 31, 2024 are as follows (in thousands):
|
2025 |
||||
|
2026 |
||||
|
2027 |
|
(9) |
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.
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 six-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 404,833 performance-based stock option awards during the year ended December 31, 2024. No performance-based stock options were awarded in 2023 or 2022.
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 year ended December 31, 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 December 31, 2024 |
$ | $ | ||||||||||||||
|
Exercisable at December 31, 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, 2023 and 2022 were estimated using a Black-Scholes valuation model with the following weighted average assumptions:
|
2024 |
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 service-based stock option activity under the 2006 Equity Incentive Plan and the 2004 Director Plan for the year ended December 31, 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 |
$ | |||||||||||||||
|
Expired |
$ | |||||||||||||||
|
Forfeited |
$ | |||||||||||||||
|
Outstanding at December 31, 2024 |
$ | $ | ||||||||||||||
|
Exercisable at December 31, 2024 |
$ | $ | ||||||||||||||
The following table summarizes information related to stock options for the years ended December 31, 2024, 2023 and 2022:
|
2024 |
2023 |
2022 |
||||||||||
|
Weighted average grant date fair value of stock options granted |
$ | $ | $ | |||||||||
|
Intrinsic value of stock options exercised (in thousands) |
$ | $ | $ | |||||||||
|
Intrinsic value of stock options vested (in thousands) |
$ | $ | $ | |||||||||
As of December 31, 2024, the total unrecognized compensation cost related to non-vested performance-based and service-based stock option awards was approximately $
There was $
Non-vested Stock Awards
No shares of non-vested common stock were granted during the years ended December 31, 2024, 2023 or 2022.
The following table summarizes information regarding non-vested stock granted to associates under the 2006 Equity Incentive Plans for the year ended December 31, 2024:
|
Common Stock Outstanding |
Common Stock Weighted Average Grant Date Fair Value Per Share |
|||||||
|
Outstanding at December 31, 2023 |
$ | |||||||
|
Granted |
$ | |||||||
|
Vested |
$ | |||||||
|
Forfeited |
$ | |||||||
|
Outstanding at December 31, 2024 |
$ | |||||||
|
(10) |
Leases |
We lease printing, computer, other equipment and office space in the United States. The leases remaining terms as of December 31, 2024 range from less than year to
Certain equipment and office lease agreements include provisions for periodic adjustments to rates and charges. The rates and charges are adjusted based on actual usage or actual costs for internet, common area maintenance, taxes or insurance, as determined by the lessor and are considered variable lease costs.
The components of lease expense for the years ended December 31, 2024, 2023 and 2022 included (in thousands):
|
2024 |
2023 |
2022 |
||||||||||
|
Operating leases |
$ | $ | $ | |||||||||
|
Finance leases: |
||||||||||||
|
Asset amortization |
||||||||||||
|
Interest on lease liabilities |
||||||||||||
|
Variable lease cost |
||||||||||||
|
Short-term lease cost |
||||||||||||
|
Sublease income |
( |
) |
( |
) |
( |
) | ||||||
|
Total net lease cost |
$ | $ | $ | |||||||||
Supplemental balance sheet information related to leases (in thousands):
|
December 31, 2024 |
December 31, 2023 |
|||||||
|
Operating leases: |
||||||||
|
Operating ROU assets |
$ | $ | ||||||
|
|
||||||||
|
|
||||||||
|
Total operating lease liabilities |
$ | $ | ||||||
|
December 31, 2024 |
December 31, 2023 |
|||||||
|
Finance leases: |
||||||||
|
Furniture and equipment |
$ | $ | ||||||
|
Computer Equipment |
||||||||
|
Computer Software |
||||||||
|
Property and equipment under finance lease, gross |
||||||||
|
Less accumulated amortization |
||||||||
|
Property and equipment under finance lease, net |
$ | $ | ||||||
|
|
$ | $ | ||||||
|
|
||||||||
|
Total finance lease liabilities |
$ | $ | ||||||
|
Weighted average remaining lease term (in years): |
||||||||
|
Operating leases |
||||||||
|
Finance leases |
||||||||
|
Weighted average discount rate: |
||||||||
|
Operating leases |
% |
% |
||||||
|
Finance leases |
% |
% |
||||||
Supplemental cash flow and other information related to leases were as follows (in thousands):
|
2024 |
2023 |
2022 |
||||||||||
|
Cash paid for amounts included in the measurement of lease liabilities: |
||||||||||||
|
Operating cash flows from operating leases |
$ | $ | $ | |||||||||
|
Operating cash flows from finance leases |
||||||||||||
|
Financing cash flows from finance leases |
||||||||||||
|
ROU assets obtained in exchange for operating lease liabilities |
||||||||||||
Undiscounted future payments under non-cancelable finance and operating leases at December 31, 2024 were as follows (in thousands):
|
Finance Leases |
Operating Leases |
|||||||
|
2025 |
$ | $ | ||||||
|
2026 |
||||||||
|
2027 |
||||||||
|
2028 |
||||||||
|
2029 |
||||||||
|
Thereafter |
||||||||
|
Total minimum lease payments |
||||||||
|
Less: Amount representing interest |
||||||||
|
Present value of minimum lease payments |
||||||||
|
Less: Current portion |
||||||||
|
Lease obligations, net of current portion |
$ | $ | ||||||
The undiscounted cash receipts due under the operating sublease agreement at December 31, 2024 are $
|
(11) |
Associate Benefits |
We sponsor a qualified 401(k) plan covering substantially all associates with no eligibility service requirement. Under the 401(k) plan, we match
|
(12) |
Segment Information |
We assess segment reporting in accordance with FASB Accounting Standards Codification Topic 280, Segment Reporting, each reporting period, including evaluating the reporting package provided and reviewed by the Chief Operating Decision Maker (“CODM”). We have concluded that our Chief Executive Officer is our CODM.
Based on the way our business is managed and reported to our CODM, we believe we have a single operating segment. We also have one reportable segment. Our revenue is primarily derived in the United States and our business is managed on a consolidated basis. All of our solutions within our one reporting segment provide analytics and insights that facilitate the measurement and improvement of patient and employee experience for healthcare organizations related to marketing, experience, reputation and governance.
The accounting policies for our operating segment are consistent with those described in the summary of significant accounting policies. The CODM assesses performance of our segment and allocates resources based on revenue and associate expenses based on three team categories: delivery, growth and support. The CODM uses net income, cash balances and debt availability to make decisions related to dividend distributions, acquisitions, and stock repurchases. Our segment results for our one reportable segment are the same as presented in our Consolidated Statements of Income. We do not have intra-entity sales or transfers. The measure of segment assets is reported on our consolidated balance sheet as total consolidated assets.
The table below presents our segment results, including other significant expenses reported to our CODM and other information related to our segment for the years ended December 31, 2024, 2023, and 2022 (in thousands) :
|
2024 |
2023 |
2022 |
||||||||||
|
Revenue |
$ | $ | $ | |||||||||
|
Less: |
||||||||||||
|
Delivery associate expense |
||||||||||||
|
Delivery other operating expenses |
||||||||||||
|
Delivery total operating expenses |
||||||||||||
|
Growth associate expenses |
||||||||||||
|
Growth other operating expenses |
||||||||||||
|
Growth total operating expenses |
||||||||||||
|
Support associate expenses |
||||||||||||
|
Support other operating expenses |
||||||||||||
|
Support total operating expenses |
||||||||||||
|
Operating income |
||||||||||||
|
Interest income |
||||||||||||
|
Interest expense |
( |
) | ( |
) | ( |
) | ||||||
|
Reclassification of cumulative foreign currency translation adjustment into earnings |
( |
) | ||||||||||
|
Other non-operating income (expense) |
( |
) | ( |
) | ( |
) | ||||||
|
Provision for income taxes |
( |
) | ( |
) | ( |
) | ||||||
|
Net income |
$ | $ | $ | |||||||||
|
2024 |
2023 |
2022 |
||||||||||
|
Other significant expenses provided to CODM* |
||||||||||||
|
Variable direct expenses |
$ | $ | $ | |||||||||
|
Fixed direct expenses |
||||||||||||
|
IT operational expenses |
||||||||||||
|
Total expenditures for purchases of long-lived assets** |
||||||||||||
|
Other significant noncash items* |
||||||||||||
|
Depreciation, amortization and impairment expense |
$ | $ | $ | |||||||||
|
Deferred income tax benefits |
||||||||||||
|
Reserve for uncertain tax positions |
||||||||||||
|
Share-based compensation |
||||||||||||
|
Contingent consideration liability assumed for acquisition |
||||||||||||
|
* |
|
|
** |
|
We closed the Canada office in 2022. As a result, no Canadian revenue is expected to be generated after 2022 and there were no long-lived assets remaining in Canada. The table below presents entity-wide information regarding our revenue and assets for the years ended and as of December 31, 2024, 2023, and 2022, by geographic area (in thousands):
|
2024 |
2023 |
2022 |
||||||||||
|
Revenue: |
||||||||||||
|
United States |
$ | $ | $ | |||||||||
|
Canada |
||||||||||||
|
Total |
$ | $ | $ | |||||||||
|
Long-lived assets (property and equipment, right of use assets, right of use assets, identifiable intangibles and goodwill): |
||||||||||||
|
United States |
$ | $ | $ | |||||||||
|
(13) |
Subsequent Events |
In February 2025, we entered a new credit agreement (the “New Credit Agreement”) with a group of lenders and FNB that amends and restates the terms of our existing Credit Facility, as amended. The New Credit Agreement provides for (i) a $
Interest accrues and is payable monthly on the New Delayed Draw Term Loan and the Revolving Loan at a floating rate equal to the one-month Term plus a percentage per annum determined by our cash flow leverage ratio, ranging from
We are obligated to pay ongoing unused commitment fees quarterly in arrears at a percentage per annum determined by our cash flow leverage ratio, ranging from
The New 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 present and future assets (including, without limitation, fee-owned real property).
The New Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our Common Stock and acquisitions, subject in each case to certain exceptions. The New Credit Agreement also contains certain financial covenants with respect to minimum fixed charge coverage ratio and maximum cash flow leverage ratio. We are required to maintain a minimum fixed charge coverage ratio of
In February 2025, our Board of Directors appointed a new Chief Executive Officer effective June 1, 2025 (the “Effective Date”). In connection with his appointment, he will receive an annual salary, a grant of
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
|
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), our management evaluated, with the participation of our Chief Executive Officer and our Interim Principal Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2024. Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and the Interim Principal Financial Officer concluded that the disclosure controls and procedures were effective as of December 31, 2024.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Our internal control over financial reporting is designed 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. Because of its inherent limitations, however, 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 of procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.
Our management, with the participation of our Chief Executive Officer and Interim Principal Financial Officer, has evaluated the effectiveness of our internal control over financial reporting using the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on such evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2024.
The effectiveness of our internal control over financial reporting as of December 31, 2024, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, a copy of which is included in this Annual Report on Form 10-K.
We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and Interim 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.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
|
Other Information |
During the quarter ended December 31, 2024, director or officer adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement.
|
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
Not applicable.
|
Directors, Executive Officers and Corporate Governance |
We have adopted a Code of Business Conduct and Ethics that applies to all of our associates, including our principal executive officer and principal financial officer, principal accounting officer or controller and other persons performing similar functions. We have posted a copy of the Code of Business Conduct and Ethics on our website at www.nrchealth.com, and such Code of Business Conduct and Ethics is available, in print, without charge, to any shareholder who requests it from our Secretary. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from, the Code of Business Conduct and Ethics by posting such information on our website at www.nrchealth.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this report.
The remaining information required by this Item will be included in our definitive proxy statement to be filed with the SEC within 120 days after December 31, 2024, in connection with the solicitation of proxies for the Company’s 2025 Annual Meeting of Stockholders (the “2025 Proxy Statement”), and is incorporated herein by reference.
|
Executive Compensation |
The information required by this Item will be included in our definitive 2025 Proxy Statement, and is incorporated herein by reference.
|
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
The following table sets forth information with respect to compensation plans under which equity securities of the Company are authorized for issuance as of December 31, 2024.
|
Plan Category Common Shares |
Number of Securities to be issued upon the exercise of outstanding options, warrants and rights |
Weighted- average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) |
|||||||||
|
Equity compensation plans approved by security holders(1) |
470,321 | $ | 35.38 | 994,520 | (2) | |||||||
|
Equity compensation plans not approved by security holders |
— | — | — | |||||||||
|
Total |
470,321 | $ | 35.38 | 994,520 | ||||||||
|
(1) |
Includes our 2006 Equity Incentive Plan and 2004 Director Plan. |
|
(2) |
Under the 2006 Equity Incentive Plan, we had authority to award up to 337,879 additional shares of restricted common stock provided that the total of such shares awarded may not exceed the total number of shares remaining available for issuance under the 2006 Equity Incentive Plan, which totaled 378,118, shares of common stock as of December 31, 2024. The Director Plan provides for granting options for 3,000,000 shares of common stock. Option awards through December 31, 2024 totaled 2,383,598 shares of common stock. |
The remaining information required by this Item will be included in our definitive 2025 Proxy Statement and is incorporated herein by reference.
|
Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item will be included in our definitive 2025 Proxy Statement and is incorporated herein by reference.
|
Principal Accountant Fees and Services |
The information required by this Item will be included in our definitive 2025 Proxy Statement and is incorporated herein by reference.
|
Exhibits, Financial Statement Schedules |
|
1. |
Consolidated financial statements. The consolidated financial statements listed in the accompanying index to the consolidated financial statements are filed as part of this Annual Report on Form 10-K. |
|
2. |
Financial statement schedules. All financial statement schedules have been omitted because they are not applicable or the required information is included in the consolidated financial statements and the related notes thereto. |
|
3. |
Exhibits. The exhibits listed in the exhibit index below are filed as part of this Annual Report on Form 10-K. |
EXHIBIT INDEX
|
Exhibit |
Exhibit Description |
|
(3.1) |
|
|
(3.2) |
|
|
(4.1) |
|
|
(4.2) |
|
|
(4.3) |
|
|
(10.1) |
|
|
(10.2) |
|
|
(10.3) |
|
|
(10.4) |
|
|
(10.5) |
|
Exhibit |
Exhibit Description |
|
(10.6)* |
|
|
(10.7)* |
|
|
(10.8)* |
|
|
(10.9)* |
|
|
(10.10)* |
|
|
(10.11)* |
|
|
(10.12)* |
|
|
(19)** |
|
|
(23)** |
|
|
(31.1)** |
|
|
(31.2)** |
|
|
(32)*** |
|
|
(97) |
|
|
(101)** |
Financial statements from the Annual Report on Form 10-K of National Research Corporation for the year ended December 31, 2024, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, (vi) the Notes to the Consolidated Financial Statements, and (vii) document and entity information. |
|
(104)** |
Cover Page Interactive Data File (formatted in the Inline XBRL and contained in Exhibit 101). |
|
* |
A management contract or compensatory plan or arrangement. |
|
** |
Filed herewith. |
|
*** |
Furnished herewith. |
|
Form 10-K Summary |
None.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
All other financial statement schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements and notes thereto.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 17th day of March 2025.
|
NATIONAL RESEARCH CORPORATION |
|||
|
By: |
/s/ Michael D. Hays |
||
|
Michael D. Hays |
|||
|
Chief Executive Officer and President |
|||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
Signature |
Title |
Date |
||
|
/s/ Michael D. Hays |
Chief Executive Officer, President and Director |
March 17, 2025 |
||
|
Michael D. Hays |
(Principal Executive Officer) |
|||
|
/s/ Linda A. Stacy |
Interim Principal Financial Officer |
March 17, 2025 |
||
|
Linda A. Stacy |
(Principal Financial and Accounting Officer) |
|||
|
/s/ Donald M. Berwick |
Director |
March 17, 2025 |
||
|
Donald M. Berwick |
||||
|
/s/ John N. Nunnelly |
Director |
March 17, 2025 |
||
|
John N. Nunnelly |
||||
|
/s/ Penny A. Wheeler |
Director |
March 17, 2025 |
||
|
Penny A. Wheeler |
||||
|
/s/ Stephen H. Lockhart |
Director |
March 17, 2025 |
||
|
Stephen H. Lockhart |
||||
|
/s/ Parul Bhandari |
Director |
March 17, 2025 |
||
|
Parul Bhandari |