UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

	For the quarterly period ended ~~September~~June 30, ~~2020~~2021

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

	For the transition period from ________ to ________

Commission File Number 001-35929

National Research Corporation

(Exact name of Registrant as specified in its charter)

~~Wisconsin~~Delaware		47-0634000
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

	(402) 475-2525
	(Registrant’s telephone number, including area code)

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

Title of Each Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.001 par value	NRC	The NASDAQ stock market

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

Yes ☒ No ☐

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

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ☐ No ☒

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

Common Stock, $.001 par value, outstanding as of ~~October 26, 2020:~~ July 23, 2021: 25,439,013~~25,302,917~~

Table of Contents

NATIONAL RESEARCH CORPORATION

~~NATIONAL RESEARCH CORPORATION~~

FORM 10-Q INDEX

For the Quarter Ended ~~September~~June 30, ~~2020~~2021

			Page No.

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Income	4
		Condensed Consolidated Statements of Comprehensive Income	5
		Condensed Consolidated Statements of ~~Shareholders’~~Shareholders’ Equity	6-7
		Condensed Consolidated Statements of Cash Flows	8
		Notes to Condensed Consolidated Financial Statements	~~9-21~~9-20

	Item 2.	~~Management’s~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~22-29~~21-28

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3028

	Item 4.	Controls and Procedures	3028

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	3129

	Item 1A.	Risk Factors	3129

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3129

	Item 6.	Exhibits	3230

	Signatures		3331

Table of Contents

Special Note Regarding Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), “believes,” “expects,” “may,” “could,” “anticipates,” or the use of words such as “would,” “may,” “could,” or “should,” or other words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. In this Quarterly Report on Form 10-Q, statements regarding the future impact of adopting new accounting standards, value and utility of, and market demand for, our service offerings, ~~our ability to compete successfully in the future,~~ future opportunities for growth with respect to new and existing clients, our future ability to compete and the types of firms with which we will compete, future adequacy of our liquidity sources, future revenue sources, future capital expenditures and the sources of cash to fund such capital expenditures, 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 source of funds for future payments of deferred purchase price obligations and other cash expenses, the future phase out of LIBOR and applicable replacement benchmark rates ~~the future receipt of insurance proceeds relating to the February 2020 ransomware attack (“February incident”)~~ and the expected impact of the COVID-19 pandemic and related government mandates and recommendations, 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 likelihood that the COVID-19 pandemic will adversely affect our sales, earnings, financial condition and liquidity;

●

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

●

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

●

The effects of an economic downturn;

●

The impact of consolidation in the healthcare industry;

●

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

●

Our ability to 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;

●

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

●

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

●

The factors set forth under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K, ~~for the year ended December 31, 2019,~~ as such section may be updated or supplemented by Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q (including this Report). and various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.

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

Table of Contents

PART I – Financial Information

ITEM 1. Financial Statements

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts and par value)

	September 30, 2020			December 31, 2019			June 30, 2021			December 31, 2020
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	21,855		$	13,517		$	48,899		$	34,690
Trade accounts receivable, less allowance for doubtful accounts of $126 and $144, respectively		17,426			11,639
Trade accounts receivable, less allowance for doubtful accounts of $107 and $120, respectively								14,157			13,923
Prepaid expenses		2,598			2,038			3,575			2,645
Income taxes receivable		2,673			69			153			1,235
Insurance recoverable		913			0
Other current assets		1,901			1,894			805			1,619
Total current assets		47,366			29,157			67,589			54,112

Net property and equipment		12,267			13,530			11,525			11,726
Intangible assets, net		1,462			1,728			1,937			1,410
Goodwill		57,875			57,935			61,640			57,255
Deferred contract costs, net		4,542			4,204			4,642			4,555
Operating lease right-of-use assets		1,213			1,628			1,134			1,308
Other		2,521			2,503			3,382			3,057
Total assets	$	127,246		$	110,685		$	151,849		$	133,423

Liabilities and Shareholders’ Equity
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of notes payable	$	4,008		$	4,378
Current portion of notes payable, net unamortized debt issuance costs							$	4,168		$	4,061
Accounts payable		725			1,279			338			1,095
Accrued wages, bonus and profit sharing		6,155			6,086
Accrued wages and bonuses								7,075			6,460
Accrued expenses		2,616			3,408			4,621			3,184
Income taxes payable		0			366			512			0
Deferred revenue								16,848			15,585
Deferred acquisition consideration								1,973			0
Dividends payable		-			5,239			3,053			0
Deferred revenue		17,328			16,354
Other current liabilities		1,241			1,045			1,391			1,296
Total current liabilities		32,073			38,155			39,979			31,681

Notes payable, net of current portion and unamortized debt issuance costs		27,583			29,795			24,434			26,547
Deferred income taxes		7,265			7,399			7,409			7,265
Other long term liabilities		3,596			2,444
Other long-term liabilities								3,662			3,615
Total liabilities		70,517			77,793			75,484			69,108

Shareholders’ equity:
Preferred stock, $0.01 par value, authorized 2,000,000 shares, none issued		0			0			--			--
Common stock, $0.001 par value; authorized 60,000,000 shares, issued 30,657,154 in 2020 and 30,151,574 in 2019, outstanding 25,321,141 in 2020 and 24,947,500 in 2019		31			30
Common stock, $0.001 par value; authorized 110,000,0000 shares in 2021 and 60,000,000 shares in 2020, issued 30,850,131 in 2021 and 30,775,154 in 2020, outstanding 25,439,013 in 2021 and 25,390,968 in 2020								31			31
Additional paid-in capital		170,052			162,154			172,844			171,785
Retained earnings (accumulated deficit)		(69,587	)		(93,357	)		(49,304	)		(61,375	)
Accumulated other comprehensive loss, foreign currency translation adjustment		(2,623	)		(2,209	)		(2,269	)		(2,399	)
Treasury stock, at cost; 5,336,013, Common shares in 2020 and 5,204,074 shares in 2019		(41,144	)		(33,726	)
Treasury stock, at cost; 5,411,118 Common shares in 2021 and 5,384,186 Common shares in 2020								(44,937	)		(43,727	)
Total shareholders’ equity		56,729			32,892			76,365			64,315
Total liabilities and shareholders’ equity	$	127,246		$	110,685		$	151,849		$	133,423

See accompanying notes to condensed consolidated financial statements

Table of Contents

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2020			2019			2020			2019			2021			2020			2021			2020

Revenue	$	33,477		$	32,465		$	98,503		$	95,359		$	36,425		$	31,166		$	71,889		$	65,026
Insurance Recoveries		533			--			533			--

Operating expenses:
Direct		12,189			12,109			36,369			35,269			12,536			11,634			24,476			24,180
Selling, general and administrative		7,953			8,706			25,554			24,732			10,016			8,852			19,536			17,600
Depreciation and amortization		1,847			1,430			4,623			4,285
Depreciation, amortization and impairment														1,634			1,405			3,618			2,777
Total operating expenses		21,989			22,245			66,546			64,286			24,186			21,891			47,630			44,557

Operating income		12,021			10,220			32,490			31,073			12,239			9,275			24,259			20,469

Other income (expense):
Interest income		2			10			15			24			3			2			6			13
Interest expense		(451	)		(510	)		(1,366	)		(1,613	)		(423	)		(450	)		(855	)		(914	)
Other, net		94			89			454			(330	)		75			(270	)		96			360

Total other income (expense)		(355	)		(411	)		(897	)		(1,919	)		(345	)		(718	)		(753	)		(541	)

Income before income taxes		11,666			9,809			31,593			29,154			11,894			8,557			23,506			19,928

Provision for income taxes		2,088			1,690			2,545			5,446			2,950			842			5,330			458

Net income	$	9,578		$	8,119		$	29,048		$	23,708		$	8,944		$	7,715		$	18,176		$	19,470

Earnings Per Share of Common Stock:
Basic Earnings Per Share	$	0.38		$	0.33		$	1.15		$	0.95		$	0.35		$	0.31		$	0.71		$	0.78
Diluted Earnings Per Share	$	0.37		$	0.31		$	1.13		$	0.92		$	0.35		$	0.30		$	0.71		$	0.76

Weighted average shares and share equivalents outstanding:
Basic		25,219			24,827			25,113			24,794			25,426			25,148			25,420			25,060
Diluted		25,704			25,741			25,701			25,624			25,645			25,680			25,656			25,702

See accompanying notes to condensed consolidated financial statements

Table of Contents

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)

	Three months ended September 30,					Nine months ended September 30,					Three months ended June 30,				Six months ended June 30,
	2020		2019			2020			2019		2021		2020		2021		2020

Net income	$	9,578	$	8,119		$	29,048		$	23,708	$	8,944	$	7,715	$	18,176	$	19,470
Other comprehensive income:
Other comprehensive income (loss):
Foreign currency translation adjustment		249		(146	)		(414	)		474		74		461		130		(663	)
Other comprehensive income	$	249	$	(146	)	$	(414	)	$	474
Other comprehensive income (loss)											$	74	$	461	$	130	$	(663	)

Comprehensive Income	$	9,827	$	7,973		$	28,634		$	24,182	$	9,018	$	8,176	$	18,306	$	18,807

See accompanying notes to condensed consolidated financial statements.

Table of Contents

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED ~~Consolidated Statements of Shareholders’ Equity~~CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

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

Common
Stock

Additional
Paid-in
Capital

Retained
Earnings
(Accumulated
Deficit)

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total

Balances at December 31, 2019
$ 30 $ 162,154 $ (93,357
)
$ (2,209
)
$ (33,726
)
$ 32,892
Purchase of 75,980 shares treasury stock
-- -- -- -- (4,425
)
(4,425
)
Issuance of 260,481 common shares for the exercise of stock options
-- 3,145 -- -- -- 3,145
Non-cash stock compensation expense
-- 332 -- -- -- 332
Dividends declared of $0.21 per common share
-- -- (5,278
)
-- -- (5,278
)
Other comprehensive loss, foreign currency translation adjustment
-- -- -- (1,124
)
-- (1,124
)
Net income
-- -- 11,755 -- -- 11,755
Balances at March 31, 2020
$ 30 $ 165,631 $ (86,880
)
$ (3,333
)
$ (38,151
)
$ 37,297
Purchase of 38,369 shares treasury stock
-- -- -- -- (2,077
)
(2,077
)
Issuance of 148,284 common shares for the exercise of stock options
1 2,036 -- -- -- 2,037
Forfeitures of 6,793 restricted common shares
-- -- -- -- -- --
Non-cash stock compensation expense
-- 141 -- -- -- 141
Other comprehensive income, foreign currency translation adjustment
-- -- -- 461 -- 461
Net income
-- -- 7,715 -- -- 7,715
Balances at June 30, 2020
$ 31 $ 167,808 $ (79,165
)
$ (2,872
)
$ (40,228
)
$ 45,574
Purchase of 17,590 shares treasury stock
-- -- -- -- (916
)
(916 )
Issuance of 103,608 common shares for the exercise of stock options
-- 1,970 -- -- -- 1,970
Non-cash stock compensation expense
-- 274 -- -- -- 274
Other comprehensive income, foreign currency translation adjustment
-- -- -- 249 -- 249
Net income
-- -- 9,578 -- -- 9,578
Balances at September 30, 2020
$ 31 $ 170,052 $ (69,587
)
$ (2,623
)
$ (41,144
)
$ 56,729

Common
Stock

Additional
Paid-in
Capital

Retained
Earnings
(Accumulated
Deficit)

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total

Balances at December 31, 2020
$ 31 $ 171,785 $ (61,375
)
$ (2,399
)
$ (43,727
)
$ 64,315
Purchase of 26,932 shares treasury stock
-- -- -- -- (1,210
)
(1,210
)
Issuance of 68,284 common shares for the exercise of stock options
-- 911 -- -- -- 911
Non-cash stock compensation expense
-- (54
)
-- -- -- (54
)
Other comprehensive income, foreign currency translation adjustment
-- -- -- 56 -- 56
Net income
-- -- 9,232 -- -- 9,232
Balances at March 31, 2021
$ 31 $ 172,642 $ (52,143
)
$ (2,343
)
$ (44,937
)
$ 73,250
Non-cash stock compensation expense
-- 202 -- -- -- 202
Dividends declared of $0.24 per common share
-- -- (6,105
)
-- -- (6,105
)
Other comprehensive income, foreign currency translation adjustment
-- -- -- 74 -- 74
Net income
-- -- 8,944 -- -- 8,944
Balances at June 30, 2021
$ 31 $ 172,844 $ (49,304
)
$ (2,269
)
$ (44,937
)
$ 76,365

See accompanying notes to condensed consolidated financial statements.

Table of Contents

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED ~~Consolidated Statements of Shareholders’ Equity~~CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

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

Common
Stock
(formerly
Class A)

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total

Balances at December 31, 2018
$ 30 $ 157,312 $ (106,339
)
$ (2,916
)
$ (29,004
)
$ 19,083
Purchase of 28,657 shares treasury stock
-- -- -- -- (1,116
)
(1,116
)
Issuance of 86,247 common shares for the exercise of stock options
-- 633 -- -- -- 633
Issuance of 6,005 restricted common shares
-- -- -- -- -- --
Non-cash stock compensation expense
-- 302 -- -- -- 302
Dividends declared of $0.19 per common share
-- -- (4,724
)
-- -- (4,724
)
Other comprehensive income, foreign currency translation adjustment
-- -- -- 365 -- 365
Net income
-- -- 8,196 -- -- 8,196
Balances at March 31, 2019
$ 30 $ 158,247 $ (102,867
)
$ (2,551
)
$ (30,120
)
$ 22,739
Purchase of 2,977 shares treasury stock
-- -- -- -- (137
)
(137
)
Issuance of 18,000 common shares for the exercise of stock options
-- 137 -- -- -- 137
Non-cash stock compensation expense
-- 307 -- -- -- 307
Dividends declared of $0.19 per common share
-- -- (4,727
)
-- -- (4,727
)
Other comprehensive income, foreign currency translation adjustment
-- -- -- 255 -- 255
Net income
-- -- 7,393 -- -- 7,393
Balances at June 30, 2019
$ 30 $ 158,691 $ (100,201
)
$ (2,296
)
$ (30,257
)
$ 25,967
Purchase of 32,207 shares treasury stock
-- -- -- -- (2,063
)
(2,063
)
Issuance of 72,843 common shares for the exercise of stock options
-- 1,525 -- -- -- 1,525
Non-cash stock compensation expense
-- 308 -- -- -- 308
Dividends declared of $0.19 per common share
-- -- (4,735
)
-- -- (4,735
)
Other comprehensive income, foreign currency translation adjustment
-- -- -- (146
)
-- (146
)
Net income
-- -- 8,119 -- -- 8,119
Balances at September 30, 2019
$ 30 $ 160,524 $ (96,817
)
$ (2,442
)
$ (32,320
)
$ 28,975

Common
Stock

Additional
Paid-in
Capital

Retained
Earnings
(Accumulated
Deficit)

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total

Balances at December 31, 2019
$ 30 $ 162,154 $ (93,357
)
$ (2,209
)
$ (33,726
)
$ 32,892
Purchase of 75,980 shares treasury stock
-- -- -- -- (4,425
)
(4,425
)
Issuance of 260,481 common shares for the exercise of stock options
-- 3,145 -- -- -- 3,145
Non-cash stock compensation expense
-- 332 -- -- -- 332
Dividends declared of $0.21 per common share
-- -- (5,278
)
-- -- (5,278
)
Other comprehensive loss, foreign currency translation adjustment
-- -- -- (1,124
)
-- (1,124
)
Net income
-- -- 11,755 -- -- 11,755
Balances at March 31, 2020
$ 30 $ 165,631 $ (86,880
)
$ (3,333
)
$ (38,151
)
$ 37,297
Purchase of 38,369 shares treasury stock
-- -- -- -- (2,077
)
(2,077
)
Issuance of 148,284 common shares for the exercise of stock options
1 2,036 -- -- -- 2,037
Forfeitures of 6,793 restricted common shares
-- -- -- -- -- --
Non-cash stock compensation expense
-- 141 -- -- -- 141
Other comprehensive income, foreign currency translation adjustment
-- -- -- 461 -- 461
Net income
-- -- 7,715 -- -- 7,715
Balances at June 30, 2020
$ 31 $ 167,808 $ (79,165
)
$ (2,872
)
$ (40,228
)
$ 45,574

See accompanying notes to condensed consolidated financial statements.

Table of Contents

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Nine months ended						Six months ended
	September 30,						June 30,
	2020			2019			2021			2020
Cash flows from operating activities:
Net income	$	29,048		$	23,708		$	18,176		$	19,470
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,623			4,285
Depreciation, amortization and impairment								3,618			2,777
Deferred income taxes		(134	)		919			140			328
Reserve for uncertain tax positions		150			(262	)		156			143
Non-cash share-based compensation expense		747			917			149			473
Gain on insurance recoveries for damaged property		(260	)		0
Loss on disposal of property and equipment		-			40			1			-
Net changes in assets and liabilities:
Trade accounts receivable		(5,830	)		(3,343	)		(40	)		(8,382	)
Prepaid expenses and other current assets		(478	)		978			(449	)		(557	)
Insurance recoverable		(913	)		0
Deferred contract costs, net		(339	)		(508	)		(87	)		(379	)
Operating lease assets and liabilities, net		(5	)		(10	)		61			(1	)
Accounts payable		(681	)		69			(717	)		(338	)
Accrued expenses, wages, bonuses and profit sharing		473			138
Accrued expenses, wages, bonuses								1,967			713
Income taxes receivable and payable		(2,974	)		(829	)		1,597			(263	)
Deferred revenue		992			2,872			994			(81	)
Net cash provided by operating activities		24,419			28,974			25,566			13,903

Cash flows from investing activities:
Purchases of property and equipment		(2,435	)		(3,429	)		(2,805	)		(1,427	)
Insurance proceeds for damaged property		260			0
Acquisition consideration								(3,000	)		--
Net cash used in investing activities		(2,175	)		(3,429	)		(5,805	)		(1,427	)

Cash flows from financing activities:
Borrowings on line of credit		-			21,000			0			0
Payments on line of credit		-			(21,000	)		0			0
Payments on notes payable		(2,575	)		(2,767	)		(2,023	)		(1,600	)
Payment of debt issuance costs		(36	)		0
Payments on finance lease obligations		(187	)		(223	)		(246	)		(124	)
Proceeds from the exercise of stock options		1,592			-
Proceeds from the exercise of share-based awards								162			538
Payment of employee payroll tax withholdings on share-based awards exercised		(1,859	)		(1,021	)		(460	)		(1,859	)
Payment of dividends on common stock		(10,517	)		(26,564	)		(3,053	)		(10,517	)
Net cash used in financing activities		(13,582	)		(30,575	)		(5,620	)		(13,562	)

Effect of exchange rate changes on cash		(324	)		397			68			(474	)
Change in cash and cash equivalents		8,338			(4,633	)		14,209			(1,560	)
Cash and cash equivalents at beginning of period		13,517			12,991			34,690			13,517
Cash and cash equivalents at end of period	$	21,855		$	8,358		$	48,899		$	11,957

Supplemental disclosure of cash paid for:
Interest, net of capitalized amounts	$	1,315		$	1,558		$	801		$	884
Income taxes	$	5,034		$	5,607		$	3,432		$	261
Supplemental disclosure of non-cash investing and financing activities:
Finance lease obligations originated for property and equipment	$	771		$	206		$	--		$	105
Stock tendered to the Company for cashless exercise of stock options in connection with equity incentive plans	$	5,560		$	2,295		$	749		$	4,644
Deferred acquisition consideration							$	1,950			--

See accompanying notes to condensed consolidated financial statements.

Table of Contents

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business and basis of presentation

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

~~Our~~In March 2021, we changed our operating segments from six ~~operating segments are aggregated into~~to one to reflect a change in corporate reporting ~~segment because they have similar economic characteristics~~structure to the Company’s Chief Executive Officer and ~~meet other aggregation criteria from the Financial Accounting Standards Board (“FASB”) guidance on segment disclosure. The~~ ~~six~~chief operating segments are Experience, The Governance Institute, Market Insights, Transparency, National Research Corporation Canada and Transitions, which offer a portfolio of solutions that address specific needs around market insight, experience, transparency and governance for healthcare providers, payers and other healthcare organizations.decision maker.

Our condensed consolidated balance sheet at December 31, ~~2019~~2020 was derived from our audited consolidated balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.

Information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are included in our Form 10-K for the year ended December 31, ~~2019,~~2020, filed with the Securities and Exchange Commission (the “SEC”) on March ~~6, 2020.~~5, 2021.

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

The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiary, National Research Corporation Canada. All significant intercompany transactions and balances have been eliminated.

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

Table of Contents

Revenue Recognition

We derive a majority of our revenues from our annually renewable subscription-based service agreements with our ~~clients,~~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 23 for further information about our contracts with ~~clients.~~customers. We account for revenue using the following steps:

	●	Identify the contract, or contracts, with a ~~client;~~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 ~~client~~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, consideration in~~ ~~one~~ ~~contract depends on another contract, or services in~~ ~~one~~ ~~or more contracts are a single performance obligation.~~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 ~~clients,~~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 ~~clients~~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 ~~client.~~customer. These agreements are renewable at the option of the ~~client~~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 ~~client~~customer as the ~~client~~customer receives and consumes the benefits throughout the contract period. Accordingly, subscription services are recognized ratably over the subscription period. Subscription services are typically billed annually in advance but may also be billed on a quarterly and monthly basis.

One-time services – These agreements typically require us to perform a specific one-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 ~~client.~~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~~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 ~~client~~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.

Table of Contents

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 ~~client~~customer contract. Deferred contract costs are amortized over the estimated term of the contract, including renewals, which generally ranges from three to five years. The contract term was estimated by considering factors such as historical ~~client~~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 ~~$717,000~~$605,000 and ~~$1.0 million~~$599,000 in the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. ~~The company~~We deferred incremental costs of obtaining a contract of ~~$2.9~~$1.5 million and ~~$1.8~~$2.2 million in the ~~nine~~six-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Deferred contract costs, net of accumulated amortization was ~~$4.5 million and $4.2~~$4.6 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020. ~~respectively.~~ Total amortization by expense classification for the three and ~~nine~~six-months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 was as follows:

	Three months ended				Nine months ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019		Three months ended June 30, 2021		Three months ended June 30, 2020		Six months ended June 30, 2021		Six months ended June 30, 2020
	(In thousands)								(In thousands)
Direct Expenses	$	43	$	10	$	221	$	26	$	41	$	60	$	73	$	178
Selling, general and administrative expenses		693		738		2,317		2,072		740		851		1,363		1,624
Total amortization	$	736	$	748	$	2,538	$	2,098	$	781	$	911	$	1,436	$	1,802

Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was ~~$20,000~~$15,000 and ~~$1,000~~$3,000 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively and ~~$25,000~~$22,000 and ~~$22,000~~$4,000 in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount. ~~Effective~~ ~~January 1, 2020,~~ ~~we adopted Accounting Standards Update (“ASU”)~~ ~~2016~~-~~13,~~~~Measurement of Credit Losses on Financial Instruments.~~ This ASU requires the measurement of all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The adoption of this standard did ~~not~~ ~~have an impact on our condensed consolidated financial statements.~~ The allowance for doubtful accounts is our best estimate of the 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 COVID-~~19 ~~pandemic has resulted in an increase in accounts receivables as some clients have delayed payments or are slower paying due to such clients’ cash-flow issues.~~

~~Table of Contents~~

The following table provides the activity in the allowance for doubtful accounts for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 (In thousands):

Balance at
Beginning
of
Period

Bad Debt
Expense
(Benefit)

Write-offs

Recoveries

Balance at
End of
Period

Nine months ended September 30, 2020
$ 144 $ 41 $ 80 $ 21 $ 126
Nine months ended September 30, 2019
$ 176 $ 40 $ 91 $ 13 $ 138

Balance at
Beginning
of
Period

Bad Debt
Expense
(Benefit)

Write-offs

Recoveries

Balance at
End of
Period

Six months ended June 30, 2021
$ 120 $ 25 $ 47 $ 9 $ 107
Six months ended June 30, 2020
$ 144 $ 40 $ 62 $ 21 $ 143

11
Table of Contents
Leases

We determine whether a lease is included in an agreement at inception. Operating lease ~~ROU~~right-of-use (“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 assets 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.

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

~~Implementation Costs~~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. During the six months ended June 30, 2021, we recorded an ROU asset impairment charge of ~~Hosting Arrangements~~
~~When a software license~~$324,000, which was the amount by which the carrying value of the Seattle office lease ROU asset exceeded the fair value. We estimated the fair value based on the discounted cash flows of estimated net rental income for the office space subleased. The ROU asset impairment charge is included in ~~a cloud computing arrangement~~depreciation, amortization and ~~we have~~impairment expenses. There were no ROU asset impairment charges in 2020. Rent income from the ~~legal right, ability and feasibility to download the software, it is accounted for as software,~~sublessee are included in ~~property and equipment, and amortized. If~~the statement of operations on a ~~software license is~~ ~~not~~ ~~included or we do~~ ~~not~~ ~~have~~straight-line basis as an offset to rent expense associated with the ~~ability or feasibility to download software~~original operating lease included in ~~a cloud computing arrangement, it is accounted for as a service contract, which is expensed to direct~~other expenses ~~or selling, general and administrative expenses during the service period. Effective~~ ~~January 1, 2020,~~ ~~we prospectively adopted ASU~~ ~~2018~~-~~15,~~ ~~Intangibles-Goodwill and Other-Internal Use Software (Subtopic~~ ~~350~~-40). This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The adoption did ~~not~~ ~~significantly impact our results of operations and financial position.~~

12

~~Table of Contents~~
Fair Value Measurements

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

The following details our financial assets within the fair value hierarchy at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

(In thousands)

(In thousands)

As of September 30, 2020

As of June 30, 2021

Money Market Funds
$ 3,732 $ - $ - $ 3,732 $ 5,646 $ - $ - $ 5,646
Total Cash Equivalents
$ 3,732 $ - $ - $ 3,732 $ 5,646 $ - $ - $ 5,646

As of December 31, 2019

As of December 31, 2020

Money Market Funds
$ 3,662 $ - $ - $ 3,662 $ 5,015 $ -- $ -- $ 5,015
Total Cash Equivalents
$ 3,662 $ - $ - $ 3,662 $ 5,015 $ -- $ -- $ 5,015

There were no transfers between levels during the three and six-month ~~period~~periods ended ~~September~~June 30, ~~2020.~~2021.

12
Table of Contents
Our long-term debt described in Note 45 is recorded at historical cost. The fair value of long-term debt is classified in Level 2 of the fair value hierarchy and was estimated based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit. The following are the carrying amount and estimated fair values of long-term debt:

September 30,
2020

December 31,
2019

(In thousands)

Total carrying amount of long-term debt
$ 31,706 $ 34,281
Estimated fair value of long-term debt
$ 34,158 $ 35,205

June 30, 2021

December 31, 2020

(In thousands)

Total carrying amount of long-term debt
$ 28,691 $ 30,713
Estimated fair value of long-term debt
$ 30,303 $ 32,943

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 ~~September~~June 30, ~~2020,~~2021, and December 31, ~~2019,~~2020, there was no0 indication of impairment related to these ~~assets.~~assets other than the Seattle office ROU asset. We estimated the fair value of the Seattle office ROU using discounted cash flows of the sublease based on management’s most recent projections, which are considered level 3 inputs in the fair value hierarchy.

Annually, we consider whether the recorded goodwill and indefinite lived intangibles have been impaired. However, goodwill and intangibles must be tested between annual tests if an event occurs or circumstances change to indicate that it is more likely than not that an impairment loss has been incurred (“triggering event”).
In connection with the March 2021 revision to our operating segments, our previous reporting units were combined into one reporting unit. We performed an interim qualitative analysis immediately before and after the reorganization and concluded that the fair value of our reporting units likely exceeded the carrying values and no impairments were recorded. Following the reorganization, we considered the current and expected future economic and market conditions, including the impact of the COVID-19 pandemic, on ~~each of~~ our reporting ~~units.~~unit. We also assessed our current market capitalization compared to book value, forecasts and margins in our last quantitative impairment testing. We concluded that a triggering event has not occurred which would require an additional interim impairment test to be performed as it is not more likely than not that an impairment loss ~~has~~had been incurred at ~~September~~June 30, ~~2020.~~2021.
13

~~Table of Contents~~
~~Our Canadian reporting unit generates service revenue from a relatively small number of clients with approximately 65.7% of its annual revenue concentrated in~~ ~~one~~ ~~client contract which currently expires in~~ ~~March 2021.~~ ~~While historically we have been successful in renewing or retaining contracts with our clients, should we be unable to or choose~~ ~~not~~ ~~to renew a significant contract, it would likely result in an impairment of goodwill at this reporting unit. The carrying amount of goodwill related to our Canadian reporting unit at~~ ~~September 30, 2020~~ ~~was $2.3 million.~~

Commitments and Contingencies

From time to time, we are involved in certain claims and litigation arising in the normal course of business. Management assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. Legal fees, net of estimated insurance recoveries, are expensed as incurred. ~~There were~~We do nonot ~~outstanding~~believe the final disposition of claims at ~~September~~June 30, ~~2020.~~2021
~~A sales tax accrual of $775,000 was recorded in~~ ~~2019~~ ~~for sales taxes that should~~will have ~~been collected from clients in~~ ~~2019~~ ~~and certain previous years. We received a revenue ruling from the state of Washington noting that our services are~~ ~~not~~ ~~subject to retail sales tax, and therefore, reversed $268,000 of sales tax accrual for the state of Washington in the~~ ~~third~~ ~~quarter of~~ ~~2020.~~ At ~~September 30, 2020,~~ ~~we have completed voluntary disclosure agreements with certain states, remitted past due sales tax, are remitting sales tax timely, are collecting sales tax from clients and~~ no accrual for past due sales tax remains. State and local jurisdictions have differing rules and regulations governing sales, use, and other taxes and these rules and regulations can be complex and subject to varying interpretations that ~~may~~ ~~change over time. As a result, we could face the possibility of tax assessment and audits, and our liability for these taxes and associated interest and penalties could exceed our original estimates.~~
~~We received $2.4 million in insurance recoveries in the~~ ~~nine~~~~-month period ended~~ ~~September 30, 2020,~~ ~~and $400,000 was paid directly to certain vendors from the insurer related to the~~ ~~February~~ ~~incident. These were recorded in selling general and administrative expenses. In the~~ ~~three~~~~-months ended~~ ~~September 30, 2020,~~ ~~we recorded an additional insurance recoverable of $913,000 from the~~ ~~February~~ incident for the final insurance loss claim. Of this amount, we expect $866,000 to be reimbursed directly to us and the remainder to be paid to certain vendors. We recorded $533,000, representing reimbursement for lost revenues, as insurance recoveries, and the remainder as a reduction to operating expenses. We expect to receive the insurance proceeds in the ~~three~~~~-month period ended~~ ~~December 31, 2020.~~ ~~Due to insurance recoveries, the~~ ~~February~~ ~~incident did~~ ~~not~~ ~~have a significant impact~~material adverse effect on our consolidated financial ~~statements.~~position, results of operations or liquidity.

Recent Accounting Pronouncements Not Yet Adopted
In ~~December 2019,~~ ~~the FASB issued ASU~~ ~~2019~~-~~12,~~ ~~Simplifying the Accounting for Income Taxes (Topic~~ ~~740~~). Among other clarifications and simplifications related to income tax accounting, this ASU simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences. The guidance is effective for fiscal years beginning after ~~December 15, 2020~~ and interim periods within those fiscal years. Early adoption is permitted in interim or annual periods with any adjustments reflected as of the beginning of the annual period that includes that interim period. Additionally, entities that elect early adoption must adopt all the amendments in the same period. Amendments are to be applied prospectively, except for certain amendments that are to be applied either retrospectively or with a modified retrospective approach through a cumulative effect adjustment recorded to retained earnings. We believe the adoption will ~~not~~ ~~significantly impact our results of operations and financial position.~~

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

14

~~Table of Contents~~

(2)
ACQUISITION
On January 4, 2021, we acquired substantially all assets and assumed certain liabilities of PatientWisdom, Inc., a company with a health engagement solution that will further our purpose of operationalizing human understanding through tangible and actionable insights. $3.0 million of the total $5.0 million all-cash consideration was paid at closing. We are required to pay the remaining $2.0 million no later than February 1, 2022, subject to offset for indemnification claims as provided in the purchase agreement. The closing payment was funded, and we expect to fund the deferred portion of the purchase price, with cash on hand. The acquisition was accounted for as a business combination, using the acquisition method of accounting, which requires, among other things, certain assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date.
13
Table of Contents
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed at the acquisition date.
Amount of Identified Assets Acquired and Liabilities Assumed

($ in thousands)

Current Assets
$ 184
Property and equipment
10
Customer related
100
Technology
600
Goodwill
4,340
Total assets acquired
$ 5,234
Current liabilities
284
Net assets acquired
$ 4,950
The identifiable intangible assets are being amortized over their estimated useful lives of 5 years. The goodwill and identifiable intangible assets are deductible for tax purposes. Goodwill related to the acquisition was primarily attributable to anticipated synergies and other intangibles that do not qualify for separate recognition.
The financial results associated with the PatientWisdom 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 2021. Pro-forma information has not been presented because the amounts for 2021 are insignificant. Acquisition-related costs of $8,000 and $119,000 are included in selling, general and administrative expenses for the three and six-month periods ended June 30, 2021.
(3)
CONTRACTS WITH CCUSTOMERS~~LIENTS~~

The following table disaggregates revenue for the three and ~~nine~~six-month periods ending ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 based on timing of revenue recognition (in thousands):

Three months ended

Nine months ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Subscription services recognized ratably over time
$ 30,712 $ 28,629 $ 90,101 $ 84,460
Services recognized at a point in time
1,170 1,606 2,456 4,231
Fixed, non-subscription recognized over time
460 1,043 1,740 2,083
Unit price services recognized over time
1,135 1,187 4,206 4,585
Total revenue
$ 33,477 $ 32,465 $ 98,503 $ 95,359
~~Our solutions within the digital VoC platform accounted for 74.0% and 63.8% of total revenue, in the~~ ~~three~~~~-month periods ending~~ ~~September 30, 2020~~ ~~and~~ ~~2019,~~ ~~respectively, and 72.0% and 61.3% of total revenue in the~~ ~~nine~~~~-month periods ending~~ ~~September 30, 2020~~ ~~and~~ ~~2019,~~ ~~respectively. The remaining revenue consists of legacy Experience and Governance Solutions.~~

Three months ended

Six months ended

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

Subscription services recognized ratably over time
$ 34,215 $ 29,572 $ 67,269 $ 59,993
Services recognized at a point in time
563 191 886 1,287
Fixed, non-subscription recognized over time
547 158 1,126 675
Unit price services recognized over time
1,100 1,245 2,608 3,071
Total revenue
$ 36,425 $ 31,166 $ 71,889 $ 65,026

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

September 30,
2020

December 31,
2019

June 30, 2021

December 31, 2020

Accounts receivables
$ 17,426 $ 11,639 $ 14,157 $ 13,923
Contract assets included in other current assets
$ 241 $ 103 $ 150 $ 311
Deferred Revenue
$ (17,328
)
$ (16,354
)
$ (16,848
)
$ (15,585
)

14
Table of Contents
Significant changes in contract assets and contract liabilities during the ~~nine~~six~~-months~~ months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 are as follows (in thousands):

Nine months ended
September 30, 2020

Nine months ended
September 30, 2019

Six months ended
June 30, 2021

Six months ended
June 30, 2020

Contract
Asset

Deferred
Revenue

Contract
Asset

Deferred
Revenue

Contract
Asset

Deferred
Revenue

Contract
Asset

Deferred
Revenue

Increase (Decrease)

Increase (Decrease)

Revenue recognized that was included in deferred revenue at beginning of year due to completion of services
$ - $ (15,366
)
$ - $ (15,214
)
$ - $ (11,605
)
$ - $ (11,934
)
Increases due to invoicing of client, net of amounts recognized as revenue
- 16,352 - 17,829 - 12,318 - 11,821
Decreases due to completion of services (or portion of services) and transferred to accounts receivable
(100
)
- (51
)
- (170
)
- (85
)
-
Increases due to acquisition
- 239 - -
Change due to cumulative catch-up adjustments arising from changes in expected contract consideration
(12
)
274 311 34
Decreases due to impairment
- - - - - - - -
Increases due to revenue recognized in the period with additional performance obligations before invoicing
238 - 131 - 9 - 102 -

We applied the practical expedient to not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Total remaining contract revenue for contracts with original duration of greater than one year expected to be recognized in the future related to performance obligations that are unsatisfied at ~~September~~June 30, ~~2020~~2021 approximated ~~$124,000,~~$1.6 million, of which ~~$51,000~~$590,000, $551,000, and ~~$73,000~~$458,000 are expected to be recognized during ~~2020~~2021,2022 and ~~2021,~~2023, respectively.

15

~~Table of Contents~~

(34)
INCOME TAXES

The effective tax rate for the three-month period ended ~~September~~June 30, ~~2020~~2021 increased to ~~17.9%~~24.8% expense compared to ~~17.2%~~9.8% for the same period in ~~2019~~2020, ~~primarily due to higher state income taxes since we are filing in more states. The effective tax rate~~and for the ~~nine~~six-month period ended ~~September~~June 30, ~~2020~~2021 ~~decreased~~increased to ~~8.1%~~22.7% expense compared to ~~18.7%~~2.3% for the same period in ~~2019~~2020 ~~primarily~~mainly due to decreased tax benefits from the exercise and vesting of ~~shared-based~~share-based compensation awards ~~partially offset by~~of $1.3 million and $4.1 million in the three and six-month periods, respectively. In addition, we have higher state income ~~taxes.~~taxes due to filing in more states.

In March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak which, among other things, contains numerous income tax provisions. As a result of the CARES Act, we have deferred ~~$800,000~~$1,313,000 of employer social security tax payments ~~into future years.~~ of which $656,000 we expect to pay in December 2021 and the remainder in December 2022. We have had no other impacts to our consolidated financial statements or related disclosures from the CARES Act.

In 2021, we adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). Among other clarifications and simplifications related to income tax accounting, this ASU simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences. The adoption of this standard had no material impact to our consolidated financial statements.

(45)
NOTES PAYABLE

Our long-term debt consists of the following:

September 30,
2020

December 31,
2019

June 30,
2021

December 31,
2020

(In thousands)

(In thousands)

Term Loans
$ 31,706 $ 34,281 $ 28,691 $ 30,713
Less: current portion
(4,008
)
(4,378
)
(4,168
)
(4,061
)
Less: unamortized debt issuance costs
(115
)
(108
)
(89
)
(105
)
Notes payable, net of current portion
$ 27,583 $ 29,795 $ 24,434 $ 26,547

15
Table of Contents
Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) ~~was amended and restated on~~ ~~May 28, 2020~~ ~~and~~ includes (i) a $30,000,000 revolving credit facility (the “Line of Credit”), (ii) a $33,002,069 term loan (the “Term Loan”) and (iii) a $15,000,000 delayed draw-dawn term facility (the “Delayed Draw Term Loan” and, together with the Line of Credit and the Term Loan, the “Credit Facilities”). ~~The~~We may use the Delayed Draw Term Loan~~may~~ ~~be used~~ to fund any permitted future business acquisitions or repurchases of our Common Stock and the Line of Credit ~~can be used~~ to fund ongoing working capital needs and for other general corporate purposes. ~~The amendment increased the Line of Credit from $15,000,000 to $30,000,000.~~

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

Borrowings under the Line of Credit and the Delayed Draw Term Loan, if any, bear interest at a floating rate equal to the 30-day London Interbank Offered Rate plus 225 basis points ~~(2.41%~~(2.34% at ~~September~~June 30, ~~2020)~~2021). Interest on the Line of Credit accrues and is payable monthly. Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in May 2023. As of ~~September~~June 30, ~~2020,~~2021, and December 31, ~~2019,~~2020, the Line of Credit did not have a balance. ~~There were~~We did nonot ~~borrowings~~borrow on the Line of Credit ~~for~~during the ~~three~~ ~~and~~ ~~nine~~six-month ~~periods~~period ended ~~September~~June 30, ~~2020.~~2021. ~~There~~We have ~~been 0 borrowings~~not borrowed on the Delayed Draw Term Loan since origination.

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

The Credit Agreement is collateralized by substantially all of our assets, subject to permitted liens and other agreed exceptions, and contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our Common Stock and acquisitions, subject in each case to certain exceptions. Pursuant to the Credit Agreement, we are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the term(s) of the Credit Facilities, which calculation excludes, unless our liquidity falls below a specified threshold, (i) any cash dividend in a fiscal quarter that, together with all other cash dividends paid or declared during such fiscal quarter, exceeds $5,500,000 in total cash dividends paid or declared, (ii) the portion of the purchase price for any permitted share repurchase of our shares paid with cash on hand, and (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand. We are also required to maintain a cash flow leverage ratio of 3.00x or less for all testing periods throughout the term(s) of the Credit Facilities. As of ~~September~~June 30, ~~2020,~~2021, we were in compliance with our financial covenants.

16

~~Table of Contents~~

(56)
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~~ ~~2001~~ ~~Equity Incentive Plan provided for the granting of stock options, stock appreciation rights,~~ We refer to our restricted stock ~~performance shares and other share-based~~ awards ~~and benefits up to an aggregate of 1,800,000 shares of our Common stock. Stock options granted could have been either nonqualified or incentive~~as “non-vested” stock ~~options. Stock options vest over~~ ~~one~~ to ~~five~~ ~~years following the date of grant and option terms are generally~~ ~~five~~ to ~~ten~~ ~~years following the date of grant. Due to the expiration of the~~ ~~2001~~ ~~Equity Incentive Plan at~~ ~~December 31, 2015,~~ ~~there were 0 shares of stock available for future grants.~~in these consolidated financial statements.

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

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 1,800,000 shares of our Common Stock. Stock options granted may be either incentive stock options or nonqualified stock options. Vesting terms vary with each grant and option terms are generally five to ten years following the date of grant.

16
Table of Contents
During the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, we granted options to purchase ~~70,471~~101,091 and ~~100,615~~70,471 shares of Common Stock, respectively. Options to purchase shares of common stock are typically granted with exercise prices equal to the fair value of the common stock on the date of grant. We do, in certain limited situations, grant options with exercise prices that exceed the fair value of the common shares on the date of grant. The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following weighted average assumptions:

2020

2019

2021

2020

Expected dividend yield at date of grant
1.84
%
2.60
%
2.15
%
1.84
%
Expected stock price volatility
33.62
%
34.01
%
34.85
%
33.62
%
Risk-free interest rate
1.35
%
2.38
%
0.91
%
1.35
%
Expected life of options (in years)
7.4 7.5 7.0 7.4

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.

17

~~Table of Contents~~
The following table summarizes stock option activity under the~~2001~~ ~~and~~ 2006 Equity Incentive Plans and the 2004 Director Plan for the ~~nine~~six-month period ended ~~September~~June 30, ~~2020:~~2021:

Number of
Options

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Terms
(Years)

Aggregate
Intrinsic
Value
(In
thousands)

Number of
Options

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Terms
(Years)

Aggregate
Intrinsic
Value
(In
thousands)

Outstanding at December 31, 2019
1,245,922 $ 18.08 4.45 $ 59,631
Outstanding at December 31, 2020
600,571 $ 25.31 5.58 $ 11,665
Granted
70,471 $ 62.23 101,091 $ 44.96
Exercised
(512,373
)
$ 13.96 $ 21,247 (68,284
)
$ 13.34 $ 2,122
Expired
(22,837
)
$ 9.74
Forfeited
(15,490
)
$ 48.42 (53,763
)
$ 40.48
Outstanding at September 30, 2020
788,530 $ 24.11 5.64 $ 20,637
Exercisable at September 30, 2020
388,876 $ 17.17 4.27 $ 12,480
Outstanding at June 30, 2021
556,778 $ 29.52 6.17 $ 9,942
Exercisable at June 30, 2021
290,668 $ 21.57 4.80 $ 7,314

As of ~~September~~June 30, ~~2020,~~2021, the total unrecognized compensation cost related to non-vested stock option awards was approximately ~~$1.9~~$1.8 million which was expected to be recognized over a weighted average period of ~~3.1~~2.42 years.

There was ~~$1.1 million and $1.6 million~~$538,000 of cash received from stock options exercised for the three ~~and~~ ~~nine~~-month ~~periods~~period ended ~~September~~June 30, 2020 ~~respectively,~~ and 0no cash ~~was~~ received from the exercise of options infor the same period in 2021. Cash received from stock options exercised for the six-month periods ofended ~~2019.~~June 30, 2021 and 2020, were $162,000 and $538,000 respectively. We recognized ~~$237,000~~$176,000 and ~~$235,000~~$216,000 of non-cash compensation ~~expense~~ for ~~the~~ three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$736,000~~$186,000 and ~~$699,000~~$498,000 of non-cash compensation ~~expense~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, related to options, which ~~are~~is included in direct fixed and selling, general and administrative expenses.

17
Table of Contents
During the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2021, we granted ~~6,005~~12,698 non-vested ~~restricted~~ shares of Common Stock under the 2006 Equity Incentive Plan. No ~~restricted~~ shares were granted during the ~~nine~~six months ended ~~September~~June 30, 2020. As of ~~September~~June 30, ~~2020,~~2021, we had ~~42,761~~12,698 non-vested ~~restricted~~ shares of Common Stock outstanding under the 2006 Equity Incentive Plan. These shares vest over five years following the date of grant and holders thereof are entitled to receive dividends from the date of grant, whether or not vested. The fair value of the awards is calculated as the fair market value of the shares on the date of grant. We recognized ~~$37,000~~$27,000 and ~~$73,000~~($75,000) of non-cash compensation ~~expense~~ for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$12,000~~($37,000) and ~~$218,000~~($26,000) of non-cash compensation ~~expense~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, related to this non-vested ~~restricted~~ stock, which ~~are~~is included in direct fixed and selling, general and administrative expenses. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, ~~34,622 shares vested and 6,793~~6,005 shares were forfeited.

The following table summarizes information regarding non-vested stock granted to associates under the 2006 Equity Incentive Plan for the ~~nine~~six-month period ended ~~September~~June 30, ~~2020:~~2021:

Common
Shares
Outstanding

Weighted
Average
Grant Date Fair
Value
Per Share

Common Shares
Outstanding

Weighted
Average
Grant Date Fair
Value
Per Share

Outstanding at December 31, 2019
84,176 $ 17.23
Outstanding at December 31, 2020
6,005 $ 38.30
Granted
- - 12,698 42.92
Vested
(34,622
)
13.17 -- --
Forfeited
(6,793
)
$ 36.80 (6,005
)
$ 38.30
Outstanding at September 30, 2020
42,761 $ 17.40
Outstanding at June 30, 2021
12,698 $ 42.92

As of ~~September~~June 30, ~~2020,~~2021, the total unrecognized compensation cost related to non-vested stock awards was approximately ~~$150,000~~$491,000 and is expected to be recognized over a weighted average period of ~~3.25~~4.52 years.

18

~~Table of Contents~~

(67)
GOODWILL AND OTHER INTANGIBLE ASSETS

The following represents a summary of changes in the carrying amount of goodwill for the ~~nine~~six-month period ended ~~September~~June 30, ~~2020:~~2021:

(In thousands)

Balance as of December 31, 2019
$ 57,935
Foreign currency translation
(60
)
Balance as of September 30, 2020
$ 57,875

Gross

Accumulated
Impairment

Net

(In thousands)

Balance as of December 31, 2020
$ 57,969 $ (714
)
$ 57,255
Goodwill acquired
4,340 - 4,340
Foreign currency translation
45 - 45
Balance at June 30, 2021
$ 62,354 (714
)
$ 61,640

Intangible assets consisted of the following:

September 30,
2020

December 31,
2019

June 30, 2021

December 31, 2020

(In thousands)

(In thousands)

Non-amortizing intangible assets:

Indefinite trade name
$ 1,191 $ 1,191 $ 1,191 $ 1,191
Amortizing intangible assets:

Client related
9,332 9,338
Customer related
9,450 9,344
Technology
1,360 1,360 1,960 1,360
Trade names
1,572 1,572 1,572 1,572
Total amortizing intangible assets
12,264 12,270 12,982 12,276
Accumulated amortization
(11,993
)
(11,733
)
(12,236
)
(12,057
)
Other intangible assets, net
$ 1,462 $ 1,728 $ 1,937 $ 1,410

See Note 2 for additional information related to goodwill and intangible assets included in the acquisition of PatientWisdom, Inc.

18
Table of Contents

(7)
~~PROPERTY AND EQUIPMENT~~

September 30,
2020

December 31,
2019

(In thousands)

Property and equipment
$ 45,143 $ 42,078
Accumulated depreciation
(32,876
)
(28,548
)
Property and equipment, net
$ 12,267 $ 13,530

(8)
PROPERTY AND EQUIPMENT

June 30, 2021

December 31, 2020

(In thousands)

Property and equipment
$ 45,226 $ 42,705
Accumulated depreciation
(33,701
)
(30,979
)
Property and equipment, net
$ 11,525 $ 11,726
(9)
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.

19

~~Table of Contents~~
We had ~~64,772~~103,704 and ~~27,284~~57,719 options of Common Stock for the three-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive. We had ~~56,812~~108,343 and ~~12,493~~52,789 options of Common Stock for the ~~nine~~six-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive.

For the Three Months Ended September 30

For the Nine Months Ended September 30

For the Three Months Ended
June 30

For the Six Months Ended
June 30

2020

2019

2020

2019

2021

2020

2021

2020

(In thousands, except per share data)

(In thousands, except per share data)

Numerator for net income per share – basic:
$ 9,578 $ 8,119 $ 29,048 $ 23,708 $ 8,944 $ 7,715 $ 18,176 $ 19,470
Net income

Allocation of distributed and undistributed income to unvested restricted stock shareholders
(17
)
(27
)
(55
)
(80
)
(5
)
(15
)
(10
)
(38
)
Net income attributable to common shareholders
9,561 8,092 28,993 23,628 8,939 7,700 18,166 19,432
Denominator for net income per share – basic:

Weighted average common shares outstanding – basic
25,219 24,827 25,113 24,794 25,426 25,148 25,420 25,060
Net income per share – basic
$ 0.38 $ 0.33 $ 1.15 $ 0.95 $ 0.35 $ 0.31 $ 0.71 $ 0.78
Numerator for net income per share – diluted:

Net income attributable to common shareholders for basic computation
9,561 8,092 28,993 23,628 8,939 7,700 18,166 19,432
Denominator for net income per share – diluted:

Weighted average common shares outstanding – basic
25,219 24,827 25,113 24,794 25,426 25,148 25,420 25,060
Weighted average effect of dilutive securities – stock options
485 914 588 830 219 532 236 642
Denominator for diluted earnings per share – adjusted weighted average shares
25,704 25,741 25,701 25,624 25,645 25,680 25,656 25,702
Net income per share - diluted
$ 0.37 $ 0.31 $ 1.13 $ 0.92 $ 0.35 $ 0.30 $ 0.71 $ 0.76

19
Table of Contents

(910)
LEASES
During the six months ending June 30, 2021, we entered into an agreement as lessor to sublease our Seattle office. Future minimum undiscounted cash receipts due under the agreement at June 30, 2021 are as follows (in thousands):

Operating
Lease

Remainder 2021
$ 67
2022
118
2023
122
2024
127
2025
65
Total minimum lease receipts
$ 499
(11)
RELATED PARTY

Until January 2020, one of our directors served as an officer and director of Ameritas Life Insurance Corp. (“Ameritas”) and ~~continues~~continued to serve on the board of directors of ~~Ameritas.~~ Ameritas for a portion of the three and six-month periods ended June 30, 2021. In connection with our regular assessment of our insurance-based associate benefits, which is conducted by an independent insurance broker, and the costs associated therewith, we purchase dental and vision insurance for certain of our associates from Ameritas. The total value of these purchases was ~~$67,000~~$73,000 and ~~$61,000~~$42,000 in the three-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively and ~~$181,000~~$144,000 and ~~$187,000~~$114,000 in the ~~nine~~six-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.
A director who began serving on our board in May 2021, currently serves as chief executive officer of Allina Health, a not-for-profit healthcare system. In connection with its routine business operations, Allina Health purchases certain of our products and services. Total revenue we earned from Allina Health in the three and six-month periods ended June 30, 2021 approximated $409,000 and $844,000, respectively.

A director, who served on our board through May 2020, also served as a board member of IMA Financial Group. In connection with our regular assessment of our liability coverage, during 2020 we began purchasing directors and officers and employment practices liability insurance through IMA Financial Group. These purchases totaled $478,000 in the ~~nine~~three and six-month ~~period~~periods ended ~~September~~June 30, ~~2020.~~2020, ~~There were 0 purchases of this insurance during the~~ ~~three~~~~-month period ended~~ ~~September 30, 2020.~~respectively.

During 2017, we acquired a cost method investment in convertible preferred stock of Practicing Excellence.com, Inc., a privately-held Delaware Corporation (“PX”), which is included in other non-current assets and is carried at cost, adjusted for changes resulting from observable price changes in orderly transactions of the same investment in PX, if any. We also have an agreement with PX which commenced in 2016 under which we act as a reseller of PX services and PX receives a portion of the revenues. The total revenue earned from the PX reseller agreement was ~~$84,000~~$17,000 and ~~$170,000~~$83,000 in the three-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$251,000~~$35,000 and ~~$493,000~~$166,000 in the ~~nine~~six-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. We will no longer earn revenue under this agreement after September 30, 2021 due to termination of the reseller agreement.

20
Table of Contents
(10)
~~SEGMENT INFORMATION~~
~~The Company’s~~ ~~six~~ ~~operating segments are aggregated into~~ ~~one~~ ~~reporting segment because they have similar economic characteristics and meet the other aggregation criteria from the FASB guidance on segment disclosure. The~~ ~~six~~ operating segments are Experience, The Governance Institute, Market Insights, Transparency, National Research Corporation Canada and Transitions, which offer a portfolio of solutions that address specific needs around market insight, experience, transparency and governance for healthcare providers, payers and other healthcare organizations. The table below presents entity-wide information regarding the Company’s assets, after elimination of intercompany balances by geographic area:

September 30,
2020

December 31,
2019

(In thousands)

Long-lived assets:

United States
$ 77,381 $ 78,906
Canada
2,499 2,622
Total
$ 79,880 $ 81,528
Total assets:

United States
$ 118,536 $ 95,668
Canada
8,710 15,017
Total
$ 127,246 $ 110,685
21

~~Table of Contents~~

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

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

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

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

The outbreak of COVID-19, and the associated responses, have impacted our business in a variety of ways. Governments have implemented business and travel restrictions and recommended social distancing and other ~~guidelines, and temporarily suspended the requirement for certain healthcare organizations to periodically assess the performance of the care they provide (although many providers continue to do so).~~guidelines. Many businesses, including many of our clients, have de-emphasized external business opportunities and restricted in-person meetings while shifting their attention toward addressing COVID-19 planning, business disruptions, higher costs, and revenue shortfalls. At NRC, our workforce remains intact and highly engaged. The vast majority of our associates are working remotely, and to date we have been capable of providing our services without significant disruption. We have made our facilities available for associates to return to work effective July 1, 2021 at their discretion. Historically, we have relied on national travel as part of our sales efforts, but as a result of the pandemic we have placed ~~an indefinite~~a temporary hold on all company related travel. We have recently modified our travel policy and expect limited travel to resume in the third quarter of 2021. The duration and severity of the COVID-19 pandemic and associated ~~responses~~impacts on our business, including the impact on our revenue, expenses, and cash flows, cannot be predicted at this time. ~~Some clients cost reducing measures have included and could continue to include reducing or eliminating the services they purchase from us.~~ Based on the foregoing, we do not expect our recent revenue and earnings growth to be indicative of future expectations. We do, however, expect to have adequate sources of liquidity to meet our current and expected needs for the foreseeable future.

We received $2.4 million in insurance recoveries in the nine-month period ended September 30, 2020, and $400,000 was paid directly to certain vendors from the insurer related to the February incident. These were recorded in selling general and administrative expenses. In the three-months ended September 30, 2020 we recorded an insurance recoverable of $913,000 from the February incident for the final insurance loss claim. Of this amount, we expect $866,000 to be reimbursed directly to us and the remainder to be paid to certain vendors. We recorded $533,000, representing reimbursement for lost revenues, as insurance recoveries and the remainder as a reduction to operating expenses. We expect to receive the insurance proceeds in the three-month period ended December 31, 2020. Due to insurance recoveries, the February incident did not have a significant impact on our consolidated financial statements.
2221

Table of Contents

Results of Operations

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

Due to changes in our corporate reporting structure in 2021, certain associates moved between departments. As a result, the related salaries and benefits and company incentive expenses are included in Selling, general and administrative expenses in 2021 instead of Direct as in the 2020 period. The total amount of the reclassified expenses approximates $500,000 in each quarter.

Three months ended
September 30,

Nine months ended
September 30,

2020

2019

2020

2019

Revenue:
100.0
%
100.0
%
100.0
%
100.0
%

Insurance recoveries: 1.6 -- 0.5 --

Operating expenses:

Direct
36.4 37.3 36.9 37.0
Selling, general and administrative
23.8 26.8 25.9 25.9
Depreciation and amortization
5.5 4.4 4.7 4.5
Total operating expenses
65.7 68.5 67.5 67.4

Operating income
35.9
%
31.5
%
33.0
%
32.6
%

23

~~Table of Contents~~

Three months ended June 30,

Six months ended June 30,

2021

2020

2021

2020

Revenue:
100.0
%
100.0
%
100.0
%
100.0
%

Operating expenses:

Direct
34.4 37.3 34.1 37.2
Selling, general and administrative
27.5 28.4 27.2 27.1
Depreciation and amortization
4.5 4.5 5.0 4.3
Total operating expenses
66.4 70.2 66.3 68.6

Operating income
33.6
%
29.8
%
33.7
%
31.4
%

Three Months Ended ~~September~~June 30, ~~2020,~~2021, Compared to Three Months Ended ~~September~~June 30, ~~2019~~2020

Revenue. Revenue for the three-month period ended ~~September~~June 30, ~~2020,~~2021, increased ~~3.1%~~16.9% to ~~$33.5~~$36.4 million, compared to ~~$32.5~~$31.2 million, in the three-month period ended ~~September~~June 30, ~~2019. The increase~~2020.This was primarily due to new ~~client~~customer sales, ~~and~~as well as increases in sales to the existing client ~~base sales, partially offset by~~base. During the same period in 2020, we also experienced revenue reductions ~~due to~~from COVID-19 as some clients ~~have~~ reduced or eliminated ~~the~~ services they ~~purchase~~purchased from us as cost reducing measures.

~~Insurance recoveries.~~ ~~Insurance recoveries were recorded in the three-month period ended September 30, 2020 representing $533,000 in lost revenue.~~
22
Table of Contents

Direct expenses. Direct expenses increased ~~0.7%~~7.8% to ~~$12.2~~$12.5 million for the three-month period ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$12.1~~$11.6 million for the same period in ~~2019.~~2020. This was due to an increase in ~~fixed~~variable expenses of ~~$872,000,~~$958,000, partially offset by a decrease in ~~variable~~fixed expenses of ~~$790,000. Fixed~~$56,000. Variable expenses increased ~~primarily as a result of increased salary and benefit costs in the client service and information technology areas,~~due to higher survey contracted services, partially offset by lower travel and meals costs due to restricted travel associated with COVID-19, reduced contracted services mainly due to insurance recoveries related to the February incident and lower company incentive event costs. Variable expenses decreased due to less postage, printing, and paper costs primarily resulting from ~~increased use of digital~~changes in survey ~~methodologies and decreased conference~~methodologies. Conference expenses due to rescheduling and virtually hosting the conferences on account of COVID-19. Direct expenses as a percentage of revenue were 36.4% in the three-month period ended September 30, 2020 and 37.3% for the same period in 2019 as expenses increased ~~by 0.7% while revenue for the same period increased by 3.1% in the September 30, 2020 period compared to the same period in 2019.~~
~~Selling, general and administrative expenses~~. Selling, general and administrative expenses decreased 8.6% to $8.0 million for the three-month period ended September 30, 2020, compared to $8.7 million for the same period in 2019, primarily due to lower travel and meals costs of $513,000 due to restricted travel associated with COVID-19, decreased legal and accounting costs of $414,000 due to timing of tax and audit related work, decreases in other taxes of $234,000 due to a favorable sales tax ruling allowing the reversal of a previous sales tax accrual, decreased salary and benefit costs of $67,000, and decreased bad debt expense of $64,000, partially offset by increased software and platform hosting expenses of $357,000 and additional contracted services of $248,000. Selling, general and administrative expenses as a percentage of revenue were 23.8% in the three-month period ended September 30, 2020 and 26.8% for the same period in 2019 as these expenses decreased by 8.6% and revenue increased by 3.1% in the September 30, 2020 period compared to the same period in 2019.
~~Depreciation and amortization.~~ ~~Depreciation and amortization increased 29.2% to $1.8 million for the three-month period ended September 30, 2020, compared to $1.4 million for the same period in 2019 primarily~~ due to the ~~change~~timing and shift in ~~the estimated useful lives~~attendance format of certain assets. Depreciation and amortization expense as a percentage of revenue was 5.5% for the three-month period ended September 30, 2020, and 4.4% for the same period in 2019 as these expenses increased by 29.2% and revenue increased by 3.1% in the September 30, 2020 period compared to the same period in 2019.
~~Other income (expense)~~. Other expense, net decreased to $355,000 for the three-month period ended September 30, 2020, compared to other expense, net of $411,000 for the same period in 2019. Interest expense decreased to $451,000 in the 2020 period from $510,000 for the same period in 2019 primarily due to the declining balance on our Term Loan and no borrowings on our Line of Credit during the 2020 period. Other non-interest expense decreased to other income of $96,000 in the 2020 period compared to other income of $99,000 for the same period of 2019 primarily due to a gain on insurance recoveries for property damage of $260,000 and the revaluation on intercompany transactions due to changes in the foreign exchange rate.
~~Income tax provision.~~ Income tax provision was $2.1 million for the three-month period ended September 30, 2020, compared to $1.7 million for the same period in 2019. The effective tax rate for the three-month period ended September 30, 2020 increased to 17.9% compared to 17.2% for the same period in 2019 primarily due to higher state income taxes.
24

~~Table of Contents~~
~~Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019~~
~~Revenue~~. Revenue for the nine-month period ended September 30, 2020, increased 3.3% to $98.5 million, compared to $95.4 million in the nine-month period ended September 30, 2019. The increase was due to new client sales and existing client base sales, partially offset by revenue reductions due to COVID-19 as some clients have reduced or eliminated the services they purchase from us as cost reducing measures.
~~Insurance recoveries.~~ ~~Insurance recoveries were recorded in the nine-month period ended September 30, 2020 representing $533,000 in lost revenue.~~
~~Direct expenses~~. Direct expenses increased 3.1% to $36.4 million for the nine-month period ended September 30, 2020, compared to $35.3 million in the same period in 2019. This was due to an increase in fixed expenses of $3.5 million, partially offset by a decrease in variable expenses of $2.4 million.conferences. Fixed expenses ~~increased~~decreased primarily as a result of ~~increased~~lower salary and benefit costs, decreased equipment lease costs, and ~~contracted services~~reduced company incentive event costs ~~in the client service and information technology areas,~~ partially offset by ~~decreased travel~~higher software and meals costs due to restricted travel from COVID-19. Variable expense decreased mainly due to less postage, printing and paper costs primarily resulting from increased use of digital survey methodologies and decreased conference expenses due to rescheduling and virtuallyplatform hosting ~~the conferences on account of COVID-19.~~expenses. Direct expenses decreased as a percentage of revenue to ~~36.9%~~34.4% in ~~the nine-month period ended September 30,~~2021, from 37.3% in 2020, ~~compared to 37.0% during the same period of 2019,~~ as ~~these expenses~~revenue increased by ~~3.1%~~16.9% while ~~revenue~~direct expenses for the same period increased by ~~3.3%~~7.8%.

Selling, general and administrative expenses. Selling, general and administrative expenses increased ~~3.3%~~13.1% to ~~$25.6~~$10.0 million for the ~~nine-month~~three-month period ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$24.7~~$8.9 million for the same period in ~~2019,~~2020, primarily due to ~~additional salary~~increases in public company and benefit costs of $936,000, an increase in software license fees and platform hosting expenses of $915,000, an increase in contracted services of $377,000, additional business insurance costs of $201,000, and an increase in company incentive event costs of $147,000. These were partially offset by a decrease in travel and meals costs of $1.1 million due to restricted travel associated with COVID-19, a decrease in marketing costs of $204,000, a decrease inother legal and accounting costs of ~~$258,000 due to timing~~$881,000, higher contracted services of ~~tax~~$225,000 and ~~audit related work, and a decrease in other taxes~~increased business insurance of ~~$170,000 due a to favorable sales tax ruling allowing the reversal of a previous sales tax accrual.~~$75,000. Selling, general and administrative expenses decreased as a percentage of revenue ~~remained at 25.9%~~to 27.5% in 2021, from 28.4% in 2020, as revenue increased by 16.9% while selling, general and administrative expenses for the ~~nine-month periods ended September 30, 2019 and 2020.~~same period increased by 13.1%.

Depreciation, amortization and ~~amortization.~~impairment. Depreciation, amortization and ~~amortization expenses increased 7.9% to $4.6~~impairment was $1.6 million for the ~~nine-month~~three-month period ended ~~September~~June 30, ~~2020, compared to $4.3~~2021 and $1.4 million for the ~~same~~three-month period ~~in 2019,~~ended June 30, 2020. The increase was primarily due to our transformation to a distributed workforce environment, which includes building renovations in our headquarters. Specifically, depreciation expense increased by $159,000 due to shortening the ~~change in~~estimated useful lives of certain building assets. Depreciation, amortization and ~~amortization expenses as a percentage~~impairment expense was 4.5% of revenue ~~were 4.7%~~ for the ~~nine-month~~three-month period ended ~~September~~June 30, ~~2020~~2021 and ~~4.5% for the same period in 2019 as these expenses increased by 7.9% while revenue increased by 3.3% in the 2020 period compared to the 2019 period.~~2020.

Other income (expense). Other expense, net decreased to ~~$897,000~~$345,000 for the ~~nine-month~~three-month period ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$1.9 million of~~ other expense, net of $718,000 for the same period in ~~2019.~~2020, primarily due to decreased interest expense and foreign exchange rate changes. Interest expense decreased to ~~$1.4 million~~$423,000 in ~~the 2020 period~~2021 from ~~$1.6 million~~$450,000 for the same period in ~~2019~~2020, primarily due to the declining balance on our ~~Term Loan and no borrowings on our Line of Credit during the 2020 period.~~term loan. Other ~~non-interest expense changed~~income increased to ~~other income of $469,000 for the nine-month period ended September 30, 2020~~$75,000 in 2021 compared to other expense of ~~$306,000~~$270,000 for the same period ~~in 2019~~of 2020, primarily due to ~~a gain~~revaluation on ~~insurance recoveries for property damage of $260,000 and the revaluation of~~ intercompany transactions ~~for~~due to changes in the Canadian to U.S. dollar foreign exchange ~~rates.~~rate.

Income tax provision. Income tax provision was ~~$2.5~~$3.0 million for the ~~nine-month~~three-month period ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$5.4 million~~$842,000 for the same period in ~~2019.~~2020. The effective tax rate for the ~~nine-month~~three-month period ended ~~September~~June 30, ~~2020, decreased~~2021 increased to ~~an 8.1% effective tax rate from an 18.7% effective tax rate for~~24.8% compared to 9.8% during the same period in ~~2019~~2020, primarily due to ~~increased~~decreased tax benefits of ~~$3.8~~$1.3 million from the exercise and vesting of share-based compensation awards ~~partially offset by~~and higher state income taxes.
Six Months Ended June 30, 2021, Compared to Six Months Ended June 30, 2020
Revenue. Revenue for the six-month period ended June 30, 2021, increased 10.6% to $71.9 million, compared to $65.0 million in the six-month period ended June 30, 2020. The increase was primarily due to new customer sales, as well as increases in sales to the existing client base. During the same period in 2020, we also experienced revenue reductions from COVID-19 as some clients reduced or eliminated services they purchased from us as cost reducing measures.

2523

Table of Contents

Direct expenses. Direct expenses increased 1.2% to $24.5 million for the six-month period ended June 30, 2021, compared to $24.2 million in the same period in 2020. This was due to an increase in variable expenses of $855,000, partially offset by a decrease in fixed expenses of $560,000. Variable expenses increased due to higher survey contracted services and salary and benefit costs, partially offset by less postage, printing, and paper costs primarily resulting from changes in survey methodologies. Conference expenses also decreased due to the timing and shift in attendance format. Fixed expenses decreased primarily as a result of decreased contracted technology services, lower travel and meal costs due to restricted travel associated with COVID-19, lower company incentive events and equipment lease costs partially offset by higher software and platform hosting expenses. Direct expenses decreased as a percentage of revenue to 34.1% in 2021, compared to 37.2% during the same period of 2020, as direct expenses increased by 1.2% while revenue for the same period increased by 10.6%.
Selling, general and administrative expenses. Selling, general and administrative expenses increased 11.0% to $19.5 million for the six-month period ended June 30, 2021, compared to $17.6 million for the same period in 2020, primarily due to increases in public company and other legal and accounting costs of $963,000, contracted services of $640,000, software and platform hosting expenses of $282,000, increased salary and benefit costs of $185,000, higher building lease costs of $130,000, and additional professional development costs of $92,000. These were partially offset by lower travel and meal costs of $375,000 due to restricted travel associated with COVID-19. Selling, general and administrative expenses increased as a percentage of revenue to 27.2% in 2021, from 27.1% in 2020, as revenue increased by 10.6% while selling, general and administrative expenses for the same period increased by 11.0%.
Depreciation, amortization and impairment. Depreciation, amortization and impairment was $3.6 million for the six-month period ended June 30, 2021 and $2.8 million for the six-month period ended June 30, 2020. The increase was primarily due to our transformation to a distributed workforce environment, which includes building renovations in our headquarters, as well as subleasing a remote office location which resulted in an ROU asset impairment of $324,000. Depreciation expense increased by $353,000 due to shortening the estimated useful lives of certain building assets. Depreciation, amortization and impairment expense increased as a percentage of revenue to 5.0% for the six-month period ended June 30, 2021 from to 4.3% in 2020, as revenue increased by 10.6% while depreciation, amortization and impairment expenses for the same period increased by 30.3%.
Other income (expense). Other expense, net increased to $753,000 for the six-month period ended June 30, 2021, compared to other expense, net of $541,000 for the same period in 2020, primarily due to decreased interest expense and foreign exchange rate changes. Interest expense decreased to $855,000 in 2021 from $914,000 for the same period in 2020, primarily due to the declining balance on our term loan. Other income decreased to $96,000 in 2021 compared to $360,000 for the same period of 2020, primarily due to revaluation on intercompany transactions due to changes in the Canadian to U.S. dollar foreign exchange rate.
Income tax provision. Income tax provision was $5.3 million for the six-month period ended June 30, 2021, compared to a $458,000 for the same period in 2020. The effective tax rate for the six-month period ended June 30, 2021 increased to 22.7%, compared to 2.3% for the same period in 2020, mainly due to decreased tax benefits of $4.1 million from the exercise and vesting of share-based compensation awards and higher state income taxes.
Liquidity and Capital Resources

We believe that our existing sources of liquidity, including cash and cash equivalents, borrowing availability, and operating cash flows, will be sufficient to meet our ~~current~~projected capital and ~~expected~~debt maturity needs for the foreseeable future. ~~Cash dividends in the aggregate amount of $10.5 million~~Dividends were declared and paid in ~~the nine-month period ended September 30, 2020~~April 2021 of $3.1 million, which were funded with cash on hand. NoWe also declared $3.1 million of dividends ~~were declared~~ in ~~the three-month period ended September 30, 2020.~~June 2021 and paid such dividends in July 2021, also funded with cash on hand. Our board of directors considers whether to declare a dividend and the amount of any dividends declared on a quarterly basis.

As of ~~September~~June 30, ~~2020,~~2021, our principal sources of liquidity included ~~$21.9~~$48.9 million of cash and cash equivalents, up to $30 million of unused borrowings under our ~~Line~~line of ~~Credit~~credit and up to $15 million on our ~~Delayed Draw Term Loan.~~delayed draw term note. Of this cash, ~~$4.4~~$6.1 million was held in Canada. ~~On May 28, 2020,~~We can use the ~~credit agreement with FNB was amended. As part of this amendment the Line of Credit was expanded from $15 million to $30 million. The Delayed Draw Term Loan can~~delayed draw term note only ~~be used~~ to fund permitted future business acquisitions or repurchasing our Common Stock.

24
Table of Contents
Working Capital

We had a working capital ~~balance~~ of ~~$15.3~~$27.6 million and ~~deficit of $9.0~~$22.4 million on ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.
The change was primarily due to increases in cash and cash equivalents of ~~$8.3~~$14.2 million ~~trade accounts receivable of $5.8 million, income taxes receivable of $2.6 million, insurance recoverable of $913,000,~~ and prepaid expenses of ~~$560,000;~~$930,000 and decreases in accounts payable of $757,000. This was partially offset by increases in dividends payable of ~~$5.2~~$3.1 million, deferred acquisition consideration of $2.0 million, accrued expenses of ~~$792,000, and accounts payable of $554,000. These were partially offset by an increase in~~$1.4 million, deferred revenue of ~~$974,000.~~$1.3 million, accrued wages and bonuses of $615,000, income taxes payable of $512,000, and decreases of $1.1 million in income taxes receivable and $814,000 in other current assets.

Trade accounts receivable increased due to the timing of billings and collections on new and renewal contracts. The COVID-19 pandemic has resulted in an increase in accounts receivables as some clients have delayed payments or are slower paying due to such clients’ cash-flow issues. An insurance recoverable was booked as result of the final loss claim made with respect to the February incident. Income taxes receivable and payable changed due to the timing of income tax payments. ~~Accounts~~Prepaid expenses, accounts payable and accrued expenses ~~and prepaid expenses~~ changed ~~due to timing of payment for services and supplies. Dividends payable varies~~ due to the timing of ~~dividends being declared~~payments, and ~~paid~~other current assets changed due to the timing of receipts on state tax incentives. Accrued wages and bonuses has grown mainly due to the deferral of social security tax payments as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The deferred acquisition consideration was due to the PatientWisdom acquisition in the six-month period ended June 30, 2021, as further described in Note 2 to our ~~board of directors’ determination of whether to pay dividends.~~condensed consolidated financial statements. Our working capital is significantly impacted by our large deferred revenue balances which will vary based on the timing and frequency of billings on annual agreements. The deferred revenue balances as of ~~September~~June 30, ~~2020,~~2021, and December 31, ~~2019,~~2020, were ~~$17.3~~$16.8 million and ~~$16.4~~$15.6 million, respectively.

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

Cash Flow Analysis

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

Nine Months Ended September 30,

2020

2019

(In thousands)

Provided by operating activities
$ 24,419 $ 28,974
Used in investing activities
(2,175
)
(3,429
)
Used in financing activities
(13,582
)
(30,575
)
Effect of exchange rate change on cash
(324
)
397
Net change in cash and cash equivalents
8,338 (4,633
)
Cash and cash equivalents at end of period
$ 21,855 $ 8,358
26

~~Table of Contents~~

Six Months Ended June 30,

2021

2020

(In thousands)

Provided by operating activities
$ 25,566 $ 13,903
Used in investing activities
(5,805
)
(1,427
)
Used in financing activities
(5,620
)
(13,562
)
Effect of exchange rate change on cash
68 (474
)
Net change in cash and cash equivalents
14,209 (1,560
)
Cash and cash equivalents at end of period
$ 48,899 $ 11,957

Cash Flows from Operating Activities

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

Net cash provided by operating activities was ~~$24.4~~$25.6 million for the ~~nine-month~~six-month period ended ~~September~~June 30, 2021, which included net income of $18.2 million, plus non-cash charges (benefits) for deferred income taxes, depreciation, amortization and impairment, reserve for uncertain tax positions, non-cash share-based compensation, and loss on disposal of property and equipment totaling $4.1 million. Changes in working capital increased cash flows from operating activities by $3.3 million, primarily from an increase in deferred revenue and accrued expenses, wages and bonuses and net changes in income taxes receivable and payable; partially offset by increases in prepaid expenses and other current assets and decreases in accounts payable. Deferred revenue will vary based on the timing and frequency of billings on annual agreements and income taxes receivable and payable vary based on timing of payments. Accrued expenses, wages and bonuses, which fluctuate due to the timing of payment, included the deferral of employer payroll taxes from the CARES Act. Prepaid expenses and other current assets and accounts payable fluctuate due to the timing of payments of prepaids and accounts payable.
25
Table of Contents
Net cash provided by operating activities was $13.9 million for the six-month period ended June 30, 2020, which included net income of ~~$29.0~~$19.5 million, plus non-cash charges (benefits) for deferred income taxes, depreciation and amortization, reserve for uncertain tax positions ~~gain on insurance recoveries for damaged property,~~ and share-based compensation and related taxes totaling ~~$5.1~~$3.7 million. Net changes in assets and liabilities decreased cash flows from operating activities by ~~$9.8~~$9.3 million, primarily due to increases in trade accounts receivable, prepaid and other current assets, ~~insurance recoverable, income taxes receivable and payable,~~ and deferred contract costs, as well as decreases in accounts payable, income taxes receivable and ~~operating lease assets and liabilities, net,~~payable, which fluctuate due to the timing of payments ~~for~~of prepaids, accounts payable, accrued expenses, direct and incremental costs directly related to sales and the timing of income tax payments. Deferred revenue also decreased, which will vary based on the timing and frequency of billings on annual agreements. These decreases to cash flows were partially offset by increases in accrued expenses, wages, bonuses, and profit ~~sharing and deferred revenue. Deferred revenue will vary based on the timing and frequency of billings on annual agreements.~~
Net cash provided by operating activities was $29.0 million for the nine-month period ended September 30, 2019, which included net income of $23.7 million, plus non-cash charges (benefits) for deferred income taxes, depreciation and amortization, reserve for uncertain tax positions, non-cash share-based compensation expense, and loss on disposal of property and equipment totaling $5.9 million. Net changes in assets and liabilities decreased cash flows from operating activities by $633,000, primarily due to increases in trade accounts receivable, deferred contract costs, net, and income taxes receivable and payable. These were partially offset by increases in deferred revenue and decreases in prepaid expenses and other current assets.sharing.

Cash Flows from Investing Activities

Net cash used for investing activities was $5.8 million in the six months ended June 30, 2021. These expenditures consisted of ~~$2.2~~$3.0 million for acquisition consideration and ~~$3.4~~$2.8 million purchases of property and equipment including computer software and hardware, leasehold improvements and furniture and equipment.
Net cash of $1.4 million was used for investing activities in the ~~nine~~six months ended ~~September~~June 30, ~~2020 and 2019, respectively.~~2020. These expenditures consisted mainly of computer software classified in property and equipment. We received $260,000 in insurance proceeds for damaged property and equipment due to a flooding. We expect slightly higher capital expenditure purchases for the remainder of 2020 consisting primarily of computer software and hardware and building improvements to be funded through cash generated from operations.

Cash Flows from Financing Activities

Net cash used in financing activities was $5.6 million in the six months ended June 30, 2021. We used cash to repay borrowings under the term note totaling $2.0 million and for finance lease obligations of $246,000. We also used cash to pay payroll tax withholdings related to share-based compensation of $460,000, partially offset by $162,000 of proceeds from the exercise of share-based awards. We also used cash to pay $3.1 million of dividends on our common stock.
Net cash used in financing activities was $13.6 million in the ~~nine~~six months ended ~~September~~June 30, 2020. ~~Cash was~~We used cash to repay borrowings under the term notes totaling ~~$2.6~~$1.6 million ~~pay debt issuance costs of $36,000~~ and for finance lease obligations of ~~$187,000. Cash was~~$124,000. We also used cash to pay $10.5 million of dividends on our common stock, and to pay payroll tax withholdings related to share-based compensation of $1.9 million. These decreases to cash flows were partially offset by proceeds from the exercise of stock options of ~~$1.6 million.~~
Net cash used in financing activities was $30.6 million in the nine months ended September 30, 2019. Cash was used to repay borrowings on the line of credit of $21.0 million, repay borrowings under the note payable totaling $2.8 million, and for finance lease obligations of $223,000. Cash was also used to pay $26.6 million of dividends on common stock, and to pay payroll tax withholdings related to share-based compensation of $1.0 million. Cash was provided from proceeds of the line of credit of $21.0 million.$538,000.

The effect of changes in foreign exchange rates increased cash and cash equivalents by $68,000 in the six months ended June 30, 2021 and decreased cash and cash equivalents by ~~$324,000~~$474,000 in the ~~nine~~six months ended ~~September~~June 30, ~~2020 and increased cash and cash equivalents by $397,000 in the nine months ended September 30, 2019.~~2020.

Capital Expenditures

Cash paid for capital expenditures was ~~$2.4~~$2.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. These expenditures consisted mainly of computer software ~~classified in property~~and hardware, leasehold improvements and furniture and equipment. ~~We expect slightly higher capital expenditure purchases~~In addition to continued expenditures for ~~the remainder of 2020 consisting primarily of~~ computer software and hardware ~~and~~in 2021, we expect substantially higher capital expenditures for building improvements, with the total amount yet to be determined, which we expect to be funded through cash generated from operations.

27

~~Table of Contents~~
Debt and Equity

Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) ~~was amended and restated on May 28, 2020 and~~ includes (i) a $30,000,000 revolving credit facility (the “Line of Credit”), (ii) a $33,002,069 term loan (the “Term Loan”) and (iii) a $15,000,000 delayed draw-dawn term facility (the “Delayed Draw Term Loan” and, together with the Line of Credit and the Term Loan, the “Credit Facilities”). ~~The~~We may use the Delayed Draw Term Loan ~~may be used~~ to fund any permitted future business acquisitions or repurchases of our Common Stock and the Line of Credit ~~can be used~~ to fund ongoing working capital needs and for other general corporate purposes. ~~The amendment increased the Line~~
26
Table of ~~Credit from $15,000,000 to $30,000,000.~~
Contents

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

Borrowings under the Line of Credit and the Delayed Draw Term Loan, if any, bear interest at a floating rate equal to the 30-day London Interbank Offered Rate plus 225 basis points ~~(2.41%~~(2.34% at ~~September~~June 30, ~~2020)~~2021). Interest on the Line of Credit accrues and is payable monthly. Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in May 2023. As of ~~September~~June 30, ~~2020, and December 31, 2019,~~2021, the Line of Credit did not have a balance. ~~There were no borrowings~~We did not borrow on the Line of Credit ~~for three and nine-month periods~~during the six-month period ended ~~September~~June 30, ~~2020. There~~2021. We have ~~been no borrowings~~not borrowed on the Delayed Draw Term Loan since origination.

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

The Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our Common Stock and acquisitions, subject in each case to certain exceptions. Pursuant to the Credit Agreement, we are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the term(s) of the Credit Facilities, which calculation excludes, unless our liquidity falls below a specified threshold, (i) any cash dividend in a fiscal quarter that, together with all other cash dividends paid or declared during such fiscal quarter, exceeds $5,500,000 in total cash dividends paid or declared, (ii) the portion of the purchase price for any permitted share repurchase of our shares paid with cash on hand, and (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand. We are also required to maintain a cash flow leverage ratio of 3.00x or less for all testing periods throughout the term(s) of the Credit Facilities. As of ~~September~~June 30, ~~2020,~~2021, we were in compliance with our financial covenants.

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

The Credit Facilities are secured, subject to permitted liens and other agreed upon exceptions, by a first-priority lien on and perfected security interest in substantially all of our and 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).

LIBOR is currently expected to be phased out beginning in 2021 through 2023. The one-week and two-month LIBOR rates are expected to retire on December 31, 2021. The overnight, one-month, three-month, six-month and 12-month LIBOR rates are expected to be published through June 2023. We are required to pay interest on borrowings under our Line of Credit and Delayed Draw Term Loan at floating rates based on the one-month LIBOR. Future debt that we may incur may also require that we pay interest based upon LIBOR. Under the terms of our Credit Agreement with FNB, if LIBOR becomes unavailable during the term of the agreement, FNB may, in its discretion and in a manner consistent with market practice, designate a substitute index. We currently expect that the determination of interest under our Credit Agreement would be revised as to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that if LIBOR is phased out or transitioned, the changes to the determination of interest under our agreements would approximate the current calculation in accordance with LIBOR. We do not know what standard, if any, will replace LIBOR if it is phased out or transitioned.

28

~~Table of Contents~~
We have finance leases for computer equipment, office equipment, printing and inserting equipment. The balance of the finance leases as of ~~September~~June 30, ~~2020~~2021, was ~~$1.4~~$1.0 million.

Shareholders’ equity increased ~~$23.8~~$12.1 million to ~~$56.7~~$76.4 million at ~~September~~June 30, ~~2020,~~2021, from ~~$32.9~~$64.3 million at December 31, ~~2019.~~2020. The increase was mainly due to net income of ~~$29.0~~$18.2 million, changes in the cumulative translation adjustment of $130,000, and ~~share-based~~shared-based compensation expense of ~~$747,000.~~$149,000. This was partially offset by dividends declared of ~~$5.3~~$6.1 million and share repurchases exceeding the cost of stock options exercised of ~~$266,000 and changes in the cumulative translation adjustment of $414,000.~~$298,000.

~~A sales tax accrual~~
27
Table of $775,000 was recorded in 2019 for sales taxes that should have been collected from clients in 2019 and certain previous years. We received a revenue ruling from the state of Washington noting that our services are not subject to retail sales tax, and therefore, reversed $268,000 of sales tax accrual for the state of Washington in the third quarter of 2020. As of September 30, 2020, we have completed voluntary disclosure agreements with certain states, remitted past due sales tax, are remitting current sales tax timely, are collecting sales tax from clients, and no accrual for past due sales tax remains. State and local jurisdictions have differing rules and regulations governing sales, use, and other taxes and these rules and regulations can be complex and subject to varying interpretations that may change over time. As a result, we could face the possibility of tax assessment and audits, and our liability for these taxes and associated interest and penalties could exceed our original estimates.
Contents

Contractual Obligations

We had contractual obligations to make payments in the following amounts in the future as of ~~September~~June 30, ~~2020:~~2021:

Contractual Obligations⁽¹⁾

Total
Payments

Less than
One Year

One to
Three Years

Three to
Five Years

After
Five Years

Contractual Obligations(1)

Total
Payments

Less than
One Year

One to
Three Years

Three to
Five Years

After
Five Years

(In thousands)

Operating leases
$ 1,369 $ 126 $ 677 $ 448 $ 118 $ 1,666 $ 577 $ 871 $ 218 $ --
Finance leases
1,435 147 978 310 -- 1,056 510 545 1 --
Uncertain tax positions⁽²⁾
-- -- -- -- --
Uncertain tax positions(2)
-- -- -- -- --
Long-term debt
36,933 1,389 11,112 11,112 13,320 32,766 2,778 11,112 18,876 --
Total
$ 39,737 $ 1,662 $ 12,767 $ 11,870 $ 13,438 $ 35,488 $ 3,865 $ 12,528 $ 19,095 $ --

⁽¹⁾
Amounts are inclusive of interest payments, where applicable.
⁽²⁾
We have ~~$748,000~~$939,000 in liabilities associated with uncertain tax positions. We are unable to reasonably estimate the expected cash settlement dates of these uncertain tax positions with the taxing authorities.

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

Stock Repurchase Program

Our Board of Directors authorized the repurchase of up to 2,250,000 then-existing class A shares and 375,000 then-existing class B shares of common stock in the open market or in privately negotiated transactions under a stock repurchase program that was originally approved in February 2006 and subsequently amended in May 2013. In connection with the Recapitalization in April 2018, our Board of Directors further amended the stock repurchase program to eliminate the repurchase of the former class B common stock. As of ~~September~~June 30, ~~2020,~~2021, the remaining number of shares of Common Stock that could be purchased under this authorization was 280,491 shares.

Critical Accounting Estimates

There have been no changes to our critical accounting estimates described in the Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 that have a material impact on our Condensed Consolidated Financial Statements and the related Notes.

29

~~Table of Contents~~

ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk

There are no material changes to the disclosures regarding our market risk exposures made in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

ITEM 4.
Controls and Procedures

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

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended ~~September~~June 30, ~~2020,~~2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3028

Table of Contents

PART II –~~PART II –~~ Other Information

ITEM 1.
Legal Proceedings

From time to time, we are involved in certain claims and litigation arising in the normal course of business. Management assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. ~~There were no outstanding~~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, ~~at September 30, 2020.~~inquiries and investigations, however, can impose a significant burden on management and employees, may include costly defense and settlement costs, and could cause harm to our reputation and brand, and other factors.

ITEM 1A.
Risk Factors

The significant risk factors known to us that could materially adversely affect our business, financial condition, or operating results are described in Part I, Item 2: Management’s Discussion and ~~analysis~~Analysis of Financial Condition and Results of Operations and in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, ~~2019, and in Part II, Item 1A of our quarterly report on Form 10-Q for the quarter ended March 31,~~ 2020.

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

In February 2006 and subsequently amended in May 2013, our Board of Directors authorized the repurchase of 2,250,000 shares of class A common stock and 375,000 shares of class B common stock in the open market or in privately negotiated transactions. In connection with the Recapitalization in April 2018, our Board of Directors further amended the stock repurchase program to eliminate the repurchase of the former class B common stock. Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares of Common Stock authorized for repurchase thereunder. No Common Stock was repurchased under that authorization during the three-month period ended ~~September~~June 30, ~~2020.~~2021. The remaining shares of Common Stock that may be purchased under that authorization are 280,491. Our Credit Agreement provides that, in order for us to pay dividends, there must be no default or event of default existing or that would result from such payment and we must show that we would comply with the Credit Agreement’s fixed charge coverage ratio and consolidated cash flow leverage ratio after giving pro forma effect to such payment.

3129

Table of Contents

ITEM 6.
Exhibits

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

EXHIBIT INDEX

Exhibit
Number
Exhibit Description

(3.1)
~~Amended and Restated Articles~~Certificate of Incorporation of National Research Corporation, effective ~~as of 5:01 pm, CT, on April 17, 2018~~June 30,2021 [Incorporated by reference to Exhibit 3.3 to National Research Corporation’s Current Report on Form 8-K dated ~~April 16, 2018~~June 29, 2021, and filed on ~~April 20, 2018~~July 2, 2021 (File No. 001-35929)]
(3.2)
~~By-Laws~~Bylaws of National Research Corporation, as amended to date [Incorporated by reference to Exhibit ~~3.1~~3.4 to National Research Corporation’s Current Report on Form 8-K dated ~~March 19, 2020~~June 29, 2021 and filed on ~~March 23, 2020~~July 2, 2021 (File No. 001-35929)]
(4.1)
~~Amended and Restated Articles~~Certificate of Incorporation of National Research Corporation, effective ~~as of 5:01 pm, CT, on April 17, 2018~~June 30,2021 [Incorporated by reference to Exhibit 3.3 to National Research Corporation’s Current Report on Form 8-K dated ~~April 16, 2018~~June 29, 2021, and filed on ~~April 20, 2018~~July 2, 2021 (File No. 001-35929)]
(4.2)
~~By-Laws~~Bylaws of National Research Corporation, as amended to date [Incorporated by reference to Exhibit ~~3.1~~3.4 to National Research Corporation’s Current Report on Form 8-K dated ~~March 19, 2020~~June 29, 2021 and filed on ~~March 23, 2020~~July 2, 2021 (File No. 001-35929)]
(31.1)**
Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of ~~1934.~~1934

(31.2)**
Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of ~~1934.~~1934

(32)**
Written Statement of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section ~~1350.~~1350

(101) **
Financial statements from the Quarterly Report on Form 10-Q of National Research Corporation for the quarter ended ~~September~~June 30, ~~2020,~~2021, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Notes to Condensed Consolidated Financial Statements, and (vi) document and entity information.
(104) **
Cover Page Interactive Data File (formatted in the Inline XBRL and contained in Exhibit 101).

** Filed herewith
3230

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NATIONAL RESEARCH CORPORATION
Date: ~~November~~August 6, ~~2020~~2021
By:
/s/ Michael D. Hays
Michael D. Hays
Chief Executive Officer (Principal
Executive Officer)
Date: ~~November~~August 6, ~~2020~~2021
By:
/s/ Kevin R. Karas
Kevin R. Karas
Senior Vice President Finance,
Treasurer, Secretary and Chief
Financial Officer (Principal Financial
and Accounting Officer)

3331

	Common Stock		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balances at December 31, 2019	$	30	$	162,154	$	(93,357	)	$	(2,209	)	$	(33,726	)	$	32,892
Purchase of 75,980 shares treasury stock		--		--		--			--			(4,425	)		(4,425	)
Issuance of 260,481 common shares for the exercise of stock options		--		3,145		--			--			--			3,145
Non-cash stock compensation expense		--		332		--			--			--			332
Dividends declared of $0.21 per common share		--		--		(5,278	)		--			--			(5,278	)
Other comprehensive loss, foreign currency translation adjustment		--		--		--			(1,124	)		--			(1,124	)
Net income		--		--		11,755			--			--			11,755
Balances at March 31, 2020	$	30	$	165,631	$	(86,880	)	$	(3,333	)	$	(38,151	)	$	37,297
Purchase of 38,369 shares treasury stock		--		--		--			--			(2,077	)		(2,077	)
Issuance of 148,284 common shares for the exercise of stock options		1		2,036		--			--			--			2,037
Forfeitures of 6,793 restricted common shares		--		--		--			--			--			--
Non-cash stock compensation expense		--		141		--			--			--			141
Other comprehensive income, foreign currency translation adjustment		--		--		--			461			--			461
Net income		--		--		7,715			--			--			7,715
Balances at June 30, 2020	$	31	$	167,808	$	(79,165	)	$	(2,872	)	$	(40,228	)	$	45,574
Purchase of 17,590 shares treasury stock		--		--		--			--			(916	)		(916	)
Issuance of 103,608 common shares for the exercise of stock options		--		1,970		--			--			--			1,970
Non-cash stock compensation expense		--		274		--			--			--			274
Other comprehensive income, foreign currency translation adjustment		--		--		--			249			--			249
Net income		--		--		9,578			--			--			9,578
Balances at September 30, 2020	$	31	$	170,052	$	(69,587	)	$	(2,623	)	$	(41,144	)	$	56,729

	Common Stock		Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balances at December 31, 2020	$	31	$	171,785		$	(61,375	)	$	(2,399	)	$	(43,727	)	$	64,315
Purchase of 26,932 shares treasury stock		--		--			--			--			(1,210	)		(1,210	)
Issuance of 68,284 common shares for the exercise of stock options		--		911			--			--			--			911
Non-cash stock compensation expense		--		(54	)		--			--			--			(54	)
Other comprehensive income, foreign currency translation adjustment		--		--			--			56			--			56
Net income		--		--			9,232			--			--			9,232
Balances at March 31, 2021	$	31	$	172,642		$	(52,143	)	$	(2,343	)	$	(44,937	)	$	73,250
Non-cash stock compensation expense		--		202			--			--			--			202
Dividends declared of $0.24 per common share		--		--			(6,105	)		--			--			(6,105	)
Other comprehensive income, foreign currency translation adjustment		--		--			--			74			--			74
Net income		--		--			8,944			--			--			8,944
Balances at June 30, 2021	$	31	$	172,844		$	(49,304	)	$	(2,269	)	$	(44,937	)	$	76,365

	Common Stock (formerly Class A)		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balances at December 31, 2018	$	30	$	157,312	$	(106,339	)	$	(2,916	)	$	(29,004	)	$	19,083
Purchase of 28,657 shares treasury stock		--		--		--			--			(1,116	)		(1,116	)
Issuance of 86,247 common shares for the exercise of stock options		--		633		--			--			--			633
Issuance of 6,005 restricted common shares		--		--		--			--			--			--
Non-cash stock compensation expense		--		302		--			--			--			302
Dividends declared of $0.19 per common share		--		--		(4,724	)		--			--			(4,724	)
Other comprehensive income, foreign currency translation adjustment		--		--		--			365			--			365
Net income		--		--		8,196			--			--			8,196
Balances at March 31, 2019	$	30	$	158,247	$	(102,867	)	$	(2,551	)	$	(30,120	)	$	22,739
Purchase of 2,977 shares treasury stock		--		--		--			--			(137	)		(137	)
Issuance of 18,000 common shares for the exercise of stock options		--		137		--			--			--			137
Non-cash stock compensation expense		--		307		--			--			--			307
Dividends declared of $0.19 per common share		--		--		(4,727	)		--			--			(4,727	)
Other comprehensive income, foreign currency translation adjustment		--		--		--			255			--			255
Net income		--		--		7,393			--			--			7,393
Balances at June 30, 2019	$	30	$	158,691	$	(100,201	)	$	(2,296	)	$	(30,257	)	$	25,967
Purchase of 32,207 shares treasury stock		--		--		--			--			(2,063	)		(2,063	)
Issuance of 72,843 common shares for the exercise of stock options		--		1,525		--			--			--			1,525
Non-cash stock compensation expense		--		308		--			--			--			308
Dividends declared of $0.19 per common share		--		--		(4,735	)		--			--			(4,735	)
Other comprehensive income, foreign currency translation adjustment		--		--		--			(146	)		--			(146	)
Net income		--		--		8,119			--			--			8,119
Balances at September 30, 2019	$	30	$	160,524	$	(96,817	)	$	(2,442	)	$	(32,320	)	$	28,975

	Balance at Beginning of Period		Bad Debt Expense (Benefit)		Write-offs		Recoveries		Balance at End of Period

Nine months ended September 30, 2020	$	144	$	41	$	80	$	21	$	126
Nine months ended September 30, 2019	$	176	$	40	$	91	$	13	$	138

	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)								(In thousands)
As of September 30, 2020
As of June 30, 2021
Money Market Funds	$	3,732	$	-	$	-	$	3,732	$	5,646	$	-	$	-	$	5,646
Total Cash Equivalents	$	3,732	$	-	$	-	$	3,732	$	5,646	$	-	$	-	$	5,646

As of December 31, 2019
As of December 31, 2020
Money Market Funds	$	3,662	$	-	$	-	$	3,662	$	5,015	$	--	$	--	$	5,015
Total Cash Equivalents	$	3,662	$	-	$	-	$	3,662	$	5,015	$	--	$	--	$	5,015

	September 30, 2020		December 31, 2019
	(In thousands)
Total carrying amount of long-term debt	$	31,706	$	34,281
Estimated fair value of long-term debt	$	34,158	$	35,205

	June 30, 2021		December 31, 2020
	(In thousands)
Total carrying amount of long-term debt	$	28,691	$	30,713
Estimated fair value of long-term debt	$	30,303	$	32,943

Amount of Identified Assets Acquired and Liabilities Assumed
	($ in thousands)
Current Assets	$	184
Property and equipment		10
Customer related		100
Technology		600
Goodwill		4,340
Total assets acquired	$	5,234
Current liabilities		284
Net assets acquired	$	4,950

	Nine months ended September 30, 2020						Nine months ended September 30, 2019						Six months ended June 30, 2021						Six months ended June 30, 2020
	Contract Asset			Deferred Revenue			Contract Asset			Deferred Revenue			Contract Asset			Deferred Revenue			Contract Asset			Deferred Revenue
	Increase (Decrease)												Increase (Decrease)
Revenue recognized that was included in deferred revenue at beginning of year due to completion of services	$	-		$	(15,366	)	$	-		$	(15,214	)	$	-		$	(11,605	)	$	-		$	(11,934	)
Increases due to invoicing of client, net of amounts recognized as revenue		-			16,352			-			17,829			-			12,318			-			11,821
Decreases due to completion of services (or portion of services) and transferred to accounts receivable		(100	)		-			(51	)		-			(170	)		-			(85	)		-
Increases due to acquisition														-			239			-			-
Change due to cumulative catch-up adjustments arising from changes in expected contract consideration					(12	)					274						311						34
Decreases due to impairment		-			-			-			-			-			-			-			-
Increases due to revenue recognized in the period with additional performance obligations before invoicing		238			-			131			-			9			-			102			-

	September 30, 2020			December 31, 2019			June 30, 2021			December 31, 2020
	(In thousands)						(In thousands)
Term Loans	$	31,706		$	34,281		$	28,691		$	30,713
Less: current portion		(4,008	)		(4,378	)		(4,168	)		(4,061	)
Less: unamortized debt issuance costs		(115	)		(108	)		(89	)		(105	)
Notes payable, net of current portion	$	27,583		$	29,795		$	24,434		$	26,547

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value (In thousands)		Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value (In thousands)
Outstanding at December 31, 2019		1,245,922		$	18.08		4.45	$	59,631
Outstanding at December 31, 2020											600,571		$	25.31		5.58	$	11,665
Granted		70,471		$	62.23						101,091		$	44.96
Exercised		(512,373	)	$	13.96			$	21,247		(68,284	)	$	13.34			$	2,122
Expired											(22,837	)	$	9.74
Forfeited		(15,490	)	$	48.42						(53,763	)	$	40.48
Outstanding at September 30, 2020		788,530		$	24.11		5.64	$	20,637
Exercisable at September 30, 2020		388,876		$	17.17		4.27	$	12,480
Outstanding at June 30, 2021											556,778		$	29.52		6.17	$	9,942
Exercisable at June 30, 2021											290,668		$	21.57		4.80	$	7,314

	Common Shares Outstanding			Weighted Average Grant Date Fair Value Per Share		Common Shares Outstanding			Weighted Average Grant Date Fair Value Per Share
Outstanding at December 31, 2019		84,176		$	17.23
Outstanding at December 31, 2020							6,005		$	38.30
Granted		-			-		12,698			42.92
Vested		(34,622	)		13.17		--			--
Forfeited		(6,793	)	$	36.80		(6,005	)	$	38.30
Outstanding at September 30, 2020		42,761		$	17.40
Outstanding at June 30, 2021							12,698		$	42.92

	(In thousands)
Balance as of December 31, 2019	$	57,935
Foreign currency translation		(60	)
Balance as of September 30, 2020	$	57,875

	Gross		Accumulated Impairment			Net
	(In thousands)
Balance as of December 31, 2020	$	57,969	$	(714	)	$	57,255
Goodwill acquired		4,340		-			4,340
Foreign currency translation		45		-			45
Balance at June 30, 2021	$	62,354		(714	)	$	61,640

	For the Three Months Ended September 30						For the Nine Months Ended September 30						For the Three Months Ended June 30						For the Six Months Ended June 30
	2020			2019			2020			2019			2021			2020			2021			2020
	(In thousands, except per share data)												(In thousands, except per share data)
Numerator for net income per share – basic:	$	9,578		$	8,119		$	29,048		$	23,708		$	8,944		$	7,715		$	18,176		$	19,470
Net income
Allocation of distributed and undistributed income to unvested restricted stock shareholders		(17	)		(27	)		(55	)		(80	)		(5	)		(15	)		(10	)		(38	)
Net income attributable to common shareholders		9,561			8,092			28,993			23,628			8,939			7,700			18,166			19,432
Denominator for net income per share – basic:
Weighted average common shares outstanding – basic		25,219			24,827			25,113			24,794			25,426			25,148			25,420			25,060
Net income per share – basic	$	0.38		$	0.33		$	1.15		$	0.95		$	0.35		$	0.31		$	0.71		$	0.78
Numerator for net income per share – diluted:
Net income attributable to common shareholders for basic computation		9,561			8,092			28,993			23,628			8,939			7,700			18,166			19,432
Denominator for net income per share – diluted:
Weighted average common shares outstanding – basic		25,219			24,827			25,113			24,794			25,426			25,148			25,420			25,060
Weighted average effect of dilutive securities – stock options		485			914			588			830			219			532			236			642
Denominator for diluted earnings per share – adjusted weighted average shares		25,704			25,741			25,701			25,624			25,645			25,680			25,656			25,702
Net income per share - diluted	$	0.37		$	0.31		$	1.13		$	0.92		$	0.35		$	0.30		$	0.71		$	0.76

	Operating Lease
Remainder 2021	$	67
2022		118
2023		122
2024		127
2025		65
Total minimum lease receipts	$	499

	Three months ended June 30,						Six months ended June 30,
	2021			2020			2021			2020

Revenue:		100.0	%		100.0	%		100.0	%		100.0	%

Operating expenses:
Direct		34.4			37.3			34.1			37.2
Selling, general and administrative		27.5			28.4			27.2			27.1
Depreciation and amortization		4.5			4.5			5.0			4.3
Total operating expenses		66.4			70.2			66.3			68.6

Operating income		33.6	%		29.8	%		33.7	%		31.4	%

	Nine Months Ended September 30,
	2020			2019
	(In thousands)
Provided by operating activities	$	24,419		$	28,974
Used in investing activities		(2,175	)		(3,429	)
Used in financing activities		(13,582	)		(30,575	)
Effect of exchange rate change on cash		(324	)		397
Net change in cash and cash equivalents		8,338			(4,633	)
Cash and cash equivalents at end of period	$	21,855		$	8,358

Contractual Obligations⁽¹⁾	Total Payments		Less than One Year		One to Three Years		Three to Five Years		After Five Years
Contractual Obligations(1)											Total Payments		Less than One Year		One to Three Years		Three to Five Years		After Five Years
(In thousands)
Operating leases	$	1,369	$	126	$	677	$	448	$	118	$	1,666	$	577	$	871	$	218	$	--
Finance leases		1,435		147		978		310		--		1,056		510		545		1		--
Uncertain tax positions⁽²⁾		--		--		--		--		--
Uncertain tax positions(2)												--		--		--		--		--
Long-term debt		36,933		1,389		11,112		11,112		13,320		32,766		2,778		11,112		18,876		--
Total	$	39,737	$	1,662	$	12,767	$	11,870	$	13,438	$	35,488	$	3,865	$	12,528	$	19,095	$	--


(3.1)	~~Amended and Restated Articles~~Certificate of Incorporation of National Research Corporation, effective ~~as of 5:01 pm, CT, on April 17, 2018~~June 30,2021 [Incorporated by reference to Exhibit 3.3 to National Research Corporation’s Current Report on Form 8-K dated ~~April 16, 2018~~June 29, 2021, and filed on ~~April 20, 2018~~July 2, 2021 (File No. 001-35929)]

(3.2)	~~By-Laws~~Bylaws of National Research Corporation, as amended to date [Incorporated by reference to Exhibit ~~3.1~~3.4 to National Research Corporation’s Current Report on Form 8-K dated ~~March 19, 2020~~June 29, 2021 and filed on ~~March 23, 2020~~July 2, 2021 (File No. 001-35929)]

(4.1)	~~Amended and Restated Articles~~Certificate of Incorporation of National Research Corporation, effective ~~as of 5:01 pm, CT, on April 17, 2018~~June 30,2021 [Incorporated by reference to Exhibit 3.3 to National Research Corporation’s Current Report on Form 8-K dated ~~April 16, 2018~~June 29, 2021, and filed on ~~April 20, 2018~~July 2, 2021 (File No. 001-35929)]

(4.2)	~~By-Laws~~Bylaws of National Research Corporation, as amended to date [Incorporated by reference to Exhibit ~~3.1~~3.4 to National Research Corporation’s Current Report on Form 8-K dated ~~March 19, 2020~~June 29, 2021 and filed on ~~March 23, 2020~~July 2, 2021 (File No. 001-35929)]


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

(101) **	Financial statements from the Quarterly Report on Form 10-Q of National Research Corporation for the quarter ended ~~September~~June 30, ~~2020,~~2021, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Notes to Condensed Consolidated Financial Statements, and (vi) document and entity information.

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

	NATIONAL RESEARCH CORPORATION


Date: ~~November~~August 6, ~~2020~~2021	By:	/s/ Michael D. Hays
		Michael D. Hays
		Chief Executive Officer (Principal Executive Officer)



Date: ~~November~~August 6, ~~2020~~2021	By:	/s/ Kevin R. Karas
		Kevin R. Karas Senior Vice President Finance, Treasurer, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer)