NRC HEALTH 10-K

Item 5. Market for the Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   In May 2013, we consummated a recapitalization pursuant to which we established two classes of common stock (class A common stock and class B common stock), issued a dividend of three shares of class A common stock for each share of our then existing common stock and reclassified each then existing share of common stock as one-half of one share of class B common stock. Following the May 2013 recapitalization, our class A common stock and our class B common stock were traded on the NASDAQ Global Market under the symbols “NRCIA” and “NRCIB,” respectively.   On April 16, 2018, our shareholders approved, among other things, an amendment to our Amended and Restated Articles of Incorporation (the “Articles”) to effect a recapitalization (the “Recapitalization”) pursuant to which each share of our then-existing class B common stock was exchanged for one share of the our then-existing Class A common stock plus $19.59 in cash, without interest. On April 17, 2018, we filed an amendment to our Articles effecting the Recapitalization, followed by an amendment and restatement of our Articles, which resulted in the elimination of our class B common stock and the reclassification of our class A common stock as a share of Common Stock, par value $0.001 per share (“Common Stock”). We issued 3,617,615 shares of Common Stock and paid $72.4 million in exchange for all class B shares outstanding and to settle outstanding share-based awards for class B common stock. The Common Stock continues to trade on the NASDAQ Global Market under the revised symbol “NRC.”   Cash dividends in the aggregate amount of $5.3 million were declared and paid in 2020. Cash dividends in the aggregate amount of $19.4 million were declared in 2019 with $14.2 million paid in 2019 and the remaining $5.2 million paid in January 2020. Cash dividends in the aggregate amount of $29.7 million were declared in 2018 with $12.6 million paid in 2018 and the remaining $17.1 million paid in January 2019. The payment and amount of future dividends, if any, is at the discretion of our Board of Directors and will depend on our future earnings, financial condition, general business conditions, alternative uses of our earnings and cash and other factors.   On February 16, 2021, there were approximately 12 shareholders of record and approximately 7,479 beneficial owners of common stock.   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 authorized for repurchase thereunder. No Common Stock was repurchased during the three-month period ended December 31, 2020. The remaining shares of Common Stock that may be purchased under that authorization are 280,491.   See Item 12 in Part III of this Annual Report on Form 10-K for certain information concerning shares of our Common Stock authorized for issuance under our equity compensation plans.   14 Table of Contents   The following graph compares the cumulative 5-year total return provided shareholders on our common stock relative to the cumulative total returns of the NASDAQ Composite Index and the Russell 2000 Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on December 31, 2015, and our relative performance is tracked through December 31, 2020.    The stock price performance included in this graph is not necessarily indicative of future stock price performance.     12/15     12/16     12/17     12/18     12/19     12/20                                                     National Research Corporation – Formerly Class B     100.00       123.06       173.87       --       --       --                                                     National Research Corporation Common Stock - Formerly Class A     100.00       121.06       241.04       253.96       445.62       290.26                                                     NASDAQ Composite     100.00       108.87       141.13       137.12       187.44       271.64                                                     Russell 2000     100.00       121.31       139.08       123.76       155.35       186.36     15 Table of Contents   Item 6. Selected Financial Data   The selected statement of income data for the years ended December 31, 2020, 2019 and 2018, and the selected balance sheet data as of December 31, 2020 and 2019, are derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected statement of income data for the years ended December 31, 2017 and 2016, and the balance sheet data as of December 31, 2018, 2017 and 2016, are derived from audited consolidated financial statements not included herein. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included in Items 7 and 8, respectively, of this Annual Report on Form 10-K.       Year Ended December 31,       2020       2019 (2)(3)       2018 (1)(2)       2017       2016       (In thousands, except per share data)   Statement of Income Data:       Revenue   $ 133,277     $ 127,982     $ 119,686     $ 117,559     $ 109,384   Insurance recoveries     533       --       --       --       --   Operating expenses:                                         Direct     49,187       46,435       47,577       49,068       45,577   Selling, general and administrative     34,441       32,973       31,371       29,686       28,385   Depreciation, amortization and impairment     7,505       5,539       5,463       4,586       4,225   Total operating expenses     91,133       84,947       84,411       83,340       78,187   Operating income     42,677       43,035       35,275       34,219       31,197   Other income (expense)     (1,210 )     (2,516 )     (566 )     64       159   Income before income taxes     41,467       40,519       34,709       34,283       31,356   Provision for income taxes     4,207       8,113       4,662       11,340       10,838   Net income   $ 37,260     $ 32,406     $ 30,047     $ 22,943     $ 20,518   Earnings per share common stock:                                         Basic Earnings per share:                                         Common Stock (formerly Class A)   $ 1.48     $ 1.30     $ 1.08     $ 0.54     $ 0.49   Class B   $ --     $ --     $ 1.31     $ 3.26     $ 2.93   Diluted Earnings per share:                                         Common Stock (formerly Class A)   $ 1.45     $ 1.26     $ 1.04     $ 0.52     $ 0.48   Class B   $ --     $ --     $ 1.27     $ 3.18     $ 2.88   Weighted average share and share equivalents outstanding:                                         Common Stock (formerly Class A) – basic     25,170       24,809       23,562       20,770       20,713   Class B – basic     --       --       3,527       3,514       3,505   Common Stock (formerly Class A) – diluted     25,696       25,653       24,448       21,627       21,037   Class B – diluted     --       --       3,628       3,603       3,560         2020       2019 (2)(3)       2018 (1)(2)       2017       2016       (In thousands, except per share data)   Balance Sheet Data:       Working capital surplus (deficiency)   $ 22,431     $ (8,998 )   $ (18,699 )   $ 19,949     $ 15,551   Total assets     133,423       110,685       108,032       127,316       120,624   Total debt and finance lease obligations, net of unamortized debt issuance costs     31,878       34,959       38,723       1,225       3,732   Total shareholders’ equity     64,315       32,892       19,083       90,041       82,806   Cash dividends declared per share:                                         Common Stock (formerly class A)     0.21       0.78       1.13       .40       .34   Class B common stock   $ --     $ --     $ .60     $ 2.40     $ 2.04       (1) On January 1, 2018, we adopted Accounting Standards Update 2014-09, Revenue- Revenue from Contracts with Customers and all related amendments using the modified retrospective method for all incomplete contracts as of the date of adoption. See Notes 1 and 3 to our consolidated financial statements.   (2) As described in Note 2 to our consolidated financial statements, we completed the Recapitalization in April 2018 which settled all then-existing outstanding class B share-based awards, resulting in the elimination of the class B common stock and reclassified class A common stock to Common Stock.   (3) On January 1, 2019, we adopted Accounting Standards Update 2016-02, Leases , and all related amendments using the modified retrospective method for all incomplete contracts as of the date of adoption. See Notes 1 and 10 to our consolidated financial statements.   16 Table of Contents   Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations     Overview   Our purpose is to establish 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 heritage, proprietary methods, and holistic approach enable our partners to better understand the people they care for and design experiences that inspire loyalty and trust, while also facilitating regulatory compliance and the shift to population-based health management. Our ability to measure what matters most and systematically capture, analyze and deliver insights based on self-reported information from patients, families and consumers is critical in today’s healthcare market. We believe that access to and analysis of our extensive consumer-driven information is becoming more valuable as healthcare providers increasingly need to more deeply understand and engage the people they serve to build customer loyalty.   Our portfolio of subscription-based solutions provides actionable information and analysis to healthcare organizations across a range of mission-critical, constituent-related elements, including patient experience, service recovery, care transitions, health risk assessments, employee engagement, reputation management, and brand loyalty. We partner with clients across the continuum of healthcare services. Our clients include integrated health systems, post-acute providers and payer organizations. We believe this cross-continuum positioning is a unique and an increasingly important capability as evolving payment models drive healthcare providers and payers towards a more collaborative and integrated service model.   The outbreak of COVID-19, and the associated responses, have impacted our business in a variety of ways.  Governments have implemented business and travel restrictions, recommended social distancing and other guidelines, and temporarily suspended the requirement for certain healthcare organizations to periodically assess the performance of the care they provide (although many providers continue to do so). Many businesses, including many of our clients, have de-emphasized external business opportunities and restricted in-person meetings while shifting their attention toward addressing COVID-19 planning, business disruptions, higher costs, and revenue shortfalls. At NRC Health, our workforce remains intact and highly engaged.  The vast majority of our associates are working remotely, and to date we have been capable of providing our services without significant disruption. Historically, we have relied on national travel as part of our sales efforts, but as a result of the pandemic we have placed an indefinite hold on all company related travel. The duration and severity of the COVID-19 pandemic and associated responses on our business, including the impact on our revenue, expenses, and cash flows, cannot be predicted at this time.  Some clients cost reducing measures have included and could continue to include reducing or eliminating the services they purchase from us. Based on the foregoing, we do not expect our recent revenue and earnings growth to be indicative of future expectations.  We do, however, expect to have adequate sources of liquidity to meet our current and expected needs for the foreseeable future.   Our operating income in 2020 was impacted by a significant increase in depreciation and amortization, as well as an impairment adjustment. Depreciation and amortization increased by $1.1 million compared to 2019 due to the change in the estimated lives of certain assets related to our transformation to a distributed workforce environment, which includes building renovations in our headquarters, as well as shortening the useful lives of certain assets associated with our Atlanta, Georgia and Markham, Ontario offices based on the expectation that we will vacate the office space before the end of the lease term. In addition, we recognized a goodwill impairment adjustment for our Canadian reporting unit of $714,000, as described in more detail under “Critical Accounting Policies and Estimates”.   Critical Accounting Policies and Estimates   The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The following areas are considered critical accounting estimates because they involve significant judgments or assumptions, involve complex or uncertain matters or they are susceptible to change and the impact could be material to our financial condition or operating results:     ● Revenue recognition; and   ● Valuation of goodwill and identifiable intangible assets.   Revenue Recognition   We derive a majority of our revenue from annually renewable subscription-based service agreements with our customers, 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 Notes 1 and 3 to our consolidated financial statements for a description of our revenue recognition policies.   17 Table of Contents   Our revenue arrangements with a client may include combinations of more than one service offering which may be executed at the same time, or within close proximity of one another. We combine contracts with the same customer into a single contract for accounting purposes when the contract is entered into at or near the same time and the contracts are negotiated as a single performance obligation. For contracts that contain more than one separately identifiable performance obligation, the total transaction price is allocated to the identified performance obligations based upon the relative stand-alone selling prices of the performance obligations. The stand-alone selling prices are based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost-plus margin or residual approach. We estimate the 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. 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 fixed, non-subscription arrangements typically require us to perform an unspecified amount of services for a fixed price during a fixed period of time. Revenues are recognized over time based upon the costs incurred to date in relation to the total estimated contract costs. In determining cost estimates, management uses historical and forecasted cost information which is based on estimated volumes, external and internal costs and other factors necessary in estimating the total costs over the term of the contract. Changes in estimates are accounted for using a cumulative catch up adjustment which could impact the amount and timing of revenue for any period.   If management made different judgments and estimates, then the amount and timing of revenue for any period could differ from the reported revenue.    Valuation of Goodwill and Identifiable Intangible Assets   Intangible assets include customer relationships, trade names, technology, and goodwill. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment with other long-lived assets in the related asset group whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We review intangible assets with indefinite lives for impairment annually as of October 1 and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.   When performing the impairment assessment, we will first assess qualitative factors to determine whether it is necessary to recalculate the fair value of the intangible assets with indefinite lives. If we believe, as a result of the qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangibles is less than their carrying amount, we determine the fair value using a market or income approach. If the carrying value of intangible assets with indefinite lives exceeds their fair value, then the intangible assets are written-down to their fair values. We did not recognize any impairments related to indefinite-lived intangibles during 2020, 2019 or 2018.   Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. All of our goodwill is allocated to our reporting units, which are the same as our six operating segments: Experience, The Governance Institute, Market Insights, Transparency, National Research Corporation Canada and Transitions. Goodwill is reviewed for impairment at least annually, as of October 1, and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.   We review goodwill for impairment by first assessing qualitative factors to determine whether any impairment may exist. If we believe, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative analysis will be performed, and the fair value of the reporting unit is compared with its carrying value (including goodwill). If the carrying value of the reporting unit exceeds the fair value, then goodwill is written down by this difference. We performed a qualitative analysis as of October 1, 2020 and determined the fair value of each reporting unit likely exceeded the carrying value. No impairments were recorded during the years ended December 31, 2019 or 2018. A substantial portion of the revenue earned by our Canadian subsidiary is concentrated with one customer. While the customer has exercised its option to extend its existing contract to September 2022, during December 2020 we chose not to enter into a new contract with this customer or otherwise extend the term of the contract beyond September 2022. We subsequently announced that we would close the Canada office at the end of the contract.  As a result, we tested for impairment of the Canada reporting unit’s goodwill at December 31, 2020. We recognized an impairment of $714,000 for the excess of the Canada reporting unit’s carrying value over the fair value, using discounted cash flows. The remaining balance of goodwill of our Canada reporting unit at December 31, 2020 was $1.6 million. Changes in the actual amount or timing of cash flows or other assumption used to discount cash flows to estimate fair value of the Canada reporting unit could result in additional impairment.   18 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.       Percentage of Total Revenue Year Ended December 31,     Percentage Increase (Decrease)       2020     2019     2018     2020 over 2019     2019 over 2018                                             Revenue     100.0 %     100.0 %     100.0 %     4.1 %     6.9 % Insurance recoveries     0.4       --       --       100.0       --   Operating expenses:                                         Direct     36.9       36.3       39.7       5.9       (2.4 ) Selling, general and administrative     25.9       25.8       26.2       4.5       5.1   Depreciation, amortization and impairment     5.6       4.3       4.6       35.5       1.4   Total operating expenses     68.4       66.4       70.5       7.3       0.6   Operating income     32.0 %     33.6 %     29.5 %     (0.8 )%     22.0 %     Year Ended December 31, 2020, Compared to Year Ended December 31, 2019   Revenue . Revenue in 2020 increased 4.1% to $133.3 million, compared to $128.0 million in 2019, which was driven primarily due to both new client sales and growth in contract value from existing clients. Revenue growth was partially offset by revenue reductions due to COVID-19, as some clients have reduced or eliminated the services they purchase from us as cost reducing measures. Our solutions within the VoC platform in 2020 accounted for 73.3% of total revenue compared to 62.7% in 2019. The remaining revenue consists of legacy Experience and Governance Solutions.   Direct expenses . Direct expenses increased 5.9% to $49.2 million in 2020, compared to $46.4 million in 2019. This was due to an increase in fixed expenses of $5.4 million, partially offset by a decrease in variable expenses of $2.6 million. Fixed expenses increased primarily as a result of increased salary and benefits and contracted services costs in the customer service and information technology areas and less sales tax incentives compared to the same period in 2019. These were partially offset by decreased travel and meal costs due to restricted travel from COVID-19. Variable expenses 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 virtually hosting the conferences on account of COVID-19. Direct expenses increased as a percentage of revenue to 36.9% in 2020, from 36.3% in 2019, as expenses increased by 5.9% while revenue for the same period increased by 4.1%.   Selling, general and administrative expenses . Selling, general and administrative expenses increased 4.5% to $34.4 million in 2020 compared to $33.0 million in 2019, primarily due to an increase in software license fees and platform hosting expenses of $1.5 million, an increase in contracted services of $1.4 million, additional salary and benefits costs of $864,000 and less sales tax incentives of $362,000 compared to the same period in 2019. These increases were partially offset by a decrease in travel and meals expense of $1.6 million due to restricted travel associated with COVID-19 and decreases in other taxes and licenses of $948,000 primarily due to less sales taxes. Selling, general, and administrative expenses as a percentage of revenue was 25.9% in 2020 and 25.8% in 2019.   19 Table of Contents   Depreciation, amortization and impairment . Depreciation, amortization and impairment expenses increased to $7.5 million for the twelve-month period ended December 31, 2020 compared to $5.5 million in 2019. This was primarily due $1.1 million in additional depreciation resulting from the change in useful lives of certain assets due to our transformation to a distributed workforce environment, which includes building renovations in our headquarters, as well as shortening the useful lives of certain assets associated with our Atlanta, Georgia and Markham, Ontario offices based on the expectation that we will vacate the office space before the end of the lease term. Additionally, we recognized a $714,000 goodwill impairment adjustment for our Canadian reporting unit due to our decision to not enter into a new agreement with an existing client, which accounted for the majority of revenue in Canada. Depreciation, amortization and impairment expenses increased as a percentage of revenue to 5.6% in 2020, from 4.3% in 2019 as depreciation, amortization and impairment expenses increased by 35.5% while revenue increased by 4.1% during the same period.   Other income (expense ). Other expense, net was $1.2 million for the twelve-month period ended December 31, 2020, compared to $2.5 million for the same period in 2019. Interest expense decreased to $1.8 million in the 2020 period from $2.1 million for the same period in 2019 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 changed to other income of $585,000 for the twelve-month period ended December 31, 2020, compared to other expense of $462,000 for the same period in 2019, primarily due to gain on insurance recoveries for property damage of $260,000 and the revaluation of intercompany transactions for changes in the foreign exchange rates.   Provision for income taxes . Provision for income taxes was $4.2 million (10.1% effective tax rate) in 2020, compared to $8.1 million (20.0% effective tax rate) in 2019. The effective tax rate for the twelve-month period ended December 31, 2020, was lower primarily due to increased tax benefits of $4.8 million from the exercise and vesting of share-based compensation awards, partially offset by a non-deductible goodwill impairment adjustment and higher state income taxes.    Year Ended December 31, 2019, Compared to Year Ended December 31, 2018   Revenue . Revenue in 2019 increased 6.9% to $128.0 million, compared to $119.7 million in 2018, which was driven primarily due to new customer sales, as well as increases in sales to the existing client base. Our solutions within the VoC platform in 2019 accounted for 62.7% of total revenue compared to 49.6% in 2018. The remaining revenue consists of legacy Experience and Governance Solutions. Clients with agreements for multiple solutions represented 27% of our client base at the end of 2019, up from 24% at the end of 2018.   Direct expenses . Direct expenses decreased 2.4% to $46.4 million in 2019, compared to $47.6 million in 2018. This was due to a decrease in variable expenses of $2.6 million, partially offset by an increase in fixed expenses of $1.4 million. Variable expenses decreased mainly due to less postage, printing and paper costs due to lower volumes and changes in survey methodologies. Fixed expenses increased primarily as a result of increased salary and benefit costs in the customer service and information technology areas partially offset by $730,000 of state payroll and sales tax incentives and lower contracted services. Direct expenses decreased as a percentage of revenue to 36.3% in 2019, from 39.7% in 2018, as expenses decreased by 2.4% while revenue for the same period increased by 6.9%.   Selling, general and administrative expenses . Selling, general and administrative expenses increased 5.1% to $33.0 million in 2019 compared to $31.4 million in 2018, primarily due to increased software license fees and platform hosting expenses of $790,000, sales tax expense of $775,000 as a result of a recent sales tax analysis, higher salary and benefit costs of $690,000, additional insurance costs of $285,000, increased travel costs of $196,000, higher marketing program expenses of $89,000 and additional company incentive event costs of $81,000. These were partially offset by decreased contract services of $529,000, a reduction in legal and accounting costs of $469,000 mainly associated with the Recapitalization, the Tax Cut and Jobs Act and adoption of ASC 606 in 2018 and state payroll and sales tax incentives of $917,000. Selling, general, and administrative expenses decreased as a percentage of revenue to 25.8% in 2019, from 26.2% in 2018 as expenses increased by 5.1% while revenue increased by 6.9% during the same period.   Depreciation and amortization . Depreciation and amortization expenses remained at $5.5 million for the twelve-month period ended December 31, 2019 and 2018, however, there was increased amortization from additional computer software investments primarily offset by an intangible asset that has been fully amortized. Depreciation and amortization expenses decreased as a percentage of revenue to 4.3% in 2019, from 4.6% in 2018 as depreciation and amortization expenses increased by 1.4% while revenue increased by 6.9% during the same period.   Other income (expense ). Other expense, net was $2.5 million for the twelve-month period ended December 31, 2019, compared to $566,000 for the same period in 2018.  Interest expense increased $578,000 due to additional interest related to the term loan originated in April 2018 and borrowings on the line of credit. Other expense, net increased $1.3 million primarily due to revaluation of intercompany transactions for changes in the foreign exchange rates.   20 Table of Contents   Provision for income taxes . Provision for income taxes was $8.1 million (20.0% effective tax rate) in 2019, compared to $4.7 million (13.4% effective tax rate) in 2018. The effective tax rate for the twelve-month period ended December 31, 2019, was higher mainly due to lower income tax benefits from the exercise of share-based compensation awards and higher state income taxes due to requirements to file in more states.   Inflation and Changing Prices   Inflation and changing prices have not had a material impact on revenue or net income in the last three years.   Liquidity and Capital Resources   We believe that our existing sources of liquidity, including cash and cash equivalents, borrowing availability, and operating cash flows will be sufficient to meet our projected capital and debt maturity needs for the foreseeable future. Cash dividends in the aggregate amount of $5.3 million were declared and paid in 2020. An additional $5.2 million was paid in January 2020 from dividends declared in 2019. The dividends were paid from cash on hand.   As of December 31, 2020, our principal sources of liquidity included $34.7 million of cash and cash equivalents, up to $30 million of unused borrowings under our line of credit and up to $15 million on our delayed draw term note. Of this cash, $5.4 million was held in Canada. The delayed draw term note can only be used to fund permitted future business acquisitions or repurchasing our Common Stock.   Working Capital   We had a working capital surplus of $22.4 million and deficiency of $9.0 million on December 31, 2020 and 2019, respectively.   The change was primarily due to increases in cash and cash equivalents of $21.2 million, trade accounts receivable of $2.3 million, income taxes receivable of $1.2 million, prepaids of $607,000, and decreases in dividends payable of $5.2 million and deferred revenue of $769,000. Dividends payable decreased due dividends not being declared since the three-month period ended March 31, 2020. Trade accounts receivable increased due to timing of billing and payments, as well as COVID-19 causing clients payments to be delayed due to such clients’ cash-flow issues. Prepaid expenses increased due to timing of payment for services and supplies. Income taxes receivable changed due to the timing of income tax payments. Our working capital is significantly impacted by our large deferred revenue balances which will vary based on the timing and frequency of billings on annual agreements. The deferred revenue balances as of December 31, 2020 and December 31, 2019, were $15.6 million and $16.4 million, respectively.   The deferred revenue balance is primarily due to timing of initial billings on new and renewal contracts. We typically invoice clients for services before they have been completed. Billed amounts are recorded as billings in excess of revenue earned, or deferred revenue, on our consolidated financial statements, and are recognized as income when earned. In addition, when work is performed in advance of billing, we record this work as 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 are shown in the following table:       For the Year Ended December 31,       2020     2019     2018       (In thousands)   Provided by operating activities   $ 40,636     $ 40,917     $ 39,848   Used in investing activities     (3,724 )     (4,656 )     (5,971 ) Used in financing activities     (15,503 )     (36,346 )     (54,497 ) Effect of exchange rate changes on cash     (236 )     611       (1,122 ) Net increase (decrease) in cash and cash equivalents     21,173       526       (21,742 ) Cash and cash equivalents at end of period   $ 34,690     $ 13,517     $ 12,991     Cash Flows from Operating Activities   Cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, deferred income taxes, share-based compensation and related taxes, reserve for uncertain tax positions, loss on disposal of property and equipment and the effect of working capital changes.   21 Table of Contents   Net cash provided by operating activities was $40.6 million for the year ended December 31, 2020, which included net income of $37.3 million, plus non-cash charges (benefits) for deferred income taxes, depreciation, amortization and impairment, reserve for uncertain tax positions, loss on disposal of property and equipment and non-cash share-based compensation totaling $8.0 million. Changes in working capital decreased cash flows from operating activities by $4.6 million, primarily from increases in trade accounts receivable, income taxes receivable, prepaid expenses and other current assets and deferred contact costs, and a decrease in accounts payable, which fluctuate due to the timing of payments of prepaids, accounts payable and income taxes and the timing of direct and incremental costs directly related to sales. A decrease in deferred revenue also contributed to the working capital surplus, 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 and bonuses which fluctuate due to the timing of accrued expenses, wages and bonuses and included the deferral of employer payroll taxes from the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).   Net cash provided by operating activities was $40.9 million for the year ended December 31, 2019, which included net income of $32.4 million, plus non-cash charges (benefits) for deferred income taxes, depreciation and amortization, reserve for uncertain tax positions, loss on disposal of property and equipment and non-cash share-based compensation totaling $7.9 million. Changes in working capital increased cash flows from operating activities by $616,000, primarily from increases in accounts payable, accrued expenses, wages, bonus and profit sharing, deferred tax incentives, and deferred contract costs, net, which fluctuate due to the timing of payments of accounts payable and accrued expenses, and the timing of direct and incremental costs directly related to sales. These increases to cash flows were partially offset by decreases in deferred contract costs and prepaid expenses and other current assets.   Net cash provided by operating activities was $39.8 million for the year ended December 31, 2018, which included net income of $30.0 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, reserve for uncertain tax positions, loss on disposal of property and equipment and non-cash share-based compensation totaling $8.4 million. Changes in working capital increased cash flows from operating activities by $1.5 million, primarily from increases in income taxes payable and decreases in accounts receivables, which fluctuate due to the timing of income tax payments and the timing and frequency of billings on new and renewal contracts, respectively. These increases to cash flows were partially offset by an increase in prepaid expenses and other current assets and decreases due to the timing of payments on accounts payable, accrued expenses, wages, bonus and profit sharing, deferred contract costs and a decrease in deferred revenue.    Cash Flows from Investing Activities   Net cash of $3.7 million was used for investing activities in the year ended December 31, 2020. We used cash of $4.0 million for purchases of property and equipment, consisting mainly of computer software classified in property and equipment. We received $260,000 in insurance proceeds for damaged property and equipment due to flooding.   Net cash of $4.7 million was used for investing activities in the year ended December 31, 2019 for purchases of property and equipment. These expenditures consisted mainly of computer software classified in property and equipment.   Net cash of $6.0 million was used for investing activities in the year ended December 31, 2018 for purchases of property and equipment.   Cash Flows from Financing Activities   Net cash used in financing activities was $15.5 million in the year ended December 31, 2020. In 2020 we used cash to repay borrowings under the term notes totaling $3.6 million, to pay loan commitment fees of $36,000 and for finance lease obligations of $332,000. In 2020 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 $2.8 million. Proceeds from the exercise of stock options were $1.7 million in 2020.   Net cash used in financing activities was $36.3 million in the year ended December 31, 2019. In 2019 we used cash to repay borrowings under the term notes totaling $3.7 million, to repay borrowings on the line of credit of $21.0 million and for finance lease obligations of $229,000. In 2019 we also used cash to pay $31.3 million of dividends on our Common Stock and to pay payroll tax withholdings related to share-based compensation of $1.1 million. In 2019 borrowings on our line of credit provided cash of $21.0 million.   Net cash used in financing activities was $54.5 million in the year ended December 31, 2018. In 2018 we used cash for the Recapitalization of $72.4 million (see Note 2 to our consolidated financial statements), to repay borrowings under the term notes totaling $3.1 million, to repay borrowings on the line of credit of $2.5 million, to pay loan origination fees on the new credit agreement of $187,000 and for finance lease obligations of $157,000. In 2018, we also used cash to pay $16.9 million of dividends on our Common Stock and to pay payroll tax withholdings related to share-based compensation of $1.9 million. In 2018 borrowings on our new term loan and the new line of credit provided cash of $40 million and $2.5 million, respectively.   22 Table of Contents   Capital Expenditures   We paid cash of $4.0 million for capital expenditures in the year ended December 31, 2020. These expenditures consisted mainly of computer software and hardware and furniture and equipment. In addition to continued expenditures for computer software and hardware and furniture and equipment in 2021, we expect substantially higher capital expenditures for investment in our VoC platform and building improvements, with the total amount yet to be determined, which we expect to be funded through cash generated from operations.   Debt and Equity   Our credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) was amended and restated on May 28, 2020 and includes (i) a $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 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 May 2020 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 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 (2.40% at December 31, 2020). Interest on the Line of Credit accrues and is payable monthly. Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in May 2023. As of December 31, 2020, and December 31, 2019, the Line of Credit did not have a balance. There were no borrowings on the Line of Credit during 2020. There have been no borrowings on the Delayed Draw Term Loan since origination.   We are obligated to pay ongoing unused commitment fees quarterly in arrears pursuant to the Line of Credit and the Delayed Draw Term Loan facility at a rate of 0.20% per annum based on the actual daily unused portions of the Line of Credit and the Delayed Draw Term Loan facility, respectively.   The Credit Agreement 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 terms of the Credit Facilities. As of December 31, 2020, we were in compliance with our financial covenants.   All obligations under the Credit Facilities are to be guaranteed by each of our direct and indirect wholly owned domestic subsidiaries, if any, and, to the extent required by the Credit Agreement, direct and indirect wholly owned foreign subsidiaries (each, a “guarantor”).   The Credit Facilities are secured, subject to permitted liens and other agreed upon exceptions, by a first-priority lien on and perfected security interest in substantially all of our and 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).   We have finance leases for computer equipment, office equipment, printing and inserting equipment. The balance of the finance leases as of December 31, 2020 was $1.3 million.   We incurred expenses related to the Recapitalization of approximately $721,000 in the year ended December 31, 2018, which were included in selling and administrative expenses.   23 Table of Contents   A sales tax accrual 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. 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 as of December 31, 2020. State and local jurisdictions have differing rules and regulations governing sales, use, and other taxes and these rules and regulations can be complex and subject to varying interpretations that may change over time. As a result, we could face the possibility of tax assessment and audits, and our liability for these taxes and associated interest and penalties could exceed our original estimates.   Contractual Obligations   We had contractual obligations to make payments in the following amounts in the future as of December 31, 2020:   Contractual Obligations (1)   Total Payments     Less than One Year     One to Three Years     Three to Five Years     After Five Years   (In thousands)                                         Operating leases   $ 1,471     $ 509     $ 641     $ 321     $ --   Finance leases     1,326       527       786       13       --   Uncertain tax positions (2)     --       --       --       --       --   Long-term debt     35,544       5,556       11,112       18,876       --   Total   $ 38,341     $ 6,592     $ 12,539     $ 19,210     $ --     (1) Amounts are inclusive of interest payments, where applicable. (2) We have $783,000 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 December 31, 2020, the remaining number of shares of Common Stock that could be purchased under this authorization was 280,491 shares.    Off-Balance Sheet Obligations   We have no significant off-balance sheet obligations.   Recent Accounting Pronouncements   See Note 1 to our consolidated financial statements for a description of recently issued accounting pronouncements.   24 Table of Contents