What changed in this filing

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Item 1. Financial Statements

2021-05-07 compared with 2020-11-06 · 259 added, 377 removed, 544 unchanged (54% of the section changed)

3 unchanged sentences

(In thousands, except share amounts and par value)

September 30,

Current assets:

7 unchanged sentences

Income taxes receivable

Insurance recoverable

Other current assets

18 unchanged sentences

Accounts payable

Accrued wages, bonus and profit sharing

Accrued wages and bonuses

Accrued expenses

Income taxes payable

Dividends payable

Deferred revenue

1 unchanged sentence

15,585  

Deferred acquisition consideration

Other current liabilities

20 unchanged sentences

Treasury stock, at cost;

5,336,013 , Common shares in 2020 and 5,204,074 shares in 2019

5,411,118 Common shares in 2021 and 5,384,186 Common shares in 2020

Total shareholders’

4 unchanged sentences

$ 133,423  

 See accompanying notes to condensed consolidated financial statements

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

2 unchanged sentences

Three months ended

September 30,

Nine months ended

September 30,

Insurance Recoveries

$ 35,464  

$ 33,860  

Operating expenses:

11,940  

12,546  

Selling, general and administrative

Depreciation and amortization

Depreciation, amortization and impairment

Total operating expenses

23,444  

22,666  

Operating income

12,020  

11,194  

Other income (expense):

3 unchanged sentences

Income before income taxes

Provision for income taxes

11,612  

11,370  

Income tax provision (benefit)

$ 9,232  

$ 11,755  

Earnings Per Share of Common Stock:

Basic Earnings Per Share

$ 0.36  

$ 0.47  

Diluted Earnings Per Share

$ 0.36  

$ 0.46  

Weighted average shares and share equivalents outstanding:

25,414  

24,972  

25,668  

25,725  

See accompanying notes to condensed consolidated financial statements

3 unchanged sentences

Three months ended

September 30,

Nine months ended

September 30,

Other comprehensive income:

Other comprehensive income (loss):

Foreign currency translation adjustment

Other comprehensive income

Other comprehensive income (loss)

Comprehensive income

11 unchanged sentences

Non-cash stock compensation expense

Dividends declared of $ 0.21 per common share

Other comprehensive loss, foreign currency translation adjustment

11,755  

Balances at March 31, 2020

$ 165,631  

$ 37,297  

Purchase of 38,369 shares treasury stock

Issuance of 148,284 common shares for the exercise of stock options

Forfeitures of 6,793 restricted common shares

Non-cash stock compensation expense

Other comprehensive income, foreign currency translation adjustment

Balances at June 30, 2020

$ 167,808  

$ 45,574  

Purchase of 17,590 shares treasury stock

Issuance of 103,608 common shares for the exercise of stock options

Non-cash stock compensation expense

Other comprehensive income, foreign currency translation adjustment

Balances at September 30, 2020

Balances at March 31, 2021

$ 172,642  

8 unchanged sentences

$ 162,154  

$ ( 106,339 )

$ 32,892  

1 unchanged sentence

Issuance of 260,481 common shares for the exercise of stock options

Issuance of 6,005 restricted common shares

Non-cash stock compensation expense

1 unchanged sentence

Other comprehensive income, foreign currency translation adjustment

Balances at March 31, 2019

11,755  

$ ( 102,867 )

11,755  

Purchase of 2,977 shares treasury stock

Issuance of 18,000 common shares for the exercise of stock options

Non-cash stock compensation expense

Dividends declared of $ 0.19 per common share

Other comprehensive income, foreign currency translation adjustment

Balances at June 30, 2019

$ 158,691  

$ ( 100,201 )

$ 25,967  

Purchase of 32,207 shares treasury stock

Issuance of 72,843 common shares for the exercise of stock options

Non-cash stock compensation expense

Dividends declared of $ 0.19 per common share

Other comprehensive income, foreign currency translation adjustment

Balances at September 30, 2019

Balances at March 31, 2020

$ 165,631  

4 unchanged sentences

(In thousands, unaudited)

Nine months ended

September 30,

Three months ended

Cash flows from operating activities:

$ 9,232  

$ 11,755  

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

Depreciation, amortization and impairment

Deferred income taxes

1 unchanged sentence

Non-cash share-based compensation expense

Gain on insurance recoveries for damaged property

Loss on disposal of property and equipment

Net changes in assets and liabilities:

1 unchanged sentence

Prepaid expenses and other current assets

Insurance recoverable

Insurance receivable

Deferred contract costs, net

1 unchanged sentence

Accounts payable

Accrued expenses, wages, bonuses and profit sharing

Accrued expenses, wages and bonuses

Income taxes receivable and payable

1 unchanged sentence

Net cash provided by operating activities

14,408  

Cash flows from investing activities:

Purchases of property and equipment

Insurance proceeds for damaged property

Acquisition consideration

Net cash used in investing activities

3 unchanged sentences

Payments on notes payable

Payment of debt issuance costs

Payments on finance lease obligations

Proceeds from the exercise of stock options

Proceeds from the exercise of share-based awards

Payment of employee payroll tax withholdings on share-based awards exercised

1 unchanged sentence

Net cash used in financing activities

Effect of exchange rate changes on cash

Effect of exchange rate changes on cash and cash equivalents

Change in cash and cash equivalents

Cash and cash equivalents at beginning of period

34,690  

13,517  

Cash and cash equivalents at end of period

$ 43,454  

$ 10,021  

Supplemental disclosure of cash paid for:

Interest, net of capitalized amounts

Interest expense, net of capitalized amounts

Supplemental disclosure of non-cash investing and financing activities:

Finance lease obligations originated for property and equipment

Stock tendered to the Company for cashless exercise of stock options in connection with equity incentive plans

$ 3,145  

Deferred acquisition consideration

$ 1,950  

See accompanying notes to condensed consolidated financial statements.

9 unchanged sentences

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 six operating segments are aggregated into one reporting segment because they have similar economic characteristics and meet other aggregation criteria from the Financial Accounting Standards Board (“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.

In March 2021, we changed our operating segments from six to one to reflect a change in corporate reporting structure to the Company’s Chief Executive Officer and chief operating decision maker.

Our condensed consolidated balance sheet at December 31, 2020 was derived from our audited consolidated balance sheet as of that date.

6 unchanged sentences

All significant intercompany transactions and balances have been eliminated.

Our Canadian subsidiary uses Canadian dollars as its functional currency.

Our Canadian subsidiary uses as its functional currency the local currency of the country in which it operates.

It translates its assets and liabilities into U.S.

2 unchanged sentences

We include translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’

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. 

Revenue Recognition

We derive a majority of our revenues from our annually renewable subscription-based service agreements with our clients, which include performance measurement and improvement services, healthcare analytics and governance education services.

We derive a majority of our revenues from our annually renewable subscription-based service agreements with our customers, which include performance measurement and improvement services, healthcare analytics and governance education services.

Such agreements are generally cancelable on short or no notice without penalty.

See Note 2 for further information about our contracts with clients.

See Note 3 for further information about our contracts with customers.

We account for revenue using the following steps:

Identify the contract, or contracts, with a client;

Identify the contract, or contracts, with a customer;

Identify the performance obligations in the contract;

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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 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.

We combine contracts with the same customer into a single contract for accounting purposes when the contract is entered into at or near the same time and the contracts are negotiated together.

For contracts that contain more than one separately identifiable performance obligation, the total transaction price is allocated to the identified performance obligations based upon the relative stand-alone selling prices of the performance obligations.

The stand-alone selling prices are based on an observable price for services sold to other comparable clients, when available, or an estimated selling price using a cost-plus margin or residual approach.

The stand-alone selling prices are based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost-plus margin or residual approach.

We estimate the amount of total contract consideration we expect to receive for variable arrangements based on the most likely amount we expect to earn from the arrangement based on the expected quantities of services we expect to provide and the contractual pricing based on those quantities.

2 unchanged sentences

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 consist principally of four different types of arrangements:

Our arrangements with customers consist principally of four different types of arrangements:

1 ) subscription-based service agreements;

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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.

These agreements are renewable at the option of the client 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 as the client receives and consumes the benefits throughout the contract period.

Subscription-based services - Services that are provided under subscription-based service agreements are usually for a twelve month period and represent a single promise to stand ready to provide reporting, tools and services throughout the subscription period as requested by the customer.

These agreements are renewable at the option of the customer at the completion of the initial contract term for an agreed upon price increase each year.

These agreements represent a series of distinct monthly services that are substantially the same, with the same pattern of transfer to the customer as the customer receives and consumes the benefits throughout the contract period.

Accordingly, subscription services are recognized ratably over the subscription period.

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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.

Under these arrangements, we recognize revenue at the point in time we complete the service and it is accepted by the customer.

Fixed, non-subscription services –

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Unit-price services –

These arrangements typically require us to perform certain services on a periodic basis as requested by the client for a per-unit amount which is typically billed in the month following the performance of the service.

These arrangements typically require us to perform certain services on a periodic basis as requested by the customer for a per-unit amount which is typically billed in the month following the performance of the service.

Revenue under these arrangements is recognized over the time the services are performed at the per-unit amount.

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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 contract.

We defer commissions and incentives, including payroll taxes, if they are incremental and recoverable costs of obtaining a renewable customer contract.

Deferred contract costs are amortized over the estimated term of the contract, including renewals, which generally ranges from three to five years.

The contract term was estimated by considering factors such as historical client attrition rates and product life. The amortization period is adjusted for significant changes in the estimated remaining term of a contract. 

The contract term was estimated by considering factors such as historical customer attrition rates and product life. The amortization period is adjusted for significant changes in the estimated remaining term of a contract. 

An impairment of deferred contract costs is recognized when the unamortized balance of deferred contract costs exceeds the remaining amount of consideration we expect to receive net of the expected future costs directly related to providing those services.  We have elected the practical expedient to expense contract costs when incurred for any nonrenewable contracts with a term of one year or less.

We deferred incremental costs of obtaining a contract of $ 717,000 and $ 1.0 million in the three months ended September 30, 2020 and 2019, respectively.

The company deferred incremental costs of obtaining a contract of $ 2.9 million and $ 1.8 million in the nine -month periods ended September 30, 2020 and 2019, respectively.

Deferred contract costs, net of accumulated amortization was $ 4.5 million and $ 4.2 million at September 30, 2020 and December 31, 2019, respectively.

Total amortization by expense classification for the three and nine -months ended September 30, 2020 and 2019 was as follows:

Three months ended

Nine months ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

We deferred incremental costs of obtaining a contract of $ 941,000 and $ 1.6 million in the three months ended March 31, 2021 and 2020, respectively.

Deferred contract costs, net of accumulated amortization was $ 4.8 million and $ 4.6 million at March 31, 2021 and December 31, 2020, respectively.

Total amortization by expense classification for the three months ended March 31, 2021 and 2020 was as follows:

(In thousands)

2 unchanged sentences

Total amortization

$ 2,538  

$ 2,098  

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

Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $ 7,000 and $ 1,000 for the three months ended March 31, 2021 and 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.

1 unchanged sentence

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.

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

Nine months ended September 30, 2020

Nine months ended September 30, 2019

The following table provides the activity in the allowance for doubtful accounts for the three months ended March 31, 2021 and 2020 (In thousands):

End of Period

Three months ended March 31, 2021

Three months ended March 31, 2020

We determine whether a lease is included in an agreement at inception.

Operating lease ROU assets are included in operating lease right-of-use assets in our consolidated balance sheet.

Operating lease 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.

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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 of Hosting Arrangements

When a software license is included in a cloud computing arrangement and we have the legal right, ability and feasibility to download the software, it is accounted for as software, included in property and equipment, and amortized.

If a software license is not included or we do not have the ability or feasibility to download software included in a cloud computing arrangement, it is accounted for as a service contract, which is expensed to direct expenses or selling, general and administrative expenses during the service period.

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.

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 three months ended March 31, 2021, we recorded an ROU asset impairment charge of $ 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 depreciation, amortization and impairment expenses.

There were no ROU asset impairment charges in 2020.

Rent income from the sublessee are included in the statement of operations on a straight-line basis as an offset to rent expense associated with the original operating lease included in other expenses .

Fair Value Measurements

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( 3 ) Level 3 Inputs—unobservable inputs.

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

The following details our financial assets within the fair value hierarchy at March 31, 2021 and December 31, 2020:

(In thousands)

As of September 30, 2020

As of March 31, 2021

Money Market Funds

11 unchanged sentences

$ 5,015  

There were no transfers between levels during the three -month period ended September 30, 2020.

There were no transfers between levels during the three -month period ended March 31, 2021.

Our long-term debt described in Note 4 is recorded at historical cost.

1 unchanged sentence

The following are the carrying amount and estimated fair values of long-term debt:

September 30,

(In thousands)

7 unchanged sentences

All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes ROU assets, property and equipment, goodwill, intangibles and cost method investments, are measured at fair value in certain circumstances (for example, when there is evidence of impairment).

As of September 30, 2020, and December 31, 2019, there was no indication of impairment related to these assets.

As of March 31, 2021, and December 31, 2020, there was no indication of impairment related to these assets other than the Seattle office ROU.

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”).

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.

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 our reporting 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 interim impairment test to be performed as it is not more likely than not that an impairment loss has been incurred at September 30, 2020.

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.

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 had been incurred at March 31, 2021.

Commitments and Contingencies

2 unchanged sentences

Legal fees, net of estimated insurance recoveries, are expensed as incurred.

There were no outstanding claims at September 30, 2020.

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.

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 on our consolidated financial statements.

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.

We do not believe the final disposition of claims at March 31, 2021 will have material adverse effect on our consolidated financial position, results of operations or liquidity.

Recent Accounting Pronouncements Not Yet Adopted  

In March 2020, FASB issued ASU No.

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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.

CONTRACTS WITH C LIENTS

The following table disaggregates revenue for the three and nine -month periods ending September 30, 2020 and 2019 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

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.

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

Property and equipment

Customer related

Total assets acquired

$ 5,234  

Current liabilities

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 of PatientWisdom 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 $ 111,000 are included in selling, general and administrative expenses for the three months ended March 31, 2021.

CONTRACTS WITH CUSTOMERS

The following table disaggregates revenue for the three -month periods ending March 31, 2021 and 2020 based on timing of revenue recognition (in thousands):

Subscription services recognized ratably over time

$ 33,054  

6 unchanged sentences

$ 33,860  

$ 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.

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

September 30,

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

Accounts receivables

3 unchanged sentences

Deferred Revenue

Significant changes in contract assets and contract liabilities during the nine -months ended September 30, 2020 and 2019 are as follows (in thousands): 

Nine months ended

September 30, 2020

Nine months ended

September 30, 2019

Significant changes in contract assets and contract liabilities during the three months ended March 31, 2021 and 2020 are as follows (in thousands):

Increase (Decrease)

1 unchanged sentence

Increases due to invoicing of client, net of amounts recognized as revenue

16,352  

17,829  

Increases due to acquisition

Decreases due to completion of services (or portion of services) and transferred to accounts receivable

2 unchanged sentences

Increases due to revenue recognized in the period with additional performance obligations before invoicing

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 30, 2020 approximated $ 124,000 , of which $ 51,000 and $ 73,000 are expected to be recognized during 2020 and 2021, respectively.

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 since we are filing in more states.

The effective tax rate for the nine -month period ended September 30, 2020 decreased to 8.1 % compared to 18.7 % for the same period in 2019 primarily from the exercise and vesting of shared-based compensation awards partially offset by higher state income taxes.

We have elected to apply the practical expedient to not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Total remaining contract revenue for contracts with original duration of greater than one year expected to be recognized in the future related to performance obligations that are unsatisfied at March 31, 2021 approximated $ 1.7 million, of which $ 708,000 , $ 497,000 and $ 458,000 are expected to be recognized during 2021, 2022 and 2023, respectively.

The effective tax rate for the three -month period ended March 31, 2021 increased to 20.5 % expense compared to a 3.4 % benefit for the same period in 2020 mainly due to decreased tax benefits of $ 2.8 million from the exercise and vesting of share-based compensation awards and higher state income taxes.  

In March 27, 2020, the U.S.

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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 of employer social security tax payments into future years.

As a result of the CARES Act, we have deferred $ 1,323,000 of employer social security tax payments of which $ 661,000 will be paid 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 ).

The adoption of this standard had no material impact to our consolidated financial statements.

NOTES PAYABLE

Our long-term debt consists of the following:

September 30,

(In thousands)

6 unchanged sentences

$ 26,547  

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”

Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) includes (i) a $ 30,000,000 revolving credit facility (the “Line of Credit”), (ii) a $ 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 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 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 % at September 30, 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 September 30, 2020, and December 31, 2019, the Line of Credit did not have a balance.

There were no borrowings on the Line of Credit for three and nine -month periods ended September 30, 2020.

As of March 31, 2021, and December 31, 2020, the Line of Credit did not have a balance.

There were no borrowings on the Line of Credit for three -month period ended March 31, 2020.

There have been no borrowings on the Delayed Draw Term Loan since origination.

4 unchanged sentences

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 30, 2020, we were in compliance with our financial covenants.

As of March 31, 2021, we were in compliance with our financial covenants.

SHARE-BASED COMPENSATION

1 unchanged sentence

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, 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 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 no shares of stock available for future grants.

We refer to our restricted stock awards as “non-vested”

stock 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.

5 unchanged sentences

Vesting terms vary with each grant and option terms are generally five to ten years following the date of grant.

During the nine months ended September 30, 2020 and 2019, we granted options to purchase 70,471 and 100,615 shares of Common Stock, respectively.

During the three months ended March 31, 2021 and 2020, we granted options to purchase 51,002 and 48,934 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.

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We consider groups of associates that have similar historical exercise behavior separately for valuation purposes.

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

The following table summarizes stock option activity under the 2006 Equity Incentive Plans and the 2004 Director Plan for the three -month period ended March 31, 2021:

Outstanding at December 31, 2020

7 unchanged sentences

$ 40.48  

Outstanding at September 30, 2020

Outstanding at March 31, 2021

529,526  

1 unchanged sentence

$ 11,203  

Exercisable at September 30, 2020

Exercisable at March 31, 2021

291,968  

1 unchanged sentence

$ 8,398  

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

There was $ 1.1 million and $ 1.6 million of cash received from stock options exercised for the three and nine -month periods ended September 30, 2020, respectively, and no cash was received from the exercise of options in the same periods of 2019.

We recognized $ 237,000 and $ 235,000 of non-cash compensation expense for the three months ended September 30, 2020 and 2019, respectively, and $ 736,000 and $ 699,000 of non-cash compensation expense for the nine months ended September 30, 2020 and 2019, respectively, related to options, which are included in direct fixed and selling, general and administrative expenses.

During the nine months ended September 30, 2019, we granted 6,005 non-vested restricted shares of Common Stock under the 2006 Equity Incentive Plan.

No restricted shares were granted during the nine months ended September 30, 2020.

As of September 30, 2020, we had 42,761 non-vested restricted shares of Common Stock outstanding under the 2006 Equity Incentive Plan.

As of March 31, 2021, the total unrecognized compensation cost related to non-vested stock option awards was approximately $ 1.3 million which was expected to be recognized over a weighted average period of 3.37 years.

There was $ 162,000 cash received from stock options exercised for the three months ended March 31, 2021 and no cash was received from stock options exercised during the same period in 2020.

We recognized $ 11,000 and $ 282,000 of non-cash compensation for the three months ended March 31, 2021 and 2020, respectively, related to options, which is included in direct fixed and selling, general and administrative expenses.

During the three months ended March 31, 2021, we granted 12,698 non-vested shares of Common Stock under the 2006 Equity Incentive Plan.

No shares were granted during the three months ended March 31, 2020.

As of March 31, 2021, we had 12,698 non-vested 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 and $ 73,000 of non-cash compensation expense for the three months ended September 30, 2020 and 2019, respectively, and $ 12,000 and $ 218,000 of non-cash compensation expense for the nine months ended September 30, 2020 and 2019, respectively, related to this non-vested restricted stock, which are included in direct fixed and selling, general and administrative expenses.

During the nine months ended September 30 2020, 34,622 shares vested and 6,793 shares were forfeited.

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

We recognized ($ 65,000 ) and $ 50,000 of non-cash compensation (benefit) expense for the three months ended March 31, 2021 and 2020, respectively, related to this non-vested stock, which is included in direct fixed and selling, general and administrative expenses.

During the three -month period ended March 31, 2021, 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 three -month period ended March 31, 2021:

Common Shares

Grant Date Fair

3 unchanged sentences

$ 38.30  

Outstanding at September 30, 2020

Outstanding at March 31, 2021

12,698  

$ 42.92  

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

As of March 31, 2021, the total unrecognized compensation cost related to non-vested stock awards was approximately $ 518,000 and is expected to be recognized over a weighted average period of 4.75 years.

GOODWILL AND OTHER INTANGIBLE ASSETS

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

The following represents a summary of changes in the carrying amount of goodwill for the three -month period ended March 31, 2021:

(In thousands)

1 unchanged sentence

$ 57,969  

$ 57,255  

Goodwill acquired

Foreign currency translation

Balance as of September 30, 2020

Balance at March 31, 2021

$ 62,328  

$ 61,614  

Intangible assets consisted of the following:

September 30,

(In thousands)

4 unchanged sentences

Amortizing intangible assets:

Client related

Customer related

Total amortizing intangible assets

5 unchanged sentences

$ 1,410  

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

PROPERTY AND EQUIPMENT

September 30,

(In thousands)

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The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method.

We had 64,772 and 27,284 options of Common Stock for the three -month periods ended September 30, 2020 and 2019, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive.

We had 56,812 and 12,493 options of Common Stock for the nine -month periods ended September 30, 2020 and 2019, 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

(In thousands, except per share data)

We had 109,286 and 47,859 options of Common Stock for the three -month periods ended March 31, 2021 and 2020, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive.

For the Three

March 31, 2021

For the Three

March 31, 2020

(In thousands)

Numerator for net income per share –

1 unchanged sentence

$ 11,755  

$ 29,048  

$ 23,708  

Allocation of distributed and undistributed income to unvested restricted stock shareholders

1 unchanged sentence

11,732  

23,628  

Denominator for net income per share –

2 unchanged sentences

24,972  

25,113  

24,794  

Net income per share –

1 unchanged sentence

$ 0.47  

$ 1.15  

$ 0.95  

Numerator for net income per share –

1 unchanged sentence

11,732  

23,628  

Denominator for net income per share –

2 unchanged sentences

24,972  

25,113  

24,794  

Weighted average effect of dilutive securities –

4 unchanged sentences

25,725  

25,701  

25,624  

Net income per share - diluted

1 unchanged sentence

$ 0.46  

$ 1.13  

During the three months ending March 31, 2021, we entered an agreement as lessor to sublease our Seattle office.

Future minimum undiscounted cash receipts due under the agreement at March 31, 2021 are as follows (in thousands):

Remainder 2021

Total minimum lease receipts

( 11 )  

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Until January 2020, one of our directors served as an officer and director of Ameritas Life Insurance Corp.

(“Ameritas”) and continues to serve on the board of directors of Ameritas.

(“Ameritas”) and as of March 31, 2021 continued to serve on the board of directors of Ameritas.

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 and $ 61,000 in the three -month periods ended September 30, 2020 and 2019, respectively and $ 181,000 and $ 187,000 in the nine -month periods ended September 30, 2020 and 2019, respectively.

The total value of these purchases was $ 71,000 and $ 72,000 in the three -month periods ended March 31, 2021 and 2020, 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 -month period ended September 30, 2020.

There were no purchases of this insurance during the three -month period ended September 30, 2020.

These purchases totaled $ 478,000 in the three -month period ended March 31, 2020.

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 and $ 170,000 in the three -month periods ended September 30, 2020 and 2019, respectively, and $ 251,000 and $ 493,000 in the nine -month periods ended September 30, 2020 and 2019, respectively.

The total revenue earned from the PX reseller agreement in the three -month periods ended March 31, 2021 and 2020, were $ 17,000 and $ 83,000 , respectively.

We will no longer earn revenue under this agreement after September 30, 2021 due to termination of the reseller agreement.

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 table below presents entity-wide information regarding the Company’s assets, after elimination of intercompany balances by geographic area:

September 30,

(In thousands)

Long-lived assets:

United States

$ 77,381  

$ 78,906  

$ 79,880  

$ 81,528  

Total assets:

United States

$ 118,536  

$ 95,668  

15,017  

$ 127,246  

$ 110,685  

 Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations

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

Our purpose is to 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.

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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.

Historically, we have relied on national travel as part of our sales efforts, but as a result of the pandemic we have placed a temporary hold on all company related travel.

We expect limited travel to resume in the third quarter of 2021.

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.

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.

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 (please note that all columns may not add up to 100% due to rounding).

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 the three-month period ended March 31, 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 in 2021 was $535,000.

Three months ended

September 30,

Nine months ended

September 30,

Insurance recoveries:

Operating expenses:

Selling, general and administrative

Depreciation and amortization

Depreciation, amortization and impairment

Total operating expenses

Operating income

Three Months Ended September 30, 2020, Compared to Three Months Ended September 30, 2019

Revenue for the three-month period ended September 30, 2020, increased 3.1% to $33.5 million, compared to $32.5 million, in the three-month period ended September 30, 2019.

The increase was due to new client sales and existing client base sales, partially offset by 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 three-month period ended September 30, 2020 representing $533,000 in lost revenue.  

Direct expenses .

Direct expenses increased 0.7% to $12.2 million for the three-month period ended September 30, 2020, compared to $12.1 million for the same period in 2019.

This was due to an increase in fixed expenses of $872,000, partially offset by a decrease in variable expenses of $790,000.

Fixed expenses increased primarily as a result of increased salary and benefit costs in the client service and information technology areas, 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 survey methodologies and decreased 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 in the estimated useful lives 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.  

Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019

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. 

Three Months Ended March 31, 2021, Compared to Three Months Ended March 31, 2020

Revenue for the three-month period ended March 31, 2021, increased 4.7% to $35.5 million, compared to $33.9 million in the three-month period ended March 31, 2020.

The increase was primarily due to new customer sales, as well as increases in sales to the existing client base. 

This was partially offset by a decrease of $605,000 in conference revenue in the three-month period ended March 31, 2021 in comparison to the same period in 2020 due to the timing of conferences and a virtual format in 2021 compared to a live format in 2020.

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.

Fixed expenses increased primarily as a result of increased salary and benefit and contracted services costs in the client service and information technology areas, partially offset by decreased travel 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 virtually hosting the conferences on account of COVID-19.

Direct expenses decreased as a percentage of revenue to 36.9% in the nine-month period ended September 30, 2020, compared to 37.0% during the same period of 2019, as these expenses increased by 3.1% while revenue for the same period increased by 3.3%.

Direct expenses decreased 4.8% to $11.9 million for the three-month period ended March 31, 2021, compared to $12.5 million in the same period in 2020.

This was due to decreases in variable expenses of $103,000 and fixed expenses of $502,000.

Variable expenses decreased due to less postage, printing, and paper costs partially offset by higher contracted services primarily resulting from changes in survey methodologies and decreased conference expenses due to the timing and virtual format of conferences.

Fixed expenses decreased primarily as a result of decreased contracted services and lower travel and meal costs due to restricted travel associated with COVID-19, partially offset by increased salary and benefit costs.

Direct expenses decreased as a percentage of revenue to 33.7% in 2021, from 37.0% in 2020, as revenue increased by 4.7% while expenses for the same period decreased by 4.8%.

Selling, general and administrative expenses .

Selling, general and administrative expenses increased 3.3% to $25.6 million for the nine-month period ended September 30, 2020, compared to $24.7 million for the same period in 2019, primarily due to additional salary 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 in legal and accounting costs of $258,000 due to timing of tax and audit related work, and a decrease in other taxes of $170,000 due a to favorable sales tax ruling allowing the reversal of a previous sales tax accrual.

Selling, general, and administrative expenses as a percentage of revenue remained at 25.9% for the nine-month periods ended September 30, 2019 and 2020.

Depreciation and amortization.

Depreciation and amortization expenses increased 7.9% to $4.6 million for the nine-month period ended September 30, 2020, compared to $4.3 million for the same period in 2019, primarily due to the change in useful lives of certain assets.

Depreciation and amortization expenses as a percentage of revenue were 4.7% for the nine-month period ended September 30, 2020 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.

Selling, general and administrative expenses increased 8.8% to $9.5 million for the three-month period ended March 31, 2021, compared to $8.7 million for the same period in 2020, primarily due to increases in software and platform hosting expenses of $344,000, higher contracted services of $380,000, increased salary and benefit costs of $218,000, higher accounting and legal costs of $81,000 and additional building lease costs of $69,000.

These were partially offset by lower travel and meal costs of $358,000 due to restricted travel associated with COVID-19.

Selling, general and administrative expenses increased as a percentage of revenue to 26.8% in 2021, from 25.8% in 2020, as revenue increased by 4.7% while expenses for the same period increased by 8.8%.

Depreciation, amortization and impairment.

Depreciation, amortization and impairment was $2.0 million for the three-month period ended March 31, 2021 and $1.4 million for the three-month period ended 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 due to shortening the estimated useful lives of certain building assets of $194,000.

Depreciation, amortization and impairment expense increased as a percentage of revenue to 5.6% for the three-month period ended March 31, 2021 from to 4.0% in 2020, as revenue increased by 4.7% while expenses for the same period increased by 44.7%.

Other income (expense) .

Other expense, net decreased to $897,000 for the nine-month period ended September 30, 2020, compared to $1.9 million of other expense, net for the same period in 2019.

Interest expense decreased to $1.4 million in the 2020 period from $1.6 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 $469,000 for the nine-month period ended September 30, 2020 compared to other expense of $306,000 for the same period in 2019 primarily due to a gain on insurance recoveries for property damage of $260,000 and the revaluation of intercompany transactions for changes in the foreign exchange rates.

Other expense, net was $408,000 for the three-month period ended March 31, 2021, compared to other income, net of $176,000 for the same period in 2020, primarily due to decreased interest expense and foreign exchange rate changes.

Interest expense decreased to $432,000 in 2021 from $465,000 for the same period in 2020 primarily due to the declining balance on our term loan.

Other income decreased to $21,000 in 2021 compared to $630,000 for the same period of 2020 primarily due to revaluation on intercompany transactions due to changes in the foreign exchange rate.

Income tax provision.

Income tax provision was $2.5 million for the nine-month period ended September 30, 2020, compared to $5.4 million for the same period in 2019.

The effective tax rate for the nine-month period ended September 30, 2020, decreased to an 8.1% effective tax rate from an 18.7% effective tax rate for the same period in 2019 primarily due to increased tax benefits of $3.8 million from the exercise and vesting of share-based compensation awards, partially offset by higher state income taxes.

Income tax provision was $2.4 million for the three-month period ended March 31, 2021, compared to a $385,000 benefit for the same period in 2020.

The effective tax rate for the three-month period ended March 31, 2021 increased to to 20.5% compared to a 3.4% tax benefit for the same period in 2020 mainly due to decreased tax benefits of $2.8 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 and expected needs for the foreseeable future. 

Cash dividends in the aggregate amount of $10.5 million paid in the nine-month period ended September 30, 2020 were funded with cash on hand.

No dividends were declared in the three-month period ended September 30, 2020.

Our board of directors considers whether to declare a dividend and the amount of any dividends declared on a quarterly basis. 

As of September 30, 2020, our principal sources of liquidity included $21.9 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 Loan.

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. 

No dividends were declared or paid in the three-month period ended March 31, 2021.

Dividends were declared and paid in April 2021 of $3.1 million, which were 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 March 31, 2021, our principal sources of liquidity included $43.5 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, $5.1 million was held in Canada.

On May 28, 2020, 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 only be used to fund permitted future business acquisitions or repurchasing our Common Stock.

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 balance of $15.3 million and deficit of $9.0 million on September 30, 2020 and December 31, 2019, respectively.

The change was primarily due to increases in cash and cash equivalents of $8.3 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;

and decreases in dividends payable of $5.2 million, accrued expenses of $792,000, and accounts payable of $554,000.

These were partially offset by an increase in deferred revenue of $974,000.

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 changed due to the timing of income tax payments.

Accounts payable, 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 and paid and our board of directors’

determination of whether to pay dividends.

We had working capital of $25.3 million and $22.4 million on March 31, 2021 and December 31, 2020, respectively.

The change was primarily due to increases in cash and cash equivalents of $8.8 million and prepaid expenses of $753,000.

This was partially offset by increases in income taxes payable of $1.0 million and deferred revenue of $2.0 million, the addition of deferred acquisition consideration of $2.0 million, and decreases of $1.1 million in income taxes receivable and $676,000 in other current assets.

Income taxes receivable and payable changed due to the timing of income tax payments.

Prepaid expenses changed due to the timing of payments, and other current assets changed due to the timing of receipts on state tax incentives.

The deferred acquisition consideration was due to the acquisition in the three-month period ended March 31, 2021.

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 30, 2020, and December 31, 2019, were $17.3 million and $16.4 million, respectively.

The deferred revenue balances as of March 31, 2021, and December 31, 2020, were $17.6 million and $15.6 million, respectively.

The deferred revenue balance is primarily due to timing of initial billings on new and renewal contracts.

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Cash Flow Analysis

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

Nine Months Ended September 30,

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

Three Months Ended March 31,

(In thousands)

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Cash Flows from Operating Activities

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

Net cash provided by operating activities was $24.4 million for the nine-month period ended September 30, 2020, which included net income of $29.0 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 million.

Net changes in assets and liabilities decreased cash flows from operating activities by $9.8 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 and operating lease assets and liabilities, net, which fluctuate due to the timing of payments for prepaids, accounts payable, accrued expenses, direct and incremental costs directly related to sales and timing of income tax payments.

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.

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

Net cash provided by operating activities was $14.4 million for the three-month period ended March 31, 2021, which included net income of $9.2 million, plus non-cash charges (benefits) for deferred income taxes, depreciation, amortization and impairment, reserve for uncertain tax positions and non-cash share-based compensation totaling $2.1 million.

Changes in working capital increased cash flows from operating activities by $3.1 million, primarily from an increase in deferred revenue and accrued expenses, wages and bonuses;

and decreases in operating lease assets and liabilities, net and changes in income taxes receivable and 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 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”).

These increases to cash flows were partially offset by increases in trade accounts 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 and accounts payable and the timing of direct and incremental costs directly related to sales.

Net cash provided by operating activities was $5.5 million for the three-month period ended March 31, 2020, which included net income of $11.8 million, plus non-cash charges (benefits) for deferred income taxes, depreciation and amortization, reserve for uncertain tax positions and share-based compensation and related taxes totaling $2.1 million.

Net changes in assets and liabilities decreased cash flows from operating activities by $8.4 million, primarily due to increases in trade accounts receivable, prepaid and other current assets, deferred contract costs, net and insurance receivable, as well as decreases in accounts payable, accrued expenses, wages, bonuses and profit sharing, and income taxes receivable and payable which fluctuate due to the timing of payments of prepaids, accounts payable and accrued expenses, direct and incremental costs directly related to sales and the timing of income tax payments.

These decreases to cash flows were partially offset by increases in deferred revenue, which will vary based on the timing and frequency of billings on annual agreements.

Cash Flows from Investing Activities

Net cash of $2.2 million and $3.4 million was used for investing activities in the nine months ended September 30, 2020 and 2019, respectively.

Net cash used for investing activities was $4.2 million in the three months ended March 31, 2021.

These expenditures consisted of $3.0 million for acquisition consideration and $1.2 million for purchases of property and equipment including leasehold improvements and computer software and hardware.

Net cash used for investing activities was $590,000 in the three months ended March 31, 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 $13.6 million in the nine months ended September 30, 2020.

Cash was used to repay borrowings under the term notes totaling $2.6 million, pay debt issuance costs of $36,000 and finance lease obligations of $187,000.

Cash was also used 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.

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

Net cash used in financing activities was $1.4 million in the three months ended March 31, 2021.

We used cash to repay borrowings under the term notes totaling $1.0 million and for finance lease obligations of $122,000.

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.

Net cash used in financing activities was $7.5 million in the three months ended March 31, 2020.

We used cash to repay borrowings under the term notes totaling $959,000 and for finance lease obligations of $58,000.

We also used cash to pay $5.2 million of dividends on our common stock, and to pay payroll tax withholdings related to share-based compensation of $1.3 million.

The effect of changes in foreign exchange rates increased cash and cash equivalents by $23,000 in the three months ended March 31, 2021 and decreased cash and cash equivalents by $893,000 in the three months ended March 31, 2020.

Capital Expenditures

Cash paid for capital expenditures was $2.4 million for the nine months ended September 30, 2020.

These expenditures consisted mainly of computer software classified in property and equipment.

Cash paid for capital expenditures was $1.2 million for the three months ended March 31, 2021.

These expenditures consisted mainly of leasehold improvements and computer software and hardware.

In addition to continued expenditures for computer software and hardware 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.

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”

Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) includes (i) a $30,000,000 revolving credit facility (the “Line of Credit”), (ii) a $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 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 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% at September 30, 2020).

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 (2.36% at March 31, 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 30, 2020, and December 31, 2019, the Line of Credit did not have a balance.

There were no borrowings on the Line of Credit for three and nine-month periods ended September 30, 2020.

As of March 31, 2021, the Line of Credit did not have a balance.

There were no borrowings on the Line of Credit for the three-month period ended March 31, 2021.

There have been no borrowings on the Delayed Draw Term Loan since origination.

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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 30, 2020, we were in compliance with our financial covenants.

As of March 31, 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”).

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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 in 2021.

We are required to pay interest on borrowings under our Line of Credit and Delayed Draw Term Loan at floating rates based on LIBOR.

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.

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We have finance leases for computer equipment, office equipment, printing and inserting equipment.

The balance of the finance leases as of September 30, 2020 was $1.4 million.

The balance of the finance leases as of March 31, 2021, was $1.1 million.

Shareholders’

equity increased $23.8 million to $56.7 million at September 30, 2020, from $32.9 million at December 31, 2019.

The increase was mainly due to net income of $29.0 million and share-based compensation of $747,000.

This was partially offset by dividends declared of $5.3 million, share repurchases exceeding the cost of stock options exercised of $266,000 and changes in the cumulative translation adjustment of $414,000.

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.

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.

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.

equity increased $8.9 million to $73.2 million at March 31, 2021, from $64.3 million at December 31, 2020.

The increase was mainly due to net income of $9.2 million and changes in the cumulative translation adjustment of $56,000.

This was partially offset by share repurchases exceeding the cost of stock options exercised of $299,000 and shared-based compensation benefit of $54,000.

Contractual Obligations

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

We had contractual obligations to make payments in the following amounts in the future as of March 31, 2021:

Contractual Obligations (1)

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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 30, 2020, the remaining number of shares of Common Stock that could be purchased under this authorization was 280,491 shares. 

As of March 31, 2021, the remaining number of shares of Common Stock that could be purchased under this authorization was 280,491 shares. 

Critical Accounting Estimates

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Quantitative and Qualitative Disclosures about Market Risk

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

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements