NRC HEALTH 10-Q

ITEM 1. Financial Statements   NATIONAL RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts and par value)       June 30, 2022     December 31, 2021       (unaudited)           Assets                 Current assets:                 Cash and cash equivalents   $ 32,974     $ 54,361   Trade accounts receivable, less allowance for doubtful accounts of $ 65 and $ 94 , respectively     13,112       13,728   Prepaid expenses     4,107       3,884   Income taxes receivable     389       752   Other current assets     1,198       982   Total current assets     51,780       73,707                     Net property and equipment     13,602       12,391   Intangible assets, net     1,696       1,790   Goodwill     61,614       61,614   Deferred contract costs, net     3,167       3,772   Deferred income taxes     18       14   Operating lease right-of-use assets     787       975   Other     3,569       3,277   Total assets   $ 136,233     $ 157,540                     Liabilities and Shareholders ’ Equity                 Current liabilities:                 Current portion of notes payable   $ 4,390     $ 4,278   Accounts payable     1,658       1,943   Accrued wages and bonuses     6,914       7,139   Accrued expenses     3,315       5,450   Dividends payable     5,944       3,044   Income taxes payable     558       -   Deferred revenue     15,496       17,213   Other current liabilities     1,312       1,321   Total current liabilities     39,587       40,388                     Notes payable, net of current portion and unamortized debt issuance costs     20,044       22,269   Deferred income taxes     5,727       7,002   Other long-term liabilities     2,251       2,544   Total liabilities     67,609       72,203                     Shareholders’ equity:                 Preferred stock, $ 0.01 par value, authorized 2,000,000 shares, none issued     -       -   Common stock, $ 0.001 par value; authorized 110,000,000 shares, issued 30,898,600 in 2022 and 2021, outstanding 24,767,118 in 2022 and 25,361,409 in 2021     31       31   Additional paid-in capital     174,561       173,942   Retained earnings (accumulated deficit)     ( 31,242 )     ( 36,112 ) Accumulated other comprehensive loss, foreign currency translation adjustment     ( 2,423 )     ( 2,375 ) Treasury stock, at cost; 6,131,482 and 5,537,191 Common shares in 2022 and 2021, respectively     ( 72,303 )     ( 50,149 ) Total shareholders’ equity     68,624       85,337   Total liabilities and shareholders’ equity   $ 136,233     $ 157,540     See accompanying notes to condensed consolidated financial statements   3 Table of Contents     NATIONAL RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except for per share amounts, unaudited)       Three months ended June 30,     Six months ended June 30,       2022     2021     2022     2021                                     Revenue   $ 37,292     $ 36,425     $ 75,734     $ 71,889                                     Operating expenses:                                 Direct     13,758       12,536       28,537       24,476   Selling, general and administrative     10,748       10,016       21,397       19,536   Depreciation, amortization and impairment     1,290       1,634       2,606       3,618   Total operating expenses     25,796       24,186       52,540       47,630                                     Operating income     11,496       12,239       23,194       24,259                                     Other income (expense):                                 Interest income     14       3       19       6   Interest expense     ( 318 )     ( 423 )     ( 635 )     ( 855 ) Other, net     ( 128 )     75       ( 81 )     96                                     Total other income (expense)     ( 432 )     ( 345 )     ( 697 )     ( 753 )                                   Income before income taxes     11,064       11,894       22,497       23,506                                     Provision for income taxes     2,742       2,950       5,636       5,330                                     Net income   $ 8,322     $ 8,944     $ 16,861     $ 18,176                                     Earnings Per Share of Common Stock:                                 Basic Earnings Per Share   $ 0.33     $ 0.35     $ 0.67     $ 0.71   Diluted Earnings Per Share   $ 0.33     $ 0.35     $ 0.67     $ 0.71                                     Weighted average shares and share equivalents outstanding:                                 Basic     25,083       25,426       25,166       25,420   Diluted     25,211       25,645       25,300       25,656     See accompanying notes to condensed consolidated financial statements   4 Table of Contents     NATIONAL RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands, unaudited)       Three months ended June 30,     Six months ended June 30,       2022     2021     2022     2021                                     Net income   $ 8,322     $ 8,944     $ 16,861     $ 18,176   Other comprehensive income (loss):                                 Foreign currency translation adjustment     ( 99 )     74       ( 48 )     130   Other comprehensive income (loss)   $ ( 99 )   $ 74     $ ( 48 )   $ 130                                     Comprehensive Income   $ 8,223     $ 9,018     $ 16,813     $ 18,306     See accompanying notes to condensed consolidated financial statements.   5 Table of Contents     NATIONAL RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY (In thousands except share and per share amounts, unaudited)       Common Stock     Additional Paid-in Capital     Retained Earnings (Deficit)     Accumulated Other Comprehensive Income (Loss)     Treasury Stock     Total   Balances at December 31, 2021   $ 31     $ 173,942     $ ( 36,112 )   $ ( 2,375 )   $ ( 50,149 )   $ 85,337   Purchase of 166,962 shares treasury stock     -       -       -       -       ( 6,679 )     ( 6,679 ) Non-cash stock compensation expense     -       285       -       -       -       285   Dividends declared of $ 0.24 per common share     -       -       ( 6,047 )     -       -       ( 6,047 ) Other comprehensive income, foreign currency translation adjustment     -       -       -       51       -       51   Net income     -       -       8,539       -       -       8,539   Balances at March 31, 2022   $ 31     $ 174,227     $ ( 33,620 )   $ ( 2,324 )   $ ( 56,828 )   $ 81,486   Purchase of 427,329 shares treasury stock     -       -       -       -       ( 15,475 )     ( 15,475 ) Non-cash stock compensation expense     -       334       -       -       -       334   Dividends declared of $ 0.24 per common share     -       -       ( 5,944 )     -       -       ( 5,944 ) Other comprehensive income (loss), foreign currency translation adjustment     -       -       -       ( 99 )     -       ( 99 ) Net income     -       -       8,322       -       -       8,322   Balances at June 30, 2022   $ 31     $ 174,561     $ ( 31,242 )   $ ( 2,423 )   $ ( 72,303 )   $ 68,624     See accompanying notes to condensed consolidated financial statements.   6 Table of Contents   NATIONAL RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY (In thousands except share and per share amounts, unaudited)       Common Stock     Additional Paid-in Capital     Retained Earnings (Deficit)     Accumulated Other Comprehensive Income (Loss)     Treasury Stock     Total   Balances at December 31, 2020   $ 31     $ 171,785     $ ( 61,375 )   $ ( 2,399 )   $ ( 43,727 )   $ 64,315   Purchase of 26,932 shares treasury stock     -       -       -       -       ( 1,210 )     ( 1,210 ) Issuance of 68,284 common shares for the exercise of stock options     -       911       -       -       -       911   Non-cash stock compensation expense     -       ( 54 )     -       -       -       ( 54 ) Other comprehensive income, foreign currency translation adjustment     -       -       -       56       -       56   Net income     -       -       9,232       -       -       9,232   Balances at March 31, 2021   $ 31     $ 172,642     $ ( 52,143 )   $ ( 2,343 )   $ ( 44,937 )   $ 73,250   Non-cash stock compensation expense     -       202       -       -       -       202   Dividends declared of $ 0.24 per common share     -       -       ( 6,105 )     -       -       ( 6,105 ) Other comprehensive income, foreign currency translation adjustment     -       -       -       74       -       74   Net income     -       -       8,944       -       -       8,944   Balances at June 30, 2021   $ 31     $ 172,844     $ ( 49,304 )   $ ( 2,269 )   $ ( 44,937 )   $ 76,365     See accompanying notes to condensed consolidated financial statements. 7 Table of Contents     NATIONAL RESEARCH CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited)       Six months ended       June 30,       2022     2021   Cash flows from operating activities:                 Net income   $ 16,861     $ 18,176   Adjustments to reconcile net income to net cash provided by operating activities:                 Depreciation, amortization and impairment     2,606       3,618   Deferred income taxes     ( 1,279 )     140   Reserve for uncertain tax positions     205       156   Non-cash share-based compensation expense     619       149   Loss on disposal of property and equipment     -       1   Net changes in assets and liabilities:                 Trade accounts receivable     614       ( 40 ) Prepaid expenses and other current assets     ( 731 )     ( 449 ) Deferred contract costs, net     605       ( 87 ) Operating lease assets and liabilities, net     ( 13 )     61   Accounts payable     139       ( 717 ) Accrued expenses, wages and bonuses     ( 718 )     1,967   Income taxes receivable and payable     918       1,597   Deferred revenue     ( 1,715 )     994   Net cash provided by operating activities     18,111       25,566                     Cash flows from investing activities:                 Purchases of property and equipment     ( 3,886 )     ( 2,805 ) Acquisition consideration     -       ( 3,000 ) Net cash used in investing activities     ( 3,886 )     ( 5,805 )                   Cash flows from financing activities:                 Payments on notes payable     ( 2,127 )     ( 2,023 ) Payments on finance lease obligations     ( 242 )     ( 246 ) Proceeds from the exercise of share-based awards     -       162   Payment of employee payroll tax withholdings on share-based awards exercised     -       ( 460 ) Repurchase of shares for treasury     ( 22,154 )     -   Payments of deferred acquisition consideration     ( 1,950 )     -   Payment of dividends on common stock     ( 9,091 )     ( 3,053 ) Net cash used in financing activities     ( 35,564 )     ( 5,620 )                   Effect of exchange rate changes on cash and cash equivalents     ( 48 )     68   Change in cash and cash equivalents     ( 21,387 )     14,209   Cash and cash equivalents at beginning of period     54,361       34,690   Cash and cash equivalents at end of period   $ 32,974     $ 48,899                     Supplemental disclosure of cash paid for:                 Interest expense, net of capitalized amounts   $ 697     $ 801   Income taxes   $ 5,790     $ 3,432   Supplemental disclosure of non-cash investing and financing activities:                 Stock tendered to the Company for cashless exercise of stock options in connection with equity incentive plans   $ -     $ 749   Deferred acquisition consideration   $ -     $ 1,950     See accompanying notes to condensed consolidated financial statements.   8 Table of Contents   NATIONAL RESEARCH CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS         ( 1 ) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   Description of business and basis of presentation   National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), is a leading provider of analytics and insights that facilitate measurement and improvement of the patient and employee experience while also increasing patient engagement and customer loyalty for healthcare organizations in the United States and Canada. Our purpose is to enable human understanding. Our solutions enable health care organizations to understand what matters most to each person they serve. Our portfolio of solutions represents a unique set of capabilities that individually and collectively provide value to our clients.   Our condensed consolidated balance sheet at December 31, 2021 was derived from our audited consolidated balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.   Information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are included in our Form 10 -K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 4, 2022.   The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.   The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiary, National Research Corporation Canada. All significant intercompany transactions and balances have been eliminated.   Our Canadian subsidiary uses Canadian dollars as its functional currency. It translates its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. It translates its revenue and expenses at the average exchange rate during the period. We include translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’ equity. Gains and losses related to transactions denominated in a currency other than the functional currency of the country in which we operate and short-term intercompany accounts are included in other income (expense) in the consolidated statements of income.   Revenue Recognition   We derive a majority of our revenues from our annually renewable subscription-based service agreements with our customers, which include performance measurement and improvement services, healthcare analytics and governance education services. Such agreements are generally cancelable on short or no notice without penalty. See Note 3 for further information about our contracts with customers. We account for revenue using the following steps:     ● Identify the contract, or contracts, with a customer;   ● Identify the performance obligations in the contract;   ● Determine the transaction price;   ● Allocate the transaction price to the identified performance obligations; and   ● Recognize revenue when, or as, we satisfy the performance obligations.   9 Table of Contents   Our revenue arrangements with a client may include combinations of more than one service offering which may be executed at the same time, or within close proximity of one another. We combine contracts with the same customer into a single contract for accounting purposes when the contract is entered into at or near the same time and the contracts are negotiated together. For contracts that contain more than one separately identifiable performance obligation, the total transaction price is allocated to the identified performance obligations based upon the relative stand-alone selling prices of the performance obligations. The stand-alone selling prices are based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost-plus margin or residual approach. We estimate the amount of total contract consideration we expect to receive for variable arrangements based on the most likely amount we expect to earn from the arrangement based on the expected quantities of services we expect to provide and the contractual pricing based on those quantities. We only include some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We consider the sensitivity of the estimate, our relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement. Our revenue arrangements do not contain any significant financing element due to the contract terms and the timing between when consideration is received and when the service is provided.   Our arrangements with customers consist principally of four different types of arrangements: 1 ) subscription-based service agreements; 2 ) one -time specified services performed at a single point in time; 3 ) fixed, non-subscription service agreements; and 4 ) unit-priced service agreements.   Subscription-based services - Services that are provided under subscription-based service agreements are usually for a twelve - month period and represent a single promise to stand ready to provide reporting, tools and services throughout the subscription period as requested by the customer. These agreements are renewable at the option of the customer at the completion of the initial contract term for an agreed upon price increase each year. These agreements represent a series of distinct monthly services that are substantially the same, with the same pattern of transfer to the customer as the customer receives and consumes the benefits throughout the contract period. Accordingly, subscription services are recognized ratably over the subscription period. Subscription services are typically billed annually in advance but may also be billed on a quarterly and monthly basis.   One-time services – These agreements typically require us to perform a specific one -time service in a particular month. We are entitled to a fixed payment upon completion of the service. Under these arrangements, we recognize revenue at the point in time we complete the service and it is accepted by the customer.   Fixed, non-subscription services – These arrangements typically require us to perform an unspecified amount of services for a fixed price during a fixed period of time. Revenues are recognized over time based upon the costs incurred to date in relation to the total estimated contract costs. In determining cost estimates, management uses historical and forecasted cost information which is based on estimated volumes, external and internal costs and other factors necessary in estimating the total costs over the term of the contract. Changes in estimates are accounted for using a cumulative catch-up adjustment which could impact the amount and timing of revenue for any period.   Unit-price services – These arrangements typically require us to perform certain services on a periodic basis as requested by the customer for a per-unit amount which is typically billed in the month following the performance of the service. Revenue under these arrangements is recognized over the time the services are performed at the per-unit amount.   Revenue is presented net of any sales tax charged to our clients that we are required to remit to taxing authorities. We recognize contract assets or unbilled receivables related to revenue recognized for services completed but not invoiced to the clients. Unbilled receivables are classified as receivables when we have an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when we invoice clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when we have satisfied the related performance obligation.     10 Table of Contents   Deferred Contract Costs   Deferred contract costs, net is stated at gross deferred costs less accumulated amortization. We defer commissions and incentives, including payroll taxes, if they are incremental and recoverable costs of obtaining a renewable customer contract. Deferred contract costs are amortized over the estimated term of the contract, including renewals, which generally ranges from three to five years. The contract term was estimated by considering factors such as historical customer attrition rates and product life. The amortization period is adjusted for significant changes in the estimated remaining term of a contract. An impairment of deferred contract costs is recognized when the unamortized balance of deferred contract costs exceeds the remaining amount of consideration we expect to receive net of the expected future costs directly related to providing those services. We have elected the practical expedient to expense contract costs when incurred for any nonrenewable contracts with a term of one year or less. We deferred incremental costs of obtaining a contract of $ 108,000 and $ 605,000 in the three -month periods ended June 30, 2022 and 2021, respectively. We deferred incremental costs of obtaining a contract of $ 342,000 and $ 1.5 million in the six -month periods ended June 30, 2022 and 2021, respectively. Deferred contract costs, net of accumulated amortization was $ 3.2 million and $ 3.8 million at June 30, 2022 and December 31, 2021, respectively. Total amortization by expense classification for the three and six -month periods ended June 30, 2022 and 2021 was as follows:       Three months ended June 30, 2022     Three months ended June 30, 2021     Six months ended June 30, 2022     Six months ended June 30, 2021       (In thousands)   Direct Expenses   $ 35     $ 41     $ 71     $ 73   Selling, general and administrative expenses     404       740       875       1,363   Total amortization   $ 439     $ 781     $ 946     $ 1,436     Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $ 400 and $ 15,000 for the three months ended June 30, 2022 and 2021, respectively and $ 1,000 and $ 22,000 in the six -month periods ended June 30, 2022 and 2021, respectively.   Trade Accounts Receivable   Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable, determined based on our historical write-off experience, current economic conditions and reasonable and supportable forecasts about the future. We review the allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.   The following table provides the activity in the allowance for doubtful accounts for the six -month periods ended June 30, 2022 and 2021 (In thousands):       Balance at Beginning of Period     Bad Debt Expense (Benefit)     Write-offs     Recoveries     Balance at End of Period                                             Six months ended June 30, 2022   $ 94     $ ( 10 )   $ 22     $ 3     $ 65   Six months ended June 30, 2021   $ 120     $ 25     $ 47     $ 9     $ 107     11 Table of Contents   Leases   We determine whether a lease is included in an agreement at inception. We recognize a lease liability and a right-of-use (“ROU”) asset on the balance sheet for our operating leases under which we are lessee. Operating lease ROU assets are included in operating lease right-of-use assets in our consolidated balance sheet. Finance lease assets are included in property and equipment. Operating and finance lease liabilities are included in other current liabilities and other long-term liabilities. Certain lease arrangements may include options to extend or terminate the lease. We include these provisions in the ROU asset and lease liabilities only when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term and is included in direct expenses and selling, general and administrative expenses. Our lease agreements do not contain any residual value guarantees.   ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments during the lease term. ROU assets and lease liabilities are recorded at lease commencement based on the estimated present value of lease payments. Because the rate of interest implicit in each lease is not readily determinable, we use our estimated incremental collateralized borrowing rate at lease commencement, to calculate the present value of lease payments. When determining the appropriate incremental borrowing rate, we consider our available credit facilities, recently issued debt and public interest rate information.   We elected the practical expedient to account for lease and non-lease components as a single lease component for all asset classifications. We have also made a policy election to not record short-term leases with a duration of 12 months or less on the balance sheet.   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. We recorded an ROU asset impairment charge in the six months ended June 30, 2021 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 the six months ended June 30, 2022. 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   Our valuation techniques are based on maximizing observable inputs and minimizing the use of unobservable inputs when measuring fair value. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The inputs are then classified into the following hierarchy: ( 1 ) Level 1 Inputs—quoted prices in active markets for identical assets and liabilities; ( 2 ) Level 2 Inputs—observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets, quoted prices for similar or identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; ( 3 ) Level 3 Inputs—unobservable inputs.   The following details our financial assets within the fair value hierarchy at June 30, 2022 and December 31, 2021:       Level 1     Level 2     Level 3     Total       (In thousands)   As of June 30, 2022                                 Money Market Funds   $ 2,507     $ -     $ -     $ 2,507   Total Cash Equivalents   $ 2,507     $ -     $ -     $ 2,507                                     As of December 31, 2021                                 Money Market Funds   $ 6,306     $ -     $ -     $ 6,306   Total Cash Equivalents   $ 6,306     $ -     $ -     $ 6,306     There were no transfers between levels during the six months ended June 30, 2022.   12 Table of Contents   Our long-term debt described in Note 5 is recorded at historical cost. The fair value of long-term debt is classified in Level 2 of the fair value hierarchy and was estimated based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit. The following are the carrying amount and estimated fair values of long-term debt:       June 30, 2022     December 31, 2021       (In thousands)   Total carrying amount of long-term debt   $ 24,493     $ 26,620   Estimated fair value of long-term debt   $ 24,364     $ 27,708     The carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate their fair value. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes ROU assets, property and equipment, goodwill, intangibles and cost method investments, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). 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 and recorded an ROU asset impairment charge of $ 324,000 during 2021. As of June 30, 2022 and December 31, 2021, there was no indication of impairment related to these assets.   Annually, we consider whether the recorded goodwill and indefinite lived intangibles have been impaired. However, goodwill and intangibles must be tested between annual tests if an event occurs or circumstances change to indicate that it is more likely than not that an impairment loss has been incurred (“triggering event”).   Commitments and Contingencies From time to time, we are involved in certain claims and litigation arising in the normal course of business. Management assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. Legal fees, net of estimated insurance recoveries, are expensed as incurred. We do not believe the final disposition of claims at June 30, 2022 will have a 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. 2020 - 04, "Reference Rate Reform (Topic 848 ): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", which provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. During 2022 we expect to apply the optional expedient for contract modification to account for the change in the reference rate on impacted credit facilities prospectively by adjusting the effective interest rate.       ( 2 ) ACQUISITION   On January 4, 2021, we acquired substantially all assets and assumed certain liabilities of PatientWisdom, Inc., a company with a health engagement solution that will further our purpose of operationalizing human understanding through tangible and actionable insights. $ 3.0 million of the total $ 5.0 million all-cash consideration was paid at closing. We paid the remaining $ 2.0 million in January 2022. All payments were made 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 financial results associated with the PatientWisdom assets we acquired and liabilities we assumed are included in our consolidated financial statements from the date of acquisition, although the amounts are insignificant for the three - and six -month periods ended June 30, 2022 and 2021.   13 Table of Contents     ( 3 ) CONTRACTS WITH CUSTOMERS   The following table disaggregates revenue for the three - and six -month periods ended June 30, 2022 and 2021 based on timing of revenue recognition (in thousands):       Three months ended     Six months ended       June 30, 2022     June 30, 2021     June 30, 2022     June 30, 2021   Subscription services recognized ratably over time   $ 35,480     $ 34,215     $ 70,930     $ 67,269   Services recognized at a point in time     735       563       1,916       886   Fixed, non-subscription recognized over time     605       547       1,191       1,126   Unit price services recognized over time     472       1,100       1,697       2,608   Total revenue   $ 37,292     $ 36,425     $ 75,734     $ 71,889       The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers (In thousands):       June 30, 2022     December 31, 2021   Accounts receivables   $ 13,112     $ 13,728   Contract assets included in other current assets   $ 64     $ 99   Deferred Revenue   $ ( 15,496 )   $ ( 17,213 )   Significant changes in contract assets and contract liabilities during the six -month periods ended June 30, 2022 and 2021 are as follows (in thousands):       2022     2021       Contract Asset     Deferred Revenue     Contract Asset     Deferred Revenue       Increase (Decrease)   Revenue recognized that was included in deferred revenue at beginning of year due to completion of services   $ -     $ ( 12,962 )   $ -     $ ( 11,605 ) Increases due to invoicing of client, net of amounts recognized as revenue     -       11,182       -       12,318   Increases due to acquisition     -       -       -       -   Decreases due to completion of services (or portion of services) and transferred to accounts receivable     ( 81 )     -       ( 170 )     -   Increases due to acquisition     -       -       -       239   Change due to cumulative catch-up adjustments arising from changes in expected contract consideration     -       63       -       311   Increases due to revenue recognized in the period with additional performance obligations before invoicing     45       -       9       -     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 June 30, 2022 approximated $ 2.7 million, of which $ 1.1 million, $ 1.0 million, $ 621,000 and $ 15,000 are expected to be recognized during 2022, 2023, 2024 and 2025, respectively.     ( 4 ) INCOME TAXES   The effective tax rate for the three -month periods ended June 30, 2022 and 2021 was 24.8 %. The effective tax rate for the six -month period ended June 30, 2022 increased to 25.1 % compared to 22.7 % for the same period in 2021 mainly due to decreased tax benefits from the exercise and vesting of share-based compensation awards of $ 455,000 in the six -month period ended June 30, 2022. In addition, we have higher state income taxes due to filing in more states.    14 Table of Contents   In March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak which, among other things, contains numerous income tax provisions. As a result of the CARES Act, we had deferred $ 1.3 million of employer social security tax payments in 2020. In accordance with the CARES Act, we paid half of this liability in December 2021 and we expect to pay the remaining $ 656,000 in December 2022. We have had no other impacts to our consolidated financial statements or related disclosures from the CARES Act.       ( 5 ) NOTES PAYABLE   Our long-term debt consists of the following:         June 30, 2022     December 31, 2021       (In thousands)   Term Loans   $ 24,493     $ 26,620   Less: current portion     ( 4,390 )     ( 4,278 ) Less: unamortized debt issuance costs     ( 59 )     ( 73 ) Notes payable, net of current portion   $ 20,044     $ 22,269     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 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 ( 3.37 % at June 30, 2022). 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 June 30, 2022, and December 31, 2021, the Line of Credit did not have a balance. There were no borrowings on the Line of Credit during the six months ended June 30, 2022. There have been no borrowings on the Delayed Draw Term Loan since origination.   We are obligated to pay ongoing unused commitment fees quarterly in arrears pursuant to the Line of Credit and the Delayed Draw Term Loan facility at a rate of 0.20 % per annum based on the actual daily unused portions of the Line of Credit and the Delayed Draw Term Loan facility, respectively.   The Credit Agreement is collateralized by substantially all of our assets, subject to permitted liens and other agreed exceptions, and contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our Common Stock and acquisitions, subject in each case to certain exceptions. Pursuant to the Credit Agreement, we are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the term(s) of the Credit Facilities, which calculation excludes, unless our liquidity falls below a specified threshold, (i) any cash dividend in a fiscal quarter that, together with all other cash dividends paid or declared during such fiscal quarter, exceeds $ 5,500,000 in total cash dividends paid or declared, (ii) the portion of the purchase price for any permitted share repurchase of our shares paid with cash on hand, and (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand. We are also required to maintain a cash flow leverage ratio of 3.00x or less for all testing periods throughout the term(s) of the Credit Facilities. As of June 30, 2022, we were in compliance with our financial covenants.   15 Table of Contents     ( 6 ) SHARE-BASED COMPENSATION   We measure and recognize compensation expense for all share-based payments based on the grant-date fair value of those awards. All of our existing stock option awards and unvested stock awards have been determined to be equity-classified awards. We account for forfeitures as they occur. We refer to our restricted stock awards as “non-vested” stock in these consolidated financial statements.   Our 2004 Non-Employee Director Stock Plan, as amended (the “2004 Director Plan”), is a nonqualified plan that provides for the granting of options with respect to 3,000,000 shares of our Common Stock. The 2004 Director Plan provides for grants of nonqualified stock options to each of our directors who we do not employ. Beginning in 2018, on the date of each annual meeting of shareholders, options to purchase shares of Common Stock equal to an aggregate grant date fair value of $ 100,000 are granted to each non-employee director that is elected or retained as a director at each such meeting. Stock options vest approximately one year following the date of grant and option terms are generally the earlier of ten years following the date of grant, or three years from the termination of the outside director’s service.   Our 2006 Equity Incentive Plan (the “2006 Equity Incentive Plan”), as amended, provides for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 1,800,000 shares of our Common Stock. Stock options granted may be either incentive stock options or nonqualified stock options. Vesting terms vary with each grant and option terms are generally five to ten years following the date of grant.   During the six -month periods ended June 30, 2022 and 2021, we granted options to purchase 127,227 and 101,091 shares of Common Stock, respectively. Options to purchase shares of Common Stock are typically granted with exercise prices equal to the fair value of the common stock on the date of grant. We do, in certain limited situations, grant options with exercise prices that exceed the fair value of the common shares on the date of grant. The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following weighted average assumptions:       2022     2021   Expected dividend yield at date of grant     3.39 %     2.15 % Expected stock price volatility     35.52 %     34.85 % Risk-free interest rate     2.33 %     0.91 % Expected life of options (in years)     6.0       7.0     The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was based on historical monthly price changes of our stock based on the expected life of the options at the date of grant. The expected life of options is the average number of years we estimate that options will be outstanding. We consider groups of associates that have similar historical exercise behavior separately for valuation purposes.   16 Table of Contents   The following table summarizes stock option activity under the 2006 Equity Incentive Plans and the 2004 Director Plan for the six -month periods ended June 30, 2022:       Number of Options     Weighted Average Exercise Price     Weighted Average Remaining Contractual Terms (Years)     Aggregate Intrinsic Value (In thousands)   Outstanding at December 31, 2021     477,640     $ 30.88       5.97     $ 6,337   Granted     127,227     $ 36.67                   Exercised     -     $ -             $ -   Forfeited     -     $ -               -   Outstanding at June 30, 2022     604,867     $ 32.10       5.96     $ 5,672   Exercisable at June 30, 2022     346,721     $ 26.03       4.21     $ 5,195     As of June 30, 2022, the total unrecognized compensation cost related to non-vested stock option awards was approximately $ 1.7 million which was expected to be recognized over a weighted average period of 2.68 years.   There was $ 162,000 cash received from stock options exercised for the six months ended June 30, 2021. There was no cash received from stock options exercised for the same period in 2022. We recognized $ 307,000 and $ 176,000 of non-cash compensation for three months ended June 30, 2022 and 2021, respectively, and $ 564,000 and $ 186,000 of non-cash compensation for the six -month periods ended June 30, 2022 and 2021, respectively, related to options, which is included in direct fixed and selling, general and administrative expenses.   We granted 12,698 non-vested shares of Common Stock under the 2006 Equity Incentive Plan during the six months ended June 30, 2021. No shares were granted during the six months ended June 30, 2022. As of June 30, 2022, 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 $ 27,000 of non-cash compensation for each of the three months ended June 30, 2022 and 2021, respectively, and $ 54,000 and ($ 37,000 ) of non-cash compensation for the six -month periods ended June 30, 2022 and 2021, respectively, related to this non-vested stock, which is included in direct fixed and selling, general and administrative expenses. The following table summarizes information regarding non-vested stock granted to associates under the 2006 Equity Incentive Plan for the three months ended June 30, 2022:       Common Shares Outstanding     Weighted Average Grant Date Fair Value Per Share   Outstanding at December 31, 2021     12,698     $ 42.92   Granted     -       -   Vested     -       -   Forfeited     -       -   Outstanding at June 30, 2022     12,698     $ 42.92     As of June 30, 2022, the total unrecognized compensation cost related to non-vested stock awards was approximately $ 382,000 and is expected to be recognized over a weighted average period of 3.5 years.   17 Table of Contents     ( 7 ) GOODWILL AND OTHER INTANGIBLE ASSETS   The following represents a summary of changes in the carrying amount of goodwill for the three months ended June 30, 2022:       Gross     Accumulated Impairment     Net       (In thousands)   Balance at June 30, 2022 and December 31, 2021   $ 62,328       ( 714 )   $ 61,614     Intangible assets consisted of the following:       June 30, 2022     December 31, 2021       (In thousands)   Non-amortizing intangible assets:                 Indefinite trade name   $ 1,191     $ 1,191   Amortizing intangible assets:                 Customer related     9,441       9,445   Technology     1,959       1,959   Trade names     1,572       1,572   Total amortizing intangible assets     12,972       12,976   Accumulated amortization     ( 12,467 )     ( 12,377 ) Other intangible assets, net   $ 1,696     $ 1,790         ( 8 ) PROPERTY AND EQUIPMENT       June 30, 2022     December 31, 2021       (In thousands)   Property and equipment   $ 49,300     $ 45,599   Accumulated depreciation     ( 35,698 )     ( 33,208 ) Property and equipment, net   $ 13,602     $ 12,391     18 Table of Contents     ( 9 ) EARNINGS PER SHARE   Basic net income per share was computed using the weighted-average number of common shares outstanding during the period.   Diluted net income per share was computed using the weighted-average number of common shares and, if dilutive, the potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method.   We had 305,985 and 103,704 options of Common Stock for the three -month periods ended June 30, 2022 and 2021, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive. We had 287,655 and 108,343 options of Common Stock for the six -month periods ended June 30, 2022 and 2021, 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 June 30     For the Six Months Ended June 30       2022     2021     2022     2021       (In thousands, except per share data)   Numerator for net income per share – basic:   $ 8,322     $ 8,944     $ 16,861     $ 18,176   Net income                                 Allocation of distributed and undistributed income to unvested restricted stock shareholders     ( 4 )     ( 5 )     ( 9 )     ( 10 ) Net income attributable to common shareholders     8,318       8,939       16,852       18,166   Denominator for net income per share – basic:                                 Weighted average common shares outstanding – basic     25,083       25,426       25,166       25,420   Net income per share – basic   $ 0.33     $ 0.35     $ 0.67     $ 0.71   Numerator for net income per share – diluted:                                 Net income attributable to common shareholders for basic computation     8,318       8,939       16,852       18,166   Denominator for net income per share – diluted:                                 Weighted average common shares outstanding – basic     25,083       25,426       25,166       25,420   Weighted average effect of dilutive securities – stock options     128       219       134       236   Denominator for diluted earnings per share – adjusted weighted average shares     25,211       25,645       25,300       25,656   Net income per share - diluted   $ 0.33     $ 0.35     $ 0.67     $ 0.71         ( 10 )   RELATED PARTY   Mr. Hays, our Chief Executive Officer and director, is an owner of approximately 13% of the equity interests of Nebraska Global Investment Company LLC (“Nebraska Global”).  We purchased certain services from Don’t Panic Labs, LLC, which was a subsidiary of Nebraska Global for a portion of the three -and six -month periods ended June 30, 2022.  The total value of these purchases were $ 196,000 in the three - and six -month periods ended June 30, 2022. 19 Table of Contents     ITEM 2. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations   The following discussion of our results of operations and financial conditions should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.   Our purpose is to establish human understanding by enabling our clients 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 patient engagement and customer loyalty for healthcare organizations. Our heritage, proprietary methods, and holistic approach enable our partners to better understand the people they care for and design experiences that inspire loyalty and trust, while also facilitating regulatory compliance and the shift to population-based health management. Our ability to measure what matters most and systematically capture, analyze and deliver insights based on self-reported information from patients, families and consumers is critical in today’s healthcare market. We believe that access to and analysis of our extensive consumer-driven information is becoming more valuable as healthcare providers increasingly need to more deeply understand and engage the people they serve to build customer loyalty.   Our portfolio of subscription-based solutions provides actionable information and analysis to healthcare organizations across a range of mission-critical, constituent-related elements, including patient experience, service recovery, care transitions, health risk assessments, employee engagement, reputation management, and brand loyalty. We partner with clients across the continuum of healthcare services. We believe this cross-continuum positioning is a unique and an increasingly important capability as evolving payment models drive healthcare providers and payers towards a more collaborative and integrated service model.   The outbreak of COVID-19, and the associated responses, have impacted our business in a variety of ways. Governments have implemented business and travel restrictions and recommended social distancing and other guidelines. Many businesses, including many of our clients, have de-emphasized external business opportunities and restricted in-person meetings while shifting their attention toward addressing COVID-19 planning, business disruptions, higher costs, and revenue shortfalls. At NRC, the vast majority of our associates are working remotely, and to date we have been capable of providing our services without significant disruption. We have made our facilities available for associates to return to work effective July 1, 2021 at their discretion. Historically, we have relied on national travel as part of our sales efforts, but as a result of the pandemic we had placed a temporary hold on all company related travel. We modified our travel policy and travel did resume in the third quarter of 2021. The duration and severity of the COVID-19 pandemic and associated impacts on our business, including the impact on our revenue, expenses, and cash flows, cannot be predicted at this time. Like many other companies, we experienced higher attrition rates in 2021. We may incur higher costs to attract, train and retain these associates. Attrition in our sales and service areas can also impact our ability to retain and attract new business. 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.    20 Table of Contents   Results of Operations   The following tables set forth, for the periods indicated, selected financial information derived from our consolidated financial statements and the percentage change in such items versus the prior comparable period, as well as other key financial metrics. The discussion that follows the information should be read in conjunction with our consolidated financial statements.   Three Months Ended June 30, 2022, Compared to Three Months Ended June 30, 2021         (In thousands, except percentages) Three Months Ended June 30,     Percentage Increase (Decrease)       2022     2021     2022 over 2021   Revenue   $ 37,292     $ 36,425       2.4   Direct expenses     13,758       12,536       9.7   Selling, general, and administrative     10,748       10,016       7.3   Depreciation, amortization and impairment     1,290       1,634       (21.1 ) Operating income     11,496       12,239       (6.1 ) Total other income (expense)     (432 )     (345 )     25.2   Provision for income taxes     2,742       2,950       (7.1 ) Effective Tax Rate     24.8 %     24.8 %     -                             Operating margin     30.8 %     33.6 %     (8.3 )       Revenue. Revenue in the 2022 period increased compared to the 2021 period, primarily due to new customer sales, as well as increases in sales to the existing client base. This was partially offset by decreased Canadian revenue due to the scheduled closure of the Canadian office later this year.   Direct expenses . Variable expenses decreased in the 2022 period compared to the 2021 period due to lower survey contracted services. Variable expenses as a percentage of revenue were 12.9% and 14.1% in the 2022 and 2021 periods, respectively. Fixed expenses increased primarily as a result of increased salary and benefit costs to attract and retain associates, contracted services to support our clients and invest in workforce automation and increased travel costs due to COVID travel restrictions being lifted.   Selling, general and administrative expenses . Selling, general and administrative expenses increased in the 2022 period compared to the 2021 period primarily due to innovation investments to support further development of our Human Understanding Solutions, new marketing initiatives as well as increased travel costs due to COVID travel restrictions being lifted, partially offset by decreases in public company and other legal and accounting costs.    21 Table of Contents   Depreciation, amortization and impairment . Depreciation, amortization and impairment expenses decreased in the 2022 period compared to the 2021 period primarily due to additional depreciation expense from shortening the estimated useful lives of certain building assets in 2021.   Operating income and margin . Operating income and margin decreased in the 2022 period compared to the 2021 period due to growth in salary and benefit costs to attract and retain associates including a new benefit addition, as well as additional investments in our Human Understanding Solutions, workforce automation tools and new marketing initiatives, partially offset by an increase in revenue.   Total other income (expense ). Total other income (expense) increased primarily due to revaluation on intercompany transactions due to changes in the Canadian to U.S. dollar foreign exchange rate partially offset by lower interest expense due to the declining balance on our term loan.   Provision for income taxes and effective tax rate . Provision for income taxes decreased in the 2022 period compared to the 2021 period primarily due to decreased taxable income as the effective tax rate remained consistent between periods.     Six Months Ended June 30, 2022, Compared to Six Months Ended June 30, 2021       (In thousands, except percentages) Six Months Ended June 30,     Percentage Increase (Decrease)       2022     2021     2022 over 2021   Revenue   $ 75,734     $ 71,889       5.3   Direct expenses     28,537       24,476       16.6   Selling, general, and administrative     21,397       19,536       9.5   Depreciation, amortization and impairment     2,606       3,618       (28.0 ) Operating income     23,194       24,259       (4.4 ) Total other income (expense)     (697 )     (753 )     (7.4 ) Provision for income taxes     5,636       5,330       5.7   Effective Tax Rate     25.1 %     22.7 %     10.6                             Operating margin     30.6 %     33.7 %     (9.2 ) Recurring Contact Value   $ 147,732     $ 149,814       (1.4 ) Cash provided by operating activities     18,111       25,566       (29.2 )     Revenue. Revenue in the 2022 period increased compared to the 2021 period, primarily due to new customer sales, as well as increases in sales to the existing client base. Conference revenue also increased due to an increase in conferences held as well as the shift to allow live or virtual attendance. This was partially offset by decreased Canadian revenue due to the scheduled closure of the Canadian office later this year.   Direct expenses . Variable expenses increased in the 2022 period compared to the 2021 period due to growth in conference expenses due to additional conferences being held in the 2022 period compared to the 2021 period and the shift to allow live or virtual attendance at conferences partially offset by lower survey contracted services. Variable expenses as a percentage of revenue were 13.9% in both the 2022 and 2021 periods. Fixed expenses increased primarily as a result of increased salary and benefit costs to attract and retain associates, contracted services to support our clients and invest in workforce automation and increased travel costs due to COVID travel restrictions being lifted.   Selling, general and administrative expenses . Selling, general and administrative expenses increased in the 2022 period compared to the 2021 period primarily due to innovation investments to support further development of our Human Understanding Solutions, new coaching services provided as an associate benefit, new marketing initiatives, increased travel costs due to COVID travel restrictions being lifted as well as increased state franchise taxes and building renovation costs, partially offset by decreases in public company and other legal and accounting costs.   22 Table of Contents   Depreciation, amortization and impairment . Depreciation, amortization and impairment expenses decreased in the 2022 period compared to the 2021 period primarily due to additional depreciation and impairment expense from shortening the estimated useful lives of certain building assets and incurring an ROU asset impairment from subleasing a remote office location in 2021.   Operating income and margin . Operating income and margin decreased in the 2022 period compared to the 2021 period due to growth in salary and benefit costs to attract and retain associates including a new benefit addition, as well as additional investments in our Human Understanding Solutions, workforce automation tools, marketing initiatives and building renovation costs, partially offset by an increase in revenue.   Total other income (expense ). Total other income (expense) decreased in the 2022 period compared to the 2021 period primarily due to lower interest expense due to the declining balance on our term loan partially offset by revaluation on intercompany transactions due to changes in the Canadian to U.S. dollar foreign exchange rate.   Provision for income taxes and effective tax rate . Provision for income taxes and effective tax rate grew in the 2022 period compared to the 2021 period primarily due to decreased tax benefits from share-based compensation awards and higher state income taxes.   Recurring Contact Value . Recurring contract value declined in the 2022 period compared to the 2021 period in part due to our strategy to focus on growing our digital core solutions, resulting in the elimination of certain legacy offerings. Our core digital solutions had 3.2% positive recurring contract value growth at June 30, 2022 compared to June 30, 2021. In addition, sales declined due to the difficulties of selling to our clients during the COVID-19 pandemic as well as increased turnover within our sales force. Our recurring contract value metric represents the total revenue projected under all renewable contracts for their respective next annual renewal periods, assuming no upsells, downsells, price increases, or cancellations, measured as of the most recent quarter end.   Cash provided by operating activities . Cash provided by operating activities decreased mainly due changes in deferred revenue primarily due to timing of initial billings on new and renewal contracts, a decrease in accrued expenses, wages and bonuses mainly due to timing and growth of the year-end bonus and decreased net income net of non-cash items.   Liquidity and Capital Resources   Our Board of Directors has established priorities for capital allocation, which prioritize funding of innovation and growth investments, including merger and acquisition activity as well as internal projects. The secondary priority is capital allocation for quarterly dividends and share repurchases. We believe that our existing sources of liquidity, including cash and cash equivalents, borrowing availability, and operating cash flows will be sufficient to meet our projected capital and debt maturity needs for the foreseeable future.   As of June 30, 2022, our principal sources of liquidity included $33.0 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, $3.1 million was held in Canada. The delayed draw term note can only be used to fund permitted future business acquisitions or repurchasing our Common Stock.   23 Table of Contents   Our cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, deferred income taxes, share-based compensation and related taxes, reserve for uncertain tax positions, loss on disposal of property and equipment and the effect of working capital changes. Cash provided by operating activities decreased mainly due changes in deferred revenue primarily due to timing of initial billings on new and renewal contracts, a decrease in accrued expenses, wages and bonuses mainly due timing and growth of the year-end bonus, changes in income taxes receivable and payable and decreased net income net of non-cash items. These were partially offset by changes in trade accounts receivable, deferred contract costs and accounts payable which increased cash flow from operating activities.   We had a working capital surplus of $12.2 million and $33.3 million on June 30, 2022 and December 31, 2021, respectively. The change was primarily due to decreases in cash and cash equivalents and increases in dividends payable, partially offset by decreases in accrued expenses. Cash and cash equivalents decreased mainly due to repurchase of shares of our Common Stock for treasury. Dividends payable increased due to timing of declarations and payments of dividends. Accrued expenses decreased mainly due to payment of the deferred acquisition consideration. Our working capital is significantly impacted by our large deferred revenue balances which will vary based on the timing and frequency of billings on annual agreements.   Cash used in investing activities consisted of purchases of property and equipment including computer software and hardware, building improvements and furniture and equipment.   Cash used in financing activities consisted of payments for borrowings under the term note and finance lease obligations. We also used cash to pay the deferred acquisition consideration, repurchase shares of our Common Stock for treasury, and to pay dividends on Common Stock.   Our material cash requirements include the following contractual and other obligations:   Dividends   Cash dividends of $9.1 million were paid in the six months ended June 30, 2022. Dividends of $5.9 million were declared in the three months ended June 30, 2022 and paid in July 2022.The dividends were paid from cash on hand. Our board of directors considers whether to declare a dividend and the amount of any dividends declared on a quarterly basis.   Acquisition Consideration   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 paid the remaining $2.0 million in January 2022. All payments were made with cash on hand.   Capital Expenditures   We paid cash of $3.9 million for capital expenditures in the six months ended June 30, 2022. These expenditures consisted mainly of computer software development for our Human Understanding solutions and building renovations to our headquarters of $1.6 million and $1.5 million, respectively. We estimate future costs related to our headquarters building renovations to be $10.0 million and $10.5 million in 2022 and 2023, respectively, which we expect to fund through operating cash flows.   24 Table of Contents   Debt   Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) includes (i) a $30,000,000 revolving credit facility (the “Line of Credit”), (ii) a $33,002,069 term loan (the “Term Loan”) and (iii) a $15,000,000 delayed draw-down term facility (the “Delayed Draw Term Loan” and, together with the Line of Credit and the Term Loan, the “Credit Facilities”). We may use the Delayed Draw Term Loan to fund any permitted future business acquisitions or repurchases of our Common Stock and the Line of Credit to fund ongoing working capital needs and for other general corporate purposes.   The Term Loan has an outstanding balance of $24.5 million and 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 (3.37% at June 30, 2022). 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 June 30, 2022, the Line of Credit did not have a balance. There were no borrowings on the Line of Credit during the six-month periods ended June 30, 2022 or 2021. There have been no borrowings on the Delayed Draw Term Loan since origination.   We are obligated to pay ongoing unused commitment fees quarterly in arrears pursuant to the Line of Credit and the Delayed Draw Term Loan facility at a rate of 0.20% per annum based on the actual daily unused portions of the Line of Credit and the Delayed Draw Term Loan facility, respectively.   The Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our Common Stock and acquisitions, subject in each case to certain exceptions. Pursuant to the Credit Agreement, we are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the term(s) of the Credit Facilities, which calculation excludes, unless our liquidity falls below a specified threshold, (i) any cash dividend in a fiscal quarter that, together with all other cash dividends paid or declared during such fiscal quarter, exceeds $5,500,000 in total cash dividends paid or declared, (ii) the portion of the purchase price for any permitted share repurchase of our shares paid with cash on hand, and (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand. We are also required to maintain a cash flow leverage ratio of 3.00x or less for all testing periods throughout the term(s) of the Credit Facilities. All obligations under the Credit Facilities are guaranteed by our subsidiary. As of June 30, 2022, we were in compliance with our financial covenants.   The Credit Facilities are secured, subject to permitted liens and other agreed upon exceptions, by a first-priority lien on and perfected security interest in substantially all of our and our guarantors’ present and future assets (including, without limitation, fee-owned real property, and limited, in the case of the equity interests of foreign subsidiaries, to 65% of the outstanding equity interests of such subsidiaries).   Leases   We have lease arrangements for certain computer, office, printing and inserting equipment as well as office and data center space. As of June 30, 2022, we had fixed lease payments of $566,000 and $468,000 for operating and finance leases, respectively payable within 12 months.   25 Table of Contents   Taxes     The liability for gross unrecognized tax benefits related to uncertain tax positions was $1.3 million as of June 30, 2022. See Note 4, "Income Taxes", to the Consolidated Financial Statements contained in this report for income tax related information.   As of June 30, 2022, the balance of the deemed repatriation tax payable imposed by the U.S. Tax Cuts and Jobs Act of 2017 (the Act”) was $175,000, which we expect to pay by the end of 2022.   We generally do not make unconditional, non-cancelable purchase commitments. We enter into purchase orders in the normal course of business, but these purchase obligations do not exceed one year.   Stock Repurchase Programs   In February 2006 and subsequently amended in May 2013, our Board of Directors authorized the repurchase of up to 2,250,000 shares of Common Stock in the open market or in privately negotiated transactions under a stock repurchase program (the “2006 Program”). In May 2022 we repurchased all of the then remaining shares authorized for repurchase under the 2006 Program.  On May 19, 2022 our Board of Directors approved a new stock repurchase authorization of 2,500,000 shares of Common Stock (the “2022 Program”). Under the 2022 Program we are authorized to repurchase from time-to-time shares of our outstanding Common Stock on the open market or in privately negotiated transactions. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions as well as corporate and regulatory considerations. The 2022 Program may be suspended, modified, or discontinued at any time and we have no obligation to repurchase any amount of Common Stock in connection with the 2022 Program. The 2022 Program has no set expiration date.   During the three months ended June 30, 2022, we repurchased the remaining 1,981 shares under the 2006 Program and 425,348 shares of our Common Stock under the 2022 Program for an aggregate of $15.5 million. As of June 30, 2022, the remaining number of shares of Common Stock that could be purchased under the 2022 Program was 2,074,652 shares.   26 Table of Contents   Critical Accounting Estimates   There have been no changes to our critical accounting estimates described in the Annual Report on Form 10-K for the year ended December 31, 2021 that have a material impact on our Condensed Consolidated Financial Statements and the related Notes.   ITEM 3. Quantitative and Qualitative Disclosures about Market Risk   There are no material changes to the disclosures regarding our market risk exposures made in its Annual Report on Form 10-K for the year ended December 31, 2021.