(

)

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. NRC Health’s portfolio of solutions represent a unique set of capabilities that individually and collectively provide value to its clients. The solutions are offered at an enterprise level through the Voice of the Customer platform (“VoC”), The Governance Institute, and legacy Experience solutions.

Principles of Consolidation

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

Use of Estimates

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

Translation of Foreign Currencies

The Company’s 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. 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. The Company includes 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 the Company operates and short-term intercompany accounts are included in other income (expense) in the consolidated statements of income.

Revenue Recognition

January 1, 2018,

the Company adopted Accounting Standards Update (“ASU”)

2014

09,

Revenue from Contracts with Customers

and all related amendments (“ASC

606”

or “new revenue standard”) using the modified retrospective method for all incomplete contracts as of the date of adoption. The Company applied the practical expedient to reflect the total of all contract modifications occurring before

January 1, 2018

in the transaction price and performance obligations at transition rather than accounting for each modification separately. Results for reporting periods beginning on or after

January 1, 2018

are presented under ASC

606,

while prior period amounts are

not

adjusted and continue to be reported under the accounting standards in effect for the prior period. As discussed in more detail below and under “Deferred Contract Costs”, the largest impact of implementing the new revenue standard was the deferral and amortization of direct and incremental costs of obtaining contracts. In addition, there were other revisions to revenue recognition primarily related to performance obligation determinations and estimating variable consideration. The Company recorded a transition adjustment of approximately

$2.7

million, net of

$814,000

of tax, to the opening balance of retained earnings.

The Company derives a majority of its revenues from its annually renewable subscription-based service agreements with its customers, which include performance measurement and improvement services, healthcare analytics and governance education services. Such agreements are generally cancelable on short or

notice without penalty. See Note

for further information about the Company's contracts with customers. Under ASC

606,

the Company accounts 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

●

Recognize revenue when, or as, the Company satisfies the performance obligations.

The Company’s 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. The Company combines 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. The Company estimates the amount of total contract consideration it expects to receive for variable arrangements based on the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes 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. The Company considers the sensitivity of the estimate, its 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. Prior to

2018,

revenue allocated to an element was limited to revenue that was

not

subject to refund or otherwise represented contingent revenue. The Company’s 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.

The Company’s arrangements with customers consist principally of

four

different types of arrangements:

) subscription-based service agreements;

)

one

-time specified services performed at a single point in time;

) fixed, non-subscription service agreements; and

) 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 the Company to perform a specific

one

-time service in a particular month. The Company is entitled to fixed payment upon completion of the service. Under these arrangements, the Company recognizes revenue at the point in time the service is completed by the Company and accepted by the customer.

Fixed, non-subscription services –

These arrangements typically require the Company 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. Prior to

2018,

these arrangements were recognized under the proportional performance method based on cost inputs, output measures or key milestones such as survey set-up, survey mailings, survey returns and reporting.

Unit-price services –

These arrangements typically require the Company 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.

The Company recognizes 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 the Company has 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.

The following tables summarize the impact the adoption of ASC

606

had on the Company’s consolidated financial statements (in thousands, except per share data):

Consolidated balance sheet:

	As reported December 31, 2018			Adjustments			Balances without Adoption of ASC 606
Accounts receivable, net	$	11,922		$	5		$	11,927
Other current assets		224			(53	)		171
All other current assets		16,264			94			16,358
Total current assets		28,410			46			28,456
Deferred contract costs		3,484			(3,484	)		--
All other noncurrent assets		76,138			--			76,138
Total assets	$	108,032		$	(3,438	)	$	104,594

Deferred revenue	$	16,244		$	327		$	16,571
Other current liabilities		30,865			--			30,865
Total current liabilities		47,109			327			47,436
Deferred income taxes		6,276			(871	)		5,405
Other long term liabilities		35,564			--			35,564
Total liabilities		88,949			(544	)		88,405

Retained earnings		(106,339	)		(2,888	)		(109,227	)
Accumulated other comprehensive income		(2,916	)		(6	)		(2,922	)
Other stockholders’ equity		128,338			--			128,338
Total stockholders’ equity		19,083			(2,894	)		16,189
Total liabilities and stockholders’ equity	$	108,032		$	(3,438	)	$	104,594

Consolidated statement of income:

	Year ended December 31, 2018
	As reported			Adjustments			Balances Without Adoption of ASC 606
Revenue	$	119,686		$	(191	)	$	119,495

Direct expenses		47,577			(82	)		47,495
Selling, general and administrative		31,371			101			31,472
Depreciation and amortization		5,463			--			5,463
Total operating expenses		84,411			19			84,430
Operating income		35,275			(210	)		35,065
Other income (expense)		(566	)		--			(566	)
Income before income taxes		34,709			(210	)		34,499
Provision (benefit) for income taxes		4,662			(57	)		4,605
Net income	$	30,047		$	(153	)	$	29,894
Earnings per share of common stock:
Basic earnings per share:
Common (formerly Class A)	$	1.08		$	(0.01	)	$	1.07
Class B		1.31			--			1.31
Diluted earnings per share:
Common (formerly Class A)	$	1.04		$	(0.01	)	$	1.03
Class B		1.27			0.01			1.28

Consolidated statement of comprehensive income:

	Year ended December 31, 2018
	As reported			Adjustments			Balances Without Adoption of ASC 606
Net Income	$	30,047		$	(153	)	$	29,894
Cumulative translation adjustment		(1,281	)		(6	)		(1,287	)
Comprehensive Income	$	28,766		$	(159	)	$	28,607

Consolidated statement of cash flows:

	Year ended December 31, 2018
	As reported			Adjustments			Balances Without adoption of ASC 606
Cash flows from operating activities:
Net income	$	30,047		$	(153	)	$	29,894
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,463			--			5,463
Deferred income taxes		1,476			(57	)		1,419
Reserve for uncertain tax positions		(288	)		--			(288	)
Non-cash share-based compensation expense		1,514			--			1,514
Loss on disposal of property and equipment		186			--			186
Change in assets and liabilities:
Trade accounts receivable and unbilled revenue		2,767			122			2,889
Prepaid expenses and other current assets		(833	)		(115	)		(948	)
Deferred contract costs		(113	)		113			--
Accounts payable		(39	)		--			(39	)
Accrued expenses, wages, bonus and profit sharing		(566	)		--			(566	)
Income taxes receivable and payable		686			--			686
Deferred revenue		(452	)		90			(362	)
Net cash provided by operating activities		39,848			--			39,848
Net cash used in investing activities		(5,971	)		--			(5,971	)
Net cash used in financing activities		(54,497	)		--			(54,497	)
Effect of exchange rate changes on cash		(1,122	)		--			(1,122	)
Change in cash and cash equivalents		(21,742	)		--			(21,742	)
Cash and cash equivalents at beginning of period		34,733			--			34,733
Cash and cash equivalents at end of period	$	12,991			--		$	12,991

Deferred Contract Costs

Deferred contract costs, net is stated at gross deferred costs less accumulated amortization. Beginning

January 1, 2018,

with the adoption of the new revenue standard, the Company defers 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

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 the Company expects to receive less than the expected future costs directly related to providing those services. The Company deferred incremental costs of obtaining a contract of

$2.6

million in the year ended

December 31, 2018.

Total amortization was

$2.5

million for the year ended

December 31, 2018.

Amortization of deferred contract costs included in direct expenses and selling, general and administrative expenses was

$83,000

and

$2.3

million for the year ended

December 31, 2018,

respectively. Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was

$51,000

for the year ended

December 31, 2018.

The Company has elected the practical expedient to expense contract costs when incurred for any nonrenewable contracts with a term of

one

year or less. Prior to

2018,

all commissions and incentives were expensed as incurred. The Company recorded a transition adjustment on

January 1, 2018

as an increase to retained earnings of

$2.6

million, net of

$776,000

of tax, to reflect

$3.4

million of commissions and incentives related to contracts that began prior to

2018,

net of accumulated amortization.

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on the Company’s historical write-off experience and current economic conditions. The Company reviews the allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

The following table provides the activity in the allowance for doubtful accounts for the years ended

December 31, 2018,

2017

and

2016:

	Balance at Beginning of Year		Bad Debt Expense		Write-offs, net of Recoveries		Balance at End of Year

Year Ended December 31, 2016	$	173	$	218	$	222	$	169
Year Ended December 31, 2017	$	169	$	249	$	218	$	200
Year Ended December 31, 2018	$	200	$	80	$	105	$	175

Property and Equipment

Property and equipment is stated at cost. Major expenditures to purchase property or to substantially increase useful lives of property are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in income.

The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software, including payroll and payroll-related costs for employees who are directly associated with the internal-use software projects and external direct costs of materials and services. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs incurred during the preliminary project and post-implementation stages, as well as software maintenance and training costs are expensed as incurred. The Company capitalized approximately

$4.0

million and

$3.0

million of costs incurred for the development of internal-use software for the years ended

December 31, 2018

and

2017,

respectively.

The Company provides for depreciation and amortization of property and equipment using annual rates which are sufficient to amortize the cost of depreciable assets over their estimated useful lives. The Company uses the straight-line method of depreciation and amortization over estimated useful lives of

three

ten

years for furniture and equipment,

three

five

years for computer equipment,

one

five

years for capitalized software, and

seven

forty

years for the Company’s office building and related improvements.

Leases are categorized as operating or capital at the inception of the lease. Assets under capital lease obligations are reported at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. The Company depreciates capital lease assets without transfer-of-ownership or bargain-purchase-options using the straight-line method over the lease terms, excluding any lease renewals, unless the lease renewals are reasonably assured. Capital lease assets with transfer-of-ownership or bargain-purchase-options are depreciated using the straight-line method over the assets’ estimated useful lives.

Impairment of Long-Lived Assets and Amortizing Intangible Assets

Long-lived assets, such as property and equipment and purchased intangible assets subject to depreciation or amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company

first

compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is

not

recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and

third

-party independent appraisals, as considered necessary.

impairments were recorded during the years ended

December 31, 2018,

2017,

2016.

Among others, management believes the following circumstances are important indicators of potential impairment of such assets and as a result

may

trigger an impairment review:

	●	Significant underperformance in comparison to historical or projected operating results;
	●	Significant changes in the manner or use of acquired assets or the Company’s overall strategy;
	●	Significant negative trends in the Company’s industry or the overall economy;
	●	A significant decline in the market price for the Company’s common stock for a sustained period; and
	●	The Company’s market capitalization falling below the book value of the Company’s net assets.

Goodwill and Intangible Assets

Intangible assets include customer relationships, trade names, technology, non-compete agreements and goodwill. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets

may

not

be recoverable. The Company reviews intangible assets with indefinite lives for impairment annually as of

October 1

and whenever events or changes in circumstances indicate that the carrying value of an asset

may

not

be recoverable.

When performing the impairment assessment, the Company will

first

assess qualitative factors to determine whether it is necessary to recalculate the fair value of the intangible assets with indefinite lives. If the Company believes, as a result of the qualitative assessment, that it is more likely than

not

that the fair value of the indefinite-lived intangibles is less than their carrying amount, the Company calculates the fair value using a market or income approach. If the carrying value of intangible assets with indefinite lives exceeds their fair value, then the intangible assets are written-down to their fair values. The Company did

not

recognize any impairments related to indefinite-lived intangibles during

2018,

2017

2016.

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are

not

individually identified and separately recognized. All of the Company’s goodwill is allocated to its reporting units, which are the same as its operating segments. Goodwill is reviewed for impairment at least annually, as of

October 1,

and whenever events or changes in circumstances indicate that the carrying value of goodwill

may

not

be recoverable.

The Company reviews for goodwill impairment by

first

assessing qualitative factors to determine whether any impairment

may

exist. If the Company believes, as a result of the qualitative assessment, that it is more likely than

not

that the fair value of a reporting unit is less than its carrying amount, a quantitative analysis will be performed, and the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, then goodwill is written down by this difference. The Company performed a qualitative analysis as of

October 1, 2018

and determined the fair value of each reporting unit likely significantly exceeded its carrying value.

impairments were recorded during the years ended

December 31, 2018,

2017

2016.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under that method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances, if any, are established when necessary to reduce deferred tax assets to the amount that is more likely than

not

to be realized. The Company uses the deferral method of accounting for its investment tax credits related to state tax incentives. During the years ended

December 31, 2018,

2017

and

2016,

the Company recorded income tax benefits relating to these tax credits of

$0,

$4,000,

and

$77,000,

respectively. Interest and penalties related to income taxes are included in income taxes in the Statement of Income.

The Company recognizes the effect of income tax positions only if those positions are more likely than

not

of being sustained. Recognized income tax positions are measured at the largest amount that is greater than

50%

likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Share-Based Compensation

All of the Company’s existing stock option awards and non-vested stock awards have been determined to be equity-classified awards. The compensation expense on share-based payments is recognized based on the grant-date fair value of those awards. The Company recognizes the excess tax benefits and tax deficiencies in the income statement when options are exercised. Amounts recognized in the financial statements with respect to these plans:

	2018			2017			2016
	(In thousands)
Amounts charged against income, before income tax benefit	$	1,514		$	1,845		$	1,929
Amount of related income tax benefit		(3,566	)		(2,310	)		(1,164	)
Net (benefit) expense to net income	$	(2,052	)	$	(465	)	$	765

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of

three

months or less to be cash equivalents. Cash equivalents were

$1.8

million and

$34.5

million as of

December 31, 2018,

and

2017,

respectively, consisting primarily of money market accounts, Eurodollar deposits and funds invested in commercial paper. At certain times, cash equivalent balances

may

exceed federally insured limits.

Fair Value Measurements

The Company’s 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 the Company’s market assumptions. The inputs are then classified into the following hierarchy: (

) Level

Inputs—quoted prices in active markets for identical assets and liabilities; (

) Level

Inputs—observable market-based inputs other than Level

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; (

) Level

Inputs—unobservable inputs.

Commercial paper and Eurodollar deposits are included in cash equivalents and are valued at amortized cost, which approximates fair value due to its short-term nature. Eurodollar deposits are United States dollars deposited in a foreign bank branch of a United States bank and have daily liquidity. Both of these are included as a Level

measurement in the table below.

The following details the Company’s financial assets within the fair value hierarchy at

December 31, 2018

and

2017:

	Level 1		Level 2		Level 3		Total
	(In thousands)
As of December 31, 2018
Money Market Funds	$	1,848	$	--	$	--	$	1,848
Total Cash Equivalents	$	1,848	$	--	$	--	$	1,848

As of December 31, 2017
Money Market Funds	$	13,971	$	--	$	--	$	13,971
Commercial Paper		--		10,490		--		10,490
Eurodollar Deposits		--		10,017		--		10,017
Total Cash Equivalents	$	13,971	$	20,507	$	--	$	34,478

There were

transfers between levels during the years ended

December 31, 2018

and

2017.

The Company's long-term debt described in Note

is recorded at historical cost. The fair value of long-term debt is classified in Level

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:

	December 31, 2018		December 31, 2017
	(In thousands)
Total carrying amount of long-term debt	$	37,966	$	1,067
Estimated fair value of long-term debt	$	38,257	$	1,066

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 property and equipment, goodwill, intangibles and cost method investments, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). As of

December 31, 2018

and

2017,

there was

indication of impairment related to these assets.

Contingencies

From time to time, the Company is 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.

Since the

September 2017

announcement of the original proposed recapitalization plan (“Original Transaction”) (see Note

three

purported class action and/or derivative complaints have been filed in state or federal courts by

three

individuals claiming to be shareholders of the Company. All of the complaints name as defendants the Company and the individual directors of the Company. Two of these lawsuits were filed in the United States District Court for the District of Nebraska— a putative class action lawsuit captioned

Gennaro v. National Research Corporation, et al

., which was filed on

November 15, 2017,

and a putative class and derivative action lawsuit captioned

Gerson v. Hays, et al

., which was filed on

November 16, 2017.

These lawsuits were consolidated by order of the federal court under the caption

In re National Research Corporation Shareholder Litigation

. A

third

lawsuit was filed in the Circuit Court for Milwaukee County, Wisconsin—a putative class action lawsuit captioned

Apfel v. Hays, et al

., which was filed on

December 1, 2017.

The allegations in all of the lawsuits were very similar. The plaintiffs alleged, among other things, that the defendants breached their fiduciary duties in connection with the allegedly unfair proposed transaction, at an allegedly unfair price, conducted in an allegedly unfair and conflicted process and in alleged violation of Wisconsin law and the Company’s Articles of Incorporation. The plaintiffs in these lawsuits sought, among other things, an injunction enjoining the defendants from consummating the Original Transaction, damages, equitable relief and an award of attorneys’ fees and costs of litigation. After the announcement of a revised proposed recapitalization plan (the “Recapitalization”), the plaintiffs abandoned their efforts to enjoin the transaction. However, the plaintiffs in

In re National Research Corporation Shareholder Litigation

in Nebraska filed an Amended Complaint on

March 23, 2018

seeking damages for alleged breach of fiduciary duties in connection with the Original Transaction and alleged omission of material facts in the proxy statement relating to the Recapitalization. The plaintiffs in the

Apfel

case in Wisconsin filed an amended complaint on

April 4, 2018

seeking damages for alleged breach of fiduciary duties in connection with the Original Transaction and the Recapitalization. The Company and its directors moved to dismiss both lawsuits, and those motions were granted in

September

and

October 2018

by the respective courts. The plaintiffs did

not

appeal the judgments dismissing these lawsuits and, therefore, both lawsuits are now concluded.

Earnings Per Share

Prior to the Recapitalization, net income per share of the Company’s former class A common stock and former class B common stock was computed using the

two

-class method. Basic net income per share was computed by allocating undistributed earnings to common shares and 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.

The liquidation rights and the rights upon the consummation of an extraordinary transaction were the same for the holders of the Company’s former class A common stock and former class B common stock. Other than share distributions and liquidation rights, the amount of any dividend or other distribution payable on each share of former class A common stock was equal to

one

sixth

(

1/6

) of the amount of any such dividend or other distribution payable on each share of former class B common stock. As a result, the undistributed earnings for each period were allocated based on the contractual participation rights of the former class A and former class B common stock as if the earnings for the year had been distributed.

As described in Note

the Company completed a Recapitalization in

April 2018

which settled all then-existing outstanding class B share-based awards, resulting in the elimination of the class B common stock and reclassified class A common stock to Common Stock. The Recapitalization was effective on

April 17, 2018.

Therefore, income was allocated between the former class A and class B stock using the

two

-class method through

April 16, 2018,

and fully allocated to the Common Stock (formerly class A) following the Recapitalization.

The Company had

93,346,

104,647

and

546,910

options of Common Stock (former class A shares) for the years ended

December 31, 2018,

2017

and

2016,

respectively and

1,858

and

83,440

options of former class B shares for the years ended

December 31, 2017

and

2016,

respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive.

	2018						2017						2016
	Common Stock (formerly Class A)			Class B Common Stock			Common Stock (formerly Class A)			Class B Common Stock			Common Stock (formerly Class A)			Class B Common Stock
	(In thousands, except per share data)
Numerator for net income per share - basic:
Net income	$	25,423		$	4,624		$	11,388		$	11,555		$	10,178		$	10,341
Allocation of distributed and undistributed income to unvested restricted stock shareholders		(82	)		(18	)		(88	)		(87	)		(88	)		(88	)
Net income attributable to common shareholders	$	25,341		$	4,606		$	11,300		$	11,468		$	10,090		$	10,253
Denominator for net income per share - basic:
Weighted average common shares outstanding - basic		23,562			3,527			20,770			3,514			20,713			3,505
Net income per share - basic	$	1.08		$	1.31		$	0.54		$	3.26		$	0.49		$	2.93
Numerator for net income per share - diluted:
Net income attributable to common shareholders for basic computation	$	25,341		$	4,606		$	11,300		$	11,468		$	10,090		$	10,253
Denominator for net income per share - diluted:
Weighted average common s hares outstanding - basic		23,562			3,527			20,770			3,514			20,713			3,505
Weighted average effect of dilutive securities – stock options:		886			101			857			89			324			55
Denominator for diluted earnings per share – adjusted weighted average shares		24,448			3,628			21,627			3,603			21,037			3,560
Net income per share - diluted	$	1.04		$	1.27		$	0.52		$	3.18		$	0.48		$	2.88

Recent Accounting Pronouncements

Not

Yet Adopted

February 2016,

the Financial Accounting Standards Board (“FASB”) issued ASU

2016

02,

Leases (Topic

842

) which supersedes existing lease guidance. Among other things, this ASU requires lessees to recognize a lease liability and a right-to-use asset for all leases, including operating leases, with a term greater than

twelve

months on its balance sheet. Leases will be classified as financing or operating which will drive the expense recognition pattern. For lessees, the income statement presentation and expense recognition pattern for financing and operating leases is similar to the current model for capital and operating leases, respectively. This ASU is effective in fiscal years beginning after

December 15, 2018,

with early adoption permitted, requires a modified retrospective transition method, and permits the use of an optional transition method to record the cumulative effect adjustment to the opening balance sheet in the period of adoption rather than in the earliest comparative period presented, which also provides that financial information and disclosures are only updated beginning with the date of initial application. The Company will adopt the standard as of

January 1, 2019

and plans to use the optional transition method and the package of practical expedients, which eliminates the reassessment of past leases, classification and initial direct costs. The Company is

not

electing to adopt the hindsight practical expedient and will therefore maintain the lease terms determined prior to adopting Topic

842.

The Company is in the process of finalizing the calculations using a lease accounting software tool and reviewing and updating its controls and processes for the new standard. Adoption of the standard is expected to result in an initial total right of use asset and corresponding lease liability in a range of

$2.3

$3.0

million for operating leases and will

not

have a significant impact on the consolidated statements of income.

June 2016,

the FASB issued ASU

2016

13,

Financial Instruments – Credit Losses (Topic

326

): Measurement of Credit Losses on Financial Instruments. This ASU will require 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 guidance is effective for annual reporting periods beginning after

December 15, 2019

and interim periods within those fiscal years. The Company believes its adoption will

not

significantly impact the Company’s results of operations and financial position.

August 2018,

the FASB issued ASU

2018

15,

Intangibles-Goodwill and Other-Internal Use Software (Subtopic

350

). 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 guidance is effective for annual reporting periods beginning after

December 15, 2019

and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have upon the Company’s results of operations and financial position and has

not

yet determined whether early adoption will be elected.