UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2019

or

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________ to ________

Commission File Number 001-35929

         National Research Corporation         

(Exact name of Registrant as specified in its charter)

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

1245 Q Street, Lincoln, Nebraska          68508

(Address of principal executive offices) (Zip Code)

(402) 475-2525

(Registrant’s telephone number, including area code)

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

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

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

Yes  ☒  No ☐

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

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

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

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

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

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

Common Stock, $.001 par value, outstanding as of April 26, 2019: 24,864,391

NATIONAL RESEARCH CORPORATION

FORM 10-Q INDEX

For the Quarter Ended March 31, 2019

			Page No.
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Income	4
		Condensed Consolidated Statements of Comprehensive Income	5
		Condensed Consolidated Statements of Shareholders’ Equity	6-7
		Condensed Consolidated Statements of Cash Flows	8
		Notes to Condensed Consolidated Financial Statements	9-19
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20-24
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4.	Controls and Procedures	25
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	26
	Item 1A.	Risk Factors	26
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
	Item 6.	Exhibits	27
	Signatures		28

1

Special Note Regarding Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), “believes,” “expects,” or other words of similar import. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated. Factors that could affect actual results or outcomes include, without limitation, the following factors:

● The possibility of non-renewal of the Company’s client service contracts and retention of key clients;

● The Company’s ability to compete in its markets, which are highly competitive with new market entrants, and the possibility of increased price pressure and expenses;

● The effects of an economic downturn;

● The impact of consolidation in the healthcare industry;

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

● The Company’s ability to attract and retain key managers and other personnel;

● The possibility that the Company’s intellectual property and other proprietary information technology could be copied or independently developed by its competitors;

● The possibility for failures or deficiencies in the Company’s information technology platform;

● The possibility that the Company could be subject to security breaches or computer viruses; and

● The factors set forth under the caption “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as such section may be updated or supplemented by Part II, Item 1A of the Company’s subsequently filed Quarterly Reports on Form 10-Q (including this Report).

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

2

PART I – Financial Information

ITEM 1. Financial Statements

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts and par value)

	March 31, 2019			December 31, 2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,641		$	12,991
Trade accounts receivable, less allowance for doubtful accounts of $138 and $175, respectively		15,888			11,922
Prepaid expenses		3,606			2,925
Income taxes receivable		217			348
Other current assets		521			224
Total current assets		22,873			28,410
Net property and equipment		13,968			14,153
Intangible assets, net		2,008			2,102
Goodwill		57,877			57,831
Deferred contract costs, net		3,642			3,484
Operating lease right-of-use assets		2,140			--
Other		2,063			2,052
Total assets	$	104,571		$	108,032
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of notes payable, net of unamortized debt issuance costs	$	3,714		$	3,667
Line of credit		1,750			--
Accounts payable		1,530			613
Accrued wages, bonus and profit sharing		4,017			5,798
Accrued expenses		2,571			2,834
Income taxes payable		1,763			636
Dividends payable		4,724			17,113
Deferred revenue		18,241			16,244
Other current liabilities		928			204
Total current liabilities		39,238			47,109
Notes payable, net of current portion		33,223			34,176
Deferred income taxes		6,534			6,276
Other long term liabilities		2,837			1,388
Total liabilities		81,832			88,949
Shareholders’ equity:
Preferred stock, $0.01 par value, authorized 2,000,000 shares, none issued		--			--
Common stock, $0.001 par value; authorized 60,000,000 shares, issued 30,009,919 in 2019 and 29,917,667 in 2018, outstanding 24,864,391 in 2019 and 24,800,796 in 2018		30			30
Additional paid-in capital		158,247			157,312
Retained earnings (accumulated deficit)		(102,867	)		(106,339	)
Accumulated other comprehensive loss, foreign currency translation adjustment		(2,551	)		(2,916	)
Treasury stock, at cost; 5,145,528 Common shares in 2019 and 5,116,871 shares in 2018		(30,120	)		(29,004	)
Total shareholders’ equity		22,739			19,083
Total liabilities and shareholders’ equity	$	104,571		$	108,032

 See accompanying notes to condensed consolidated financial statements

3

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

	Three months ended March 31
	2019			2018
Revenue	$	31,480		$	31,017
Operating expenses:
Direct, exclusive of depreciation and amortization		11,654			12,909
Selling, general and administrative, exclusive of depreciation and amortization		7,707			7,867
Depreciation and amortization		1,415			1,283
Total operating expenses		20,776			22,059
Operating income		10,704			8,958
Other income (expense):
Interest income		6			45
Interest expense		(570	)		(8	)
Other, net		(280	)		(28	)
Total other income (expense)		(844	)		9
Income before income taxes		9,860			8,967
Provision for income taxes		1,664			1,661
Net income	$	8,196		$	7,306
Earnings Per Share of Common Stock:
Basic Earnings Per Share:
Common (formerly Class A)	$	0.33		$	0.17
Class B	$	--		$	1.04
Diluted Earnings Per Share:
Common (formerly Class A)	$	0.32		$	0.17
Class B	$	--		$	1.01
Dividends Per Share of Common Stock:
Common (formerly Class A)	$	0.19		$	0.10
Class B	$	--		$	0.60
Weighted average shares and share equivalents outstanding:
Common (formerly Class A) – basic		24,766			20,884
Class B – basic		--			3,527
Common (formerly Class A) – diluted		25,509			21,837
Class B – diluted		--			3,630

See accompanying notes to condensed consolidated financial statements

4

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)

	Three months ended March 31,
	2019		2018
Net income	$	8,196	$	7,306
Other comprehensive income (loss):
Foreign currency translation adjustment	$	365	$	(414	)
Other comprehensive income (loss)	$	365	$	(414	)
Comprehensive income	$	8,561	$	6,892

See accompanying notes to condensed consolidated financial statements.

5

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED Consolidated Statements of Shareholders’ Equity

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

	Common Stock (formerly Class A)		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balances at December 31, 2018	$	30	$	157,312	$	(106,339	)	$	(2,916	)	$	(29,004	)	$	19,083
Purchase of 28,657 shares treasury stock		--		--		--			--			(1,116	)		(1,116	)
Issuance of 86,247 common shares for the exercise of stock options		--		633		--			--			--			633
Issuance of 6,005 restricted common shares, net of (forfeitures)		--		--		--			--			--			--
Non-cash stock compensation expense		--		302		--			--			--			302
Dividends declared of $0.19 per common share		--		--		(4,724	)		--			--			(4,724	)
Other comprehensive income, foreign currency translation adjustment		--		--		--			365			--			365
Net income		--		--		8,196			--			--			8,196
Balances at March 31, 2019	$	30	$	158,247	$	(102,867	)	$	(2,551	)	$	(30,120	)	$	22,739

See accompanying notes to condensed consolidated financial statements.

6

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED Consolidated Statements of Shareholders’ Equity

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

	Common Stock (formerly Class A)		Class B Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balances at December 31, 2017	$	26	$	4	$	51,025	$	77,574		$	(1,635	)	$	(36,953	)	$	90,041
Purchase of 30,180 shares of class A and 3,677 shares of class B treasury stock		--		--		--		--			--			(1,272	)		(1,272	)
Issuance of 74,769 class A common shares and 9,296 class B common shares for the exercise of stock options		--		--		737		--			--			--			737
Issuance of 6,793 class A restricted common shares, net of (forfeitures)		--		--		--		--			--			--			--
Non-cash stock compensation expense		--		--		454		--			--			--			454
Dividends declared of $0.10 and $0.60 per A and B common share, respectively		--		--		--		(4,223	)		--			--			(4,223	)
Cumulative effect adjustment for adoption of ASC 606, net of income tax		--		--		--		2,735			--			--			2,735
Other comprehensive income, foreign currency translation adjustment		--		--		--		--			(414	)		--			(414	)
Net income		--		--		--		7,306			--			--			7,306
Balances at March 31, 2018	$	26	$	4	$	52,216	$	83,392		$	(2,049	)	$	(38,225	)	$	95,364

See accompanying notes to condensed consolidated financial statements.

7

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Three months ended
	March 31,
	2019			2018
Cash flows from operating activities:
Net income	$	8,196		$	7,306
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,415			1,283
Deferred income taxes		(25	)		328
Reserve for uncertain tax positions		20			52
Non-cash share-based compensation expense		302			454
Net changes in assets and liabilities:
Trade accounts receivable		(3,934	)		395
Prepaid expenses and other current assets		(1,004	)		(208	)
Deferred contract costs, net		(158	)		(200	)
Operating lease assets and liabilities, net		3			-
Accounts payable		807			57
Accrued expenses, wages, bonuses and profit sharing		(1,840	)		(2,668	)
Income taxes receivable and payable		1,531			1,171
Deferred revenue		1,987			258
Net cash provided by operating activities		7,300			8,228
Cash flows from investing activities:
Purchases of property and equipment		(1,134	)		(1,298	)
Net cash used in investing activities		(1,134	)		(1,298	)
Cash flows from financing activities:
Borrowings on line of credit		8,500			-
Payments on line of credit		(6,750	)		-
Payments on notes payable		(918	)		(1,067	)
Payments on finance lease obligations		(57	)		(28	)
Payment of employee payroll tax withholdings on share-based awards exercised		(483	)		(535	)
Payment of dividends on common stock		(17,112	)		(4,221	)
Net cash used in financing activities		(16,820	)		(5,851	)
Effect of exchange rate changes on cash		304			(334	)
Change in cash and cash equivalents		(10,350	)		745
Cash and cash equivalents at beginning of period		12,991			34,733
Cash and cash equivalents at end of period	$	2,641		$	35,478
Supplemental disclosure of cash paid for:
Interest, net of capitalized amounts	$	520		$	8
Income taxes	$	147		$	110
Supplemental disclosure of non-cash investing and financing activities:
Finance lease obligations originated for property and equipment	$	25		$	--
Stock tendered to the Company for cashless exercise of stock options in connection with equity incentive plans	$	633		$	737

See accompanying notes to condensed consolidated financial statements.

8

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. 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 ("VoC") platform, The Governance Institute, and legacy Experience solutions.

The Company’s six operating segments are aggregated into one reporting segment because they have similar economic characteristics and meet other aggregation criteria from the Financial Accounting Standards Board (“FASB”) guidance on segment disclosure. The six operating segments are Experience, The Governance Institute, Market Insights, Transparency, National Research Corporation Canada and Transitions, which offer a portfolio of solutions that address specific needs around market insight, experience, transparency and governance for healthcare providers, payers and other healthcare organizations.

The condensed consolidated balance sheet of the Company at December 31, 2018 was derived from the Company’s 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) the Company considers 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 the Company’s Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2019.

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

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

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 no notice without penalty. See Note 3 for further information about the Company's contracts with customers. 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.

9

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. 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: 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 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. 

10

Deferred Contract Costs

Deferred contract costs, net is stated at gross deferred costs less accumulated amortization. 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 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 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 $868,000 and $828,000 in the three-month periods ended March 31, 2019 and 2018, respectively. Total amortization was $689,000 for the three months ended March 31, 2019, of which $6,000 and $683,000 was included in selling, direct expenses and selling, general and administrative expenses, respectively. Total amortization was $616,000 for the three months ended March 31, 2018, of which $31,000 and $585,000 was included in direct expenses and selling, general and administrative expenses, respectively. Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $21,000 and $12,000 for the three months ended March 31, 2019 and 2018, respectively. 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.

Leases

The Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“Topic 842” or the “New Leases Standard”) effective January 1, 2019 using a modified retrospective transition, with the cumulative-effect adjustment recorded to retained earnings as of the effective date. As a result, the financial results for periods prior to 2019 have not been restated. The Company elected practical expedients related to existing leases at transition to not reassess whether contracts are or contain leases, to not reassess lease classification, initial direct costs, or lease terms. Additionally, the Company has elected the practical expedient to account for lease and non-lease components as a single lease component for all asset classifications. The Company has also made a policy election to not record short-term leases with a duration of 12 months or less on the balance sheet.

Topic 842 requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset on the balance sheet for operating leases. The Company recorded $2.3 million of ROU assets and $2.4 million of lease liabilities related to operating leases at the date of transition. The ROU assets recorded were net of $43,000 of accrued liabilities and prepaid expenses representing previously deferred (prepaid) rent. There was no significant impact to the unaudited condensed consolidated statements of income, comprehensive income, shareholders’ equity or cash flows. Accounting for finance leases is substantially unchanged.

We determine whether a lease is included in an agreement at inception. Operating lease ROU assets are included in operating lease right-of-use assets in our consolidated balance sheet. 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. The Company includes these provisions in the ROU and lease liabilities only when it is reasonably certain that the Company 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. The Company’s 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, the Company uses its estimated incremental collateralized borrowing rate at lease commencement, to calculate the present value of lease payments. When determining the appropriate incremental borrowing rate, the Company considers its available credit facilities, recently issued debt and public interest rate information.

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: (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.

11

The following details the Company’s financial assets within the fair value hierarchy at March 31, 2019 and December 31, 2018:

	Level 1		Level 2		Level 3		Total
	(In thousands)
As of March 31, 2019
Money Market Funds	$	1,443	$	--	$	--	$	1,443
Total Cash Equivalents	$	1,443	$	--	$	--	$	1,443
As of December 31, 2018
Money Market Funds	$	1,848	$	--	$	--	$	1,848
Total Cash Equivalents	$	1,848	$	--	$	--	$	1,848

There were no transfers between levels during the three-month period ended March 31, 2019.

The Company's 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:

	March 31, 2019		December 31, 2018
	(In thousands)
Total carrying amount of long-term debt	$	37,079	$	37,966
Estimated fair value of long-term debt	$	37,619	$	38,257

The carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate their fair value. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes ROU assets, property and equipment, goodwill, intangibles and cost method investments, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). As of March 31, 2019 and December 31, 2018, there was no 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.

Recent Accounting Pronouncements Not Yet Adopted

In 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 years 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.  

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40). This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The guidance is to be applied either retrospectively or prospectively and 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 method of adoption and 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.

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(2) RECAPITALIZATION

On April 16, 2018, the shareholders of the Company approved, among other things, an amendment to the Company’s Amended and Restated Articles of Incorporation (the “Articles”) to effect a recapitalization (the “Recapitalization”) pursuant to which each share of the Company’s then-existing class B common stock was exchanged for one share of the Company’s then-existing Class A common stock plus $19.59 in cash, without interest. On April 17, 2018, the Company filed an amendment to its Articles effecting the Recapitalization and then a further amendment and restatement of the Company’s Articles which resulted in the elimination of the Company’s class B common stock and the reclassification of the Company’s class A common stock as a share of Common Stock, par value $0.001 per share (“Common Stock”). The Company issued 3,617,615 shares of Common Stock and paid $72.4 million in exchange for all class B shares outstanding and to settle outstanding share-based awards for class B common stock.

(3) CONTRACTS WITH CUSTOMERS

The following table disaggregates revenue for the three-month periods ending March 31, 2019 and 2018 based on timing of revenue recognition (in thousands):

	2019		2018
Subscription services recognized ratably over time	$	27,913	$	25,766
Services recognized at a point in time		1,000		1,872
Fixed, non-subscription recognized over time		534		1,187
Unit price services recognized over time		2,033		2,192
Total revenue	$	31,480	$	31,017

The Company’s solutions within the digital VoC platform in the three-month periods ending March 31, 2019 and 2018 accounted for 57.9% and 44.6% of total revenue, respectively. The remaining revenue consists of legacy Experience and Governance Solutions.  

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

	March 31, 2019			December 31, 2018
Accounts receivables	$	15,888		$	11,922
Contract assets included in other current assets	$	100		$	53
Deferred Revenue	$	(18,241	)	$	(16,244	)

Significant changes in contract assets and contract liabilities during the three months ended March 31, 2019 and 2018 are as follows (in thousands):

	2019						2018
	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	$	-		$	(7,289	)				$	(8,238	)
Increases due to invoicing of client, net of amounts recognized as revenue		-			9,082						8,655
Decreases due to completion of services (or portion of services) and transferred to accounts receivable		(32	)		-			(35	)
Change due to cumulative catch-up adjustments arising from changes in expected contract consideration					204						(94	)
Decreases due to impairment		-			-
Increases due to revenue recognized in the period with additional performance obligations before invoicing		79			-			49

The Company has elected to apply the practical expedient to not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Total remaining contract revenue for contracts with original duration of greater than one year expected to be recognized in the future related to performance obligations that are unsatisfied at March 31, 2019 approximated $524,000, of which $419,000 and $105,000 are expected to be recognized during 2019 and 2020, respectively.

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(4) INCOME TAXES

The effective tax rate for the three-month period ended March 31, 2019 decreased to 16.9% compared to 18.5% for the same period in 2018 mainly due to an insurance reimbursement of Recapitalization expenses creating a tax benefit of $26,000 in 2019 compared to additional tax of expense of $67,000 from the non-deductible Recapitalization expenses in 2018. In addition, the Company had increased tax benefits of $87,000 from the exercise of options and dividends paid to non-vested shareholders. 

(5) NOTES PAYABLE

The Company’s long-term debt consists of the following:  

	March 31, 2019			December 31, 2018
	(In thousands)
Term Loans	$	37,079		$	37,996
Less: current portion		(3,714	)		(3,667	)
Less: unamortized debt issuance costs		(142	)		(153	)
Notes payable, net of current portion	$	33,223		$	34,176

The Company’s credit agreement (the “Credit Agreement”) with First National Bank of Omaha, a national banking association includes (i) a $15,000,000 revolving credit facility (the “Line of Credit”), (ii) a $40,000,000 term loan (the “Term Loan”) and (iii) a $15,000,000 delayed draw-dawn term facility (the “Delayed Draw Term Loan”). The Delayed Draw Term Loan may be used to fund any permitted future business acquisitions or repurchasing of the Company’s Common Stock and the Line of Credit will be used to fund ongoing working capital needs and other general corporate purposes.

The Term Loan is payable in monthly installments of $462,988 through April 2020 and $526,362 thereafter, with a balloon payment due at maturity in April 2023. The Term Loan bears interest at a fixed rate 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 (4.73% at March 31, 2019). 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 April 2021. As of March 31, 2019, borrowings outstanding under the Line of Credit were $1.8 million and the Company had the availability to borrow an additional $13.2 million. There were no borrowings outstanding under the Line of Credit at December 31, 2018. The weighted average interest rate on borrowings on the Line of Credit for the three-month period ended March 31, 2019 was 4.75%. There have been no borrowings on the Delayed Draw Term Loan since origination.

The Credit Agreement is collateralized by substantially all of the Company’s assets 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 the Company’s Common Stock and acquisitions, subject in each case to certain exceptions. The Credit Agreement also contains certain financial covenants with respect to a minimum fixed charge coverage ratio of 1.10x and a maximum cash flow leverage ratio of 3.00x or less. As of March 31, 2019, the Company was in compliance with its financial covenants. 

(6) SHARE-BASED COMPENSATION

The Company measures and recognizes compensation expense for all share-based payments based on the grant-date fair value of those awards. All of the Company’s existing stock option awards and unvested stock awards have been determined to be equity-classified awards. The Company accounts for forfeitures as they occur. The Company completed a Recapitalization in April 2018 which, among other things, settled all then-existing outstanding class B share-based awards and resulted in the elimination of the class B common stock. As a result, the Company accelerated vesting of all outstanding class B share based awards, resulting in accelerated share-based compensation in the year ended December 31, 2018. All outstanding class B share-based awards were then settled for the same stock to cash proportion of the class B common stock, less the exercise price, if any, which approximated the awards’ intrinsic values.

The Company’s 2001 Equity Incentive Plan provided for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 1,800,000 shares of the Company's former class A common stock and 300,000 shares of the Company's former class B common stock. Stock options granted could have been either nonqualified or incentive stock options. Stock options vest over one to five years following the date of grant and option terms are generally five to ten years following the date of grant. Due to the expiration of the 2001 Equity Incentive Plan, at December 31, 2015, there were no shares of stock available for future grants.

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The Company’s 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 the Company’s Common Stock and, prior to the Recapitalization, 500,000 shares of the Company’s former class B common stock. The 2004 Director Plan provides for grants of nonqualified stock options to each director of the Company who is not employed by the Company. Beginning in 2018, on the date

of each annual meeting of shareholders of the Company, 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 ten years following the date of grant, or three years in the case of termination of the outside director’s service.

The Company’s 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 Common Stock and, prior to the Recapitalization, 300,000 shares of the Company’s former class B 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. 

The Company granted options to purchase 73,331 and 74,516 shares of the Company’s Common Stock (formerly class A) during the three-month periods ended March 31, 2019 and 2018, respectively. Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common stock on the date of grant. The fair value of the stock options granted was estimated using a Black-Scholes valuation model with the following assumptions:

	2019			2018
Expected dividend yield at date of grant		2.85	%		2.65	%
Expected stock price volatility		34.05	%		32.24	%
Risk-free interest rate		2.48	%		2.39	%
Expected life of options (in years)		8			8

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 the Company’s 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 the Company estimates that options will be outstanding. The Company considers groups of associates that have similar historical exercise behavior separately for valuation purposes.

The following table summarizes stock option activity under the 2001 and 2006 Equity Incentive Plans and the 2004 Director Plan for the three-month period ended March 31, 2019:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value (In thousands)
Outstanding at December 31, 2018		1,373,209		$	15.99
Granted		73,331		$	38.30
Exercised		(86,247	)	$	7.34			$	2,717
Forfeited		--		$	--
Outstanding at March 31, 2019		1,360,293		$	17.74		5.22	$	28,379
Exercisable at March 31, 2019		907,432		$	14.44		3.91	$	21,928

As of March 31, 2019, the total unrecognized compensation cost related to non-vested stock option awards was approximately $1.8 million which was expected to be recognized over a weighted average period of 3.66 years.

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The following table summarizes information regarding non-vested stock granted to associates under the 2006 Equity Incentive Plan for the three-month period ended March 31, 2019:

	Common Shares Outstanding		Weighted Average Grant Date Fair Value Per Share
Outstanding at December 31, 2018		78,171	$	15.61
Granted		6,005		38.30
Vested		--		--
Forfeited		--	$	--
Outstanding at March 31, 2019		84,176	$	17.23

As of March 31, 2019, the total unrecognized compensation cost related to non-vested stock awards was approximately $629,000 and is expected to be recognized over a weighted average period of 3.22 years.

(7) GOODWILL AND OTHER INTANGIBLE ASSETS

The following represents a summary of changes in the Company’s carrying amount of goodwill for the three-month period ended March 31, 2019:

	(In thousands)
Balance as of December 31, 2018	$	57,831
Foreign currency translation		46
Balance as of March 31, 2019	$	57,877

Intangible assets consisted of the following:

	March 31, 2019			December 31, 2018
	(In thousands)
Non-amortizing intangible assets:
Indefinite trade name	$	1,191		$	1,191
Amortizing intangible assets:
Customer related		9,332			9,327
Technology		1,360			1,360
Trade names		1,572			1,572
Total amortizing intangible assets		13,455			13,450
Accumulated amortization		(11,447	)		(11,348	)
Other intangible assets, net	$	2,008		$	2,102

(8) PROPERTY AND EQUIPMENT

	March 31, 2019			December 31, 2018
	(In thousands)
Property and equipment	$	45,887		$	44,730
Accumulated depreciation		(31,919	)		(30,577	)
Property and equipment, net	$	13,968		$	14,153

(9) 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.

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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^th) 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 2, 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 137,453 and 72,860 options of Common Stock (former class A shares) for the three-month periods ended March 31, 2019 and 2018, 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 March 31, 2019			For the Three Months Ended March 31, 2018
	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	$	8,196		$	3,630		$	3,676
Allocation of distributed and undistributed income to unvested restricted stock shareholders		(28	)		(15	)		(14	)
Net income attributable to common shareholders	$	8,168		$	3,615		$	3,662
Denominator for net income per share - basic:
Weighted average common shares outstanding - basic		24,766			20,884			3,527
Net income per share – basic	$	0.33		$	0.17		$	1.04
Numerator for net income per share - diluted:
Net income attributable to common shareholders for basic computation	$	8,168		$	3,615		$	3,662
Denominator for net income per share - diluted:
Weighted average common shares outstanding - basic		24,766			20,884			3,527
Weighted average effect of dilutive securities – stock options		743			953			103
Denominator for diluted earnings per share – adjusted weighted average shares		25,509			21,837			3,630
Net income per share – diluted	$	0.32		$	0.17		$	1.01

 (10) LEASES

The Company leases printing equipment in the United States, and office space in Canada, California, Georgia, Washington, and Tennessee. The leases remaining terms as of March 31, 2019 range from less than one year to 6.4 years.

Certain equipment and office lease agreements include provisions for periodic adjustments to rates and charges. The rates and charges are adjusted based on actual usage or actual costs for internet, common area, taxes or insurance, as determined by the lessor and are considered variable lease costs.

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The components of lease expense for the three-month period ended March 31, 2019 included (in thousands):

	Three months ended March 31, 2019
Operating leases	$	204
Finance leases:
Asset amortization		61
Interest on lease liabilities		12
Variable lease cost		20
Short-term lease cost		8
Total net lease cost	$	305

Supplemental balance sheet information related to leases ($ in thousands):     

	March 31, 2019		January 1, 2019
Operating leases:
Operating ROU assets	$	2,140	$	2,308	(1)
Current operating lease liabilities699		697		699	(1)
Noncurrent operating lease liabilities		1,489		1,652	(1)
Total operating lease liabilities	$	2,186	$	2,351	(1)

(1) Represents the December 31, 2018 balance recorded at implementation of Topic 842

	March 31, 2019			December 31, 2018
Finance leases:
Furniture and equipment	$	1,062		$	1,062
Computer Equipment		512			487
Computer Software		224			224
Property and equipment under finance lease, gross		1,798			1,773
Less accumulated amortization		(901	)		(839	)
Property and equipment under finance lease, net	$	897		$	934
Current obligations of finance leases	$	231		$	204
Noncurrent obligations of finance leases		617			676
Total finance lease liabilities	$	848		$	880
Weighted average remaining lease term (in years):
Operating leases		4.43
Finance leases		3.91
Weighted average discount rate:
Operating leases		4.81	%
Finance leases		4.94	%

Supplemental cash flow and other information related to leases was as follows (in thousands):

	Three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	196
Operating cash flows from finance leases		11
Financing cash flows from finance leases		57
ROU assets obtained in exchange for operating lease liabilities		--
ROU assets obtained in exchange for finance lease liabilities		25

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Undiscounted payments under non-cancelable operating leases and finance leases at March 31, 2019 are as follows (in thousands):

	Finance Leases			Operating Leases
Remainder 2019	$	200		$	601
2020		249			591
2021		222			449
2022		168			225
2023		85			245
Thereafter		--			320
Total minimum lease payments		924			2,431
Less: Amount representing interest		(76	)		(245	)
Present value of minimum lease payments		848			2,186
Less: Current maturities		(231	)		(697	)
Lease obligations, net of current portion	$	617		$	1,489

Undiscounted payments under non-cancelable operating leases and finance leases at December 31, 2018 were as follows (in thousands):

Year Ending December 31,	Finance Leases			Operating Leases
2019	$	258		$	882
2020		241			672
2021		214			564
2022		168			273
2023		85			262
Total minimum lease payments		966
Less: Amount representing interest		(86	)
Present value of minimum lease payments		880
Less: Current maturities		(204	)
Capital lease obligations, net of current portion	$	676

(11)  RELATED PARTY

A director of the Company also serves as an officer of Ameritas Life Insurance Corp. (“Ameritas”). In connection with the Company’s regular assessment of its insurance-based associate benefits, which is conducted by an independent insurance broker, and the costs associated therewith, the Company purchases dental and vision insurance for certain of its associates from Ameritas. The total value of these purchases was $59,000 and $41,000 in the three-month periods ended March 31, 2019 and 2018, respectively.

During 2017, the Company acquired a cost method investment in convertible preferred stock of Practicing Excellence.com, Inc., a privately-held Delaware Corporation (“PX”), which is included in other non-current assets and is carried at cost, adjusted for changes resulting from observable price changes in orderly transactions of the same investment in PX, if any.  The Company also has an agreement with PX which commenced in 2016 under which the Company acts as a reseller of PX services and receives a portion of the revenues. The total revenue earned from the PX reseller agreement in the three-month periods ended March 31, 2019 and 2018, were $153,000 and $43,000, respectively.

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

The Company 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. The Company’s solutions enable its clients to understand the voice of the customer with greater clarity, immediacy and depth. NRC Health’s 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. The Company’s 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. NRC Health believes that access to and analysis of its 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.

The Company’s 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. NRC Health partners with clients across the continuum of healthcare services. The Company’s clients include integrated health systems, post-acute providers and payer organizations. The Company believes 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.

Results of Operations

The following table and graphs set forth, for the periods indicated, select financial information derived from the Company’s condensed consolidated financial statements expressed as a percentage of total revenue. The trends illustrated may not necessarily be indicative of future results. The discussion that follows the table should be read in conjunction with the condensed consolidated financial statements.

	Three months ended
	March 31,
	2019			2018
Revenue:		100.0	%		100.0	%
Operating expenses:
Direct		37.0			41.6
Selling, general and administrative		24.5			25.4
Depreciation and amortization		4.5			4.1
Total operating expenses		66.0			71.1
Operating income		34.0	%		28.9	%

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Three Months Ended March 31, 2019, Compared to Three Months Ended March 31, 2018

Revenue. Revenue for the three-month period ended March 31, 2019, increased 1.5% to $31.5 million, compared to $31.0 million in the three-month period ended March 31, 2018. The increase was primarily due to new customer sales, as well as increases in sales to the existing client base.

Direct expenses. Direct expenses decreased 9.7% to $11.7 million for the three-month period ended March 31, 2019, compared to $12.9 million in the same period in 2018. This was due to a decrease of variable expenses of $1.5 million and an increase in fixed expenses of $222,000. Variable expenses decreased due to less postage, printing and paper costs resulting from changes in survey methodologies and lower conference expenses due to timing of conferences. Fixed expenses increased primarily as a result of increased salary and benefit costs partially offset by decreased contracted services in the customer service and information technology areas. Direct expenses as a percentage of revenue were 37.0% in the three-month periods ended March 31, 2019 and 41.6% for the same period in 2018.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased 2.0% to $7.7 million for the three-month period ended March 31, 2019, compared to $7.9 million for the same period in 2018, primarily due to a reduction in legal and accounting costs of $488,000 mainly associated with the Recapitalization, the Tax Cut and Jobs Act and adoption of the new revenue standard in 2018, reduced bad debt expense of $150,000 and decreased contracted services of $103,000. These were partially offset by increased software and platform hosting expenses of $305,000, higher salary and benefit costs of $211,000 and increased business insurance costs of $71,000. Selling, general and administrative expenses as a percentage of revenue were 24.5% in the three-month periods ended March 31, 2019 and 25.4% for the same period in 2018.

Depreciation and amortization. Depreciation and amortization increased 10.3% to $1.4 million for the three-month period ended March 31, 2019, compared to $1.3 million for the same period in 2018 mainly due to increased amortization from additional computer software investments partially offset by an intangible asset that has been fully amortized. Depreciation and amortization expenses as a percentage of revenue was 4.5% for the three-month period ended March 31, 2019, and 4.1% for the same period in 2018.

Other income (expense). Other income (expense) decreased to other expense of $844,000 for the three-month period ended March 31, 2019, compared to other income of $9,000 for the same period in 2018, primarily due to increased interest expense and foreign exchange rate changes. Interest expense increased to $570,000 in 2019 from $8,000 for the same period in 2018 due to interest related to the new term loan originated in April 2018. Other expense increased to $280,000 in 2019 compared to $28,000 for the same period of 2018 primarily due to revaluation on intercompany transactions due to changes in the foreign exchange rate.

Provision for income taxes. Provision for income taxes was $1.7 million (16.9% effective tax rate) for the three-month period ended March 31, 2019, compared to $1.7 million (18.5% effective tax rate) for the same period in 2018. The effective tax rate for the three-month period ended March 31, 2019, was lower mainly due to an insurance reimbursement of Recapitalization expenses creating a tax benefit of $26,000 in 2019 compared to additional tax of expense of $67,000 from the non-deductible Recapitalization expenses in 2018. In addition, the Company had increased tax benefits of $87,000 from the exercise of options and dividends paid to non-vested shareholders. 

Liquidity and Capital Resources

The Company believes that its existing sources of liquidity, including cash and cash equivalents, borrowing availability, and operating cash flows will be sufficient to meet its projected capital and debt maturity needs and dividend policy for the foreseeable future.

As of March 31, 2019, our principal sources of liquidity included $2.6 million of cash and cash equivalents, up to $13.2 million of unused borrowings under our line of credit and up to $15 million on our delayed draw term note. Of this cash, $1.6 million was held in Canada. The delayed draw term note can only be used to fund permitted future business acquisitions or repurchasing the Company’s Common Stock.

Working Capital

The Company had a working capital deficit of $16.4 million and $18.7 million on March 31, 2019 and December 31, 2018, respectively.

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The change was primarily due to a decrease in dividends payable of $12.4 million, a decrease in accrued wages, bonus and profit sharing of $1.8 million, an increase in trade accounts receivable of $4.0 million and an increase in prepaid expenses of $681,000. These were partially offset by a decrease in cash and cash equivalents of $10.4 million, a $2.0 million increase in deferred revenue, an increase in borrowings on the line of credit of $1.8 million due to the special dividends paid in 2018, an increase in income taxes payable of $1.1 million, an increase in accounts payable of $917,000 (due to timing of payments) and an increase in other current liabilities of $724,000 (mainly due to the adoption of the new leases standard). Dividends payable decreased due to a special dividend, in addition to a quarterly dividend declaration, that was declared in 2018 and paid in January 2019. Trade accounts receivable increased due to the timing of billings and collections on new and renewal contracts. Prepaid expenses and accounts payable changed due to the timing of payment for services and supplies. Accrued wages, bonus and profit sharing decreased due to the payment of 2018 annual bonuses in the three-month period ended March 31, 2019. Income taxes payable changed due to the timing of income tax payments. The Company’s working capital is significantly impacted by its large deferred revenue balances which will vary based on the timing and frequency of billings on annual agreements. The deferred revenue balances as of March 31, 2019 and December 31, 2018, was $18.2 million and $16.2 million, respectively.

The deferred revenue balance is primarily due to timing of initial billings on new and renewal contracts. The Company typically invoices clients for services before they have been completed. Billed amounts are recorded as deferred revenue on the Company’s consolidated financial statements and are recognized as income when earned. In addition, when work is performed in advance of billing, the Company records this work as contract assets or unbilled revenue. Substantially all deferred revenue and all unbilled revenue will be earned and billed respectively, within 12 months of the respective period ends.

Cash Flow Analysis

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

	Three Months Ended March 31,
	2019			2018
	(In thousands)
Provided by operating activities	$	7,300		$	8,228
Used in investing activities		(1,134	)		(1,298	)
Used in financing activities		(16,820	)		(5,851	)
Effect of exchange rate change on cash		304			(334	)
Net change in cash and cash equivalents		(10,350	)		745
Cash and cash equivalents at end of period	$	2,641		$	35,478

Cash Flows from Operating Activities

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

Net cash provided by operating activities was $7.3 million for the three-month period ended March 31, 2019, which included net income of $8.2 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, reserve for uncertain tax positions, totaling $1.7 million. Net changes in assets and liabilities decreased cash flows from operating activities by $2.6 million, primarily due to increases in trade accounts receivable and prepaid and other current assets, and decreases in accrued expense, wages, bonus and profit sharing, partially offset by increases in accounts payable, deferred revenue and income taxes payable and receivable which fluctuate with the timing of income tax payments.

Net cash provided by operating activities was $8.2 million for the three-month period ended March 31, 2018, which included net income of $7.3 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, reserve for uncertain tax positions, totaling $2.1 million. Net changes in assets and liabilities decreased cash flows from operating activities by $1.2 million, primarily due to decreases accrued wages, bonus and profit sharing and increases in deferred contract costs partially offset by income taxes receivable and payable which fluctuate with the timing of income tax payments.

Cash Flows from Investing Activities

Net cash of $1.1 million and $1.3 million was used for investing activities in the three months ended March 31, 2019 and 2018, respectively. These expenditures consisted mainly of computer software classified in property and equipment. The Company expects similar capital expenditure purchases for the remainder of 2019 consisting primarily of computer software and hardware and other equipment to be funded through cash generated from operations.

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Cash Flows from Financing Activities

Net cash used in financing activities was $16.8 million in the three months ended March 31, 2019. Cash was used to repay borrowings on the line of credit of $6.8 million, repay borrowings under the note payable totaling $918,000, and for finance lease obligations of $57,000. Cash was also used to pay $17.1 million of dividends on common stock, and to pay payroll tax withholdings related to share-based compensation of $483,000. Cash was provided from proceeds of the line of credit of $8.5 million.

Net cash used in financing activities was $5.9 million in the three months ended March 31, 2018. Cash was used to repay borrowings under the term note totaling $1.1 million and for finance lease obligations of $28,000. Cash was also used to pay $4.2 million of dividends on common stock, and to pay payroll tax withholdings related to share-based compensation of $535,000.

The effect of changes in foreign exchange rates increased cash and cash equivalents by $304,000 in the three months ended March 31, 2019 and decreased it by $334,000 in the three months ended March 31, 2018.

Capital Expenditures

Cash paid for capital expenditures was $1.1 million for the three months ended March 31, 2019. These expenditures consisted mainly of computer software classified in property and equipment. The Company expects similar capital expenditure purchases for the remainder of 2019 consisting primarily of computer software and hardware and other equipment to be funded through cash generated from operations.

Debt and Equity

The Company’s credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) provides for (i) a $15,000,000 revolving credit facility (the “Line of Credit”), (ii) a $40,000,000 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”). The Delayed Draw Term Loan may be used to fund any permitted future business acquisitions or repurchasing of the Company’s Common Stock and the Line of Credit will be used to fund ongoing working capital needs and other general corporate purposes.

The Term Loan is payable in monthly installments of $462,988 through April 2020 and $526,362 thereafter, with a balloon payment due at maturity in April 2023. The Term Loan bears interest at a fixed rate 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 (“LIBOR”) plus 225 basis points (4.73% at March 31, 2019). 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 April 2021. At March 31, 2019, the Line of Credit had an outstanding balance of $1.8 million. The weighted average borrowings on the Line of Credit for three-month period ended March 31, 2019 was $5.7 million. The weighted average interest on borrowings on the Line of Credit for the three-month period ended March 31, 2019 was 4.75%. The Company is also 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.

In the event that the Delayed Draw Term Loan is used, interest-only payments will be due through the calendar year in which the Delayed Draw Term Loan is drawn upon. After that, amortization will occur at the then current Term Loan rate and schedule with principal and accrued interest amounts outstanding under the Delayed Draw Term Loan due and payable monthly during the term of the Delayed Draw Term Loan, which expires on April 18, 2023.  There have been no borrowings on the Delayed Draw Term Loan since origination.

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

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

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 the Company’s Common Stock and acquisitions, subject in each case to certain exceptions. The Credit Agreement also contains certain financial covenants with respect to minimum fixed charge coverage ratio and maximum cash flow leverage ratio. Pursuant to the Credit Agreement, the Company is required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the terms of the Credit Facilities. The Company is also required to maintain a cash flow leverage ratio of 3.00x or less for all testing periods throughout the terms of the Credit Facilities. As of March 31, 2019, the Company was in compliance with its financial covenants. 

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

The Company has finance leases for computer equipment, office equipment, printing and inserting equipment. The balance of the finance leases as of March 31, 2019 was $848,000.

Shareholders’ equity increased $3.7 million to $22.7 million at March 31, 2019, from $19.1 million at December 31, 2018. The increase was mainly due to net income of $8.2 million, share-based compensation of $302,000 and changes in the cumulative translation adjustment of $365,000. This was partially offset by dividends declared of $4.7 million, share repurchases exceeding the cost of stock options exercised of $483,000.

Contractual Obligations

The Company had contractual obligations to make payments in the following amounts in the future as of March 31, 2019:

Contractual Obligations(1)	Total Payments		Remainder of 2019		One to Three Years		Three to Five Years		After Five Years
(In thousands)
Operating leases(3)	$	2,431	$	601	$	1,040	$	470	$	320
Finance leases		924		200		471		253		--
Uncertain tax positions(2)		--		--		--		--		--
Line of credit		1,750		1,750
Long term debt		43,005		4,167		12,379		26,459		--
Total	$	48,110	$	6,718	$	13,890	$	27,182	$	320

(1)	Amounts are inclusive of interest payments, where applicable.
(2)	We have $579,000 in liabilities associated with uncertain tax positions. We are unable to reasonably estimate the expected cash settlement dates of these uncertain tax positions with the taxing authorities.
(3)	Excludes variable costs such as taxes, insurance, and maintenance which vary from year to year.

Stock Repurchase Program

The Board of Directors of the Company authorized the repurchase of up to 2,250,000 then-existing class A shares and 375,000 then-existing class B shares of common stock in the open market or in privately negotiated transactions under a stock repurchase program that was originally approved in February 2006 and subsequently amended in May 2013. In connection with the Recapitalization in April 2018, the Board of Directors further amended the stock repurchase program to eliminate the repurchase of the former class B common stock. As of March 31, 2019, the remaining number of shares of Common Stock that could be purchased under this authorization was 280,491 shares. 

Critical Accounting Estimates

There have been no changes to the Company’s critical accounting estimates described in the Annual Report on Form 10-K for the year ended December 31, 2018 that have a material impact on the Company’s Condensed Consolidated Financial Statements and the related Notes.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

There are no material changes to the disclosures regarding the Company’s market risk exposures made in its Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 4. Controls and Procedures

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

On January 1, 2019, we adopted the new leases standard, Topic 842 (see Note 1 to the Condensed Consolidated Financial Statements). We implemented internal controls to ensure we adequately evaluated our vendor contracts and properly assessed the impact of the new accounting standard on our financial statements. We also implemented changes to our business processes related to lease arrangements and the control activities within them. The changes included training within business operations management, ongoing vendor contract review and monitoring, and gathering of information for disclosures.

There have been no other changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – Other Information

ITEM 1. Legal Proceedings

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.

ITEM 1A. Risk Factors

There have been no material changes to the risk factors relating to the Company set forth in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2018.

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

In February 2006 and subsequently amended in May 2013, the Board of Directors of the Company authorized the repurchase of 2,250,000 shares of class A common stock and 375,000 shares of class B common stock in the open market or in privately negotiated transactions. In connection with the Recapitalization in April 2018, the Board of Directors further amended the stock repurchase program to eliminate the repurchase of the former class B common stock. Unless terminated earlier by resolution of the Company’s Board of Directors, the repurchase program will expire when the Company has repurchased all shares of Common Stock authorized for repurchase thereunder. No Common Stock was repurchased during the three-month period ended March 31, 2019. The remaining shares of Common Stock that may be purchased under that authorization are 280,491.

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ITEM 6. Exhibits

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

EXHIBIT INDEX  

Exhibit
Number Exhibit Description

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

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

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

(101)* Financial statements from the Quarterly Report on Form 10-Q of National Research Corporation for the quarter ended March 31, 2019, formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Notes to Condensed Consolidated Financial Statements, and (vi) document and entity information.

* In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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SIGNATURES

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

	NATIONAL RESEARCH CORPORATION
Date: May 8, 2019	By:	/s/ Michael D. Hays
		Michael D. Hays
		Chief Executive Officer (Principal Executive Officer)
Date: May 8, 2019	By:	/s/ Kevin R. Karas
		Kevin R. Karas Senior Vice President Finance, Treasurer, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer)

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