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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

-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

notice without penalty. See Note

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.

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:

) 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.

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.

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

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

$741,000

and

$445,000

in the

three

-month periods ended

June 30, 2019

and

2018,

respectively. The Company deferred incremental costs of obtaining a contract of

$1.6

million and

$1.3

million in the

six

-month periods ended

June 30, 2019

and

2018,

respectively. Total amortization by expense classification for the

three

and

six

month-periods ended

June 30, 2019

and

2018

was as follows:

	Three months ended June 30, 2019		Three months ended June 30, 2018		Six months ended June 30, 2019		Six months ended June 30, 2018
	(In thousands)
Direct Expenses	$	13	$	29	$	19	$	59
Selling, general and administrative expenses		628		610		1,309		1,195
Total	$	641	$	639	$	1,328	$	1,254

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

$1,000

and

$7,000

for the

three

months ended

June 30, 2019

and

2018,

respectively and

$21,000

and

$19,000

in the

six

months ended

June 30, 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

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

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: (

) 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.

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

June 30, 2019

and

December 31, 2018:

	Level 1		Level 2		Level 3		Total
	(In thousands)
As of June 30, 2019
Money Market Funds	$	2,854	$	--	$	--	$	2,854
Total Cash Equivalents	$	2,854	$	--	$	--	$	2,854

As of December 31, 2018
Money Market Funds	$	1,848	$	--	$	--	$	1,848
Total Cash Equivalents	$	1,848	$	--	$	--	$	1,848

There were

transfers between levels during the

three

and

six

-month periods ended

June 30, 2019.

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:

	June 30, 2019		December 31, 2018
	(In thousands)
Total carrying amount of long-term debt	$	36,159	$	37,966
Estimated fair value of long-term debt	$	37,157	$	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

June 30, 2019

and

December 31, 2018,

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.

Recent Accounting Pronouncements

Not

Yet Adopted

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.

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 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.