The following table sets forth selected financial information for each of the eight quarters in the two-year period ended December 31, 2018. This unaudited information has been prepared by the Company on the same basis as the consolidated financial statements and includes all normal recurring adjustments necessary to present fairly this information when read in conjunction with the Company’s audited consolidated financial statements and the notes thereto.
Notes to 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 platform (“VoC”), The Governance Institute, and legacy Experience solutions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, National Research Corporation Canada. All significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Translation of Foreign Currencies
The Company’s Canadian subsidiary uses as its functional currency the local currency of the country in which it operates. It translates its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. It translates its revenue and expenses at the average exchange rate during the period. The Company includes translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’ equity. Gains and losses related to transactions denominated in a currency other than the functional currency of the country in which the Company operates and short-term intercompany accounts are included in other income (expense) in the consolidated statements of income.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
and all related amendments (“ASC 606” or “new revenue standard”) using the modified retrospective method for all incomplete contracts as of the date of adoption. The Company applied the practical expedient to reflect the total of all contract modifications occurring before January 1, 2018 in the transaction price and performance obligations at transition rather than accounting for each modification separately. Results for reporting periods beginning on or after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. As discussed in more detail below and under “Deferred Contract Costs”, the largest impact of implementing the new revenue standard was the deferral and amortization of direct and incremental costs of obtaining contracts. In addition, there were other revisions to revenue recognition primarily related to performance obligation determinations and estimating variable consideration. The Company recorded a transition adjustment of approximately $2.7 million, net of $814,000 of tax, to the opening balance of retained earnings.
The Company derives a majority of its revenues from its annually renewable subscription-based service agreements with its customers, which include performance measurement and improvement services, healthcare analytics and governance education services. Such agreements are generally cancelable on short or no notice without penalty. See Note 3 for further information about the Company's contracts with customers. Under ASC 606, the Company accounts for revenue using the following steps:
|
●
|
Identify the contract, or contracts, with a customer
|
|
●
|
Identify the performance obligations in the contract
|
|
●
|
Determine the transaction price
|
|
●
|
Allocate the transaction price to the identified performance obligations
|
|
●
|
Recognize revenue when, or as, the Company satisfies the performance obligations.
|
The Company’s revenue arrangements with a client may include combinations of more than one service offering which may be executed at the same time, or within close proximity of one another. The Company combines contracts with the same customer into a single contract for accounting purposes when the contract is entered into at or near the same time and the contracts are negotiated together. For contracts that contain more than one separately identifiable performance obligation, the total transaction price is allocated to the identified performance obligations based upon the relative stand-alone selling prices of the performance obligations. The stand-alone selling prices are based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost-plus margin or residual approach. The Company estimates the amount of total contract consideration it expects to receive for variable arrangements based on the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement. Prior to 2018, revenue allocated to an element was limited to revenue that was not subject to refund or otherwise represented contingent revenue. The Company’s revenue arrangements do not contain any significant financing element due to the contract terms and the timing between when consideration is received and when the service is provided.
The Company’s arrangements with customers consist principally of four different types of arrangements: 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.
The following tables summarize the impact the adoption of ASC 606 had on the Company’s consolidated financial statements (in thousands, except per share data):
Consolidated balance sheet:
|
|
As reported
December 31,
2018
|
|
|
Adjustments
|
|
|
Balances without
Adoption of ASC
606
|
|
Accounts receivable, net
|
|
$
|
11,922
|
|
|
$
|
5
|
|
|
$
|
11,927
|
|
Other current assets
|
|
|
224
|
|
|
|
(53
|
)
|
|
|
171
|
|
All other current assets
|
|
|
16,264
|
|
|
|
94
|
|
|
|
16,358
|
|
Total current assets
|
|
|
28,410
|
|
|
|
46
|
|
|
|
28,456
|
|
Deferred contract costs
|
|
|
3,484
|
|
|
|
(3,484
|
)
|
|
|
--
|
|
All other noncurrent assets
|
|
|
76,138
|
|
|
|
--
|
|
|
|
76,138
|
|
Total assets
|
|
$
|
108,032
|
|
|
$
|
(3,438
|
)
|
|
$
|
104,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
16,244
|
|
|
$
|
327
|
|
|
$
|
16,571
|
|
Other current liabilities
|
|
|
30,865
|
|
|
|
--
|
|
|
|
30,865
|
|
Total current liabilities
|
|
|
47,109
|
|
|
|
327
|
|
|
|
47,436
|
|
Deferred income taxes
|
|
|
6,276
|
|
|
|
(871
|
)
|
|
|
5,405
|
|
Other long term liabilities
|
|
|
35,564
|
|
|
|
--
|
|
|
|
35,564
|
|
Total liabilities
|
|
|
88,949
|
|
|
|
(544
|
)
|
|
|
88,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
(106,339
|
)
|
|
|
(2,888
|
)
|
|
|
(109,227
|
)
|
Accumulated other comprehensive income
|
|
|
(2,916
|
)
|
|
|
(6
|
)
|
|
|
(2,922
|
)
|
Other stockholders’ equity
|
|
|
128,338
|
|
|
|
--
|
|
|
|
128,338
|
|
Total stockholders’ equity
|
|
|
19,083
|
|
|
|
(2,894
|
)
|
|
|
16,189
|
|
Total liabilities and stockholders’ equity
|
|
$
|
108,032
|
|
|
$
|
(3,438
|
)
|
|
$
|
104,594
|
|
Consolidated statement of income:
|
|
Year ended December 31, 2018
|
|
|
|
As reported
|
|
|
Adjustments
|
|
|
Balances Without
Adoption of ASC 606
|
|
Revenue
|
|
$
|
119,686
|
|
|
$
|
(191
|
)
|
|
$
|
119,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses
|
|
|
47,577
|
|
|
|
(82
|
)
|
|
|
47,495
|
|
Selling, general and administrative
|
|
|
31,371
|
|
|
|
101
|
|
|
|
31,472
|
|
Depreciation and amortization
|
|
|
5,463
|
|
|
|
--
|
|
|
|
5,463
|
|
Total operating expenses
|
|
|
84,411
|
|
|
|
19
|
|
|
|
84,430
|
|
Operating income
|
|
|
35,275
|
|
|
|
(210
|
)
|
|
|
35,065
|
|
Other income (expense)
|
|
|
(566
|
)
|
|
|
--
|
|
|
|
(566
|
)
|
Income before income taxes
|
|
|
34,709
|
|
|
|
(210
|
)
|
|
|
34,499
|
|
Provision (benefit) for income taxes
|
|
|
4,662
|
|
|
|
(57
|
)
|
|
|
4,605
|
|
Net income
|
|
$
|
30,047
|
|
|
$
|
(153
|
)
|
|
$
|
29,894
|
|
Earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common (formerly Class A)
|
|
$
|
1.08
|
|
|
$
|
(0.01
|
)
|
|
$
|
1.07
|
|
Class B
|
|
|
1.31
|
|
|
|
--
|
|
|
|
1.31
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common (formerly Class A)
|
|
$
|
1.04
|
|
|
$
|
(0.01
|
)
|
|
$
|
1.03
|
|
Class B
|
|
|
1.27
|
|
|
|
0.01
|
|
|
|
1.28
|
|
Consolidated statement of comprehensive income:
|
|
Year ended December 31, 2018
|
|
|
|
As reported
|
|
|
Adjustments
|
|
|
Balances Without
Adoption of ASC 606
|
|
Net Income
|
|
$
|
30,047
|
|
|
$
|
(153
|
)
|
|
$
|
29,894
|
|
Cumulative translation adjustment
|
|
|
(1,281
|
)
|
|
|
(6
|
)
|
|
|
(1,287
|
)
|
Comprehensive Income
|
|
$
|
28,766
|
|
|
$
|
(159
|
)
|
|
$
|
28,607
|
|
Consolidated statement of cash flows:
|
|
Year ended December 31, 2018
|
|
|
|
As reported
|
|
|
Adjustments
|
|
|
Balances Without
adoption of ASC 606
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30,047
|
|
|
$
|
(153
|
)
|
|
$
|
29,894
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,463
|
|
|
|
--
|
|
|
|
5,463
|
|
Deferred income taxes
|
|
|
1,476
|
|
|
|
(57
|
)
|
|
|
1,419
|
|
Reserve for uncertain tax positions
|
|
|
(288
|
)
|
|
|
--
|
|
|
|
(288
|
)
|
Non-cash share-based compensation expense
|
|
|
1,514
|
|
|
|
--
|
|
|
|
1,514
|
|
Loss on disposal of property and equipment
|
|
|
186
|
|
|
|
--
|
|
|
|
186
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable and unbilled revenue
|
|
|
2,767
|
|
|
|
122
|
|
|
|
2,889
|
|
Prepaid expenses and other current assets
|
|
|
(833
|
)
|
|
|
(115
|
)
|
|
|
(948
|
)
|
Deferred contract costs
|
|
|
(113
|
)
|
|
|
113
|
|
|
|
--
|
|
Accounts payable
|
|
|
(39
|
)
|
|
|
--
|
|
|
|
(39
|
)
|
Accrued expenses, wages, bonus and profit sharing
|
|
|
(566
|
)
|
|
|
--
|
|
|
|
(566
|
)
|
Income taxes receivable and payable
|
|
|
686
|
|
|
|
--
|
|
|
|
686
|
|
Deferred revenue
|
|
|
(452
|
)
|
|
|
90
|
|
|
|
(362
|
)
|
Net cash provided by operating activities
|
|
|
39,848
|
|
|
|
--
|
|
|
|
39,848
|
|
Net cash used in investing activities
|
|
|
(5,971
|
)
|
|
|
--
|
|
|
|
(5,971
|
)
|
Net cash used in financing activities
|
|
|
(54,497
|
)
|
|
|
--
|
|
|
|
(54,497
|
)
|
Effect of exchange rate changes on cash
|
|
|
(1,122
|
)
|
|
|
--
|
|
|
|
(1,122
|
)
|
Change in cash and cash equivalents
|
|
|
(21,742
|
)
|
|
|
--
|
|
|
|
(21,742
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
34,733
|
|
|
|
--
|
|
|
|
34,733
|
|
Cash and cash equivalents at end of period
|
|
$
|
12,991
|
|
|
|
--
|
|
|
$
|
12,991
|
|
Deferred Contract Costs
Deferred contract costs, net is stated at gross deferred costs less accumulated amortization. Beginning January 1, 2018, with the adoption of the new revenue standard, the Company defers commissions and incentives, including payroll taxes, if they are incremental and recoverable costs of obtaining a renewable customer contract. Deferred contract costs are amortized over the estimated term of the contract, including renewals, which generally ranges from three 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 $2.6 million in the year ended December 31, 2018. Total amortization was $2.5 million for the year ended December 31, 2018. Amortization of deferred contract costs included in direct expenses and selling, general and administrative expenses was $83,000 and $2.3 million for the year ended December 31, 2018, respectively. Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $51,000 for the year ended December 31, 2018. The Company has elected the practical expedient to expense contract costs when incurred for any nonrenewable contracts with a term of one year or less. Prior to 2018, all commissions and incentives were expensed as incurred. The Company recorded a transition adjustment on January 1, 2018 as an increase to retained earnings of $2.6 million, net of $776,000 of tax, to reflect $3.4 million of commissions and incentives related to contracts that began prior to 2018, net of accumulated amortization.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on the Company’s historical write-off experience and current economic conditions. The Company reviews the allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
The following table provides the activity in the allowance for doubtful accounts for the years ended December 31, 2018, 2017 and 2016:
|
|
Balance at
Beginning
of Year
|
|
|
Bad Debt
Expense
|
|
|
Write-offs,
net of
Recoveries
|
|
|
Balance
at End
of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
$
|
173
|
|
|
$
|
218
|
|
|
$
|
222
|
|
|
$
|
169
|
|
Year Ended December 31, 2017
|
|
$
|
169
|
|
|
$
|
249
|
|
|
$
|
218
|
|
|
$
|
200
|
|
Year Ended December 31, 2018
|
|
$
|
200
|
|
|
$
|
80
|
|
|
$
|
105
|
|
|
$
|
175
|
|
Property and Equipment
Property and equipment is stated at cost. Major expenditures to purchase property or to substantially increase useful lives of property are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in income.
The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software, including payroll and payroll-related costs for employees who are directly associated with the internal-use software projects and external direct costs of materials and services. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs incurred during the preliminary project and post-implementation stages, as well as software maintenance and training costs are expensed as incurred. The Company capitalized approximately $4.0 million and $3.0 million of costs incurred for the development of internal-use software for the years ended December 31, 2018 and 2017, respectively.
The Company provides for depreciation and amortization of property and equipment using annual rates which are sufficient to amortize the cost of depreciable assets over their estimated useful lives. The Company uses the straight-line method of depreciation and amortization over estimated useful lives of three to ten years for furniture and equipment, three to five years for computer equipment, one to five years for capitalized software, and seven to forty years for the Company’s office building and related improvements.
Leases are categorized as operating or capital at the inception of the lease. Assets under capital lease obligations are reported at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. The Company depreciates capital lease assets without transfer-of-ownership or bargain-purchase-options using the straight-line method over the lease terms, excluding any lease renewals, unless the lease renewals are reasonably assured. Capital lease assets with transfer-of-ownership or bargain-purchase-options are depreciated using the straight-line method over the assets’ estimated useful lives.
Impairment of Long-Lived Assets and Amortizing Intangible Assets
Long-lived assets, such as property and equipment and purchased intangible assets subject to depreciation or amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No impairments were recorded during the years ended December 31, 2018, 2017, or 2016.
Among others, management believes the following circumstances are important indicators of potential impairment of such assets and as a result may trigger an impairment review:
|
●
|
Significant underperformance in comparison to historical or projected operating results;
|
|
●
|
Significant changes in the manner or use of acquired assets or the Company’s overall strategy;
|
|
●
|
Significant negative trends in the Company’s industry or the overall economy;
|
|
●
|
A significant decline in the market price for the Company’s common stock for a sustained period; and
|
|
●
|
The Company’s market capitalization falling below the book value of the Company’s net assets.
|
Goodwill and Intangible Assets
Intangible assets include customer relationships, trade names, technology, non-compete agreements and goodwill. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company reviews intangible assets with indefinite lives for impairment annually as of October 1 and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
When performing the impairment assessment, the Company will first assess qualitative factors to determine whether it is necessary to recalculate the fair value of the intangible assets with indefinite lives. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangibles is less than their carrying amount, the Company calculates the fair value using a market or income approach. If the carrying value of intangible assets with indefinite lives exceeds their fair value, then the intangible assets are written-down to their fair values. The Company did not recognize any impairments related to indefinite-lived intangibles during 2018, 2017 or 2016.
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. All of the Company’s goodwill is allocated to its reporting units, which are the same as its operating segments. Goodwill is reviewed for impairment at least annually, as of October 1, and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.
The Company reviews for goodwill impairment by first assessing qualitative factors to determine whether any impairment may exist. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative analysis will be performed, and the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, then goodwill is written down by this difference. The Company performed a qualitative analysis as of October 1, 2018 and determined the fair value of each reporting unit likely significantly exceeded its carrying value. No impairments were recorded during the years ended December 31, 2018, 2017 or 2016.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under that method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances, if any, are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company uses the deferral method of accounting for its investment tax credits related to state tax incentives. During the years ended December 31, 2018, 2017 and 2016, the Company recorded income tax benefits relating to these tax credits of $0, $4,000, and $77,000, respectively. Interest and penalties related to income taxes are included in income taxes in the Statement of Income.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Share-Based Compensation
All of the Company’s existing stock option awards and non-vested stock awards have been determined to be equity-classified awards. The compensation expense on share-based payments is recognized based on the grant-date fair value of those awards. The Company recognizes the excess tax benefits and tax deficiencies in the income statement when options are exercised. Amounts recognized in the financial statements with respect to these plans:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Amounts charged against income, before income tax benefit
|
|
$
|
1,514
|
|
|
$
|
1,845
|
|
|
$
|
1,929
|
|
Amount of related income tax benefit
|
|
|
(3,566
|
)
|
|
|
(2,310
|
)
|
|
|
(1,164
|
)
|
Net (benefit) expense to net income
|
|
$
|
(2,052
|
)
|
|
$
|
(465
|
)
|
|
$
|
765
|
|
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents were $1.8 million and $34.5 million as of December 31, 2018, and 2017, respectively, consisting primarily of money market accounts, Eurodollar deposits and funds invested in commercial paper. At certain times, cash equivalent balances may exceed federally insured limits.
Fair Value Measurements
The Company’s valuation techniques are based on maximizing observable inputs and minimizing the use of unobservable inputs when measuring fair value. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The inputs are then classified into the following hierarchy: (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.
Commercial paper and Eurodollar deposits are included in cash equivalents and are valued at amortized cost, which approximates fair value due to its short-term nature. Eurodollar deposits are United States dollars deposited in a foreign bank branch of a United States bank and have daily liquidity. Both of these are included as a Level 2 measurement in the table below.
The following details the Company’s financial assets within the fair value hierarchy at December 31, 2018 and 2017:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
1,848
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
1,848
|
|
Total Cash Equivalents
|
|
$
|
1,848
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
1,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
13,971
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
13,971
|
|
Commercial Paper
|
|
|
--
|
|
|
|
10,490
|
|
|
|
--
|
|
|
|
10,490
|
|
Eurodollar Deposits
|
|
|
--
|
|
|
|
10,017
|
|
|
|
--
|
|
|
|
10,017
|
|
Total Cash Equivalents
|
|
$
|
13,971
|
|
|
$
|
20,507
|
|
|
$
|
--
|
|
|
$
|
34,478
|
|
There were no transfers between levels during the years ended December 31, 2018 and 2017.
The Company's long-term debt described in Note 10 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:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
(In thousands)
|
|
Total carrying amount of long-term debt
|
|
$
|
37,966
|
|
|
$
|
1,067
|
|
Estimated fair value of long-term debt
|
|
$
|
38,257
|
|
|
$
|
1,066
|
|
The carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate their fair value. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes property and equipment, goodwill, intangibles and cost method investments, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). As of December 31, 2018 and 2017, there was 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.
Since the September 2017 announcement of the original proposed recapitalization plan (“Original Transaction”) (see Note 2), three purported class action and/or derivative complaints have been filed in state or federal courts by three individuals claiming to be shareholders of the Company. All of the complaints name as defendants the Company and the individual directors of the Company. Two of these lawsuits were filed in the United States District Court for the District of Nebraska— a putative class action lawsuit captioned
Gennaro v. National Research Corporation, et al
., which was filed on November 15, 2017, and a putative class and derivative action lawsuit captioned
Gerson v. Hays, et al
., which was filed on November 16, 2017. These lawsuits were consolidated by order of the federal court under the caption
In re National Research Corporation Shareholder Litigation
. A third lawsuit was filed in the Circuit Court for Milwaukee County, Wisconsin—a putative class action lawsuit captioned
Apfel v. Hays, et al
., which was filed on December 1, 2017. The allegations in all of the lawsuits were very similar. The plaintiffs alleged, among other things, that the defendants breached their fiduciary duties in connection with the allegedly unfair proposed transaction, at an allegedly unfair price, conducted in an allegedly unfair and conflicted process and in alleged violation of Wisconsin law and the Company’s Articles of Incorporation. The plaintiffs in these lawsuits sought, among other things, an injunction enjoining the defendants from consummating the Original Transaction, damages, equitable relief and an award of attorneys’ fees and costs of litigation. After the announcement of a revised proposed recapitalization plan (the “Recapitalization”), the plaintiffs abandoned their efforts to enjoin the transaction. However, the plaintiffs in
In re National Research Corporation Shareholder Litigation
in Nebraska filed an Amended Complaint on March 23, 2018 seeking damages for alleged breach of fiduciary duties in connection with the Original Transaction and alleged omission of material facts in the proxy statement relating to the Recapitalization. The plaintiffs in the
Apfel
case in Wisconsin filed an amended complaint on April 4, 2018 seeking damages for alleged breach of fiduciary duties in connection with the Original Transaction and the Recapitalization. The Company and its directors moved to dismiss both lawsuits, and those motions were granted in September and October 2018 by the respective courts. The plaintiffs did not appeal the judgments dismissing these lawsuits and, therefore, both lawsuits are now concluded.
Earnings Per Share
Prior to the Recapitalization, net income per share of the Company’s former class A common stock and former class B common stock was computed using the two-class method. Basic net income per share was computed by allocating undistributed earnings to common shares and using the weighted-average number of common shares outstanding during the period.
Diluted net income per share was computed using the weighted-average number of common shares and, if dilutive, the potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method.
The liquidation rights and the rights upon the consummation of an extraordinary transaction were the same for the holders of the Company’s former class A common stock and former class B common stock. Other than share distributions and liquidation rights, the amount of any dividend or other distribution payable on each share of former class A common stock was equal to one-sixth (1/6
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 93,346, 104,647 and 546,910 options of Common Stock (former class A shares) for the years ended December 31, 2018, 2017 and 2016, respectively and 1,858 and 83,440 options of former class B shares for the years ended December 31, 2017 and 2016, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive.
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Common
Stock
(formerly
Class A)
|
|
|
Class B
Common
Stock
|
|
|
Common
Stock
(formerly
Class A)
|
|
|
Class B
Common
Stock
|
|
|
Common
Stock
(formerly
Class A)
|
|
|
Class B
Common
Stock
|
|
|
|
(In thousands, except per share data)
|
|
Numerator for net income per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,423
|
|
|
$
|
4,624
|
|
|
$
|
11,388
|
|
|
$
|
11,555
|
|
|
$
|
10,178
|
|
|
$
|
10,341
|
|
Allocation of distributed and undistributed income to unvested restricted stock shareholders
|
|
|
(82
|
)
|
|
|
(18
|
)
|
|
|
(88
|
)
|
|
|
(87
|
)
|
|
|
(88
|
)
|
|
|
(88
|
)
|
Net income attributable to common shareholders
|
|
$
|
25,341
|
|
|
$
|
4,606
|
|
|
$
|
11,300
|
|
|
$
|
11,468
|
|
|
$
|
10,090
|
|
|
$
|
10,253
|
|
Denominator for net income per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
23,562
|
|
|
|
3,527
|
|
|
|
20,770
|
|
|
|
3,514
|
|
|
|
20,713
|
|
|
|
3,505
|
|
Net income per share - basic
|
|
$
|
1.08
|
|
|
$
|
1.31
|
|
|
$
|
0.54
|
|
|
$
|
3.26
|
|
|
$
|
0.49
|
|
|
$
|
2.93
|
|
Numerator for net income per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders for basic computation
|
|
$
|
25,341
|
|
|
$
|
4,606
|
|
|
$
|
11,300
|
|
|
$
|
11,468
|
|
|
$
|
10,090
|
|
|
$
|
10,253
|
|
Denominator for net income per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
s
hares outstanding - basic
|
|
|
23,562
|
|
|
|
3,527
|
|
|
|
20,770
|
|
|
|
3,514
|
|
|
|
20,713
|
|
|
|
3,505
|
|
Weighted average effect of dilutive securities – stock options:
|
|
|
886
|
|
|
|
101
|
|
|
|
857
|
|
|
|
89
|
|
|
|
324
|
|
|
|
55
|
|
Denominator for diluted earnings per share – adjusted weighted average shares
|
|
|
24,448
|
|
|
|
3,628
|
|
|
|
21,627
|
|
|
|
3,603
|
|
|
|
21,037
|
|
|
|
3,560
|
|
Net income per share - diluted
|
|
$
|
1.04
|
|
|
$
|
1.27
|
|
|
$
|
0.52
|
|
|
$
|
3.18
|
|
|
$
|
0.48
|
|
|
$
|
2.88
|
|
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) which supersedes existing lease guidance. Among other things, this ASU requires lessees to recognize a lease liability and a right-to-use asset for all leases, including operating leases, with a term greater than twelve months on its balance sheet. Leases will be classified as financing or operating which will drive the expense recognition pattern. For lessees, the income statement presentation and expense recognition pattern for financing and operating leases is similar to the current model for capital and operating leases, respectively. This ASU is effective in fiscal years beginning after December 15, 2018, with early adoption permitted, requires a modified retrospective transition method, and permits the use of an optional transition method to record the cumulative effect adjustment to the opening balance sheet in the period of adoption rather than in the earliest comparative period presented, which also provides that financial information and disclosures are only updated beginning with the date of initial application. The Company will adopt the standard as of January 1, 2019 and plans to use the optional transition method and the package of practical expedients, which eliminates the reassessment of past leases, classification and initial direct costs. The Company is not electing to adopt the hindsight practical expedient and will therefore maintain the lease terms determined prior to adopting Topic 842. The Company is in the process of finalizing the calculations using a lease accounting software tool and reviewing and updating its controls and processes for the new standard. Adoption of the standard is expected to result in an initial total right of use asset and corresponding lease liability in a range of $2.3 to $3.0 million for operating leases and will not have a significant impact on the consolidated statements of income.
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 annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. The Company believes its adoption will not significantly impact the Company’s results of operations and financial position.
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 effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have upon the Company’s results of operations and financial position and has not yet determined whether early adoption will be elected.
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 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. The transactions were recorded based on the cash paid and the fair value of the Common Stock issued. The Common Stock continues to trade on the NASDAQ Global Market under the revised symbol “NRC.”
In connection with the Recapitalization, on April 18, 2018, the Company entered into a credit agreement with First National Bank of Omaha, a national banking association (“FNB”), as described in Note 10.
(3)
|
Contracts with Customers
|
The following table disaggregates revenue for the year ended December 31, 2018 based on timing of revenue recognition (In thousands):
|
|
2018
|
|
Subscription services recognized ratably over time
|
|
$
|
104,777
|
|
Services recognized at a point in time
|
|
|
4,775
|
|
Fixed, non-subscription recognized over time
|
|
|
3,163
|
|
Unit price services recognized over time
|
|
|
6,971
|
|
Total revenue
|
|
$
|
119,686
|
|
The Company’s solutions within the digital VoC platform in 2018 accounted for 49.6% of total revenue compared to 33.9% in 2017. 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):
|
|
December 31, 2018
|
|
|
Balance at 1/1/2018
as adjusted (1)
|
|
Accounts receivables
|
|
$
|
11,922
|
|
|
$
|
14,674
|
|
Contract assets included in other current assets
|
|
$
|
53
|
|
|
$
|
74
|
|
Deferred Revenue
|
|
$
|
(16,244
|
)
|
|
$
|
(16,642
|
)
|
(1)
|
Represents the December 31, 2017 balance adjusted for the ASC 606 transition adjustments.
|
Significant changes in contract assets and contract liabilities during 2018 are as follows (in thousands):
|
|
2018
|
|
|
|
Contract Assets
|
|
|
Deferred Revenue
|
|
|
|
Increase (Decrease)
|
|
Revenue recognized that was included in deferred revenue at beginning of year due to completion of services
|
|
$
|
-
|
|
|
$
|
(16,372
|
)
|
Increases due to invoicing of client, net of amounts recognized as revenue
|
|
|
-
|
|
|
|
16,119
|
|
Decreases due to completion of services (or portion of services) and transferred to accounts receivable
|
|
|
(74
|
)
|
|
|
-
|
|
Change due to cumulative catch-up adjustments arising from changes in expected contract consideration
|
|
|
|
|
|
|
(145
|
)
|
Decreases due to impairment
|
|
|
-
|
|
|
|
-
|
|
Increases due to revenue recognized in the period with additional performance obligations before invoicing
|
|
|
53
|
|
|
|
-
|
|
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 December 31, 2018 approximated $976,000, of which $881,000 and $95,000 are expected to be recognized during 2019 and 2020, respectively.
The Company makes equity investments to promote business and strategic objectives. For investments that do not have a readily determinable fair value, the Company applies either cost or equity method of accounting depending on the nature of its investment and its ability to exercise significant influence. Investments are periodically analyzed to determine whether or not there are any indicators of impairment and written down to fair value if the investment has incurred an other than temporary impairment. It is not practicable for the Company to estimate fair value at each reporting date due to the cost and complexity of the calculations for this non-public entity. During 2017, the Company acquired a $1.3 million investment in convertible preferred stock of PracticingExcellence.com, Inc., a privately-held Delaware corporation (“PX”), which is included in non-current assets and is carried at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, if any. The Company has a seat on PX's board of directors and the Company's investment, which is not considered to be in-substance common stock, represents approximately 15.7% of the issued and outstanding equity interests in PX.
On December 21, 2015, the Company completed the sale of selected assets and liabilities related to the clinical workflow product of the Predictive Analytics operating segment, for a net cash amount of approximately $1.6 million. In connection with the closing of the transaction, $300,000 was placed in escrow to cover certain indemnification claims for one year following the transaction pursuant to the purchase agreement. Due to the uncertainty related to the settlement of the claims, escrowed amounts were recognized when the contingency was removed and the cash was released from escrow rather than at the time of sale. The Company received $223,000 of the escrow funds in December 2016 upon final resolution of the claims and recorded an additional gain on the sale from these funds.
Customer-Connect LLC was formed in June 2013 to develop and commercialize the Connect programs. Connect programs provide healthcare organizations the technology to engage patients through real-time identification and management of individual patient needs, preferences, risks, and experiences. The platform ensures that organizations have access to a longitudinal view of the patient to more effectively manage patient engagement across the continuum of care. At inception, NRC Health had a 49% ownership interest in Connect. NG Customer-Connect, LLC held a 25% interest, and the remaining 26% was held by Illuminate Health, LLC. Profits and losses were allocated under the hypothetical liquidation at book value approach.
In July 2015, the Company acquired all of NG Customer-Connect, LLC’s interest in Connect and a portion of Illuminate Health LLC’s interest in Connect for combined consideration of $2.8 million. As a result, as of December 31, 2015, the Company owned approximately 89% of Connect and Illuminate Health, LLC owned 11%. Under the amended operating agreement, NRC Health had the option to acquire additional equity units from Illuminate Health when new annual recurring contract value reached targeted levels. On March 7, 2016, the Company elected to exercise its first option to acquire one-third of the outstanding non-controlling interest for $1.0 million. Subsequently, on March 28, 2016, NRC Health and Illuminate Health reached an agreement whereby NRC Health acquired the remaining interest held by Illuminate Health for $1.0 million. Following these transactions, Customer-Connect LLC was a wholly owned subsidiary of NRC Health. All of Connect’s previous net income (losses) had been attributable to NRC Health. Since the Company previously consolidated Connect, the transactions to acquire additional ownership interests in Connect were accounted for as equity transactions, resulting in a reduction to additional paid-in capital of $252,000 and $2.8 million in 2016 and 2015, respectively. The acquisition of the remaining interest resulted in differences between the book and tax basis of Connect’s assets. As a result, the Company recorded deferred tax assets of $1.7 million, with a corresponding increase to additional paid-in capital during 2016. On June 30, 2016, Customer-Connect LLC was dissolved.
(
7
)
|
Property and Equipment
|
At December 31, 2018, and 2017, property and equipment consisted of the following:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Furniture and equipment
|
|
$
|
5,321
|
|
|
$
|
5,064
|
|
Computer equipment
|
|
|
2,900
|
|
|
|
2,721
|
|
Computer software
|
|
|
26,694
|
|
|
|
22,569
|
|
Building
|
|
|
9,349
|
|
|
|
9,386
|
|
Leaseholds
|
|
|
41
|
|
|
|
41
|
|
Land
|
|
|
425
|
|
|
|
425
|
|
Property and equipment at cost
|
|
|
44,730
|
|
|
|
40,206
|
|
Less accumulated depreciation and amortization
|
|
|
30,577
|
|
|
|
27,847
|
|
Net property and equipment
|
|
$
|
14,153
|
|
|
$
|
12,359
|
|
Depreciation and amortization expense related to property and equipment, including assets under capital lease, for the years ended December 31, 2018, 2017, and 2016 was $4.8 million, $4.0 million, and $3.6 million, respectively.
Property and equipment included the following amounts under capital lease:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Furniture and equipment
|
|
$
|
1,062
|
|
|
$
|
843
|
|
Computer Equipment
|
|
|
487
|
|
|
|
-
|
|
Computer Software
|
|
|
224
|
|
|
|
-
|
|
Property and equipment under capital lease, gross
|
|
|
1,773
|
|
|
|
843
|
|
Less accumulated amortization
|
|
|
839
|
|
|
|
684
|
|
Net assets under capital lease
|
|
$
|
934
|
|
|
$
|
159
|
|
(
8
)
|
Goodwill and Intangible Assets
|
Goodwill and intangible assets consisted of the following at December 31, 2018:
|
|
Useful Life
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
(In years)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
$
|
57,831
|
|
|
|
|
|
|
$
|
57,831
|
|
Non-amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite trade name
|
|
|
|
|
|
|
|
1,191
|
|
|
|
|
|
|
|
1,191
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer related
|
|
5
|
-
|
15
|
|
|
|
9,327
|
|
|
|
9,011
|
|
|
|
316
|
|
Technology
|
|
|
7
|
|
|
|
|
1,360
|
|
|
|
765
|
|
|
|
595
|
|
Trade names
|
|
5
|
-
|
10
|
|
|
|
1,572
|
|
|
|
1,572
|
|
|
|
--
|
|
Total amortizing intangible assets
|
|
|
|
|
|
|
|
12,259
|
|
|
|
11,348
|
|
|
|
911
|
|
Total intangible assets other than goodwill
|
|
|
|
|
|
|
$
|
13,450
|
|
|
$
|
11,348
|
|
|
$
|
2,102
|
|
Goodwill and intangible assets consisted of the following at December 31, 2017:
|
|
Useful Life
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
(In years)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
$
|
58,021
|
|
|
|
|
|
|
$
|
58,021
|
|
Non-amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite trade name
|
|
|
|
|
|
|
|
|
1,191
|
|
|
|
|
|
|
|
1,191
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer related
|
|
|
5
|
-
|
15
|
|
|
|
9,347
|
|
|
|
8,611
|
|
|
|
736
|
|
Technology
|
|
|
|
7
|
|
|
|
|
1,360
|
|
|
|
523
|
|
|
|
837
|
|
Trade names
|
|
|
5
|
-
|
10
|
|
|
|
1,572
|
|
|
|
1,572
|
|
|
|
--
|
|
Total amortizing intangible assets
|
|
|
|
|
|
|
|
|
12,279
|
|
|
|
10,706
|
|
|
|
1,573
|
|
Total intangible assets other than goodwill
|
|
|
|
|
|
|
|
$
|
13,470
|
|
|
$
|
10,706
|
|
|
$
|
2,764
|
|
The following represents a summary of changes in the Company’s carrying amount of goodwill for the years ended December 31, 2018, and 2017 (in thousands):
Balance as of December 31, 2016
|
|
$
|
57,861
|
|
Foreign currency translation
|
|
|
160
|
|
Balance as of December 31, 2017
|
|
$
|
58,021
|
|
Foreign currency translation
|
|
|
(190
|
)
|
Balance as of December 31, 2018
|
|
$
|
57,831
|
|
Aggregate amortization expense for customer related intangibles, trade names, technology and non-competes for the years ended December 31, 2018, 2017 and 2016 was $662,000, $610,000, and $654,000, respectively. Estimated amortization expense for future years is: 2019—$374,000; 2020—$318,000; 2021—$180,000; 2022—$39,000.
For the years ended December 31, 2018, 2017, and 2016, income before income taxes consists of the following:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
U.S. Operations
|
|
$
|
32,056
|
|
|
$
|
32,750
|
|
|
$
|
29,848
|
|
Foreign Operations
|
|
|
2,653
|
|
|
|
1,533
|
|
|
|
1,508
|
|
Income before income taxes
|
|
$
|
34,709
|
|
|
$
|
34,283
|
|
|
$
|
31,356
|
|
Income tax expense consisted of the following components:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
2,144
|
|
|
$
|
10,947
|
|
|
$
|
8,930
|
|
Deferred
|
|
|
1,328
|
|
|
|
(1,596
|
)
|
|
|
847
|
|
Total
|
|
$
|
3,472
|
|
|
$
|
9,351
|
|
|
$
|
9,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
882
|
|
|
$
|
387
|
|
|
$
|
409
|
|
Deferred
|
|
|
(178
|
)
|
|
|
704
|
|
|
|
(18
|
)
|
Total
|
|
$
|
704
|
|
|
$
|
1,091
|
|
|
$
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
204
|
|
|
$
|
837
|
|
|
$
|
634
|
|
Deferred
|
|
|
282
|
|
|
|
61
|
|
|
|
36
|
|
Total
|
|
$
|
486
|
|
|
$
|
898
|
|
|
$
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,662
|
|
|
$
|
11,340
|
|
|
$
|
10,838
|
|
Federal Tax Reform
On December 22, 2017, the Tax Cut and Jobs Act (the “Tax Act”) was enacted which, among other changes, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. The Tax Act made broad and complex changes to the U.S. tax code. Based on the information available, and the current interpretation of the Tax Act, the Company was able to make a reasonable estimate as of December 31, 2017, and recorded a provisional net tax benefit related to the remeasurement of the deferred tax assets and liabilities due to the reduction in the U.S. federal corporate tax rate, offset by the one-time mandatory deemed repatriation tax, payable over eight years. In accordance with Staff Accounting Bulletin No. 118, the Company made reasonable estimates and recorded a provisional net tax benefit of $1.9 million as of December 31, 2017 related to the following elements of the Tax Act:
|
●
|
Reduction in the U.S. Federal Corporate Tax Rate: The Tax Act reduced the corporate tax rate to 21%, effective January 1, 2018. Recorded a decrease related to deferred tax assets and liabilities with a corresponding net adjustment to deferred income tax benefit for the year ended December 31, 2017.
|
|
●
|
Availability of 100% bonus depreciation on assets placed in service after September 27, 2017.
|
|
●
|
Certain stock compensation plans potentially subject to limitations as to deductibility.
|
The above items were final as of December 31, 2018, and no material adjustments were made to the provisional amounts recorded as of December 31, 2017. Under the Tax Act, the Company was also subject to a one-time mandatory deemed repatriation tax on accumulated non-U.S. earnings. The estimates booked as of December 31, 2017 have been finalized and no material adjustments were made to the financials.
In addition, as a result of the Tax Act, the Company determined that it would no longer indefinitely reinvest the earnings of its Canadian subsidiary and recorded the withholding tax of $706,000 associated with this planned repatriation in December 2017. In December 2018, the Canadian subsidiary declared a deemed dividend for $3 million to the Company. Withholding tax of $150,000 was paid in 2018.
The Tax Act subjects a U.S. corporation to tax on its Global Intangible Low Taxed Income (“GILTI”). Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act. Under Generally Accepted Accounting Principles, the Company can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense or factor such amounts into the measurement of deferred taxes. The Company elected the current period expense method and has not reflected any corresponding deferred tax assets and liabilities associated with the GILTI tax in the table of deferred tax assets and liabilities. GILTI tax has been recorded as current period expense of $40,000 in 2018.
The difference between the Company’s income tax expense as reported in the accompanying consolidated financial statements and the income tax expense that would be calculated applying the U.S. federal income tax rate of 21% for 2018 and 35% for 2017 and 2016 on pretax income was as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Expected federal income taxes
|
|
$
|
7,285
|
|
|
$
|
11,999
|
|
|
$
|
10,975
|
|
Foreign tax rate differential
|
|
|
146
|
|
|
|
(131
|
)
|
|
|
(129
|
)
|
State income taxes, net of federal benefit and state tax credits
|
|
|
376
|
|
|
|
608
|
|
|
|
436
|
|
Federal tax credits
|
|
|
(150
|
)
|
|
|
(130
|
)
|
|
|
(165
|
)
|
Uncertain tax positions
|
|
|
90
|
|
|
|
151
|
|
|
|
6
|
|
Nondeductible expenses related to recapitalization
|
|
|
151
|
|
|
|
504
|
|
|
|
--
|
|
Share based compensation
|
|
|
(3,041
|
)
|
|
|
(1,564
|
)
|
|
|
(441
|
)
|
Compensation limit for covered employees
|
|
|
--
|
|
|
|
955
|
|
|
|
--
|
|
Impact of 2017 Tax Act
|
|
|
--
|
|
|
|
(2,415
|
)
|
|
|
--
|
|
Tax depreciation method change
|
|
|
(308
|
)
|
|
|
--
|
|
|
|
--
|
|
Valuation allowance
|
|
|
--
|
|
|
|
535
|
|
|
|
--
|
|
Withholding tax on repatriation of foreign earnings
|
|
|
--
|
|
|
|
706
|
|
|
|
--
|
|
GILTI
|
|
|
40
|
|
|
|
--
|
|
|
|
--
|
|
Other
|
|
|
73
|
|
|
|
122
|
|
|
|
156
|
|
Total
|
|
$
|
4,662
|
|
|
$
|
11,340
|
|
|
$
|
10,838
|
|
Deferred tax assets and liabilities at December 31, 2018 and 2017, were comprised of the following:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
41
|
|
|
$
|
46
|
|
Accrued expenses
|
|
|
424
|
|
|
|
416
|
|
Share based compensation
|
|
|
1,264
|
|
|
|
1,457
|
|
Accrued bonuses
|
|
|
198
|
|
|
|
113
|
|
Foreign tax credit from repatriation
|
|
|
535
|
|
|
|
535
|
|
Other
|
|
|
46
|
|
|
|
166
|
|
Gross deferred tax assets
|
|
|
2,508
|
|
|
|
2,733
|
|
Less valuation allowance
|
|
|
(535
|
)
|
|
|
(535
|
)
|
Deferred tax assets
|
|
|
1,973
|
|
|
|
2,198
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
95
|
|
|
|
169
|
|
Deferred contract costs
|
|
|
786
|
|
|
|
--
|
|
Property and equipment
|
|
|
1,944
|
|
|
|
856
|
|
Intangible assets
|
|
|
4,919
|
|
|
|
4,497
|
|
Repatriation withholding
|
|
|
505
|
|
|
|
706
|
|
Deferred tax liabilities
|
|
|
8,249
|
|
|
|
6,228
|
|
Net deferred tax liabilities
|
|
$
|
(6,276
|
)
|
|
$
|
(4,030
|
)
|
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income, carry-back opportunities, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, the Company believes it is more likely than not that it will realize the benefits of these deductible differences excluding the foreign tax credit carryforward.
The Company had an unrecognized tax benefit at December 31, 2018 and 2017, of $554,000 and $843,000, respectively, excluding interest of $6,000 and $5,000 at December 31, 2018 and 2017, respectively. Of these amounts, $482,000 and $620,000 at December 31, 2018 and 2017, respectively, represents the net unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate. The change in the unrecognized tax benefits for 2018 and 2017 is as follows:
|
|
(In thousands)
|
|
Balance of unrecognized tax benefits at December 31, 2016
|
|
$
|
662
|
|
Additions based on tax positions of prior years
|
|
|
(7
|
)
|
Additions based on tax positions related to the current year
|
|
|
188
|
|
Balance of unrecognized tax benefits at December 31, 2017
|
|
$
|
843
|
|
Reductions due to lapse of applicable statute of limitations
|
|
|
(35
|
)
|
Reductions due to tax positions of prior years
|
|
|
(66
|
)
|
Reductions due to settlement with taxing authorities
|
|
|
(300
|
)
|
Additions based on tax positions related to the current year
|
|
|
112
|
|
Balance of unrecognized tax benefits at December 31, 2018
|
|
$
|
554
|
|
The Company files a U.S. federal income tax return, various state jurisdictions returns and a Canada federal and provincial income tax return. All years prior to 2015 are now closed for US federal income tax and for years prior to 2015 for state income tax returns, and no exposure items exist for these years. The Company completed a United States federal tax examination for the tax year ended December 31, 2013 in the first quarter of 2016. The 2014 to 2018 Canada federal and provincial income tax returns remain open to examination.
The Company’s long-term debt consists of the following:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Term Loans
|
|
$
|
37,996
|
|
|
$
|
1,067
|
|
Less: current portion
|
|
|
(3,667
|
)
|
|
|
(1,067
|
)
|
Less: unamortized debt issuance costs
|
|
|
(153
|
)
|
|
|
--
|
|
Notes payable, net of current portion
|
|
$
|
34,176
|
|
|
$
|
--
|
|
The balance on the Company’s former term note with US Bank was paid in full in March 2018.
On April 18, 2018, in connection with the Recapitalization, the Company entered into a credit agreement (the “Credit Agreement”) with FNB providing 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-dawn term facility (the “Delayed Draw Term Loan” and, together with the Line of Credit and the Term Loan, the “Credit Facilities”). The Company used the Term Loan to fund, in part, the cash portion paid to holders of the Company’s then-existing class B common stock in connection with the Recapitalization and the accompanying exchange of outstanding share-based awards tied to the class B common stock, as well as for the costs of the Recapitalization. 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, including to pay the fees and expenses incurred in connection with the Recapitalization and the Credit Agreement.
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 (4.60% at December 31, 2018). 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 December 31, 2018, the Line of Credit did not have a balance. There were no borrowings on the Line of Credit for the three-month period ended December 31, 2018. The weighted average interest rate on borrowings on the Line of Credit for the year ended December 31, 2018 was 4.25%. In January 2019, the Company borrowed $8.5 million on the Line of Credit. There have been no borrowings on the Delayed Draw Term Loan since origination.
The Company paid a one-time fee equal to 0.25% of the amount borrowed under the Term Loan at the closing of the Credit Facilities. 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.
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 December 31, 2018, the Company was in compliance with its financial covenants.
Scheduled maturities of notes payable at December 31, 2018 are as follows:
2019
|
|
$
|
3,715
|
|
2020
|
|
|
4,418
|
|
2021
|
|
|
4,916
|
|
2022
|
|
|
5,171
|
|
2023
|
|
|
19,776
|
|
(
11
)
|
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. As described in Note 2, 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 of $331,000 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 described in Note 2, 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.
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. Prior to 2018, on the date of each annual meeting of shareholders of the Company, options to purchase 36,000 shares of the Company’s former class A common stock and 6,000 shares of the Company’s former class B common stock were granted to directors that were elected or retained as a director at 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. At December 31, 2018, there were 879,240 shares of Common Stock available for issuance pursuant to future grants under the 2004 Director Plan. The Company has accounted for grants of 2,120,760 Common Stock under the 2004 Director Plan using the date of grant as the measurement date for financial accounting purposes.
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. At December 31, 2018, there were 815,828 shares of Common Stock available for issuance pursuant to future grants under the 2006 Equity Incentive Plan. The Company has accounted for grants of 984,172 Common Stock and restricted stock under the 2006 Equity Incentive Plan using the date of grant as the measurement date for financial accounting purposes.
During 2018, the Company granted options to purchase 116,276 shares of Common Stock. The Company granted options to purchase 299,917 shares of the Company’s former class A common stock and 49,986 shares of the Company’s former class B common stock during 2017. During 2016, the Company granted options to purchase 315,620 shares of the Company’s former class A common stock and 52,603 shares of the Company’s former class B common stock. Options to purchase shares of common stock are typically granted with exercise prices equal to the fair value of the common stock on the date of grant. The Company does, in certain limited situations, grant options with exercise prices that exceed the fair value of the common shares on the date of grant. The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following weighted average assumptions:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Common
Stock (former
Class A)
|
|
|
Common
Stock (former
Class A)
|
|
|
Former Class
B Common
Stock
|
|
|
Common
Stock (former
Class A)
|
|
|
Former Class
B Common
Stock
|
|
Expected dividend yield at date of grant
|
|
|
2.59
|
%
|
|
|
2.62
|
%
|
|
|
8.06
|
%
|
|
|
2.99
|
%
|
|
|
7.29
|
%
|
Expected stock price volatility
|
|
|
32.47
|
%
|
|
|
32.45
|
%
|
|
|
26.75
|
%
|
|
|
32.74
|
%
|
|
|
29.41
|
%
|
Risk-free interest rate
|
|
|
2.51
|
%
|
|
|
2.18
|
%
|
|
|
2.18
|
%
|
|
|
1.69
|
%
|
|
|
1.69
|
%
|
Expected life of options (in years)
|
|
|
7.28
|
|
|
|
6.80
|
|
|
|
6.80
|
|
|
|
6.86
|
|
|
|
6.86
|
|
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 year ended December 31, 2018:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining Contractual
Terms (Years)
|
|
|
Aggregate
Intrinsic
Value
(In thousands)
|
|
Common Stock (former Class A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
1,746,634
|
|
|
$
|
13.88
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
116,276
|
|
|
$
|
36.12
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(468,318
|
)
|
|
$
|
12.67
|
|
|
|
|
|
|
$
|
10,621
|
|
Forfeited
|
|
|
(21,383
|
)
|
|
$
|
26.18
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,373,209
|
|
|
$
|
15.99
|
|
|
|
4.91
|
|
|
$
|
30,421
|
|
Exercisable at December 31, 2018
|
|
|
981,069
|
|
|
$
|
13.76
|
|
|
|
3.83
|
|
|
$
|
23,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former
Class B
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
276,716
|
|
|
$
|
31.78
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
Exercised/Settled in Recapitalization
|
|
|
(276,716
|
)
|
|
$
|
31.78
|
|
|
|
--
|
|
|
$
|
5,937
|
|
Forfeited
|
|
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
Exercisable at December 31, 2018
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
The following table summarizes information related to stock options for the years ended December 31, 2018, 2017 and 2016:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Common
Stock (former
Class A)
|
|
|
Common
Stock (former
Class A)
|
|
|
Former Class
B Common
Stock
|
|
|
Common
Stock (former
Class A)
|
|
|
Former Class
B Common
Stock
|
|
Weighted average grant date fair value of stock options granted
|
|
$
|
10.02
|
|
|
$
|
5.83
|
|
|
$
|
3.66
|
|
|
$
|
3.62
|
|
|
$
|
3.90
|
|
Intrinsic value of stock options exercised (in thousands)
|
|
$
|
10,621
|
|
|
$
|
2,681
|
|
|
$
|
202
|
|
|
$
|
459
|
|
|
$
|
632
|
|
Intrinsic value of stock options vested (in thousands)
|
|
$
|
2,719
|
|
|
$
|
5,258
|
|
|
$
|
787
|
|
|
$
|
1,627
|
|
|
$
|
535
|
|
As of December 31, 2018, the total unrecognized compensation cost related to non-vested stock option awards was approximately $1.2 million which was expected to be recognized over a weighted average period of 2.87 years.
Cash received from stock options exercised for the years ended December 31, 2016 was $548,000. There was no cash received from stock options exercised for the year ended December 31, 2018 or 2017. The Company recognized $1.1 million, $1.2 million and $964,000 of non-cash compensation for the years ended December 31, 2018, 2017, and 2016, respectively, related to options, which is included in selling, general and administrative expenses. The actual tax benefit realized for the tax deduction from stock options exercised was $3.8 million, $1.1 million and $398,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
During 2018 and 2016, the Company granted 6,793 and 20,578 non-vested shares of Common Stock and during 2016 granted 3,430 non-vested shares of former class B common stock, respectively, under the 2006 Equity Incentive Plan. No shares were granted during the year ended December 31, 2017. As of December 31, 2018, the Company had 78,171 non-vested shares of Common Stock outstanding under the 2006 Equity Incentive Plan. These shares vest over five years following the date of grant and holders thereof are entitled to receive dividends from the date of grant, whether or not vested. The fair value of the awards is calculated as the fair market value of the shares on the date of grant. The Company recognized $428,000, $629,000 and $966,000 of non-cash compensation for the years ended December 31, 2018, 2017, and 2016, respectively, related to this non-vested stock, which is included in selling, general and administrative expenses. The actual tax benefit realized for the tax deduction from vesting of restricted stock was $168,000, $1.3 million and $161,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
The following table summarizes information regarding non-vested stock granted to associates under the 2006 Equity Incentive Plans for the year ended December 31, 2018:
|
|
Common Stock
(formerly Class A)
Outstanding
|
|
|
Common Stock
(formerly Class A)
Weighted
Average Grant
Date Fair Value
Per Share
|
|
|
Former Class B
Common Stock
Outstanding
|
|
|
Former Class B
Common Stock
Weighted
Average Grant
Date Fair Value
Per Share
|
|
Outstanding at December 31, 2017
|
|
|
81,667
|
|
|
$
|
13.80
|
|
|
|
13,611
|
|
|
$
|
36.65
|
|
Granted
|
|
|
6,793
|
|
|
$
|
36.80
|
|
|
|
--
|
|
|
$
|
--
|
|
Vested
|
|
|
--
|
|
|
$
|
--
|
|
|
|
(13,611
|
)
|
|
$
|
36.65
|
|
Forfeited
|
|
|
(10,289
|
)
|
|
$
|
15.23
|
|
|
|
--
|
|
|
$
|
--
|
|
Outstanding at December 31, 2018
|
|
|
78,171
|
|
|
$
|
15.61
|
|
|
|
--
|
|
|
$
|
--
|
|
As of December 31, 2018, the total unrecognized compensation cost related to non-vested stock awards was approximately $471,000 and is expected to be recognized over a weighted average period of 2.56 years.
The Company leases printing equipment in the United States, and office space in Canada, California, Georgia, Washington, and Tennessee. The Company also leased additional office space in Nebraska through June 2016. The Company recorded rent expense in connection with its operating leases of $779,000, $869,000 and $920,000 in 2018, 2017, and 2016, respectively. The Company also has capital leases for production, mailing and computer equipment.
Payments under non-cancelable operating leases and capital leases at December 31, 2018 for the next five years are:
Year Ending December 31,
|
|
Capital
Leases
|
|
|
Operating Leases
|
|
|
|
(In thousands)
|
|
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
|
|
|
|
|
|
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 $200,000, $248,000 and $232,000 in 2018, 2017 and 2016 respectively.
Mr. Hays, the Chief Executive Officer and director of the Company, is an owner of 14% of the equity interest of Nebraska Global Investment Company LLC (“Nebraska Global”). The Company, directly or indirectly through its former subsidiary Customer-Connect LLC, purchased certain services from Nebraska Global, primarily consisting of software development services. The total value of these purchases were $12,500 and $488,000 in 2017 and 2016, respectively.
Mr. Hays personally incurred approximately $538,000 of fees and expenses in connection with exploring strategic alternatives for the Company, including the Recapitalization (see Note 2), for which the Company reimbursed Mr. Hays in 2017. These fees and expenses were attributable to the evaluation of alternatives and the sourcing and negotiating of financing for the alternatives, all of which would have been borne directly by the Company if they had not been advanced by Mr. Hays.
During 2017, the Company acquired a cost method investment in convertible preferred stock of PX (see Note 4). Also in 2017, the Company paid $250,000 to acquire certain perpetual content licenses from PX for content the Company includes in certain of its subscription services. 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 years ended December 31, 2018, 2017 and 2016 was $439,000, $633,000 and $28,000, respectively.
(1
4
)
|
Associate Benefits
|
The Company sponsors a qualified 401(k) plan covering substantially all associates with no eligibility service requirement. Under the 401(k) plan, the Company matches 25.0% of the first 6.0% of compensation contributed by each associate. Employer contributions, which are discretionary, vest to participants at a rate of 20% per year. The Company contributed $396,000, $350,000 and $291,000 in 2018, 2017 and 2016, respectively, as a matching percentage of associate 401(k) contributions.
The Company’s six operating segments are aggregated into one reporting segment because they have similar economic characteristics and meet the other aggregation criteria from the FASB guidance on segment disclosure. The 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 table below presents entity-wide information regarding the Company’s revenue and assets by geographic area:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
115,451
|
|
|
$
|
112,885
|
|
|
$
|
104,445
|
|
Canada
|
|
|
4,235
|
|
|
|
4,674
|
|
|
|
4,939
|
|
Total
|
|
$
|
119,686
|
|
|
$
|
117,559
|
|
|
$
|
109,384
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
77,330
|
|
|
$
|
72,562
|
|
|
$
|
71,192
|
|
Canada
|
|
|
2,291
|
|
|
|
2,495
|
|
|
|
2,367
|
|
Total
|
|
$
|
79,621
|
|
|
$
|
75,057
|
|
|
$
|
73,559
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
91,080
|
|
|
$
|
110,785
|
|
|
$
|
106,288
|
|
Canada
|
|
|
16,952
|
|
|
|
16,531
|
|
|
|
14,336
|
|
Total
|
|
$
|
108,032
|
|
|
$
|
127,316
|
|
|
$
|
120,624
|
|