NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1)
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Description of business and basis of presentation
National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), is a leading provider of analytics and insights that facilitate measurement and improvement of the patient and employee experience while also increasing patient engagement and customer loyalty for healthcare organizations in the United States and Canada. Our purpose is to enable human understanding. Our solutions enable health care organizations to understand what matters most to each person they serve. Our portfolio of solutions represents a unique set of capabilities that individually and collectively provide value to our clients.
In March 2021, we changed our operating segments from six to one to reflect a change in corporate reporting structure to the Company’s Chief Executive Officer and chief operating decision maker.
Our condensed consolidated balance sheet at December 31, 2020 was derived from our audited consolidated balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.
Information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are included in our Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2021.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiary, National Research Corporation Canada. All significant intercompany transactions and balances have been eliminated.
Our Canadian subsidiary uses 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. We include translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’ equity. Gains and losses related to transactions denominated in a currency other than the functional currency of the country in which we operate and short-term intercompany accounts are included in other income (expense) in the condensed consolidated statements of income.
9
Revenue Recognition
We derive a majority of our revenues from our annually renewable subscription-based service agreements with our customers, which include performance measurement and improvement services, healthcare analytics and governance education services. Such agreements are generally cancelable on short or no notice without penalty. See Note 3 for further information about our contracts with customers. We account for revenue using the following steps:
|
●
|
Identify the contract, or contracts, with a customer;
|
|
●
|
Identify the performance obligations in the contract;
|
|
●
|
Determine the transaction price;
|
|
●
|
Allocate the transaction price to the identified performance obligations; and
|
|
●
|
Recognize revenue when, or as, we satisfy the performance obligations.
|
Our revenue arrangements with a client may include combinations of more than one service offering which may be executed at the same time, or within close proximity of one another. We combine contracts with the same customer into a single contract for accounting purposes when the contract is entered into at or near the same time and the contracts are negotiated together. For contracts that contain more than one separately identifiable performance obligation, the total transaction price is allocated to the identified performance obligations based upon the relative stand-alone selling prices of the performance obligations. The stand-alone selling prices are based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost-plus margin or residual approach. We estimate the amount of total contract consideration we expect to receive for variable arrangements based on the most likely amount we expect to earn from the arrangement based on the expected quantities of services we expect to provide and the contractual pricing based on those quantities. We only include some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We consider the sensitivity of the estimate, our relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement. Our revenue arrangements do not contain any significant financing element due to the contract terms and the timing between when consideration is received and when the service is provided.
Our arrangements with customers consist principally of four different types of arrangements: 1) subscription-based service agreements; 2) one-time specified services performed at a single point in time; 3) fixed, non-subscription service agreements; and 4) unit-priced service agreements.
Subscription-based services - Services that are provided under subscription-based service agreements are usually for a twelve- month period and represent a single promise to stand ready to provide reporting, tools and services throughout the subscription period as requested by the customer. These agreements are renewable at the option of the customer at the completion of the initial contract term for an agreed upon price increase each year. These agreements represent a series of distinct monthly services that are substantially the same, with the same pattern of transfer to the customer as the customer receives and consumes the benefits throughout the contract period. Accordingly, subscription services are recognized ratably over the subscription period. Subscription services are typically billed annually in advance but may also be billed on a quarterly and monthly basis.
One-time services – These agreements typically require us to perform a specific one-time service in a particular month. We are entitled to a fixed payment upon completion of the service. Under these arrangements, we recognize revenue at the point in time we complete the service and it is accepted by the customer.
Fixed, non-subscription services – These arrangements typically require us to perform an unspecified amount of services for a fixed price during a fixed period of time. Revenues are recognized over time based upon the costs incurred to date in relation to the total estimated contract costs. In determining cost estimates, management uses historical and forecasted cost information which is based on estimated volumes, external and internal costs and other factors necessary in estimating the total costs over the term of the contract. Changes in estimates are accounted for using a cumulative catch-up adjustment which could impact the amount and timing of revenue for any period.
Unit-price services – These arrangements typically require us to perform certain services on a periodic basis as requested by the customer for a per-unit amount which is typically billed in the month following the performance of the service. Revenue under these arrangements is recognized over the time the services are performed at the per-unit amount.
10
Revenue is presented net of any sales tax charged to our clients that we are required to remit to taxing authorities. We recognize contract assets or unbilled receivables related to revenue recognized for services completed but not invoiced to the clients. Unbilled receivables are classified as receivables when we have an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when we invoice clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when we have satisfied the related performance obligation.
Deferred Contract Costs
Deferred contract costs, net is stated at gross deferred costs less accumulated amortization. We defer commissions and incentives, including payroll taxes, if they are incremental and recoverable costs of obtaining a renewable customer contract. Deferred contract costs are amortized over the estimated term of the contract, including renewals, which generally ranges from three to five years. The contract term was estimated by considering factors such as historical customer attrition rates and product life. The amortization period is adjusted for significant changes in the estimated remaining term of a contract. An impairment of deferred contract costs is recognized when the unamortized balance of deferred contract costs exceeds the remaining amount of consideration we expect to receive net of the expected future costs directly related to providing those services. We have elected the practical expedient to expense contract costs when incurred for any nonrenewable contracts with a term of one year or less. We deferred incremental costs of obtaining a contract of $233,000 and $717,000 in the three months ended September 30, 2021 and 2020, respectively. We deferred incremental costs of obtaining a contract of $1.8 million and $2.9 million in the nine-month periods ended September 30, 2021 and 2020, respectively. Deferred contract costs, net of accumulated amortization was $4.2 million and $4.6 million at September 30, 2021 and December 31, 2020, respectively. Total amortization by expense classification for the three and nine-months ended September 30, 2021 and 2020 was as follows:
|
|
Three months
ended
September 30,
2021
|
|
|
Three months
ended
September 30,
2020
|
|
|
Nine months
ended
September 30,
2021
|
|
|
Nine months
ended
September 30,
2020
|
|
|
|
(In thousands)
|
|
Direct Expenses
|
|
$
|
40
|
|
|
$
|
43
|
|
|
$
|
113
|
|
|
$
|
221
|
|
Selling, general and administrative expenses
|
|
|
596
|
|
|
|
693
|
|
|
|
1,960
|
|
|
|
2,317
|
|
Total amortization
|
|
$
|
636
|
|
|
$
|
736
|
|
|
$
|
2,073
|
|
|
$
|
2,538
|
|
Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $2,000 and $20,000 for the three months ended September 30, 2021 and 2020, respectively and $24,000 and $25,000 in the nine months ended September 30, 2021 and 2020, respectively.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable, determined based on our historical write-off experience, current economic conditions and reasonable and supportable forecasts about the future. We review the allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
The following table provides the activity in the allowance for doubtful accounts for the nine months ended September 30, 2021 and 2020 (In thousands):
|
|
Balance at
Beginning
of
Period
|
|
|
Bad Debt
Expense
(Benefit)
|
|
|
Write-offs
|
|
|
Recoveries
|
|
|
Balance at
End of
Period
|
|
Nine months ended September 30, 2021
|
|
$
|
120
|
|
|
$
|
38
|
|
|
$
|
74
|
|
|
$
|
10
|
|
|
$
|
94
|
|
Nine months ended September 30, 2020
|
|
$
|
144
|
|
|
$
|
41
|
|
|
$
|
80
|
|
|
$
|
21
|
|
|
$
|
126
|
|
11
Leases
We determine whether a lease is included in an agreement at inception. Operating lease right-of-use (“ROU”) assets are included in operating lease right-of-use assets in our consolidated balance sheet. Finance lease assets are included in property and equipment. Operating and finance lease liabilities are included in other current liabilities and other long term liabilities. Certain lease arrangements may include options to extend or terminate the lease. We include these provisions in the ROU assets and lease liabilities only when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term and is included in direct expenses and selling, general and administrative expenses. Our lease agreements do not contain any residual value guarantees.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments during the lease term. ROU assets and lease liabilities are recorded at lease commencement based on the estimated present value of lease payments. Because the rate of interest implicit in each lease is not readily determinable, we use our estimated incremental collateralized borrowing rate at lease commencement, to calculate the present value of lease payments. When determining the appropriate incremental borrowing rate, we consider our available credit facilities, recently issued debt and public interest rate information.
We elected the practical expedient to account for lease and non-lease components as a single lease component for all asset classifications. We have also made a policy election to not record short-term leases with a duration of 12 months or less on the balance sheet.
Due to remote working arrangements, we reassessed our office needs and subleased our Seattle location under an agreement considered to be an operating lease beginning in May 2021. We have not been legally released from our primary obligations under the original lease and therefore we continue to account for the original lease separately. During the nine months ended September 30, 2021, we recorded an ROU asset impairment charge of $324,000, which was the amount by which the carrying value of the Seattle office lease ROU asset exceeded the fair value. We estimated the fair value based on the discounted cash flows of estimated net rental income for the office space subleased. The ROU asset impairment charge is included in depreciation, amortization and impairment expenses. There were no ROU asset impairment charges in 2020. Rent income from the sublessee are included in the statement of operations on a straight-line basis as an offset to rent expense associated with the original operating lease included in other expenses.
Fair Value Measurements
Our valuation techniques are based on maximizing observable inputs and minimizing the use of unobservable inputs when measuring fair value. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The inputs are then classified into the following hierarchy: (1) Level 1 Inputs—quoted prices in active markets for identical assets and liabilities; (2) Level 2 Inputs—observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets, quoted prices for similar or identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; (3) Level 3 Inputs—unobservable inputs.
The following details our financial assets within the fair value hierarchy at September 30, 2021 and December 31, 2020:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
As of September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
5,274
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,274
|
|
Total Cash Equivalents
|
|
$
|
5,274
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
5,015
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
5,015
|
|
Total Cash Equivalents
|
|
$
|
5,015
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
5,015
|
|
There were no transfers between levels during the three and nine-month periods ended September 30, 2021.
12
Our long-term debt described in Note 5 is recorded at historical cost. The fair value of long-term debt is classified in Level 2 of the fair value hierarchy and was estimated based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit. The following are the carrying amount and estimated fair values of long-term debt:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
(In thousands)
|
|
Total carrying amount of long-term debt
|
|
$
|
27,664
|
|
|
$
|
30,713
|
|
Estimated fair value of long-term debt
|
|
$
|
29,114
|
|
|
$
|
32,943
|
|
The carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate their fair value. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes ROU assets, property and equipment, goodwill, intangibles and cost method investments, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). We estimated the fair value of the Seattle office ROU using discounted cash flows of the sublease based on management’s most recent projections, which are considered level 3 inputs in the fair value hierarchy and recorded an ROU asset impairment charge of $324,000 during the nine months ended September 30, 2021. As of September 30, 2021 there was no indication of other impairments related to these assets. We did not recognize any impairments to these assets in the nine months ended September 30, 2020.
Annually, we consider whether the recorded goodwill and indefinite lived intangibles have been impaired. However, goodwill and intangibles must be tested between annual tests if an event occurs or circumstances change to indicate that it is more likely than not that an impairment loss has been incurred (“triggering event”).
In connection with the March 2021 revision to our operating segments, our previous reporting units were combined into one reporting unit. We performed an interim qualitative analysis immediately before and after the reorganization and concluded that the fair value of our reporting units likely exceeded the carrying values and no impairments were recorded. Following the reorganization, we considered the current and expected future economic and market conditions, including the impact of the COVID-19 pandemic, on our reporting unit. We also assessed our current market capitalization compared to book value, forecasts and margins in our last quantitative impairment testing. We concluded that a triggering event has not occurred which would require an additional interim impairment test to be performed as it is not more likely than not that an impairment loss had been incurred at September 30, 2021.
Commitments and Contingencies
From time to time, we are involved in certain claims and litigation arising in the normal course of business. Management assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. Legal fees, net of estimated insurance recoveries, are expensed as incurred. We do not believe the final disposition of claims at September 30, 2021 will have material adverse effect on our consolidated financial position, results of operations or liquidity.
Recent Accounting Pronouncements Not Yet Adopted
In March 2020, FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", which provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We expect to apply the optional expedient for contract modification to account for the change in the reference rate on impacted credit facilities prospectively by adjusting the effective interest rate.
On January 4, 2021, we acquired substantially all assets and assumed certain liabilities of PatientWisdom, Inc., a company with a health engagement solution that will further our purpose of operationalizing human understanding through tangible and actionable insights. $3.0 million of the total $5.0 million all-cash consideration was paid at closing. We are required to pay the remaining $2.0 million no later than February 1, 2022, subject to offset for indemnification claims as provided in the purchase agreement. The closing payment was funded, and we expect to fund the deferred portion of the purchase price, with cash on hand. The acquisition was accounted for as a business combination, using the acquisition method of accounting, which requires, among other things, certain assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date.
13
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed at the acquisition date.
Amount of Identified Assets Acquired and Liabilities Assumed
|
|
|
|
($ in thousands)
|
|
Current Assets
|
|
$
|
184
|
|
Property and equipment
|
|
|
10
|
|
Customer related
|
|
|
100
|
|
Technology
|
|
|
600
|
|
Goodwill
|
|
|
4,340
|
|
Total assets acquired
|
|
$
|
5,234
|
|
Current liabilities
|
|
|
284
|
|
Net assets acquired
|
|
$
|
4,950
|
|
The identifiable intangible assets are being amortized over their estimated useful lives of 5 years. The goodwill and identifiable intangible assets are deductible for tax purposes. Goodwill related to the acquisition was primarily attributable to anticipated synergies and other intangibles that do not qualify for separate recognition.
The financial results associated with the PatientWisdom assets we acquired and liabilities we assumed are included in our consolidated financial statements from the date of acquisition, although the amounts are insignificant for 2021. Pro-forma information has not been presented because the amounts for 2021 are insignificant. Acquisition-related costs of $119,000 are included in selling, general and administrative expenses for the nine-month periods ended September 30, 2021.
(3)
|
CONTRACTS WITH CUSTOMERS
|
The following table disaggregates revenue for the three and nine-month periods ending September 30, 2021 and 2020 based on timing of revenue recognition (in thousands):
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September
30, 2021
|
|
|
September
30, 2020
|
|
|
September
30, 2021
|
|
|
September
30, 2020
|
|
Subscription services recognized ratably over time
|
|
$
|
34,598
|
|
|
$
|
30,712
|
|
|
$
|
101,867
|
|
|
$
|
90,101
|
|
Services recognized at a point in time
|
|
|
1,160
|
|
|
|
1,170
|
|
|
|
2,046
|
|
|
|
2,456
|
|
Fixed, non-subscription recognized over time
|
|
|
888
|
|
|
|
460
|
|
|
|
2,014
|
|
|
|
1,740
|
|
Unit price services recognized over time
|
|
|
1,121
|
|
|
|
1,135
|
|
|
|
3,729
|
|
|
|
4,206
|
|
Total revenue
|
|
$
|
37,767
|
|
|
$
|
33,477
|
|
|
$
|
109,656
|
|
|
$
|
98,503
|
|
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers (In thousands):
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Accounts receivables
|
|
$
|
16,262
|
|
|
$
|
13,923
|
|
Contract assets included in other current assets
|
|
$
|
172
|
|
|
$
|
311
|
|
Deferred Revenue
|
|
$
|
(17,308
|
)
|
|
$
|
(15,585
|
)
|
14
Significant changes in contract assets and contract liabilities during the nine months ended September 30, 2021 and 2020 are as follows (in thousands):
|
|
Nine months ended
September 30, 2021
|
|
|
Nine months ended
September 30, 2020
|
|
|
|
Contract
Asset
|
|
|
Deferred
Revenue
|
|
|
Contract
Asset
|
|
|
Deferred
Revenue
|
|
|
|
Increase (Decrease)
|
|
Revenue recognized that was included in deferred revenue at beginning of year due to completion of services
|
|
$
|
-
|
|
|
$
|
(14,926
|
)
|
|
$
|
-
|
|
|
$
|
(15,366
|
)
|
Increases due to invoicing of client, net of amounts recognized as revenue
|
|
|
-
|
|
|
|
16,087
|
|
|
|
-
|
|
|
|
16,352
|
|
Decreases due to completion of services (or portion of services) and transferred to accounts receivable
|
|
|
(164
|
)
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
-
|
|
Increases due to acquisition
|
|
|
-
|
|
|
|
239
|
|
|
|
-
|
|
|
|
-
|
|
Change due to cumulative catch-up adjustments arising from changes in expected contract consideration
|
|
|
|
|
|
|
323
|
|
|
|
|
|
|
|
(12
|
)
|
Decreases due to impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Increases due to revenue recognized in the period with additional performance obligations before invoicing
|
|
|
26
|
|
|
|
-
|
|
|
|
238
|
|
|
|
-
|
|
We applied 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 September 30, 2021 approximated $3.2 million, of which $153,000, $1.4 million, $1.1 million, and $587,000 are expected to be recognized during 2021, 2022, 2023, and 2024, respectively.
The effective tax rate for the three-month period ended September 30, 2021 increased to 23.5% expense compared to 17.9% for the same period in 2020, and for the nine-month period ended September 30, 2021 increased to 23.0% expense compared to 8.1% for the same period in 2020 mainly due to decreased tax benefits from the exercise and vesting of share-based compensation awards of $653,000 and $4.7 million in the three and nine-month periods, respectively. In addition, we have higher state income taxes due to filing in more states.
In March 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak which, among other things, contains numerous income tax provisions. As a result of the CARES Act, we have deferred $1,313,000 of employer social security tax payments of which $656,000 we expect to pay in December 2021 and the remainder in December 2022. We have had no other impacts to our consolidated financial statements or related disclosures from the CARES Act.
In 2021, we adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). Among other clarifications and simplifications related to income tax accounting, this ASU simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences. The adoption of this standard had no material impact to our consolidated financial statements.
Our long-term debt consists of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
(In thousands)
|
|
Term Loans
|
|
$
|
27,664
|
|
|
$
|
30,713
|
|
Less: current portion
|
|
|
(4,223
|
)
|
|
|
(4,061
|
)
|
Less: unamortized debt issuance costs
|
|
|
(81
|
)
|
|
|
(105
|
)
|
Notes payable, net of current portion
|
|
$
|
23,360
|
|
|
$
|
26,547
|
|
15
Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) includes (i) a $30,000,000 revolving credit facility (the “Line of Credit”), (ii) a $33,002,069 term loan (the “Term Loan”) and (iii) a $15,000,000 delayed draw-dawn term facility (the “Delayed Draw Term Loan” and, together with the Line of Credit and the Term Loan, the “Credit Facilities”). We may use the Delayed Draw Term Loan to fund any permitted future business acquisitions or repurchases of our Common Stock and the Line of Credit to fund ongoing working capital needs and for other general corporate purposes.
The Term Loan is payable in monthly installments of $462,988 through May 2025, with a balloon payment due at maturity in May 2025. The Term Loan bears interest at a fixed rate per annum of 5%.
Borrowings under the Line of Credit and the Delayed Draw Term Loan, if any, bear interest at a floating rate equal to the 30-day London Interbank Offered Rate plus 225 basis points (2.33% at September 30, 2021). Interest on the Line of Credit accrues and is payable monthly. Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in May 2023. As of September 30, 2021, and December 31, 2020, the Line of Credit did not have a balance. We did not borrow on the Line of Credit during the nine-month period ended September 30, 2021. We have not borrowed on the Delayed Draw Term Loan since origination.
We are obligated to pay ongoing unused commitment fees quarterly in arrears pursuant to the Line of Credit and the Delayed Draw Term Loan facility at a rate of 0.20% per annum based on the actual daily unused portions of the Line of Credit and the Delayed Draw Term Loan facility, respectively.
The Credit Agreement is collateralized by substantially all of our assets, subject to permitted liens and other agreed exceptions, and contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our Common Stock and acquisitions, subject in each case to certain exceptions. Pursuant to the Credit Agreement, we are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the term(s) of the Credit Facilities, which calculation excludes, unless our liquidity falls below a specified threshold, (i) any cash dividend in a fiscal quarter that, together with all other cash dividends paid or declared during such fiscal quarter, exceeds $5,500,000 in total cash dividends paid or declared, (ii) the portion of the purchase price for any permitted share repurchase of our shares paid with cash on hand, and (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand. We are also required to maintain a cash flow leverage ratio of 3.00x or less for all testing periods throughout the term(s) of the Credit Facilities. As of September 30, 2021, we were in compliance with our financial covenants.
(6)
|
SHARE-BASED COMPENSATION
|
We measure and recognize compensation expense for all share-based payments based on the grant-date fair value of those awards. All of our existing stock option awards and unvested stock awards have been determined to be equity-classified awards. We account for forfeitures as they occur. We refer to our restricted stock awards as “non-vested” stock in these consolidated financial statements.
Our 2004 Non-Employee Director Stock Plan, as amended (the “2004 Director Plan”), is a nonqualified plan that provides for the granting of options with respect to 3,000,000 shares of our Common Stock. The 2004 Director Plan provides for grants of nonqualified stock options to each of our directors who we do not employ. 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 when joining the board and when retained as a director at each annual meeting. Stock options vest approximately one year following the date of grant and option terms are generally the earlier of ten years following the date of grant, or three years from the termination of the outside director’s service.
Our 2006 Equity Incentive Plan (the “2006 Equity Incentive Plan”), as amended, provides for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 1,800,000 shares of our Common Stock. Stock options granted may be either incentive stock options or nonqualified stock options. Vesting terms vary with each grant and option terms are generally five to ten years following the date of grant.
16
During the nine months ended September 30, 2021 and 2020, we granted options to purchase 101,091 and 70,471 shares of Common Stock, respectively. Options to purchase shares of common stock are typically granted with exercise prices equal to the fair value of the common stock on the date of grant. We do, in certain limited situations, grant options with exercise prices that exceed the fair value of the common shares on the date of grant. The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following weighted average assumptions:
|
|
2021
|
|
|
2020
|
|
Expected dividend yield at date of grant
|
|
|
2.15
|
%
|
|
|
1.84
|
%
|
Expected stock price volatility
|
|
|
34.85
|
%
|
|
|
33.62
|
%
|
Risk-free interest rate
|
|
|
0.91
|
%
|
|
|
1.35
|
%
|
Expected life of options (in years)
|
|
|
7.0
|
|
|
|
7.4
|
|
The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was based on historical monthly price changes of our stock based on the expected life of the options at the date of grant. The expected life of options is the average number of years we estimate that options will be outstanding. We consider groups of associates that have similar historical exercise behavior separately for valuation purposes.
The following table summarizes stock option activity under the 2006 Equity Incentive Plans and the 2004 Director Plan for the nine-month period ended September 30, 2021:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Terms
(Years)
|
|
|
Aggregate
Intrinsic
Value
(In
thousands)
|
|
Outstanding at December 31, 2020
|
|
|
600,571
|
|
|
$
|
25.31
|
|
|
|
5.58
|
|
|
$
|
11,665
|
|
Granted
|
|
|
101,091
|
|
|
$
|
44.96
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(78,284
|
)
|
|
$
|
13.45
|
|
|
|
|
|
|
$
|
2,416
|
|
Expired
|
|
|
(84,432
|
)
|
|
$
|
38.38
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(22,837
|
)
|
|
$
|
9.74
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2021
|
|
|
516,109
|
|
|
$
|
29.51
|
|
|
|
5.93
|
|
|
$
|
7,697
|
|
Exercisable at September 30, 2021
|
|
|
280,668
|
|
|
$
|
21.83
|
|
|
|
4.58
|
|
|
$
|
6,081
|
|
As of September 30, 2021, the total unrecognized compensation cost related to non-vested stock option awards was approximately $1.4 million which was expected to be recognized over a weighted average period of 2.31 years.
There was $142,000 and $1.1 million of cash received from stock options exercised for the three-month periods ended September 30, 2021 and 2020, respectively. Cash received from stock options exercised for the nine-month periods ended September 30, 2021 and 2020, were $304,000 and $1.6 million respectively. We recognized $99,000 and $237,000 of non-cash compensation for three months ended September 30, 2021 and 2020, respectively, and $285,000 and $736,000 of non-cash compensation for the nine months ended September 30, 2021 and 2020, respectively, related to options, which is included in direct fixed and selling, general and administrative expenses.
17
During the nine months ended September 30, 2021, we granted 12,698 non-vested shares of Common Stock under the 2006 Equity Incentive Plan. No shares were granted during the nine months ended September 30, 2020. As of September 30, 2021, we had 12,698 non-vested shares of Common Stock outstanding under the 2006 Equity Incentive Plan. These shares vest over five years following the date of grant and holders thereof are entitled to receive dividends from the date of grant, whether or not vested. The fair value of the awards is calculated as the fair market value of the shares on the date of grant. We recognized $27,000 and $37,000 of non-cash compensation for the three months ended September 30, 2021 and 2020, respectively, and ($10,000) and $12,000 of non-cash compensation for the nine months ended September 30, 2021 and 2020, respectively, related to this non-vested stock, which is included in direct fixed and selling, general and administrative expenses. During the nine months ended September 30, 2021, 6,005 shares were forfeited.
The following table summarizes information regarding non-vested stock granted to associates under the 2006 Equity Incentive Plan for the nine-month period ended September 30, 2021:
|
|
Common Shares
Outstanding
|
|
|
Weighted
Average
Grant Date Fair
Value
Per Share
|
|
Outstanding at December 31, 2020
|
|
|
6,005
|
|
|
$
|
38.30
|
|
Granted
|
|
|
12,698
|
|
|
|
42.92
|
|
Vested
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(6,005
|
)
|
|
$
|
38.30
|
|
Outstanding at September 30, 2021
|
|
|
12,698
|
|
|
$
|
42.92
|
|
As of September 30, 2021, the total unrecognized compensation cost related to non-vested stock awards was approximately $463,000 and is expected to be recognized over a weighted average period of 4.25 years.
(7)
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
The following represents a summary of changes in the carrying amount of goodwill for the nine-month period ended September 30, 2021:
|
|
Gross
|
|
|
Accumulated
Impairment
|
|
|
Net
|
|
|
|
(In thousands)
|
|
Balance as of December 31, 2020
|
|
$
|
57,969
|
|
|
$
|
(714
|
)
|
|
$
|
57,255
|
|
Goodwill acquired
|
|
|
4,340
|
|
|
|
-
|
|
|
|
4,340
|
|
Foreign currency translation
|
|
|
19
|
|
|
|
-
|
|
|
|
19
|
|
Balance at September 30, 2021
|
|
$
|
62,328
|
|
|
|
(714
|
)
|
|
$
|
61,614
|
|
Intangible assets consisted of the following:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
(In thousands)
|
|
Non-amortizing intangible assets:
|
|
|
|
|
|
|
|
|
Indefinite trade name
|
|
$
|
1,191
|
|
|
$
|
1,191
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
Customer related
|
|
|
9,444
|
|
|
|
9,344
|
|
Technology
|
|
|
1,960
|
|
|
|
1,360
|
|
Trade names
|
|
|
1,572
|
|
|
|
1,572
|
|
Total amortizing intangible assets
|
|
|
12,976
|
|
|
|
12,276
|
|
Accumulated amortization
|
|
|
(12,316
|
)
|
|
|
(12,057
|
)
|
Other intangible assets, net
|
|
$
|
1,851
|
|
|
$
|
1,410
|
|
See Note 2 for additional information related to goodwill and intangible assets included in the acquisition of PatientWisdom, Inc.
18
(8)
|
PROPERTY AND EQUIPMENT
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
(In thousands)
|
|
Property and equipment
|
|
$
|
46,419
|
|
|
$
|
42,705
|
|
Accumulated depreciation
|
|
|
(34,972
|
)
|
|
|
(30,979
|
)
|
Property and equipment, net
|
|
$
|
11,447
|
|
|
$
|
11,726
|
|
Basic net income per share was computed using the weighted-average number of common shares outstanding during the period.
Diluted net income per share was computed using the weighted-average number of common shares and, if dilutive, the potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method.
We had 145,736 and 64,772 options of Common Stock for the three-month periods ended September 30, 2021 and 2020, respectively, which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive. We had 122,171 and 56,812 options of Common Stock for the nine-month periods ended September 30, 2021 and 2020, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive.
|
|
For the Three Months Ended
September 30
|
|
|
For the Nine Months Ended
September 30
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands, except per share data)
|
|
Numerator for net income per share – basic:
|
|
$
|
9,657
|
|
|
$
|
9,578
|
|
|
$
|
27,833
|
|
|
$
|
29,048
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of distributed and undistributed income to unvested restricted stock shareholders
|
|
|
(5
|
)
|
|
|
(17
|
)
|
|
|
(14
|
)
|
|
|
(55
|
)
|
Net income attributable to common shareholders
|
|
|
9,652
|
|
|
|
9,561
|
|
|
|
27,819
|
|
|
|
28,993
|
|
Denominator for net income per share – basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
25,427
|
|
|
|
25,219
|
|
|
|
25,423
|
|
|
|
25,113
|
|
Net income per share – basic
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
1.09
|
|
|
$
|
1.15
|
|
Numerator for net income per share – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders for basic computation
|
|
|
9,652
|
|
|
|
9,561
|
|
|
|
27,819
|
|
|
|
28,993
|
|
Denominator for net income per share – diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
25,427
|
|
|
|
25,219
|
|
|
|
25,423
|
|
|
|
25,113
|
|
Weighted average effect of dilutive securities – stock options
|
|
|
223
|
|
|
|
485
|
|
|
|
232
|
|
|
|
588
|
|
Denominator for diluted earnings per share – adjusted weighted average shares
|
|
|
25,650
|
|
|
|
25,704
|
|
|
|
25,655
|
|
|
|
25,701
|
|
Net income per share - diluted
|
|
$
|
0.38
|
|
|
$
|
0.37
|
|
|
$
|
1.08
|
|
|
$
|
1.13
|
|
During the nine months ending September 30, 2021, we entered into an agreement as lessor to sublease our Seattle office. Future minimum undiscounted cash receipts due under the agreement at September 30, 2021 are as follows (in thousands):
|
|
Operating
Lease
|
|
Remainder 2021
|
|
$
|
38
|
|
2022
|
|
|
118
|
|
2023
|
|
|
122
|
|
2024
|
|
|
127
|
|
2025
|
|
|
65
|
|
Total minimum lease receipts
|
|
$
|
470
|
|
Until January 2020, one of our directors served as an officer and director of Ameritas Life Insurance Corp. (“Ameritas”) and continued to serve on the board of directors of Ameritas for a portion of the three and nine-month periods ended September 30, 2021. In connection with our regular assessment of our insurance-based associate benefits, which is conducted by an independent insurance broker, and the costs associated therewith, we purchase dental and vision insurance for certain of our associates from Ameritas. The total value of these purchases was $66,000 and $67,000 in the three-month periods ended September 30, 2021 and 2020, respectively and $210,000 and $181,000 in the nine-month periods ended September 30, 2021 and 2020, respectively.
A director who began serving on our board in May 2021, currently serves as chief executive officer of Allina Health, a not-for-profit healthcare system. In connection with its routine business operations, Allina Health purchases certain of our products and services. Total revenue we earned from Allina Health in the three and nine-month periods ended September 30, 2021 approximated $429,000 and $1.3 million, respectively.
A director, who served on our board through May 2020, also served as a board member of IMA Financial Group. In connection with our regular assessment of our liability coverage, during 2020 we began purchasing directors and officers and employment practices liability insurance through IMA Financial Group. These purchases totaled $478,000 in the nine-month period ended September 30, 2020. There were no purchases of this insurance during the three-month period ended September 30, 2020.
During 2017, we acquired a cost method investment in convertible preferred stock of Practicing Excellence.com, Inc., a privately-held Delaware Corporation (“PX”), which is included in other non-current assets and is carried at cost, adjusted for changes resulting from observable price changes in orderly transactions of the same investment in PX, if any. We also have an agreement with PX which commenced in 2016 under which we act as a reseller of PX services and PX receives a portion of the revenues. The total revenue earned from the PX reseller agreement was $84,000 in the three-month period ended September 30, 2020 and $35,000 and $251,000 in the nine-month periods ended September 30, 2021 and 2020, respectively. We no longer earn revenue under this agreement after June 30, 2021 due to termination of the reseller agreement.