ITEM 1. Financial Statements
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
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. We believe that understanding the story is the key to unlocking the highest-quality and truly personalized care. Our end-to-end solutions enable health care organizations to understand what matters most to each person they serve – before, during, after, and outside of clinical encounters – to gain a longitudinal understanding of how life and health intersect, with the goal of developing lasting, trusting relationships. Our portfolio of solutions represents a unique set of capabilities that individually and collectively provide value to our clients.
Our condensed consolidated balance sheet at December 31, 2021 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, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 4, 2022.
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 Canadian dollars as its functional currency. 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 consolidated statements of income.
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. |
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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.
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.
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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 $68,000 and $233,000 in the three-month periods ended September 30, 2022 and 2021, respectively. We deferred incremental costs of obtaining a contract of $410,000 and $1.8 million in the nine-month periods ended September 30, 2022 and 2021, respectively. Deferred contract costs, net of accumulated amortization was $2.8 million and $3.8 million at September 30, 2022 and December 31, 2021, respectively. Total amortization by expense classification for the three and nine-month periods ended September 30, 2022 and 2021 was as follows:
| | Three months ended September 30, 2022 | | | Three months ended September 30, 2021 | | | Nine months ended September 30, 2022 | | | Nine months ended September 30, 2021 | |
| | (In thousands) | |
Direct Expenses | | $ | 40 | | | $ | 40 | | | $ | 111 | | | $ | 113 | |
Selling, general and administrative expenses | | | 398 | | | | 596 | | | | 1,273 | | | | 1,960 | |
Total amortization | | $ | 438 | | | $ | 636 | | | $ | 1,384 | | | $ | 2,073 | |
Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $13,000 and $2,000 for the three months ended September 30, 2022 and 2021, respectively and $14,000 and $24,000 in the nine-month periods ended September 30, 2022 and 2021, 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-month periods ended September 30, 2022 and 2021 (In thousands):
| | Balance at Beginning of Period | | | Bad Debt Expense (Benefit) | | | Write-offs | | | Recoveries | | | Balance at End of Period | |
| | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2022 | | $ | 94 | | | $ | 6 | | | $ | 37 | | | $ | 2 | | | $ | 65 | |
Nine months ended September 30, 2021 | | $ | 120 | | | $ | 38 | | | $ | 74 | | | $ | 10 | | | $ | 94 | |
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Leases
We determine whether a lease is included in an agreement at inception. We recognize a lease liability and a right-of-use (“ROU”) asset on the balance sheet for our operating leases under which we are lessee. Operating lease ROU assets are included in operating lease right-of-use assets in our consolidated balance sheet. Finance lease assets are included in property and equipment. Operating and finance lease liabilities are included in other current liabilities and other long-term liabilities. Certain lease arrangements may include options to extend or terminate the lease. We include these provisions in the ROU asset 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. We recorded an ROU asset impairment charge in the nine months ended September 30, 2021 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 the nine months ended September 30, 2022. 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, 2022 and December 31, 2021:
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | (In thousands) | |
As of September 30, 2022 | | | | | | | | | | | | | | | | |
Money Market Funds | | $ | 2,366 | | | $ | - | | | $ | - | | | $ | 2,366 | |
Total Cash Equivalents | | $ | 2,366 | | | $ | - | | | $ | - | | | $ | 2,366 | |
| | | | | | | | | | | | | | | | |
As of December 31, 2021 | | | | | | | | | | | | | | | | |
Money Market Funds | | $ | 6,306 | | | $ | - | | | $ | - | | | $ | 6,306 | |
Total Cash Equivalents | | $ | 6,306 | | | $ | - | | | $ | - | | | $ | 6,306 | |
There were no transfers between levels during the nine months ended September 30, 2022.
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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, 2022 | | | December 31, 2021 | |
| | (In thousands) | |
Total carrying amount of long-term debt | | $ | 23,412 | | | $ | 26,620 | |
Estimated fair value of long-term debt | | $ | 22,681 | | | $ | 27,708 | |
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 2021. As of September 30, 2022 and December 31, 2021, there was no indication of impairment related to these assets.
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”).
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, 2022 will have a material adverse effect on our consolidated financial position, results of operations or liquidity.
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 paid the remaining $2.0 million in January 2022. All payments were made 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.
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 the three- and nine-month periods ended September 30, 2022 and 2021.
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(3) | CONTRACTS WITH CUSTOMERS |
The following table disaggregates revenue for the three- and nine-month periods ended September 30, 2022 and 2021 based on timing of revenue recognition (in thousands):
| | Three months ended | | | Nine months ended | |
| | September 30, 2022 | | | September 30, 2021 | | | September 30, 2022 | | | September 30, 2021 | |
Subscription services recognized ratably over time | | $ | 34,907 | | | $ | 34,598 | | | $ | 105,822 | | | $ | 101,867 | |
Services recognized at a point in time | | | 1,342 | | | | 1,160 | | | | 3,272 | | | | 2,046 | |
Fixed, non-subscription recognized over time | | | 1,127 | | | | 888 | | | | 2,318 | | | | 2,014 | |
Unit price services recognized over time | | | 315 | | | | 1,121 | | | | 2,012 | | | | 3,729 | |
Total revenue | | $ | 37,691 | | | $ | 37,767 | | | $ | 113,424 | | | $ | 109,656 | |
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers (in thousands):
| | September 30, 2022 | | | December 31, 2021 | |
Accounts receivables | | $ | 15,378 | | | $ | 13,728 | |
Contract assets included in other current assets | | $ | 19 | | | $ | 99 | |
Deferred Revenue | | $ | (17,373 | ) | | $ | (17,213 | ) |
Significant changes in contract assets and contract liabilities during the nine-month periods ended September 30, 2022 and 2021 are as follows (in thousands):
| | 2022 | | | 2021 | |
| | 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 | | $ | - | | | $ | (16,522 | ) | | $ | - | | | $ | (14,926 | ) |
Increases due to invoicing of client, net of amounts recognized as revenue | | | - | | | | 16,578 | | | | - | | | | 16,087 | |
Decreases due to completion of services (or portion of services) and transferred to accounts receivable | | | (88 | ) | | | - | | | | (164 | ) | | | - | |
Increases due to acquisition | | | - | | | | - | | | | - | | | | 239 | |
Change due to cumulative catch-up adjustments arising from changes in expected contract consideration | | | - | | | | 104 | | | | - | | | | 323 | |
Increases due to revenue recognized in the period with additional performance obligations before invoicing | | | 8 | | | | - | | | | 26 | | | | - | |
We have 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 September 30, 2022 approximated $1.8 million, of which $218,000, $972,000, $621,000 and $15,000 are expected to be recognized during 2022, 2023, 2024 and 2025, respectively.
The effective tax rate was 23.5% for the three-month periods ended September 30, 2022 and 2021. The effective tax rate for the nine-month period ended September 30, 2022 increased to 24.5% compared to 23.0% for the same period in 2021 mainly due to decreased tax benefits from the exercise and vesting of share-based compensation awards of $316,000 and a 0.6% increase in our state tax rate which fluctuates based on the various apportionment factors and rates for the states we operate in.
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In March 27, 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 had deferred $1.3 million of employer social security tax payments in 2020. In accordance with the CARES Act, we paid half of this liability in December 2021 and we expect to pay the remaining $656,000 in December 2022. We have had no other impacts to our consolidated financial statements or related disclosures from the CARES Act.
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into U.S. law. The IRA includes implementation of a new alternative minimum tax, an excise tax on stock buybacks, and significant tax incentives for energy and climate initiatives, among other provisions. The Company is evaluating the provisions included under the IRA and does not expect the provisions to have a material impact to the Company’s consolidated financial statements.
Our long-term debt consists of the following:
| | September 30, 2022 | | | December 31, 2021 | |
| | (In thousands) | |
Term Loans | | $ | 23,412 | | | $ | 26,620 | |
Less: current portion | | | (4,434 | ) | | | (4,278 | ) |
Less: unamortized debt issuance costs | | | (141 | ) | | | (73 | ) |
Notes payable, net of current portion | | $ | 18,837 | | | $ | 22,269 | |
Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) was amended and restated on September 30, 2022 and includes (i) a $30,000,000 revolving credit facility (the “Line of Credit”), (ii) a $23,412,383 term loan (the “Term Loan”) and (iii) a $75,000,000 delayed draw-down term facility (the “Delayed Draw Term Loan” and, together with the Line of Credit and the Term Loan, the “Credit Facilities”). 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 amended Term Loan revised the remaining payments for the existing balance outstanding balance of $23.4 million to monthly installments of $462,988 through May 2027. 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 Secured Overnight Financing Rate (“SOFR”) plus 235 basis points (4.53% at September 30, 2022). 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 2025. As of September 30, 2022, the Line of Credit did not have a balance. There were no borrowings on the Line of Credit during the nine-month periods ended September 30, 2022 or 2021. There have been no borrowings 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. All obligations under the Credit Facilities are to be guaranteed by each of our direct and indirect wholly owned domestic subsidiaries, if any, and, to the extent required by the Credit Agreement, direct and indirect wholly owned foreign subsidiaries. As of September 30, 2022, we were in compliance with our financial covenants.
On September 30, 2022, we adopted 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 adoption did not have an impact on our consolidated financial statements since there were no borrowings outstanding under the Line of Credit or the Delayed Draw Term Loan, which referenced LIBOR prior to the September 2022 amendment.
(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. Beginning in 2018, on the date of each annual meeting of shareholders, options to purchase shares of Common Stock equal to an aggregate grant date fair value of $100,000 are granted to each non-employee director that is elected or retained as a director at each such meeting. Stock options vest approximately one year following the date of grant and option terms are generally 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.
During the nine-month periods ended September 30, 2022 and 2021, we granted options to purchase 127,227 and 101,091 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:
| | 2022 | | | 2021 | |
Expected dividend yield at date of grant | | | 3.39 | % | | | 2.15 | % |
Expected stock price volatility | | | 35.52 | % | | | 34.85 | % |
Risk-free interest rate | | | 2.33 | % | | | 0.91 | % |
Expected life of options (in years) | | | 6.3 | | | | 7.0 | |
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.
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The following table summarizes stock option activity under the 2006 Equity Incentive Plans and the 2004 Director Plan for the nine-month periods ended September 30, 2022:
| | Number of Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Terms (Years) | | | Aggregate Intrinsic Value (In thousands) | |
Outstanding at December 31, 2021 | | | 477,640 | | | $ | 30.88 | | | | 5.97 | | | $ | 6,337 | |
Granted | | | 127,227 | | | $ | 36.67 | | | | | | | | | |
Exercised | | | 23,581 | | | $ | 13.17 | | | | | | | $ | - | |
Forfeited | | | - | | | $ | - | | | | | | | | - | |
Outstanding at September 30, 2022 | | | 581,286 | | | $ | 32.86 | | | | 5.84 | | | $ | 5,664 | |
Exercisable at September 30, 2022 | | | 323,140 | | | $ | 26.97 | | | | 4.08 | | | $ | 4,964 | |
As of September 30, 2022, the total unrecognized compensation cost related to non-vested stock option awards was approximately $1.5 million which was expected to be recognized over a weighted average period of 2.62 years.
There was $304,000 cash received from stock options exercised for the nine months ended September 30, 2021. There was no cash received from stock options exercised for the same period in 2022. We recognized $264,000 and $99,000 of non-cash compensation for three months ended September 30, 2022 and 2021, respectively, and $828,000 and $285,000 of non-cash compensation for the nine-month periods ended September 30, 2022 and 2021, respectively, related to options, which is included in direct fixed and selling, general and administrative expenses.
We granted 12,698 non-vested shares of Common Stock under the 2006 Equity Incentive Plan during the nine months ended September 30, 2021. No shares were granted during the nine months ended September 30, 2022. As of September 30, 2022, 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 of non-cash compensation for each of the three-month periods ended September 30, 2022 and 2021, respectively, and $82,000 and ($10,000) of non-cash compensation for the nine-month periods ended September 30, 2022 and 2021, respectively, related to this non-vested stock, which is included in direct fixed and selling, general and administrative expenses. The following table summarizes information regarding non-vested stock granted to associates under the 2006 Equity Incentive Plan for the three months ended September 30, 2022:
| | Common Shares Outstanding | | | Weighted Average Grant Date Fair Value Per Share | |
Outstanding at December 31, 2021 | | | 12,698 | | | $ | 42.92 | |
Granted | | | - | | | | - | |
Vested | | | - | | | | - | |
Forfeited | | | - | | | | - | |
Outstanding at September 30, 2022 | | | 12,698 | | | $ | 42.92 | |
As of September 30, 2022, the total unrecognized compensation cost related to non-vested stock awards was approximately $354,000 and is expected to be recognized over a weighted average period of 3.25 years.
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(7) | GOODWILL AND OTHER INTANGIBLE ASSETS |
The following represents the carrying amount of goodwill at September 30, 2022 and December 31, 2021:
| | Gross | | | Accumulated Impairment | | | Net | |
| | (In thousands) | |
Balance at September 30, 2022 and December 31, 2021 | | $ | 62,328 | | | | (714 | ) | | $ | 61,614 | |
Intangible assets consisted of the following:
| | September 30, 2022 | | | December 31, 2021 | |
| | (In thousands) | |
Non-amortizing intangible assets: | | | | | | | | |
Indefinite trade name | | $ | 1,191 | | | $ | 1,191 | |
Amortizing intangible assets: | | | | | | | | |
Customer related | | | 9,426 | | | | 9,445 | |
Technology | | | 1,959 | | | | 1,959 | |
Trade names | | | 1,572 | | | | 1,572 | |
Total amortizing intangible assets | | | 12,957 | | | | 12,976 | |
Accumulated amortization | | | (12,498 | ) | | | (12,377 | ) |
Other intangible assets, net | | $ | 1,650 | | | $ | 1,790 | |
(8) | PROPERTY AND EQUIPMENT |
| | September 30, 2022 | | | December 31, 2021 | |
| | (In thousands) | |
Property and equipment | | $ | 52,182 | | | $ | 45,599 | |
Accumulated depreciation | | | (36,421 | ) | | | (33,208 | ) |
Property and equipment, net | | $ | 15,761 | | | $ | 12,391 | |
18
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 343,414 and 145,736 options of Common Stock for the three-month periods ended September 30, 2022 and 2021, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive. We had 306,446 and 122,171 options of Common Stock for the nine-month periods ended September 30, 2022 and 2021, 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 | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (In thousands, except per share data) | |
Numerator for net income per share – basic: | | $ | 8,298 | | | $ | 9,657 | | | $ | 25,159 | | | $ | 27,833 | |
Net income | | | | | | | | | | | | | | | | |
Allocation of distributed and undistributed income to unvested restricted stock shareholders | | | (4 | ) | | | (5 | ) | | | (12 | ) | | | (14 | ) |
Net income attributable to common shareholders | | | 8,294 | | | | 9,652 | | | | 25,147 | | | | 27,819 | |
Denominator for net income per share – basic: | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding – basic | | | 24,716 | | | | 25,427 | | | | 25,014 | | | | 25,423 | |
Net income per share – basic | | $ | 0.34 | | | $ | 0.38 | | | $ | 1.01 | | | $ | 1.09 | |
Numerator for net income per share – diluted: | | | | | | | | | | | | | | | | |
Net income attributable to common shareholders for basic computation | | | 8,294 | | | | 9,652 | | | | 25,147 | | | | 27,819 | |
Denominator for net income per share – diluted: | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding – basic | | | 24,716 | | | | 25,427 | | | | 25,014 | | | | 25,423 | |
Weighted average effect of dilutive securities – stock options | | | 131 | | | | 223 | | | | 133 | | | | 232 | |
Denominator for diluted earnings per share – adjusted weighted average shares | | | 24,847 | | | | 25,650 | | | | 25,147 | | | | 25,655 | |
Net income per share - diluted | | $ | 0.33 | | | $ | 0.38 | | | $ | 1.00 | | | $ | 1.08 | |
Mr. Hays, our Chief Executive Officer and director, is an owner of approximately 13% of the equity interests of Nebraska Global Investment Company LLC (“Nebraska Global”). We purchased certain services from Don’t Panic Labs, LLC, which was a subsidiary of Nebraska Global for a portion of the six-month period ended June 30, 2022. The total value of these purchases was $196,000 in the six-month period ended June 30, 2022.
(11) | Geographic Information |
The tables below present entity-wide information regarding our revenue and assets by geographic area (in thousands):
| | Three months ended September 30, | | | Nine months ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Revenue: | | | | | | | | | | | | | | | | |
United States | | $ | 37,691 | | | $ | 37,106 | | | $ | 112,631 | | | $ | 107,324 | |
Canada | | | - | | | | 661 | | | | 793 | | | | 2,332 | |
Total | | $ | 37,691 | | | $ | 37,767 | | | $ | 113,424 | | | $ | 109,656 | |
| | September 30, 2022 | | | December 31, 2021 | |
Long-lived assets: | | | | | | | | |
United States | | $ | 85,849 | | | $ | 83,722 | |
Canada | | | 29 | | | | 111 | |
Total | | $ | 85,878 | | | $ | 83,833 | |
| | | | | | | | |
Total assets: | | | | | | | | |
United States | | $ | 132,003 | | | $ | 153,879 | |
Canada | | | 2,980 | | | | 3,661 | |
Total | | $ | 134,983 | | | $ | 157,540 | |