NATIONAL RESEARCH CORP

To the Shareholders and the Board of Directors

National Research Corporation:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of National Research Corporation and subsidiary (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established inInternal Control–* Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023 based on criteria established inInternal Control–* Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Sufficiency of audit evidence over new and modified subscription-based service agreement terms

As discussed in Notes 1 and 3 to the consolidated financial statements, revenue consists of service arrangement contracts with customers that can include more than one separately identifiable performance obligation. The Company’s revenue for the year ended December 31, 2023 included $140.2 million for subscription-based service agreements, a portion of which was revenue from new and modified subscription-based service agreements, that was recognized ratably over the subscription period and which agreements are renewable at the option of the customer. Subscription-based service agreements represent a single promise to stand ready to provide reporting, tools and services throughout the subscription period.

We identified the evaluation of the sufficiency of audit evidence over the key terms within new and modified subscription-based service agreements as a critical audit matter. Specifically, the nature and extent of procedures performed over the key terms within the new and modified subscription-based service agreements required subjective auditor judgment as recognition of revenue by the Company is dependent on the accuracy of the key terms within the related information technology (IT) application used to calculate revenue. The key terms within the new subscription-based service agreements included the description of service, transaction price, renewal price and contract term, and the key terms within the modified subscription-based service agreements were the transaction price and contract term.

The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over the accuracy of key terms within the IT application, including the identification of key terms. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s subscription-based service revenue process, including controls related to the key terms within the new and modified subscription-based service agreements. We also tested certain internal controls over the accurate input of the underlying key terms of the subscription-based service agreement into the related IT application. For a sample of revenue transactions, we compared the key terms used in the revenue calculation to the underlying contract with the customer. We evaluated the sufficiency of audit evidence obtained over the key terms within new and modified subscription-based service agreements by assessing the results of procedures performed, including the appropriateness of the nature and extent of audit effort.

/s/KPMG LLP

We have served as the Company’s auditor since 1997.

Omaha, Nebraska

February 27, 2024

(In thousands, except share amounts)

(In thousands, except share amounts)

(In thousands)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’** EQUITY**

(In thousands except share and per share amounts)

(In thousands)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. Our purpose is to humanize healthcare and support organizations in their understanding of each person they servenot as point-in-time insights, but as an ongoing relationship. 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.

Principles of Consolidation

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.

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

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. Our Canadian subsidiary uses Canadian dollars as its functional currency. We translate its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. We translate its revenue and expenses at the average exchange rate during the period. We included foreign currency translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’ equity. During* December 2022,we substantially liquidated our investment in Canada. As a result, we reclassified the cumulative foreign currency translation adjustment balance into earnings and recognized a net cumulative foreign currency translation loss of $2.6 million, which is included in Other income (expense), net in our Consolidated Statements of Income. Any future currency changes after2022* are recognized in Other income (expense), net in our 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 orno notice without penalty. See Note3 for further information about our contracts with customers. We account for revenue using the following steps:

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Our revenue arrangements with a client* mayinclude combinations of more thanone* service offering which* maybe executed at the same time, or within close proximity ofone* 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 thanone 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 willnot 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 donot 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 offour 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; and4) unit-priced service agreements.

Subscription-based services–* Services that are provided under subscription-based service agreements are usually for atwelve*- 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 either annually or quarterly in advance but* may*also be billed on a monthly basis.

One-time services–* These agreements typically require us to perform a specificone*-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 butnot 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 tofive 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 ofone year or less. We deferred incremental costs of obtaining a contract of $395,000, $454,000 and $1.9 million in the years ended* December 31, 2023,2022 and2021, respectively. Deferred contract costs, net of accumulated amortization was $1.5 million and $2.4 million at December 31, 2023and2022,* respectively. Total amortization by expense classification for the years ended* December 31, 2023,*2021 and2021 was as follows:

Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $41,000, $14,000 and $31,000 for the years* December 31, 2023,*2022 and2021, respectively.

Trade Accounts Receivable

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 years ended* December 31, 2023,*2022 and2021 (in thousands):

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.

We capitalize 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. We capitalized approximately $4.3 million, $3.6 million and $2.8 million of costs incurred for the development of internal-use software for the years ended* December 31, 2023,*2022 and2021, respectively.

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When a software license is included in a cloud computing arrangement and we have the legal right, ability and feasibility to download the software, it is accounted for as software, included in property and equipment, and amortized. If a software license isnot included or we donot have the ability or feasibility to download software included in a cloud computing arrangement, it is accounted for as a service contract, which is expensed to direct expenses or selling, general and administrative expenses during the service period.

We provide 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. We use the straight-line method of depreciation and amortization over estimated useful lives oftwo toten years for furniture and equipment, three tofive years for computer equipment, one tofive years for capitalized software, andseven toforty years for our office building and related improvements. Software licenses are amortized over the term of the license.

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, wefirst compare 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 isnot 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 andthird-party independent appraisals, as considered necessary. No significant impairments were recorded during the years ended* December 31, 2023,*2022, or2021.

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:

Goodwill and Intangible Assets

Intangible assets include customer relationships, trade names, technology, 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* maynot* be recoverable. We review intangible assets with indefinite lives for impairment annually as of* October 1and whenever events or changes in circumstances indicate that the carrying value of an asset maynot* be recoverable.

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When performing the impairment assessment, we willfirst assess qualitative factors to determine whether it is necessary to determine the fair value of the intangible assets with indefinite lives. If we believe, as a result of the qualitative assessment, that it is more likely thannot that the fair value of an indefinite-lived intangible is less than its carrying amount, we calculate the fair value using a market or income approach. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, then the intangible asset is written-down to its fair value. We didnot recognize any impairments related to indefinite-lived intangibles during2023, 2022 or2021.

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that arenot individually identified and separately recognized. All of our goodwill is allocated to our reporting unit, which is the same as our operating segment. 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.

We review goodwill for impairment byfirst assessing qualitative factors to determine whether any impairment* mayexist. If we believe, as a result of the qualitative assessment, that it is more likely thannot* 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 carrying value of the reporting unit exceeds the fair value, then goodwill is written down by this difference. We performed a qualitative analysis as of* October 1, 2023and determined the fair value of our reporting unit likely exceeded the carrying value. At December 31, 2023,we assessed our current market capitalization compared to book value, forecasts and margins in our last quantitative impairment testing. We concluded that a triggering event hasnot* occurred which would require an additional interim impairment test to be performed as it isnot more likely thannot that an impairment loss had been incurred at* December 31, 2023.No impairments were recorded during the years ended December 31, 2023,*2022, or2021.

In* March 2021,we changed our operating segments fromsix toone to reflect a change in the way we operated and managed our business, including changes to our corporate reporting structure to the Company’s Chief Executive Officer and chief operating decision maker. In connection with this change, our previous reporting units were combined intoone 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 andno* impairments were recorded.

Income Taxes

We use 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 thannot to be realized. We use the deferral method of accounting for our investment tax credits related to state tax incentives. During the years ended* December 31, 2023,*2022, and2021, we recorded income tax benefits relating to these tax credits of $2,000, $36,000, and $10,000, respectively. Interest and penalties related to income taxes are included in income taxes in the Consolidated Statements of Income.

We recognize the effect of income tax positions only if those positions are more likely thannot of being sustained. Recognized income tax positions are measured at the largest amount that is greater than50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

In2021, we adopted ASU2019-12, Simplifying the Accounting for Income Taxes (Topic740). 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 hadno material impact to our consolidated financial statements.

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Share-Based Compensation

All of our 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. We recognize 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 are as follows:

We refer to our restricted stock awards as “non-vested” stock in these consolidated financial statements.

Cash and Cash Equivalents

We consider all highly liquid investments with original maturities ofthree months or less to be cash equivalents. Cash equivalents were $6.5 million and $24.9 million as of* December 31, 2023,and2022,* respectively, consisting primarily of money market accounts. At certain times, cash equivalent balances* may*exceed federally insured limits.

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* mayinclude 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 donot* 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 isnot 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.

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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 havenot* 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 in2021 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 wereno ROU asset impairment charges in2023 or2022. 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) Level1 Inputs—quoted prices in active markets for identical assets and liabilities; (2) Level2 Inputs—observable market-based inputs other than Level1 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 arenot active, or other inputs that are observable or can be corroborated by observable market data; (3) Level3 Inputs—unobservable inputs.

The following details our financial assets within the fair value hierarchy at* December 31, 2023and2022:*

There wereno transfers between levels during the years ended* December 31, 2023and2022.*

Our long-term debt described in Note8 is recorded at historical cost. The fair value of fixed rate long-term debt is classified in Level2 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 fair value of our variable rate long-term debt is believed to approximate the carrying value because we believe the current rate reasonably estimates the current market rate for our debt.

The following are the carrying amount and estimated fair values of long-term debt:

The carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate their fair value. All non-financial assets that arenot 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 asset using discounted cash flows of the sublease based on management’s most recent projections, which are considered level3 inputs in the fair value hierarchy and recorded an ROU asset impairment charge of $324,000 during2021. As of* December 31, 2023and2022,* there wasno indication of impairment related to these assets.

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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 donot believe the final disposition of claims at* December 31, 2023*will have a material adverse effect on our consolidated financial position, results of operations or liquidity.

We are self-insured for group medical and dental insurance. We carry excess loss coverage in the amount of $150,000 per covered person per year for group medical insurance. We donot self-insure for any other types of losses, and therefore donot carry any additional excess loss insurance. In addition, we had aggregate claims loss coverage with a minimum aggregate deductible of $5.4 million, $4.7 million and $3.2 million, in2023, 2022 and2021, respectively. We record a reserve for our group medical and dental insurance for all unresolved claims and for an estimate of incurred butnot reported (“IBNR”) claims. On a quarterly basis, we adjust our accrual based on a review of our claims experience and athird-party actuarial IBNR analysis. As of* December 31, 2023and2022,* our accrual related to self-insurance was $449,000 and $424,000, respectively.

Earnings Per Share

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 263,909,315,764 and 127,185 options of common stock for the years ended* December 31, 2023,*2022 and2021, respectively, which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive.

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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 following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date.

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 donot 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. Pro-forma information hasnot been presented because the amounts for2021 are insignificant. Acquisition-related costs of $119,000 are included in selling, general and administrative expenses for the year ended* December 31, 2021.*

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The following table disaggregates revenue for the years ended* December 31, 2023,*2022 and2021 based on timing of revenue recognition (in thousands):

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

Significant changes in contract assets and contract liabilities during the years ended* December 31, 2023and2022* are as follows (in thousands):

We have elected to apply the practical expedient tonot disclose the value of unsatisfied performance obligations for contracts with an original expected length ofone year or less. Total remaining contract revenue for contracts with original duration of greater thanone year expected to be recognized in the future related to performance obligations that are unsatisfied at* December 31, 2023approximated $14.5 million of which $5.9 million, $4.7 million,4.0 million and $12,000 is expected to be recognized during2024,* 2025, 2026 and2027, respectively.

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We make equity investments to promote business and strategic objectives. For investments that donot have a readily determinable fair value, we apply either cost or equity method of accounting depending on the nature of our investment and our ability to exercise significant influence. Investments are periodically analyzed to determine whether ornot there are any indicators of impairment and written down to fair value if the investment has incurred an other than temporary impairment. Our investment of $1.3 million in convertible preferred stock of PracticingExcellence.com, Inc., a privately-held Delaware corporation (“PX”) is included in non-current assets. It isnot practicable for us to estimate fair value at each reporting date due to the cost and complexity of the calculations for this non-public entity. Therefore, it 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. We have a seat on PX’s board of directors and our investment, which isnot considered to be in-substance common stock, represents approximately 16% of the issued and outstanding equity interests in PX.

At* December 31, 2023,and2022,* property and equipment consisted of the following:

Work in progress included in computer equipment, computer software and building at* December 31, 2023was $322,000, $129,000 and $14.6 million, respectively. Work in progress included in computer equipment, computer software and building at December 31, 2022was $77,000, $545,000 and $7.0 million, respectively. Depreciation and amortization expense related to property and equipment, including assets under capital lease, for the years ended December 31, 2023,*2022, and2021 was $5.8 million, $5.1 million and $5.7 million, respectively. We capitalize interest expense on major construction and development projects while in progress. Interest capitalized for2023 and2022 was $566,000 and $216,000, respectively. We didnot capitalize interest in2021. There wereno significant impairments in property and equipment during2023, 2022, and2021. However, we did shorten the useful lives of certain assets to reflect our best estimate of when assets are expected to be disposed of or replaced.

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Goodwill and intangible assets consisted of the following at* December 31, 2023:*

Goodwill and intangible assets consisted of the following at* December 31, 2022:*

There wereno changes in goodwill during the years ending* December 2023,*2022 and2021.

Aggregate amortization expense for customer related intangibles, trade names, and technology for the years ended* December 31, 2023,*2022 and2021 was $140,000, $180,000, and $320,000, respectively. Estimated future amortization expense for2024 and2025 is $140,000 and $140,000, respectively. No amortization expense is projected beyond2025.

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For the years ended* December 31, 2023,*2022, and2021, income before income taxes consists of the following:

Income tax expense consisted of the following components:

As a result of the Tax Cuts and Jobs Act (the “Tax Act”), we determined that we wouldno longer indefinitely reinvest the earnings of our Canadian subsidiary. Our Canadian subsidiary declared a deemed dividend to the Company of $1.4 million in2022. Additionally, a withholding tax of 5% was paid for the dividend distribution. Due to the closure of the Canadian office, we also processed a return of capital from the Canadian subsidiary to the Company of $1.2 million in2022.

We qualify for tax incentives through the Nebraska AdvantageLB312 Act (“NAA”). The NAA provides direct refunds of sales tax on qualified property, as well as investment credits and employment credits that can be claimed through credits of Nebraska income tax, employment tax, and sales tax on non-qualified property. For the year ended* December 31, 2023,2022 and2021, the amortization of credits reduced operating expenses by approximately $200,000, $510,000 and $473,000, respectively. In addition, income tax credits of $2,000, $36,000 and $10,000 were recorded as a reduction to income tax expense for the years ended December 31, 2023,*2022 and2021, respectively. Credits were lower in the2023 year due tonot meeting certain full time equivalent thresholds in Nebraska, causing certain credits to be recaptured andno additional credits to be earned. The NAA credit earning years are now complete. We have applied for the ImagiNE Act, the new economic development incentive program that replaces the NAA. When we meet certain investment criteria we will have the ability to earn similar credits as with the NAA.

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The differences between income taxes expected at the U.S. federal statutory income tax rate of21 percent and the reported income tax (benefit) expense are summarized as follows:

Deferred tax assets and liabilities at* December 31, 2023and2022,* were comprised of the following:

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 as of December 31, 2020.In accordance with the CARES Act, we paid half of this liability in December 2021,and paid the remaining $656,000 in December 2022.We have hadno* other impacts to our consolidated financial statements or related disclosures from the CARES Act.

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On* August 16, 2022,the Inflation Reduction Act of2022* (“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. We accrued excise taxes that increased the cost of treasury stock we acquired by $152,000 in2023 due to the IRA. The excise tax will be paid in early2024. We haveno other financial impacts from the IRA.

In assessing the realizability of deferred tax assets, we consider whether it is more likely thannot that some portion, or all, of the deferred tax assets willnot 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. We consider 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, we believe it is more likely thannot that we will realize the benefits of these deductible differences.

The Tax Act amended Section174 rules for the federal tax treatment of research or experimental (“R&E”) expenditures paid or incurred during the taxable year. The new Section174 rules require taxpayers to capitalize and amortize specified R&E expenditures over a period offive years (attributable to domestic research) or 15 years (attributable to foreign research), beginning with the midpoint of the taxable year in which the expenses are paid or incurred. Software development costs are expressly included in the definition of specified R&E expenditures after2021. Due to this change in legislation we capitalized costs of $7.8 million and $7.1 million for tax purposes in2023 and2022, respectively, resulting in deferred tax assets of $2.9 million and $856,000 at* December 31, 2023and2022,* respectively.

We had an unrecognized tax benefit at* December 31, 2023and2022,* of $1.9 million and $1.6 million, respectively, excluding interest of $43,000 and $25,000 at* December 31, 2023and2022,* respectively. Of these amounts, $1.6 million and $1.3 million at* December 31, 2023and2022,* 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 for2023 and2022 was as follows:

We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and Canada federal and provincial jurisdictions. Tax years2020 and forward remain subject to U.S. federal examination. Tax years2017 and forward remain subject to state examination. Tax years 2019 and forward remain subject to Canadian federal and provincial examination.

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Our long-term debt consists of the following:

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 $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 Term Loan is payable in monthly installments of $462,988 through* May 2027*and bears interest at a fixed rate per annum of 5%.

Borrowings under the Delayed Draw Term Loan and Line of Credit, if any, bear interest at a floating rate equal to the30-day Secured Overnight Financing Rate (“SOFR”) plus 235 basis points (7.68% at* December 31, 2023).*Interest on the Line of Credit and Delayed Draw Term Loan accrues and is payable monthly.

Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in* May 2025.The Line of Credit didnot* have a balance at* December 31, 2023and we had the availability to borrow $30,000,000. The weighted average borrowings on the Line of Credit for year ended December 31, 2023was $1.7 million. There wereno borrowings on the Line of Credit in the years ended December 31, 2022or2021.* The weighted average interest rate on borrowings on the Line of Credit during the year ended* December 31, 2023*was 7.67%.

The initial borrowing on the Delayed Draw Term Loan was in* December 2023.Principal payments are due in monthly installments of $226,190 through April 2027and a balloon payment for the remaining balance of $10.2 million is due in May 2027.We had the availability to borrow an additional $56.0 million on the Delayed Draw Term Loan at December 31, 2023.*

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.

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The Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our common stock and acquisitions, subject in each case to certain exceptions. In* June 2023,the Credit Agreement was amended to exclude our costs associated with our building renovation from or after January 1, 2023,from the fixed charge coverage ratio calculation. 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, (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand, and (iv) up to $25 million of costs associated with our building renovation from or after January 1, 2023.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 December 31, 2023,*we were in compliance with our financial covenants.

The Credit Facilities are secured, subject to permitted liens and other agreed upon exceptions, by afirst-priority lien on and perfected security interest in substantially all of our and our guarantors’ present and future assets (including, without limitation, fee-owned real property, and limited, in the case of the equity interests of foreign subsidiaries, to 65% of the outstanding equity interests of such subsidiaries).

Scheduled maturities of notes payable at* December 31, 2023*are as follows (in thousands):

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.

Our2004 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. The2004 Director Plan provides for grants of nonqualified stock options to each of our directors who we donot employ. 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 approximatelyone year following the date of grant and option terms are generally the earlier often years following the date of grant, orthree years from the termination of the outside director’s service. At* December 31, 2023,there were 670,932 shares of common stock available for issuance pursuant to future grants under the2004* Director Plan. We have accounted for grants of 2,329,068 shares of common stock under the2004 Director Plan using the date of grant as the measurement date for financial accounting purposes.

Our2006 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. Stock options granted* maybe either incentive stock options or nonqualified stock options. Vesting terms vary with each grant and option terms are generally five toten years following the date of grant. At December 31, 2023,there were 720,088 shares of common stock available for issuance pursuant to future grants under the2006* Equity Incentive Plan. We have accounted for grants of 1,079,912 shares of common stock and restricted stock under the2006 Equity Incentive Plan using the date of grant as the measurement date for financial accounting purposes.

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During2023, 2022 and2021, we granted options to purchase 96,359,127,227, 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:

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 under2006 Equity Incentive Plan and the2004 Director Plan for the year ended* December**31,* 2023:

The following table summarizes information related to stock options for the years ended* December 31, 2023,*2022 and2021:

As of* December 31, 2023,*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 2.76 years.

There was $584,000 and $446,000 in cash received from stock options exercised for the years ended* December 31, 2023and2021,* respectively. No cash was received for stock options exercised for the year ended* December 31, 2022.We recognized $997,000, $1.1 million, and $607,000 of non-cash compensation for the years ended December 31, 2023,2022, and2021, respectively, related to options, which is included in direct and selling, general and administrative expenses. The actual tax benefit realized for the tax deduction from stock options exercised was $498,000, $160,000, and $862,000 for the years ended December 31, 2023,*2022, and2021, respectively.

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During2021 we granted 12,698 non-vested shares of common stock under the2006 Equity Incentive Plan.No shares of non-vested common stock were granted during the years ended* December 31, 2023or2022* and 6,640 shares were forfeited during the year ended* December 31, 2023.As of December 31, 2023,we had 6,058 non-vested shares of common stock outstanding under the2006* Equity Incentive Plan. These shares vest five years following the date of grant and holders thereof are entitled to receive dividends from the date of grant, whether ornot vested. The fair value of the awards is calculated as the fair market value of the shares on the date of grant. We recognized a $62,000 benefit, $109,000 expense, and*$17,000* expense of non-cash compensation for the years ended* December 31, 2023,2022, and2021, respectively, related to this non-vested stock, which is included in direct and selling, general and administrative expenses.No restricted stock vested during the years end December 31, 2023,*2022 and2021.

The following table summarizes information regarding non-vested stock granted to associates under the2006 Equity Incentive Plans for the year ended* December**31,* 2023:

As of* December 31, 2023,*the total unrecognized compensation cost related to non-vested stock awards was approximately $104,000 and is expected to be recognized over a weighted average period of 2.00 years.

We lease printing, computer, other equipment and office space in the United States and Canada. The leases remaining terms as of* December 31, 2023*range from less thanone year to 7.09 years.

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

The components of lease expense for the years ended* December 31, 2023,*2022 and2021 included (in thousands):

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

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

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Undiscounted payments under non-cancelable finance and operating leases at* December 31, 2023*were as follows (in thousands):

Undiscounted cash receipts due under the sublease agreement at* December 31, 2023*are as follows (in thousands):

A director who began serving on our board in* May 2021,also served until her retirement at the end of2021* as chief executive officer of Allina Health, anot-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 year ended* December 31, 2021*approximated $1.7 million.

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We sponsor a qualified401(k) plan covering substantially all associates withno eligibility service requirement. Under the401(k) plan, we match 25% of thefirst 6% of compensation contributed by each associate. The Employer contributions, which are discretionary, vest to participants at a rate of 20% per year. We contributed $561,000, $588,000, and $531,000, in2023, 2022, and2021, respectively, as a matching percentage of associate401(k) contributions.

In* March 2021,*we changed our operating segments fromsix toone to reflect a change in the way we operated and managed our business, including changes to our corporate reporting structure to our Chief Executive Officer and chief operating decision maker.

We closed the Canada office in2022. As a result,no Canadian revenue is expected to be generated after2022. The table below presents entity-wide information regarding our revenue and assets by geographic area (in thousands):

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