NATIONAL RESEARCH CORP

Previous wording

*Revenue.*Revenue in the 2024 period decreased compared to the 2023 period by $1.1 million. This was mainly from decreased US recurring revenue in our existing client base. Of this decrease, 9% was from our non-core solutions.

Current wording

*Revenue.*Revenue in the 2024 period decreased compared to the 2023 period by $2.1 million. This was mainly from decreased US recurring revenue in our existing client base. Of this decrease, 26% was from our non-core solutions.

Previous wording

Direct expenses. Variable expenses decreased $25,000 in the 2024 period compared to the 2023 period primarily from lower conference expenses. Variable expenses as a percentage of revenue were 15% and 14% in the 2024 and 2023 periods, respectively. Fixed expenses increased $138,000 primarily due to higher contracted services to support investments in our Human Understanding solutions, decreased benefits from state tax incentives and decreased salary and benefit costs from workforce reduction and automation implemented in 2023.* *We have increased investments and expect to see increased costs in future quarters to support and provide innovative AI solutions to our clients.

Current wording

Direct expenses. Variable expenses increased $452,000 in the 2024 period compared to the 2023 period primarily from higher conference expenses partially offset by decreased data collection expenses. Variable expenses as a percentage of revenue were 18% and 16% in the 2024 and 2023 periods, respectively. Fixed expenses increased $220,000 primarily due to higher contracted services to support investments in our Human Understanding solutions partially offset by decreased salary and benefit costs from workforce changes and automation and state tax incentive adjustments.* *We have increased investments and will continue to invest in providing innovative AI solutions to our clients.

Previous wording

Selling, general and administrative expenses. Selling, general and administrative expenses decreased in the 2024 period compared to the 2023 period primarily due to decreased marketing expenses of $544,000 and salary and benefits costs of $564,000 primarily from shared based compensation forfeitures. We expect to see selling, general, and administrative expenses increase in future quarters due to our new leadership positions and investments in our product development and sales teams.

Current wording

Selling, general and administrative expenses. Selling, general and administrative expenses decreased in the 2024 period compared to the 2023 period primarily due to decreased marketing expenses of $890,000, less web hosting and other software services of $204,000, decreased legal fees of $142,000 and less consulting fees of $141,000 partially offset by increased salary and benefit costs of $669,000 from investments in strategic leadership, product development and sales teams. We expect these investment levels to continue with the goal of driving efficiencies and savings in overall costs.

Previous wording

Depreciation and amortization. Depreciation and amortization expenses decreased $8,000 due to less building, furniture and equipment depreciation partially offset by increased software investment amortization.

Current wording

Depreciation and amortization. Depreciation and amortization expenses decreased $9,000 due to less building, furniture and computer equipment depreciation partially offset by increased software investment amortization and intangible amortization from the Nobl acquisition.

Previous wording

Total other income (expense). Total other expense increased in the 2024 period compared to the 2023 period primarily due to lower interest income of $248,000 from decreased money market funds investments and higher interest expense of $363,000 mainly from borrowings on our Line of Credit and Delayed Draw Term Loan. Other expense is expected to increase in future periods due to the August 2024 amendment to our Credit Agreement, which extended the maturity of our debt and revised the interest rate on our Term Note to SOFR plus 2.35%.

Current wording

Total other income (expense). Total other expense increased in the 2024 period compared to the 2023 period primarily due to lower interest income of $222,000 from decreased money market funds investments and higher interest expense of $546,000 mainly from borrowings on our Line of Credit and Delayed Draw Term Loan, as well as the increased interest rate on our Term Loan. Other expense is expected to increase in future periods due to additional borrowings on our Delayed Draw Term Loan and the August 2024 amendment to our Credit Agreement, which extended the maturity of our debt and revised the interest rate on our Term Note to SOFR plus 2.35%.

Previous wording

Provision for income taxes and effective tax rate. Provision for income taxes decreased in the 2024 period compared to the 2023 period primarily due to decreased taxable income. The effective tax rate increased mainly due to decreased tax benefits of $132,000 from the exercise of share-based compensation awards partially offset by higher state income taxes of approximately $80,000 which fluctuate based on various apportionment factors and rates for the states in which we operate.

Current wording

Provision for income taxes and effective tax rate. Provision for income taxes decreased in the 2024 period compared to the 2023 period primarily due to decreased taxable income. The effective tax rate remained consistent between periods.

Previous wording

*Revenue.*Revenue in the 2024 period decreased compared to the 2023 period by $2.3 million. This was mainly from decreased US recurring revenue of $2.9 million in our existing client base. Of this decrease, 30% was from our non-core solutions.

Current wording

*Revenue.*Revenue in the 2024 period decreased compared to the 2023 period by $4.4 million. This was mainly from decreased US recurring revenue in our existing client base. Of this decrease, 28% was from our non-core solutions.

Previous wording

Direct expenses. Variable expenses increased $42,000 in the 2024 period compared to the 2023 period primarily from higher data collection expenses. Variable expenses as a percentage of revenue were 15% and 14% in the 2024 and 2023 periods, respectively. Fixed expenses decreased $352,000 primarily due to decreased salary and benefit costs from workforce reduction and automation implemented in 2023 partially offset by increased contracted services to support investments in our Human Understanding solutions and decreased benefits from state tax incentives.* *We have increased investments and expect to see increased costs in future quarters to support and provide innovative AI solutions to our clients.

Current wording

Direct expenses. Variable expenses increased $494,000 in the 2024 period compared to the 2023 period primarily from higher conference expenses partially offset by decreased data collection expenses. Variable expenses as a percentage of revenue were 16% and 15% in the 2024 and 2023 periods, respectively. Fixed expenses decreased $133,000 primarily due to decreased salary and benefit costs from workforce changes and automation partially offset by increased contracted services to support investments in our Human Understanding® solutions. We have increased investments and will continue to invest in providing innovative AI solutions to our clients.

Previous wording

Depreciation and amortization. Depreciation and amortization expenses increased $45,000 in the 2024 period compared to the 2023 period primarily due to increased software investment amortization.

Current wording

Depreciation and amortization. Depreciation and amortization expenses increased $37,000 in the 2024 period compared to the 2023 period primarily due to increased software investment amortization and intangible amortization from the Nobl acquisition.

Previous wording

Operating income and margin. Operating income decreased in the 2024 period compared to the 2023 period primarily due to the decline in revenue, but operating margin remained consistent between periods due to the decline in revenue being offset by the decline in expenses.

Current wording

Operating income and margin. Operating income and operating margin decreased in the 2024 period compared to the 2023 period primarily due to the decline in revenue exceeding the decline in operating expenses.

Previous wording

Total other income (expense). Total other expense increased in the 2024 period compared to the 2023 period primarily due to lower interest income of $454,000 from decreased money market funds investments and higher interest expense of $727,000 mainly from borrowings on our Line of Credit and Delayed Draw Term Loan. Other expense is expected to increase in future periods due to the August 2024 amendment to our Credit Agreement, which extended the maturity of our debt and revised the interest rate on our Term Note to SOFR plus 2.35%.

Current wording

Total other income (expense). Total other expense increased in the 2024 period compared to the 2023 period primarily due to lower interest income of $676,000 from decreased money market funds investments and higher interest expense of $1.3 million mainly from borrowings on our Line of Credit and Delayed Draw Term Loan, as well as the increased interest rate on our Term Loan. Other expense is expected to increase in future periods due to additional borrowings on our Delayed Draw Term Loan and the August 2024 amendment to our Credit Agreement, which extended the maturity of our debt and revised the interest rate on our Term Note to SOFR plus 2.35%.

Previous wording

*Provision for income taxes and effective tax rate.*Provision for income taxes decreased in the 2024 period compared to the 2023 period primarily due to decreased taxable income. The effective tax rate increased mainly due to decreased tax benefits of $53,000 from the exercise of share-based compensation awards and higher state income taxes of approximately $112,000 which fluctuate based on various apportionment factors and rates for the states in which we operate.

Current wording

*Provision for income taxes and effective tax rate.*Provision for income taxes decreased in the 2024 period compared to the 2023 period primarily due to decreased taxable income. The effective tax rate increased mainly due to decreased tax benefits of $55,000 from the exercise of share-based compensation awards and higher state income taxes of approximately $241,000 which fluctuate based on various apportionment factors and rates for the states in which we operate.

Previous wording

Recurring Contract Value. Recurring contract value declined in declined in 2024 compared to 2023 primarily due to the lack of growth in new contracts to replace losses. Our retention rate remained fairly consistent in comparison to prior years. Our recurring contract value metric represents the total revenue projected under all renewable contracts for their respective next annual renewal periods, assuming no upsells, downsells, price increases, or cancellations, measured as of the most recent quarter end.

Current wording

Recurring Contract Value. Recurring contract value declined in 2024 compared to 2023 primarily due to the lack of growth in new contracts to replace losses. Our retention rate remained fairly consistent in comparison to prior years. Our recurring contract value metric represents the total revenue projected under all renewable contracts for their respective next annual renewal periods, assuming no upsells, downsells, price increases, or cancellations, measured as of the most recent quarter end.

Previous wording

As of June 30, 2024, our principal sources of liquidity included $485,000 of cash and cash equivalents, up to $21 million of unused borrowings under our Line of Credit and an additional $56 million on our Delayed Draw Term Loan. The Delayed Draw Term Loan can only be used to fund dividends, permitted future business acquisitions or repurchasing our common stock

Current wording

As of September 30, 2024, our principal sources of liquidity included $3.5 million of cash and cash equivalents, up to $25 million of unused borrowings under our Line of Credit and an additional $39 million on our Delayed Draw Term Loan. The Delayed Draw Term Loan can only be used to fund dividends, capital expenditures, permitted future business acquisitions or repurchasing our common stock.

Previous wording

Our cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, deferred income taxes, share-based compensation and related taxes, reserve for uncertain tax positions and the effect of working capital changes. Cash provided by operating activities increased primarily due to working capital changes, mainly consisting of changes in accrued expenses, wages and bonuses mainly due to the timing of payments and changes in prepaid expenses and other current assets primarily due to the timing of our annual business insurance and other service agreements partially offset by changes in income taxes receivable and payable due to the timing of payments. Cash provided by operating activities was also partially offset by decreased net income net of non-cash items.

Current wording

Our cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, deferred income taxes, share-based compensation and related taxes, reserve for uncertain tax positions, change in fair value of contingent consideration and the effect of working capital changes. Cash provided by operating activities increased primarily due to working capital changes, mainly consisting of changes in trade accounts receivable due to timing of invoicing and payments, accrued expenses, wages and bonuses mainly due to the timing of payments and changes in prepaid expenses and other current assets primarily due to the timing of our annual business insurance and other service agreements partially offset by changes in income taxes receivable and payable due to the timing of payments. Cash provided by operating activities was also partially offset by decreased net income net of non-cash items.

Previous wording

We had a working capital deficit of $28.8 million and $11.8 million on June 30, 2024 and December 31, 2023, respectively. The change was primarily due to decreases in cash and cash equivalents and trade accounts receivable and increases in the borrowings outstanding on our Line of Credit, accrued expenses, and accrued wages and bonuses. These were partially offset by increases in prepaid expenses primarily due to the timing of our annual business insurance payment and other service agreements. Cash and cash equivalents decreased mainly due to the repurchase of shares of our common stock for treasury. We also borrowed on our Line of Credit to fund the share repurchases during the first quarter of 2024. Accrued expenses and accrued wages and bonuses increased primarily due to the timing of payments. Trade accounts receivable decreased due to timing of billing and collections, as well as decreases in our overall recurring contract value. Our working capital is significantly impacted by our large deferred revenue balances which will vary based on the timing and frequency of billings on annual agreements. Notwithstanding our working capital deficit on June 30, 2024, we believe that our existing sources of liquidity, including cash and cash equivalents, borrowing availability, and operating cash flows will be sufficient to meet our projected capital and debt maturity needs for the foreseeable future.

Current wording

We had a working capital deficit of $23.6 million and $11.8 million on September 30, 2024 and December 31, 2023, respectively. The change was primarily due to decreases in cash and cash equivalents and trade accounts receivable and increases in the borrowings outstanding on our Line of Credit and Delayed Draw Term Loan, accrued expenses, accounts payable, accrued wages and bonuses, deferred revenue and contingent consideration due to the acquisition. These were partially offset by increases in prepaid expenses primarily due to the timing of our annual business insurance payment and other service agreements, increases in income taxes receivable due to timing of payments and decreased current portion of notes payable due to the amendment of our credit agreement . Cash and cash equivalents decreased mainly due to the repurchase of shares of our common stock for treasury and cash paid to fund the Nobl acquisition, which was also funded by borrowings on our Line of Credit and Delayed Draw Term Loan. Accrued expenses, accounts payable and accrued wages and bonuses increased primarily due to the timing of payments. Trade accounts receivable decreased due to timing of billing and collections, as well as decreases in our overall recurring contract value. Our working capital is significantly impacted by our large deferred revenue balances which will vary based on the timing and frequency of billings on annual agreements. Notwithstanding our working capital deficit on September 30, 2024, we believe that our existing sources of liquidity, including cash and cash equivalents, borrowing availability, and operating cash flows will be sufficient to meet our projected capital and debt maturity needs for the foreseeable future.

Previous wording

Cash used in investing activities primarily consisted of purchases of property and equipment including computer software and hardware, building improvements, and furniture and equipment.

Current wording

Cash used in investing activities primarily consisted of payments for the acquisition of Nobl Health and purchases of property and equipment including computer software and hardware, building improvements, and furniture and equipment.

Previous wording

Cash used in financing activities consisted of payments for borrowings under the Term Loan, Delayed Draw Term Loan, Line of Credit and finance lease obligations. We also used cash to repurchase shares of our common stock for treasury, to pay dividends on common stock and for payment of payroll tax withholdings on options exercised. This was partially offset by cash provided from borrowings on the Line of Credit.

Current wording

Cash used in financing activities consisted of payments for borrowings under the Term Loan, Delayed Draw Term Loan, Line of Credit and finance lease obligations. We also used cash to repurchase shares of our common stock for treasury, to pay dividends on common stock and for payment of payroll tax withholdings on options exercised. This was partially offset by cash provided from borrowings on the Line of Credit and Delayed Draw Down Term loan.

Previous wording

Cash dividends of $5.8 million were paid in the six months ended June 30, 2024. Dividends of $2.9 million were declared in the three months ended June 30, 2024 and paid in July 2024. The dividends were paid from cash on hand and borrowings on our Line of Credit. Our board of directors considers whether to declare a dividend and the amount of any dividends declared on a quarterly basis.

Current wording

Cash dividends of $8.6 million were paid in the nine months ended September 30, 2024. Dividends of $2.8 million were declared in the three months ended September 30, 2024 and paid in October 2024. The dividends were paid from cash on hand and borrowings on our Line of Credit. Our board of directors considers whether to declare a dividend and the amount of any dividends declared on a quarterly basis.

Previous wording

We paid cash of $9.4 million for capital expenditures in the six months ended June 30, 2024. These expenditures consisted mainly of computer software development for our Human Understanding solutions and building renovations to our headquarters. We estimate future costs related to our headquarters building renovations to be $4.9 million in 2024 and $3.4 million in 2025, which we expect to fund through operating cash flows and borrowings on the Line of Credit.

Current wording

We paid cash of $11.0 million for capital expenditures in the nine months ended September 30, 2024. These expenditures consisted mainly of computer software development for our Human Understanding® solutions and building renovations to our headquarters. We estimate future costs related to our headquarters building renovations to be $2.5 million in 2024 and $4.7 million in 2025, which we expect to fund through operating cash flows and borrowings on the Line of Credit or Delayed Draw Term Loan.

Previous wording

As of June 30, 2024, our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) included (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”). As of June 30, 2024 we could use the Delayed Draw Term Loan to fund any dividends, permitted future business acquisitions or repurchases of our common stock. We may use the Line of Credit to fund ongoing working capital needs and for other general corporate purposes.

Current wording

Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) includes (i) a $30.0 million revolving credit facility (the “Line of Credit”), (ii) a $23.4 million term loan (the “Term Loan”) and (iii) a $75.0 million 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 through May 2026 to fund dividends, any permitted future business acquisitions, capital expenditures or repurchases of our common stock. The Line of Credit is available to fund ongoing working capital needs and for other general corporate purposes.

Previous wording

Borrowings under the Delayed Draw Term Loan and Line of Credit, if any, bear interest at a floating rate equal to the 30-day Secured Overnight Financing Rate (“SOFR”) plus 235 basis points (7.68% at June 30, 2024). Interest on the Delayed Draw Term Loan and Line of Credit accrues and is payable monthly.

Current wording

Borrowings under the Term Loan, Delayed Draw Term Loan and Line of Credit, if any, accrue interest at a floating rate equal to the SOFR plus 235 basis points (7.55% at September 30, 2024), which is payable monthly.

Previous wording

The outstanding balance on the Delayed Draw Term Loan was $17.9 million at June 30, 2024. As of June 30, 2024, principal payments were due in monthly installments of $226,190 through April 2027 and a balloon payment for the remaining balance of $10.2 million was due in May 2027. We had the availability to borrow an additional $56.0 million on the Delayed Draw Term Loan at June 30, 2024.

Current wording

The outstanding balance on the Delayed Draw Term Loan was $34.2 million at September 30, 2024. Principal payments are due on the Delayed Draw Term Loan in monthly installments of $220,882 through May 2027 and a balloon payment for the remaining balance of $27.1 million is due in May 28, 2027. We had the availability to borrow an additional $39 million on the Delayed Draw Term Loan at September 30, 2024.

Previous wording

As of June 30, 2024 principal amounts outstanding under the Line of Credit were due and payable in full at maturity, in May 2025. We had $9.0 million of borrowings outstanding and the availability to borrow $21.0 million on the Line of Credit at June 30, 2024. The weighted average borrowings on the Line of Credit for the three-month and six-month periods ended June 30, 2024 was $10 million and 9.5 million, respectively. The weighted average interest rate on borrowings on the Line of Credit during the three-month and six-month periods ended June 30, 2024 was 7.67% and 7.68%, respectively.

Current wording

Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in May 2027. As of September 30, 2024, we had $5.0 million of borrowings outstanding and the availability to borrow $25.0 million on the Line of Credit. The weighted average borrowings on the Line of Credit for the three-month periods ended September 30, 2024 and 2023 were $8.0 million and $543,000, respectively. The weighted average borrowings on the Line of Credit for the nine-month periods ended September 30, 2024 and 2023 were $9.0 million and $183,000, respectively. The weighted average interest rate on borrowings on the Line of Credit during the three-month periods ended September 30, 2024 and 2023 were 7.65% and 7.68%, respectively. The weighted average interest on borrowings on the Line of Credit during the nine-month periods ended September 30, 2024 was 7.67% and 7.68%, respectively.

Previous wording

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.

Current wording

We are obligated to pay ongoing unused commitment fees quarterly in arrears 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.

Previous wording

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. 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 excluded, as of June 30, 2024, 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 $5.5 million 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 June 30, 2024, we were in compliance with our financial covenants.

Current wording

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 $5.5 million 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 $27.5 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 September 30, 2024, we were in compliance with our financial covenants.

Previous wording

We have lease arrangements for certain computer, office, printing and inserting equipment as well as office and data center space. As of June 30, 2024, we had fixed lease payments of $672,000 and $12,000 for operating and finance leases, respectively payable within 12 months.

Current wording

We have lease arrangements for certain computer, office, printing and inserting equipment as well as office and data center space. As of September 30, 2024, we had fixed lease payments of $674,000 and $10,000 for operating and finance leases, respectively payable within 12 months.

Previous wording

The liability for gross unrecognized tax benefits related to uncertain tax positions was $2.1 million as of June 30, 2024. See Note 3, "Income Taxes", to the Condensed Consolidated Financial Statements contained in this report for income tax related information.

Current wording

The liability for gross unrecognized tax benefits related to uncertain tax positions was $2.2 million as of September 30, 2024. See Note 4, "Income Taxes", to the Condensed Consolidated Financial Statements contained in this report for income tax related information.

Previous wording

No shares were repurchased during the three months ended June 30, 2024. As of June 30, 2024, the remaining number of shares of common stock that could be purchased under the 2022 Program was 1,095,850 shares.

Current wording

During the three months ended September 30, 2024, we repurchased 395,217 shares of our common stock under the 2022 Program. As of September 30, 2024, the remaining number of shares of common stock that could be purchased under the 2022 Program was 700,633 shares.