NATIONAL RESEARCH CORP

Previous wording

On February 26, 2025, our Board of Directors appointed Trent Green as our Chief Executive Officer and to serve as a director, both effective June 1, 2025. Mr. Green brings more than 25 years of healthcare leadership experience, most recently serving as Chief Executive Officer of Amazon One Medical and previously as Chief Operating Officer of Legacy Health. Upon the effectiveness of Mr. Green’s appointment as Chief Executive Officer, Mr. Hays will transition to the role of Chairman.

Current wording

Effective June 1, 2025, Trent Green began serving as our Chief Executive Officer and as a director. Mr. Green brings more than 25 years of healthcare leadership experience, most recently serving as Chief Executive Officer of Amazon One Medical and previously as Chief Operating Officer of Legacy Health. Upon the effectiveness of Mr. Green’s appointment as Chief Executive Officer, Mr. Hays transitioned to the role of Chairman.

Previous wording

*Revenue.*Revenue in the 2025 period decreased compared to the 2024 period by $1.8 million. This was mainly from decreased recurring revenue of $2.1 million in our existing client base, partially offset by an increase in revenue from new clients of $353,000. We view total Recurring Contract Value, or TRCV, a measure of revenue under all renewable contracts for their respective annual renewal periods, as a leading indicator of revenue expectations. TRCV declined for several quarters prior to the fourth quarter of 2024, when it increased slightly and increased further sequentially in the first quarter 2025. We believe the expansion of our product and services portfolio during 2024, along with a broader sales effort, led to improved sales and retention in the fourth quarter compared with the prior several quarters. Despite this sequential quarterly improvement, TRCV was lower for the first quarter of 2025 compared to the first quarter of 2024. There is a lag between changes in TRCV (next twelve months) and revenue (trailing twelve months). Generally, if we are able to sustain growth in TRCV, we would expect revenue growth to follow within the next few quarters (and vice versa). However, intervening events may affect this general expectation.

Current wording

*Revenue.*Revenue in the 2025 period decreased compared to the 2024 period by $1.0 million. This was mainly from decreased recurring revenue of $1.3 million in our existing client base and $134,000 in non-recurring revenue, partially offset by an increase in revenue from new clients of $419,000. We view Total Recurring Contract Value, or TRCV, a measure of revenue under all renewable contracts for their respective annual renewal periods, as a leading indicator of revenue expectations. TRCV declined for several quarters prior to the fourth quarter of 2024, then it increased slightly in the fourth quarter of 2024 and increased further sequentially in each of the first and second quarters of 2025 (see further discussion in the six months ended comparison). We believe the expansion of our product and services portfolio during 2024, along with a broader sales effort, led to improved sales and retention in the fourth quarter compared with the prior several quarters. Despite this sequential quarterly improvement, TRCV was lower for the second quarter of 2025 compared to the second quarter of 2024. There is a lag between changes in TRCV (next twelve months) and revenue (trailing twelve months). Generally, if we are able to sustain growth in TRCV, we would expect revenue growth to follow within the next few quarters (and vice versa). However, intervening events may affect this general expectation.

Previous wording

Direct expenses. Variable expenses increased $267,000 in the 2025 period compared to the 2024 period primarily due to higher conference costs due to more conferences in the 2025 period than the 2024 period, partially offset by lower data collection expenses. Variable expenses as a percentage of revenue were 17% and 15% in the 2025 and 2024 periods, respectively. Fixed expenses decreased $1.1 million primarily due to decreased salary and benefit costs from workforce reduction and automation implemented in the fourth quarter of 2024 partially offset by increased contracted services to support investments in our Human Understanding solutions.* *We expect to continue to invest in providing innovative solutions to our clients, which could cause direct expenses to fluctuate as a percentage of revenue.

Current wording

Direct expenses. Variable expenses decreased $244,000 in the 2025 period compared to the 2024 period primarily due to lower data collection expenses partially offset by higher conference costs due to more conferences in the 2025 period than the 2024 period. Variable expenses as a percentage of revenue were 15% in each, the 2025 and 2024 periods. Fixed expenses decreased $204,000 primarily due to decreased salary and benefit costs from workforce reduction and automation implemented in the fourth quarter of 2024 partially offset by increased contracted services to support investments in our Human Understanding solutions.* *We expect to continue to invest in providing innovative solutions to our clients, which could cause direct expenses to fluctuate as a percentage of revenue.

Previous wording

Selling, general and administrative expenses. Selling, general and administrative expenses decreased in the 2025 period compared to the 2024 period primarily due to decreased marketing expenses of $688,000 and reduced legal and accounting fees of $259,000. While we continue to invest in product development and sales, our goal is to drive efficiencies and savings in overall costs to offset such investments. Selling, general and administrative expenses are expected to increase due to increased compensation expense related to certain executives and our new CEO. We expect a $3.6 million (based on the price of our common stock at April 25, 2025) charge during the second quarter of 2025 for Mr. Green's signing bonus and quarterly non-cash charges of approximately $447,000 (based on the price of our common stock on April 25, 2025) for Mr. Green's equity grant beginning in June 2025 and continuing through the third anniversary of the grant. Additionally, in light of Mr. Green’s appointment, two other executives were awarded similar compensation arrangements, which will result in a charge of $1.7 million in April 2025 for cash bonuses and quarterly non-cash charges of $207,000 beginning in April 2025 and continuing through March 2028. In consideration for the foregoing compensation, the long-term cash incentive plan was terminated and the unvested performance awards were forfeited for these two executives.

Current wording

Selling, general and administrative expenses. Selling, general and administrative expenses increased in the 2025 period compared to the 2024 period primarily due to increased salary and benefits of $7.6 million and legal and accounting expenses of $167,000. The increase in salaries and benefits is primarily due to implementing new compensation arrangements for our new CEO and existing executive leaders. As a result of the new arrangements, we recognized $6.6 million in cash bonuses and increased non-cash share-based compensation expense of $364,000. These increases were partially offset by decreased marketing expenses of $1.1 million and reduced recruiting expenses of $325,000. While we continue to invest in product development and sales, our goal is to drive efficiencies and savings in overall costs to offset such investments. Selling, general and administrative expenses are expected to increase in the third quarter of 2025 compared to the similar period of 2024 due to increased compensation expense related to certain executives and our new CEO. Non-cash charges related to executive equity awards granted in the second quarter of 2025 will approximate $770,000 quarterly through March 2028 and $375,000 in the second quarter of 2028. In consideration for the foregoing compensation, the prior long-term cash incentive plan was terminated and the unvested performance awards were forfeited for two executives.

Previous wording

Depreciation and amortization. Depreciation, amortization and impairment expenses increased in 2025 compared to the 2024 period due to increased software investment amortization and intangible amortization from the Nobl acquisition partially offset by less building, furniture and computer equipment depreciation. We expect our depreciation and amortization to increase slightly given continued software and intangible amortization, as well as depreciation on the building renovations when completed in 2025.

Current wording

Depreciation and amortization. Depreciation and amortization expenses increased in 2025 compared to the 2024 period due to increased depreciation on our building and related furnishings due to our building renovations being completed during 2025 and increased intangible amortization from the Nobl acquisition. These increases were partially offset by decreased software amortization. We expect our depreciation and amortization to increase given continued software and intangible amortization, as well as depreciation on the building renovations and related furnishings completed during 2025.

Previous wording

Operating income and margin. Operating income decreased in the 2025 period compared to the 2024 period primarily due to the decline in revenue, but operating margin increased in the 2025 period compared to the 2024 period due to the decrease in marketing expenses, legal and accounting, and salary and benefit costs partially offsetting the reduction in revenue. In the near term, we expect operating income and margin to increase due to revenue and cost initiatives, excluding the impact of the executive compensation charges described above.

Current wording

Operating income and margin. Operating income decreased in the 2025 period compared to the 2024 period primarily due to the executive compensation awarded in the second quarter of 2025, as well as the decline in revenue. In the near term, we expect operating income and margin to increase due to revenue and cost initiatives, excluding the impact of the executive compensation charges described above.

Previous wording

Total other expense. Total other expense increased in the 2025 period compared to the 2024 period primarily due to higher interest expense of $294,000 mainly from higher borrowings outstanding on our Delayed Draw Term Loan, partially offset by lower average borrowings and interest rates on the Revolving Loan. Other expense is expected to increase in future periods due to additional borrowings on our Delayed Draw Term Loan and Revolving Loan.

Current wording

Total other expense. Total other expense increased in the 2025 period compared to the 2024 period primarily due to higher interest expense of $477,000 mainly from higher borrowings outstanding on our Delayed Draw Term Loan, partially offset by lower average borrowings and interest rates on the Revolving Loan. Other expense is expected to increase in future periods due to additional borrowings on our Delayed Draw Term Loan.

Previous wording

Provision for income taxes and effective tax rate. The effective tax rate increased in the 2025 period compared to the 2024 period primarily due to decreased tax benefits from share-based compensation awards, an increase in the effective rate related to state income taxes which fluctuates based on various apportionment factors and rates for the states we operate in. The provision for income taxes increased due to the increase in the effective tax rate partially offset by the decrease in income before income taxes.

Current wording

Provision for income taxes and effective tax rate. The effective tax rate increased in the 2025 period compared to the 2024 period primarily due to deductible limitations on executive compensation related to cash bonuses in the second quarter of 2025. The provision for income taxes decreased due to the increase in the effective tax rate partially offset by the decrease in income before income taxes.

Previous wording

Recurring Contract Value. Recurring contract value at March 31, 2025 was lower compared to March 31, 2024 primarily due to the lack of growth in new contracts to replace losses. Our retention rate remained fairly consistent from prior years. Recurring contract value increased at March 31, 2025 compared to December 31, 2024 as year-to-date new sales surpassed year-to-date losses. 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

Total Recurring Contract Value. TRCV at June 30, 2025 was lower compared to June 30, 2024 primarily due to the lack of growth in new contracts to replace losses. Our retention rate increased 2% in the six-month period ending June 30, 2025 compared to the same period of 2024. Recurring contract value increased at June 30, 2025 compared to December 31, 2024 as year-to-date new sales surpassed year-to-date losses. 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 March 31, 2025, our principal sources of liquidity included $2.5 million of cash and cash equivalents, up to $26.5 million of unused borrowings under our Revolving Loan and an additional $47.6 million on our Delayed Draw Term Loan.

Current wording

As of June 30, 2025, our principal sources of liquidity included $5.3 million of cash and cash equivalents, up to $30 million of unused borrowings under our Revolving Loan and an additional $27.6 million on our Delayed Draw Term Loan.

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, reserve for uncertain tax positions, loss on extinguishment of debt, change in fair value of contingent consideration, and the effect of working capital changes. Cash provided by operating activities decreased primarily due to working capital changes, mainly consisting of changes in trade accounts receivable primarily due to timing of initial billings and collections for new and renewal contracts, prepaid expenses and other current assets primarily due to the timing of our annual business insurance and other service agreements, accrued expenses, wages and bonuses, deferred revenue and income taxes payable and receivable mainly due to the timing of payments, partially offset by changes in accounts payable. Cash provided by operating activities was also partially offset by an increase in 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, reserve for uncertain tax positions, loss on extinguishment of debt, change in fair value of contingent consideration, and the effect of working capital changes. Cash provided by operating activities decreased primarily due to the decrease in net income (loss), net of non-cash items, and working capital changes. Working capital changes mainly consisted of changes in trade accounts receivable primarily due to timing of initial billings and collections for new and renewal contracts, prepaid expenses and other current assets primarily due to the timing of our annual business insurance and other service agreements, accrued expenses, wages and bonuses, and income taxes payable and receivable mainly due to the timing of payments.

Previous wording

We had a working capital deficit of $17.4 million and $16.3 million on March 31, 2025 and December 31, 2024, respectively. The change was primarily due to decreases in cash and cash equivalents and increases in the borrowings outstanding on our Revolving Loan and accounts payable. These were partially offset by increases in accounts receivable and prepaid expenses primarily due to the timing of our annual business insurance payment and other service agreements and decreases in the current portion of our long-term debt, accrued expenses and deferred revenue. Cash and cash equivalents decreased mainly due to the repurchase of shares of our common stock for treasury. We also borrowed on our Revolving Loan to fund the share repurchases. Accounts payable and accrued expenses vary due to the timing of payments. Trade accounts receivable increased due to timing of billing and collections. 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 March 31, 2025, 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 $10.6 million and $16.3 million on June 30, 2025 and December 31, 2024, respectively. The change was primarily due to increases in cash and cash equivalents, increases in accounts receivable, prepaid expenses primarily due to the timing of our annual business insurance payment and other service agreements, and other current assets and decreases in the current portion of our long-term debt, deferred revenue income taxes payable. These increases were partially offset by increases in accrued wages and bonuses and accrued expenses. Cash and cash equivalents increased mainly due to borrowings on our Delayed Draw Term Loan for the repurchase of shares of our common stock for treasury and building renovations. Accrued expenses vary due to the timing of payments. Trade accounts receivable increased due to timing of billing and collections. 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, 2025, 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 financing activities consisted of payments for debt issuance costs and payments on our notes payable related to our extinguishment of debt and new credit agreement, payments on our Revolving Loan and finance lease obligations. We also used cash to pay contingent consideration related to our 2024 acquisition of Nobl Health, 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 our notes payable under our new credit agreement and Revolving Loan and proceeds from the exercise of stock options.

Current wording

Cash provided by financing activities consisted of borrowings on our notes payable under the Delayed Draw Term Loan and Revolving Loan and proceeds from the exercise of share-based equity awards. This was partially offset by payments for debt issuance costs and payments on our notes payable related to our extinguishment of debt and new credit agreement, payments on our Revolving Loan and finance lease obligations. We also used cash to pay contingent consideration related to our 2024 acquisition of Nobl Health, repurchase shares of our common stock for treasury, and to pay dividends on common stock.

Previous wording

Cash dividends of $2.8 million were paid in the three months ended March 31, 2025. Dividends of $2.7 million were declared in the three months ended March 31, 2025 and paid in April 2025. The dividends were paid from cash on hand and borrowings on our Revolving Loan. 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 $5.5 million were paid in the six months ended June 30, 2025. Dividends of $2.8 million were declared in the three months ended June 30, 2025 and paid in July 2025. The dividends were paid from cash on hand and borrowings on our Revolving Loan. 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 $3.0 million for capital expenditures in the three months ended March 31, 2025. 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 $3.7 million in 2025, which we expect to fund through operating cash flows and borrowings on the Revolving Loan and Delayed Draw Term Loan.

Current wording

We paid cash of $6.0 million for capital expenditures in the six months ended June 30, 2025. 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 $2.7 million in 2025, which we expect to fund through operating cash flows and borrowings on the Revolving Loan and Delayed Draw Term Loan.

Previous wording

The outstanding balance on the Delayed Draw Term Loan was $62.2 million at March 31, 2025. Principal amounts outstanding are due and payable monthly during the term of the Delayed Draw Term Loan, in equal monthly installments to amortize the aggregate outstanding principal balance by (i) 5% during each of the first three years and (ii) 7.5% during each of the fourth and fifth years following the date of such loan. All outstanding principal and interest on the Delayed Draw Term Loan are due and payable in full at the maturity date, February 6, 2030. We had the availability to borrow an additional $47.6 million on the Delayed Draw Term Loan at March 31, 2025.

Current wording

The outstanding balance on the Delayed Draw Term Loan was $82.4 million at June 30, 2025. Principal amounts outstanding are due and payable monthly during the term of the Delayed Draw Term Loan, in equal monthly installments to amortize the aggregate outstanding principal balance by (i) 5% during each of the first three years and (ii) 7.5% during each of the fourth and fifth years following the date of such loan. All outstanding principal and interest on the Delayed Draw Term Loan are due and payable in full at the maturity date, February 6, 2030. We had the availability to borrow an additional $27.6 million on the Delayed Draw Term Loan at June 30, 2025.

Previous wording

Principal amounts outstanding under the Revolving Loan are due and payable in full at maturity at February 6, 2028. As of March 31, 2025, we had $3.5 million of borrowings outstanding and the availability to borrow $26.5 million on the Revolving Loan. Our weighted average short-term borrowings for the three month periods ended March 31, 2025 and 2024 were $2.0 million and $9.1 million, respectively. The weighted average interest rate on short-term borrowings during the three month periods ended March 31, 2025 and 2024 was 6.67% and 7.69%, respectively.

Current wording

Principal amounts outstanding under the Revolving Loan are due and payable in full at maturity at February 6, 2028. As of June 30, 2025, we had no borrowings outstanding and the availability to borrow $30.0 million on the Revolving Loan. Our weighted average short-term borrowings for the three-month periods ended June 30, 2025 and 2024 were $8.2 million and $10.0 million, respectively. Our weighted average short-term borrowings for the six-month periods ended June 30, 2025 and 2024 were $5.1 million and $9.5 million, respectively. The weighted average interest rate on short-term borrowings during the three-month periods ended June 30, 2025 and 2024 was 6.67% and 7.67%, respectively. The weighted average interest rate on short-term borrowings during the six-month periods ended June 30, 2025 and 2024 was 6.67% and 7.68%, respectively.

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. 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 terms 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 $32.5 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 3.50x or less for all testing periods throughout the term of the Credit Facilities. As of March 31, 2025, 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 and a cash flow leverage ratio of 3.50x or less for all testing periods throughout the term of the Credit Facilities. As of June 30, 2025, 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 March 31, 2025, we had fixed lease payments of $574,000 and $10,000 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 June 30, 2025, we had fixed lease payments of $534,000 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 $2.2 million as of March 31, 2025. 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 $2.4 million as of June 30, 2025. See Note 3, "Income Taxes", to the Condensed Consolidated Financial Statements contained in this report for income tax related information.

Previous wording

In April 2025 our Board of Directors approved a new stock repurchase authorization of up to 1.0 million shares of our common stock (the “2025 Program”). We are authorized to repurchase shares of our outstanding common stock from time-to-time on the open market or in privately negotiated transactions, provided that the maximum dollar amount repurchased shall not exceed $20 million without further consent. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions as well as corporate and regulatory considerations. The stock repurchase authorization may be suspended, modified, or discontinued at any time and we have no obligation to repurchase any amount of our common stock in connection with the repurchase authorization. The repurchase authorization has no set expiration date. The new authorization follows our recent repurchase of all shares remaining under the 2022 Program.

Current wording

In April 2025 our Board of Directors approved a stock repurchase authorization of up to 1.0 million shares of our common stock (the “2025 Program”). We are authorized to repurchase shares of our outstanding common stock from time-to-time on the open market or in privately negotiated transactions, provided that the maximum dollar amount repurchased shall not exceed $20 million without further consent. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions as well as corporate and regulatory considerations. The stock repurchase authorization may be suspended, modified, or discontinued at any time and we have no obligation to repurchase any amount of our common stock in connection with the repurchase authorization. The repurchase authorization has no set expiration date. The authorization follows our recent repurchase of all shares remaining under the prior repurchase authorization.

Previous wording

During the three months ended March 31, 2025, we repurchased 307,709 shares of our common stock under the 2022 Program for an aggregate of $5.0 million.

Current wording

During the three months ended June 30, 2025, we repurchased 381,736 shares of our common stock under the 2025 Program for an aggregate of $5.8 million.