nrc20230630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended June 30, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from ________ to ________

Commission File Number 001-35929

National Research Corporation

(Exact name of Registrant as specified in its charter)

Delaware		47-0634000
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

	1245 Q Street, Lincoln, Nebraska 68508
	(Address of principal executive offices) (Zip Code)

	(402) 475-2525
	(Registrant’s telephone number, including area code)

Securities registered pursuant to 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.001 par value	NRC	The NASDAQ stock market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common Stock, $.001 par value, outstanding as of July 27, 2023: 24,567,754

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NATIONAL RESEARCH CORPORATION

FORM 10-Q INDEX

For the Quarter Ended June 30, 2023

			Page No.

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Income	4
		Condensed Consolidated Statements of Comprehensive Income	5
		Condensed Consolidated Statements of Shareholders’ Equity	6-7
		Condensed Consolidated Statements of Cash Flows	8
		Notes to Condensed Consolidated Financial Statements	9-20

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-26

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

	Item 4.	Controls and Procedures	27

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	27

	Item 1A.	Risk Factors	27

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

	Item 5.	Other Information	28

	Item 6.	Exhibits	29

	Signatures		30

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Special Note Regarding Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), “believes,” “expects,” “may,” “could,” “anticipates,” “estimates,” “plans,” “intends,” or the use of words such as “would,” “will,” “may,” “could,” “goal,” “focus,” or “should,” or other words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. In this Quarterly Report on Form 10-Q, statements regarding the value and utility of, and market demand for, our service offerings, future opportunities for growth with respect to new and existing clients, our future ability to compete and the types of firms with which we will compete, future consolidation in the healthcare industry, future adequacy of our liquidity sources, future revenue sources, future revenue growth, future revenue estimates used to calculate recurring contract value, the expected impact of economic factors, including inflation, future capital expenditures including, without limitation, our headquarters renovation costs, and the timing, amount, and sources of cash to fund such capital expenditures, future stock repurchases and dividends, the expected impact of pending claims and contingencies, the future outcome of uncertain tax positions, our future use of owned and leased real property, the expected impact of the conflict in Ukraine, and the expected impact of the COVID-19 pandemic or other similar outbreak, among others, are forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated. Factors that could affect actual results or outcomes include, without limitation, the following factors:

●	The possibility of non-renewal of our client service contracts, reductions in services purchased or prices, and failure to retain key clients;

●	The likelihood that the COVID-19 or other similar outbreak will adversely affect our operations, sales, earnings, financial condition and liquidity;

●	Our ability to compete in our markets, which are highly competitive with new market entrants, and the possibility of increased price pressure and expenses;

●	The likelihood that the ongoing Russian-Ukraine conflict will adversely affect our operations, sales, earnings, financial condition and liquidity;

●	The effects of an economic downturn;

●	The impact of consolidation in the healthcare industry;

●	The impact of federal healthcare reform legislation or other regulatory changes;

●	Our ability to attract and retain key managers and other personnel;

●	The possibility that our intellectual property and other proprietary information technology could be copied or independently developed by our competitors;

●	The possibility for failures or deficiencies in our information technology platform;

●	The possibility that we or our third-party providers could be subject to cyber-attacks, security breaches or computer viruses; and

●

The factors set forth under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K, as such section may be updated or supplemented by Part II, Item 1A of our subsequently filed Quarterly Reports on Form 10-Q (including this Report) and various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.

Shareholders, potential investors and other readers are urged to consider these and other factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included are only made as of the date of this Quarterly Report on Form 10-Q and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances, except as required by the federal securities laws.

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PART I – Financial Information

ITEM 1. Financial Statements

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts and par value)

	June 30, 2023			December 31, 2022
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	22,496		$	25,026
Trade accounts receivable, less allowance for doubtful accounts of $100 and $65, respectively		11,891			14,461
Prepaid expenses		5,554			2,386
Income taxes receivable		212			733
Other current assets		834			1,110
Total current assets		40,987			43,716

Net property and equipment		22,609			17,248
Intangible assets, net		1,541			1,611
Goodwill		61,614			61,614
Deferred contract costs, net		1,944			2,441
Deferred income taxes		8			14
Operating lease right-of-use assets		344			556
Other		4,580			3,261
Total assets	$	133,627		$	130,461

Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of notes payable	$	4,606		$	4,491
Accounts payable		2,152			1,153
Accrued wages and bonuses		4,578			4,551
Accrued expenses		3,720			3,983
Dividends payable		2,949			2,956
Deferred revenue		14,828			15,198
Other current liabilities		903			1,085
Total current liabilities		33,736			33,417

Notes payable, net of current portion and unamortized debt issuance costs		15,358			17,690
Deferred income taxes		4,517			5,274
Other long-term liabilities		2,266			2,047
Total liabilities		55,877			58,428

Shareholders’ equity:
Preferred stock, $0.01 par value, authorized 2,000,000 shares, none issued		-			-
Common stock, $0.001 par value; authorized 110,000,000 shares, issued 30,963,119 in 2023 and 30,922,181 in 2022, outstanding 24,576,092 in 2023 and 24,628,173 in 2022		31			31
Additional paid-in capital		176,646			175,453
Retained earnings (accumulated deficit)		(16,849	)		(25,184	)
Treasury stock, at cost; 6,387,027 and 6,294,008 common stock in 2023 and 2022, respectively		(82,078	)		(78,267	)
Total shareholders’ equity		77,750			72,033
Total liabilities and shareholders’ equity	$	133,627		$	130,461

See accompanying notes to condensed consolidated financial statements

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except for per share amounts, unaudited)

	Three months ended June 30,						Six months ended June 30,
	2023			2022			2023			2022

Revenue	$	36,161		$	37,292		$	72,634		$	75,734

Operating expenses:
Direct		13,309			13,758			27,589			28,537
Selling, general and administrative		11,966			10,748			23,750			21,397
Depreciation and amortization		1,521			1,290			2,915			2,606
Total operating expenses		26,796			25,796			54,254			52,540

Operating income		9,365			11,496			18,380			23,194

Other income (expense):
Interest income		273			14			523			19
Interest expense		(192	)		(318	)		(433	)		(635	)
Other, net		(2	)		(128	)		(15	)		(81	)

Total other income (expense)		79			(432	)		75			(697	)

Income before income taxes		9,444			11,064			18,455			22,497

Provision for income taxes		2,171			2,742			4,219			5,636

Net income	$	7,273		$	8,322		$	14,236		$	16,861

Earnings Per Share of Common Stock:
Basic Earnings Per Share	$	0.30		$	0.33		$	0.58		$	0.67
Diluted Earnings Per Share	$	0.29		$	0.33		$	0.58		$	0.67

Weighted average shares and share equivalents outstanding:
Basic		24,578			25,083			24,582			25,166
Diluted		24,716			25,211			24,727			25,300

See accompanying notes to condensed consolidated financial statements

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)

	Three months ended June 30,					Six months ended June 30,
	2023		2022			2023		2022

Net income	$	7,273	$	8,322		$	14,236	$	16,861
Other comprehensive income (loss):
Foreign currency translation adjustment		--		(99	)		--		(48	)
Other comprehensive income (loss)	$	--	$	(99	)	$	--	$	(48	)

Comprehensive Income	$	7,273	$	8,223		$	14,236	$	16,813

See accompanying notes to condensed consolidated financial statements.

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands except share and per share amounts, unaudited)

	Common Stock		Additional Paid-in Capital		Retained Earnings (Deficit)			Treasury Stock			Total
Balances at December 31, 2022	$	31	$	175,453	$	(25,184	)	$	(78,267	)	$	72,033
Purchase of 49,296 shares treasury stock		-		-		-			(1,983	)		(1,983	)
Issuance of 20,938 shares of common stock for the exercise of stock options		-		300		-			-			300
Non-cash stock compensation expense		-		304		-			-			304
Dividends declared of $0.12 per share of common stock		-		-		(2,953	)		-			(2,953	)
Net income		-		-		6,964			-			6,964
Balances at March 31, 2023	$	31	$	176,057	$	(21,173	)	$	(80,250	)	$	74,665
Purchase of 43,723 shares treasury stock		-		-		-			(1,828	)		(1,828	)
Issuance of 20,000 shares of common stock for the exercise of stock options		-		284		-			-			284
Non-cash stock compensation expense		-		305		-			-			305
Dividends declared of $0.12 per share of common stock		-		-		(2,949	)		-			(2,949	)
Net income		-		-		7,273			-			7,273
Balances at June 30, 2023	$	31	$	176,646	$	(16,849	)	$	(82,078	)	$	77,750

See accompanying notes to condensed consolidated financial statements.

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands except share and per share amounts, unaudited)

	Common Stock		Additional Paid-in Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balances at December 31, 2021	$	31	$	173,942	$	(36,112	)	$	(2,375	)	$	(50,149	)	$	85,337
Purchase of 166,962 shares treasury stock		-		-		-			-			(6,679	)		(6,679	)
Non-cash stock compensation expense		-		285		-			-			-			285
Dividends declared of $0.24 per common share		-		-		(6,047	)		-			-			(6,047	)
Other comprehensive income, foreign currency translation adjustment		-		-		-			51			-			51
Net income		-		-		8,539			-			-			8,539
Balances at March 31, 2022	$	31	$	174,227	$	(33,620	)	$	(2,324	)	$	(56,828	)	$	81,486
Purchase of 427,329 shares treasury stock		-		-		-			-			(15,475	)		(15,475	)
Non-cash stock compensation expense		-		334		-			-			-			334
Dividends declared of $0.24 per common share		-		-		(5,944	)		-			-			(5,944	)
Other comprehensive income (loss), foreign currency translation adjustment		-		-		-			(99	)		-			(99	)
Net income		-		-		8,322			-			-			8,322
Balances at June 30, 2022	$	31	$	174,561	$	(31,242	)	$	(2,423	)	$	(72,303	)	$	68,624

See accompanying notes to condensed consolidated financial statements.

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Six months ended
	June 30
	2023			2022
Cash flows from operating activities:
Net income	$	14,236		$	16,861
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,915			2,606
Deferred income taxes		(750	)		(1,279	)
Reserve for uncertain tax positions		229			205
Non-cash share-based compensation expense		609			619
Net changes in assets and liabilities:
Trade accounts receivable		2,570			614
Prepaid expenses and other current assets		(3,859	)		(731	)
Deferred contract costs, net		497			605
Operating lease assets and liabilities, net		(64	)		(13	)
Accounts payable		513			139
Accrued expenses, wages and bonuses		(459	)		(718	)
Income taxes receivable and payable		521			918
Deferred revenue		(370	)		(1,715	)
Net cash provided by operating activities		16,588			18,111

Cash flows from investing activities:
Proceeds from sale of equipment		1			-
Purchases of property and equipment		(7,539	)		(3,886	)
Net cash used in investing activities		(7,538	)		(3,886	)

Cash flows from financing activities:
Payments on notes payable		(2,236	)		(2,127	)
Payments on finance lease obligations		(230	)		(242	)
Proceeds from the exercise of share-based awards		584			-
Repurchase of shares for treasury		(3,791	)		(22,154	)
Payment of deferred acquisition consideration		-			(1,950	)
Payment of dividends on common stock		(5,907	)		(9,091	)
Net cash used in financing activities		(11,580	)		(35,564	)

Effect of exchange rate changes on cash and cash equivalents		-			(48	)
Change in cash and cash equivalents		(2,530	)		(21,387	)
Cash and cash equivalents at beginning of period		25,026			54,361
Cash and cash equivalents at end of period	$	22,496		$	32,974

Supplemental disclosure of cash paid for:
Interest expense, net of capitalized amounts	$	647		$	697
Income taxes	$	4,219		$	5,790
Supplemental disclosure of non-cash investing and financing activities:
Purchase of property and equipment in accounts payable and accrued expenses	$	1,777		$	807
Repurchase of shares for treasury in accounts payable and accrued expenses	$	21		$	-

See accompanying notes to condensed consolidated financial statements.

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business and basis of presentation

National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), is a leading provider of analytics and insights that facilitate measurement and improvement of the patient and employee experience while also increasing patient engagement and customer loyalty for healthcare organizations in the United States. Our purpose is to humanize healthcare and support organizations in their understanding of each person they serve not 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.

Our condensed consolidated balance sheet at December 31, 2022 was derived from our audited consolidated balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.

Information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are included in our Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2023.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The condensed consolidated financial statements include the accounts of the Company and our wholly-owned subsidiary, National Research Corporation Canada. All significant intercompany transactions and balances have been eliminated.

Our Canadian subsidiary uses Canadian dollars as its functional currency. 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 through December 2022. During December 2022, we substantially liquidated our investment in Canada. As a result, we reclassified the cumulative foreign currency translation adjustment balance into earnings in 2022. Currency translation changes after 2022 are recognized in Other income (expense), net in our Condensed Consolidated Statements of Income.

Revenue Recognition

We derive a majority of our revenues from our annually renewable subscription-based service agreements with our customers, which include performance measurement and improvement services, healthcare analytics and governance education services. Such agreements are generally cancelable on short or no notice without penalty. See Note 2 for further information about our contracts with customers. We account for revenue using the following steps:

	●	Identify the contract, or contracts, with a customer;
	●	Identify the performance obligations in the contract;
	●	Determine the transaction price;
	●	Allocate the transaction price to the identified performance obligations; and
	●	Recognize revenue when, or as, we satisfy the performance obligations.

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Our revenue arrangements with a client may include combinations of more than one service offering which may be executed at the same time, or within close proximity of one another. We combine contracts with the same customer into a single contract for accounting purposes when the contract is entered into at or near the same time and the contracts are negotiated together. For contracts that contain more than one separately identifiable performance obligation, the total transaction price is allocated to the identified performance obligations based upon the relative stand-alone selling prices of the performance obligations. The stand-alone selling prices are based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost-plus margin or residual approach. We estimate the amount of total contract consideration we expect to receive for variable arrangements based on the most likely amount we expect to earn from the arrangement based on the expected quantities of services we expect to provide and the contractual pricing based on those quantities. We only include some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We consider the sensitivity of the estimate, our relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement. Our revenue arrangements do not contain any significant financing element due to the contract terms and the timing between when consideration is received and when the service is provided.

Our arrangements with customers consist principally of four different types of arrangements: 1) subscription-based service agreements; 2) one-time specified services performed at a single point in time; 3) fixed, non-subscription service agreements; and 4) unit-priced service agreements.

Subscription-based services - Services that are provided under subscription-based service agreements are usually for a twelve- month period and represent a single promise to stand ready to provide reporting, tools and services throughout the subscription period as requested by the customer. These agreements are renewable at the option of the customer at the completion of the initial contract term for an agreed upon price increase each year. These agreements represent a series of distinct monthly services that are substantially the same, with the same pattern of transfer to the customer as the customer receives and consumes the benefits throughout the contract period. Accordingly, subscription services are recognized ratably over the subscription period. Subscription services are typically billed 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 specific one-time service in a particular month. We are entitled to a fixed payment upon completion of the service. Under these arrangements, we recognize revenue at the point in time we complete the service and it is accepted by the customer.

Fixed, non-subscription services – These arrangements typically require us to perform an unspecified amount of services for a fixed price during a fixed period of time. Revenues are recognized over time based upon the costs incurred to date in relation to the total estimated contract costs. In determining cost estimates, management uses historical and forecasted cost information which is based on estimated volumes, external and internal costs and other factors necessary in estimating the total costs over the term of the contract. Changes in estimates are accounted for using a cumulative catch-up adjustment which could impact the amount and timing of revenue for any period.

Unit-price services – These arrangements typically require us to perform certain services on a periodic basis as requested by the customer for a per-unit amount which is typically billed in the month following the performance of the service. Revenue under these arrangements is recognized over the time the services are performed at the per-unit amount.

Revenue is presented net of any sales tax charged to our clients that we are required to remit to taxing authorities. We recognize contract assets or unbilled receivables related to revenue recognized for services completed but not invoiced to the clients. Unbilled receivables are classified as receivables when we have an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when we invoice clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when we have satisfied the related performance obligation.

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Deferred Contract Costs

Deferred contract costs, net is stated at gross deferred costs less accumulated amortization. We defer commissions and incentives, including payroll taxes, and certain implementation costs if they are incremental and recoverable costs of obtaining a renewable customer contract. Deferred contract costs are amortized over the estimated term of the contract, including renewals, which generally ranges from three to five years. The contract term was estimated by considering factors such as historical customer attrition rates and product life. The amortization period is adjusted for significant changes in the estimated remaining term of a contract. An impairment of deferred contract costs is recognized when the unamortized balance of deferred contract costs exceeds the remaining amount of consideration we expect to receive net of the expected future costs directly related to providing those services. We have elected the practical expedient to expense contract costs when incurred for any nonrenewable contracts with a term of one year or less. We deferred incremental costs of obtaining a contract of $70,000 and $108,000 in the three-month periods ended June 30, 2023 and 2022, respectively. We deferred incremental costs of obtaining a contract of $233,000 and $342,000 in the six-month periods ended June 30, 2023 and 2022, respectively. Deferred contract costs, net of accumulated amortization was $1.9 million and $2.4 million at June 30, 2023 and December 31, 2022, respectively. Total amortization by expense classification for the periods ended June 30, 2023 and 2022 was as follows:

	Three months ended June 30, 2023		Three months ended June 30, 2022		Six months ended June 30, 2023		Six months ended June 30, 2022
	(In thousands)
Direct Expenses	$	43	$	35	$	78	$	71
Selling, general and administrative expenses		312		404		638		875
Total amortization	$	355	$	439	$	716	$	946

Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $7,000 and $400 for the three months ended June 30, 2023 and 2022, respectively and $15,000 and $1,000 in the six-month periods ended June 30, 2023 and 2022, respectively.

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable, determined based on our historical write-off experience, current economic conditions and reasonable and supportable forecasts about the future. We review the allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

The following table provides the activity in the allowance for doubtful accounts for the six-month periods ended June 30, 2023 and 2022 (In thousands):

	Balance at Beginning of Period		Bad Debt Expense (Benefit)			Write-offs		Recoveries		Balance at End of Period

Six months ended June 30, 2023	$	65	$	113		$	81	$	3	$	100
Six months ended June 30, 2022	$	94	$	(10	)	$	22	$	3	$	65

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Leases

We determine whether a lease is included in an agreement at inception. We recognize a lease liability and a right-of-use (“ROU”) asset on the balance sheet for our operating leases under which we are lessee. Operating lease ROU assets are included in operating lease right-of-use assets in our condensed consolidated balance sheet. Finance lease assets are included in property and equipment. Operating and finance lease liabilities are included in other current liabilities and other long-term liabilities. Certain lease arrangements may include options to extend or terminate the lease. We include these provisions in the ROU asset and lease liabilities only when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term and is included in direct expenses and selling, general and administrative expenses. Our lease agreements do not contain any residual value guarantees.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments during the lease term. ROU assets and lease liabilities are recorded at lease commencement based on the estimated present value of lease payments. Because the rate of interest implicit in each lease is not readily determinable, we use our estimated incremental collateralized borrowing rate at lease commencement, to calculate the present value of lease payments. When determining the appropriate incremental borrowing rate, we consider our available credit facilities, recently issued debt and public interest rate information.

Due to remote working arrangements, we reassessed our office needs and subleased our Seattle location under an agreement considered to be an operating lease beginning in May 2021. We have not been legally released from our primary obligations under the original lease and therefore we continue to account for the original lease separately. Rent income from the sublessee is included in the statement of operations on a straight-line basis as an offset to rent expense associated with the original operating lease included in other expenses.

Fair Value Measurements

Our valuation techniques are based on maximizing observable inputs and minimizing the use of unobservable inputs when measuring fair value. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The inputs are then classified into the following hierarchy: (1) Level 1 Inputs—quoted prices in active markets for identical assets and liabilities; (2) Level 2 Inputs—observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets, quoted prices for similar or identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; (3) Level 3 Inputs—unobservable inputs.

The following details our financial assets within the fair value hierarchy at June 30, 2023 and December 31, 2022:

	Level 1		Level 2		Level 3		Total
	(In thousands)
As of June 30, 2023
Money Market Funds	$	22,256	$	-	$	-	$	22,256
Total Cash Equivalents	$	22,256	$	-	$	-	$	22,256

As of December 31, 2022
Money Market Funds	$	24,927	$	-	$	-	$	24,927
Total Cash Equivalents	$	24,927	$	-	$	-	$	24,927

There were no transfers between levels during the six months ended June 30, 2023.

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Our long-term debt described in Note 4 is recorded at historical cost. The fair value of long-term debt is classified in Level 2 of the fair value hierarchy and was estimated based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit. The following are the carrying amount and estimated fair values of long-term debt:

	June 30, 2023		December 31, 2022
	(In thousands)
Total carrying amount of long-term debt	$	20,078	$	22,315
Estimated fair value of long-term debt	$	19,453	$	21,668

The carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate their fair value. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes ROU assets, property and equipment, goodwill, intangibles and cost method investments, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). As of June 30, 2023 and December 31, 2022, there was no indication of impairment related to these assets.

Annually, we consider whether the recorded goodwill and indefinite lived intangibles have been impaired. However, goodwill and intangibles must be tested between annual tests if an event occurs or circumstances change to indicate that it is more likely than not that an impairment loss has been incurred (“triggering event”).

Commitments and Contingencies

From time to time, we are involved in certain claims and litigation arising in the normal course of business. Management assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. Legal fees, net of estimated insurance recoveries, are expensed as incurred. We do not believe the final disposition of claims at June 30, 2023 will have a material adverse effect on our consolidated financial position, results of operations or liquidity.

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(2)

CONTRACTS WITH CUSTOMERS

The following table disaggregates revenue for the three- and six-month periods ended June 30, 2023 and 2022 based on timing of revenue recognition (in thousands):

	Three months ended				Six months ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Subscription services recognized ratably over time	$	34,306	$	35,480	$	68,739	$	70,930
Services recognized at a point in time		903		735		2,079		1,916
Fixed, non-subscription recognized over time		742		605		1,397		1,191
Unit price services recognized over time		210		472		419		1,697
Total revenue	$	36,161	$	37,292	$	72,634	$

SEC Form 10-Q filed by National Research Corporation