NATIONAL RESEARCH CORP - Quarter Report: 2021 June (Form 10-Q)

NATIONAL RESEARCH CORPORATION

FORM 10-Q INDEX

For the Quarter Ended June 30, 2021

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,” or the use of words such as “would,” “may,” “could,” 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 future impact of adopting new accounting standards, 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 adequacy of our liquidity sources, future revenue sources, future capital expenditures and the sources of cash to fund such capital expenditures, 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 source of funds for future payments of deferred purchase price obligations and other cash expenses, the future phase out of LIBOR and applicable replacement benchmark rates and the expected impact of the COVID-19 pandemic and related government mandates and recommendations, 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:

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.

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)

See accompanying notes to condensed consolidated financial statements

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

See accompanying notes to condensed consolidated financial statements

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)

See accompanying notes to condensed consolidated financial statements.

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

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

See accompanying notes to condensed consolidated financial statements.

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

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

See accompanying notes to condensed consolidated financial statements.

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

See accompanying notes to condensed consolidated financial statements.

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Description of business and basis of presentation

National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), is a leading provider of analytics and insights that facilitate measurement and improvement of the patient and employee experience while also increasing patient engagement and customer loyalty for healthcare organizations in the United States and Canada. Our purpose is to enable human understanding. Our solutions enable health care organizations to understand what matters most to each person they serve. Our portfolio of solutions represents a unique set of capabilities that individually and collectively provide value to our clients.

In March 2021, we changed our operating segments from six to one to reflect a change in corporate reporting structure to the Company’s Chief Executive Officer and chief operating decision maker.

Our condensed consolidated balance sheet at December 31, 2020 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, 2020, filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2021.

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

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

Our Canadian subsidiary uses as its functional currency the local currency of the country in which it operates. It translates its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. It translates its revenue and expenses at the average exchange rate during the period. We include translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’ equity. Gains and losses related to transactions denominated in a currency other than the functional currency of the country in which we operate and short-term intercompany accounts are included in other income (expense) in the 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 3 for further information about our contracts with customers. We account for revenue using the following steps:

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

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

Subscription-based services - Services that are provided under subscription-based service agreements are usually for a twelve- month period and represent a single promise to stand ready to provide reporting, tools and services throughout the subscription period as requested by the customer. These agreements are renewable at the option of the customer at the completion of the initial contract term for an agreed upon price increase each year. These agreements represent a series of distinct monthly services that are substantially the same, with the same pattern of transfer to the customer as the customer receives and consumes the benefits throughout the contract period. Accordingly, subscription services are recognized ratably over the subscription period. Subscription services are typically billed annually in advance but may also be billed on a quarterly and monthly basis.

One-time services – These agreements typically require us to perform a specific one-time service in a particular month. We are entitled to a fixed payment upon completion of the service. Under these arrangements, we recognize revenue at the point in time we complete the service and it is accepted by the customer.

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

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

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

Deferred Contract Costs

Deferred contract costs, net is stated at gross deferred costs less accumulated amortization. We defer commissions and incentives, including payroll taxes, if they are incremental and recoverable costs of obtaining a renewable customer contract. Deferred contract costs are amortized over the estimated term of the contract, including renewals, which generally ranges from three to five years. The contract term was estimated by considering factors such as historical customer attrition rates and product life. The amortization period is adjusted for significant changes in the estimated remaining term of a contract.  An impairment of deferred contract costs is recognized when the unamortized balance of deferred contract costs exceeds the remaining amount of consideration we expect to receive net of the expected future costs directly related to providing those services.  We have elected the practical expedient to expense contract costs when incurred for any nonrenewable contracts with a term of one year or less. We deferred incremental costs of obtaining a contract of $605,000 and $599,000 in the three months ended June 30, 2021 and 2020, respectively. We deferred incremental costs of obtaining a contract of $1.5 million and $2.2 million in the six-month periods ended June 30, 2021 and 2020, respectively. Deferred contract costs, net of accumulated amortization was $4.6 million at June 30, 2021 and December 31, 2020. Total amortization by expense classification for the three and six-months ended June 30, 2021 and 2020 was as follows:

Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $15,000 and $3,000 for the three months ended June 30, 2021 and 2020, respectively and $22,000 and $4,000 in the six months ended June 30, 2021 and 2020, 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 months ended June 30, 2021 and 2020 (In thousands):

Leases

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

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

We elected the practical expedient to account for lease and non-lease components as a single lease component for all asset classifications. We have also made a policy election to not record short-term leases with a duration of 12 months or less on the balance sheet.

Due to remote working arrangements, we reassessed our office needs and subleased our Seattle location under an agreement considered to be an operating lease beginning in May 2021. We have not been legally released from our primary obligations under the original lease and therefore we continue to account for the original lease separately. During the six months ended June 30, 2021, we recorded an ROU asset impairment charge of $324,000, which was the amount by which the carrying value of the Seattle office lease ROU asset exceeded the fair value. We estimated the fair value based on the discounted cash flows of estimated net rental income for the office space subleased. The ROU asset impairment charge is included in depreciation, amortization and impairment expenses. There were no ROU asset impairment charges in 2020. Rent income from the sublessee are included in the statement of operations on a straight-line basis as an offset to rent expense associated with the original operating lease included in other expenses.

Fair Value Measurements

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

The following details our financial assets within the fair value hierarchy at June 30, 2021 and December 31, 2020:

There were no transfers between levels during the three and six-month periods ended June 30, 2021.

Our long-term debt described in Note 5 is recorded at historical cost. The fair value of long-term debt is classified in Level 2 of the fair value hierarchy and was estimated based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit. The following are the carrying amount and estimated fair values of long-term debt:

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, 2021, and December 31, 2020, there was no indication of impairment related to these assets other than the Seattle office ROU asset. We estimated the fair value of the Seattle office ROU using discounted cash flows of the sublease based on management’s most recent projections, which are considered level 3 inputs in the fair value hierarchy.

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”).

In connection with the March 2021 revision to our operating segments, our previous reporting units were combined into one reporting unit. We performed an interim qualitative analysis immediately before and after the reorganization and concluded that the fair value of our reporting units likely exceeded the carrying values and no impairments were recorded. Following the reorganization, we considered the current and expected future economic and market conditions, including the impact of the COVID-19 pandemic, on our reporting unit. We also assessed our current market capitalization compared to book value, forecasts and margins in our last quantitative impairment testing. We concluded that a triggering event has not occurred which would require an additional interim impairment test to be performed as it is not more likely than not that an impairment loss had been incurred at June 30, 2021.

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, 2021 will have material adverse effect on our consolidated financial position, results of operations or liquidity.

Recent Accounting Pronouncements Not Yet Adopted

In March 2020, FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", which provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We expect to apply the optional expedient for contract modification to account for the change in the reference rate on impacted credit facilities prospectively by adjusting the effective interest rate.

On January 4, 2021, we acquired substantially all assets and assumed certain liabilities of PatientWisdom, Inc., a company with a health engagement solution that will further our purpose of operationalizing human understanding through tangible and actionable insights. $3.0 million of the total $5.0 million all-cash consideration was paid at closing. We are required to pay the remaining $2.0 million no later than February 1, 2022, subject to offset for indemnification claims as provided in the purchase agreement. The closing payment was funded, and we expect to fund the deferred portion of the purchase price, with cash on hand. The acquisition was accounted for as a business combination, using the acquisition method of accounting, which requires, among other things, certain assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date.

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

The identifiable intangible assets are being amortized over their estimated useful lives of 5 years. The goodwill and identifiable intangible assets are deductible for tax purposes. Goodwill related to the acquisition was primarily attributable to anticipated synergies and other intangibles that do not qualify for separate recognition.

The financial results associated with the PatientWisdom assets we acquired and liabilities we assumed are included in our consolidated financial statements from the date of acquisition, although the amounts are insignificant for 2021. Pro-forma information has not been presented because the amounts for 2021 are insignificant. Acquisition-related costs of $8,000 and $119,000 are included in selling, general and administrative expenses for the three and six-month periods ended June 30, 2021.

The following table disaggregates revenue for the three and six-month periods ending June 30, 2021 and 2020 based on timing of revenue recognition (in thousands):

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

Significant changes in contract assets and contract liabilities during the six months ended June 30, 2021 and 2020 are as follows (in thousands): 

We applied the practical expedient to not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Total remaining contract revenue for contracts with original duration of greater than one year expected to be recognized in the future related to performance obligations that are unsatisfied at June 30, 2021 approximated $1.6 million, of which $590,000, $551,000, and $458,000 are expected to be recognized during 2021, 2022 and 2023, respectively.

The effective tax rate for the three-month period ended June 30, 2021 increased to 24.8% expense compared to 9.8% for the same period in 2020, and for the six-month period ended June 30, 2021 increased to 22.7% expense compared to 2.3% for the same period in 2020 mainly due to decreased tax benefits from the exercise and vesting of share-based compensation awards of $1.3 million and $4.1 million in the three and six-month periods, respectively. In addition, we have higher state income taxes due to filing in more states.  

In March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is an emergency economic stimulus package in response to the coronavirus outbreak which, among other things, contains numerous income tax provisions. As a result of the CARES Act, we have deferred $1,313,000 of employer social security tax payments of which $656,000 we expect to pay in December 2021 and the remainder in December 2022. We have had no other impacts to our consolidated financial statements or related disclosures from the CARES Act.

In 2021, we adopted ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). Among other clarifications and simplifications related to income tax accounting, this ASU simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences.  The adoption of this standard had no material impact to our consolidated financial statements.

Our long-term debt consists of the following:  

Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) includes (i) a $30,000,000 revolving credit facility (the “Line of Credit”), (ii) a $33,002,069 term loan (the “Term Loan”) and (iii) a $15,000,000 delayed draw-dawn term facility (the “Delayed Draw Term Loan” and, together with the Line of Credit and the Term Loan, the “Credit Facilities”). We may use the Delayed Draw Term Loan to fund any permitted future business acquisitions or repurchases of our Common Stock and the Line of Credit to fund ongoing working capital needs and for other general corporate purposes.

The Term Loan is payable in monthly installments of $462,988 through May 2025, with a balloon payment due at maturity in May 2025. The Term Loan bears interest at a fixed rate per annum of 5%.

Borrowings under the Line of Credit and the Delayed Draw Term Loan, if any, bear interest at a floating rate equal to the 30-day London Interbank Offered Rate plus 225 basis points (2.34% at June 30, 2021). Interest on the Line of Credit accrues and is payable monthly. Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in May 2023. As of June 30, 2021, and December 31, 2020, the Line of Credit did not have a balance. We did not borrow on the Line of Credit during the six-month period ended June 30, 2021. We have not borrowed on the Delayed Draw Term Loan since origination.

We are obligated to pay ongoing unused commitment fees quarterly in arrears pursuant to the Line of Credit and the Delayed Draw Term Loan facility at a rate of 0.20% per annum based on the actual daily unused portions of the Line of Credit and the Delayed Draw Term Loan facility, respectively.

The Credit Agreement is collateralized by substantially all of our assets, subject to permitted liens and other agreed exceptions, and contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our Common Stock and acquisitions, subject in each case to certain exceptions. Pursuant to the Credit Agreement, we are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the term(s) of the Credit Facilities, which calculation excludes, unless our liquidity falls below a specified threshold, (i) any cash dividend in a fiscal quarter that, together with all other cash dividends paid or declared during such fiscal quarter, exceeds $5,500,000 in total cash dividends paid or declared, (ii) the portion of the purchase price for any permitted share repurchase of our shares paid with cash on hand, and (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand. We are also required to maintain a cash flow leverage ratio of 3.00x or less for all testing periods throughout the term(s) of the Credit Facilities. As of June 30, 2021, we were in compliance with our financial covenants.

We measure and recognize compensation expense for all share-based payments based on the grant-date fair value of those awards. All of our existing stock option awards and unvested stock awards have been determined to be equity-classified awards. We account for forfeitures as they occur. We refer to our restricted stock awards as “non-vested” stock in these consolidated financial statements.

Our 2004 Non-Employee Director Stock Plan, as amended (the “2004 Director Plan”), is a nonqualified plan that provides for the granting of options with respect to 3,000,000 shares of our Common Stock. The 2004 Director Plan provides for grants of nonqualified stock options to each of our directors who we do not employ. Options to purchase shares of Common Stock equal to an aggregate grant date fair value of $100,000 are granted to each non-employee director when joining the board and when retained as a director at each annual meeting. Stock options vest approximately one year following the date of grant and option terms are generally the earlier of ten years following the date of grant, or three years from the termination of the outside director’s service.

Our 2006 Equity Incentive Plan (the “2006 Equity Incentive Plan”), as amended, provides for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 1,800,000 shares of our Common Stock. Stock options granted may be either incentive stock options or nonqualified stock options. Vesting terms vary with each grant and option terms are generally five to ten years following the date of grant.

During the six months ended June 30, 2021 and 2020, we granted options to purchase 101,091 and 70,471 shares of Common Stock, respectively. Options to purchase shares of common stock are typically granted with exercise prices equal to the fair value of the common stock on the date of grant. We do, in certain limited situations, grant options with exercise prices that exceed the fair value of the common shares on the date of grant. The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following weighted average assumptions:

The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was based on historical monthly price changes of our stock based on the expected life of the options at the date of grant. The expected life of options is the average number of years we estimate that options will be outstanding. We consider groups of associates that have similar historical exercise behavior separately for valuation purposes.

The following table summarizes stock option activity under the 2006 Equity Incentive Plans and the 2004 Director Plan for the six-month period ended June 30, 2021:

As of June 30, 2021, the total unrecognized compensation cost related to non-vested stock option awards was approximately $1.8 million which was expected to be recognized over a weighted average period of 2.42 years.

There was $538,000 of cash received from stock options exercised for the three-month period ended June 30, 2020 and no cash received from the exercise of options for the same period in 2021. Cash received from stock options exercised for the six-month periods ended June 30, 2021 and 2020, were $162,000 and $538,000 respectively. We recognized $176,000 and $216,000 of non-cash compensation for three months ended June 30, 2021 and 2020, respectively, and $186,000 and $498,000 of non-cash compensation for the six months ended June 30, 2021 and 2020, respectively, related to options, which is included in direct fixed and selling, general and administrative expenses.

During the six months ended June 30, 2021, we granted 12,698 non-vested shares of Common Stock under the 2006 Equity Incentive Plan. No shares were granted during the six months ended June 30, 2020. As of June 30, 2021, we had 12,698 non-vested shares of Common Stock outstanding under the 2006 Equity Incentive Plan. These shares vest over five years following the date of grant and holders thereof are entitled to receive dividends from the date of grant, whether or not vested. The fair value of the awards is calculated as the fair market value of the shares on the date of grant. We recognized $27,000 and ($75,000) of non-cash compensation for the three months ended June 30, 2021 and 2020, respectively, and ($37,000) and ($26,000) of non-cash compensation for the six months ended June 30, 2021 and 2020, respectively, related to this non-vested stock, which is included in direct fixed and selling, general and administrative expenses. During the six months ended June 30, 2021, 6,005 shares were forfeited.

The following table summarizes information regarding non-vested stock granted to associates under the 2006 Equity Incentive Plan for the six-month period ended June 30, 2021:

As of June 30, 2021, the total unrecognized compensation cost related to non-vested stock awards was approximately $491,000 and is expected to be recognized over a weighted average period of 4.52 years.

The following represents a summary of changes in the carrying amount of goodwill for the six-month period ended June 30, 2021:

Intangible assets consisted of the following:

See Note 2 for additional information related to goodwill and intangible assets included in the acquisition of PatientWisdom, Inc.

Basic net income per share was computed using the weighted-average number of common shares outstanding during the period.

Diluted net income per share was computed using the weighted-average number of common shares and, if dilutive, the potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method.

We had 103,704 and 57,719 options of Common Stock for the three-month periods ended June 30, 2021 and 2020, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive. We had 108,343 and 52,789 options of Common Stock for the six-month periods ended June 30, 2021 and 2020, respectively which have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive.

During the six months ending June 30, 2021, we entered into an agreement as lessor to sublease our Seattle office. Future minimum undiscounted cash receipts due under the agreement at June 30, 2021 are as follows (in thousands):

Until January 2020, one of our directors served as an officer and director of Ameritas Life Insurance Corp. (“Ameritas”) and continued to serve on the board of directors of Ameritas for a portion of the three and six-month periods ended June 30, 2021. In connection with our regular assessment of our insurance-based associate benefits, which is conducted by an independent insurance broker, and the costs associated therewith, we purchase dental and vision insurance for certain of our associates from Ameritas. The total value of these purchases was $73,000 and $42,000 in the three-month periods ended June 30, 2021 and 2020, respectively and $144,000 and $114,000 in the six-month periods ended June 30, 2021 and 2020, respectively.

A director who began serving on our board in May 2021, currently serves as chief executive officer of Allina Health, a not-for-profit healthcare system. In connection with its routine business operations, Allina Health purchases certain of our products and services. Total revenue we earned from Allina Health in the three and six-month periods ended June 30, 2021 approximated $409,000 and $844,000, respectively.

A director, who served on our board through May 2020, also served as a board member of IMA Financial Group. In connection with our regular assessment of our liability coverage, during 2020 we began purchasing directors and officers and employment practices liability insurance through IMA Financial Group. These purchases totaled $478,000 in the three and six-month periods ended June 30, 2020, respectively.

During 2017, we acquired a cost method investment in convertible preferred stock of Practicing Excellence.com, Inc., a privately-held Delaware Corporation (“PX”), which is included in other non-current assets and is carried at cost, adjusted for changes resulting from observable price changes in orderly transactions of the same investment in PX, if any.  We also have an agreement with PX which commenced in 2016 under which we act as a reseller of PX services and PX receives a portion of the revenues. The total revenue earned from the PX reseller agreement was $17,000 and $83,000 in the three-month periods ended June 30, 2021 and 2020, respectively, and $35,000 and $166,000 in the six-month periods ended June 30, 2021 and 2020, respectively. We will no longer earn revenue under this agreement after September 30, 2021 due to termination of the reseller agreement.

The following discussion of our results of operations and financial conditions should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Our purpose is to enable human understanding. Our solutions enable health care organizations to understand what matters most to each person they serve. We are 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. Our heritage, proprietary methods, and holistic approach enable our partners to better understand the people they care for and design experiences that inspire loyalty and trust, while also facilitating regulatory compliance and the shift to population-based health management. Our ability to measure what matters most and systematically capture, analyze and deliver insights based on self-reported information from patients, families and consumers is critical in today’s healthcare market. We believe that access to and analysis of our extensive consumer-driven information is becoming more valuable as healthcare providers increasingly need to more deeply understand and engage the people they serve to build customer loyalty.

Our portfolio of subscription-based solutions provides actionable information and analysis to healthcare organizations across a range of mission-critical, constituent-related elements, including patient experience, service recovery, care transitions, health risk assessments, employee engagement, reputation management, and brand loyalty. We partner with clients across the continuum of healthcare services. Our clients include integrated health systems, post-acute providers and payer organizations. We believe this cross-continuum positioning is a unique and an increasingly important capability as evolving payment models drive healthcare providers and payers towards a more collaborative and integrated service model.

The outbreak of COVID-19, and the associated responses, have impacted our business in a variety of ways.  Governments have implemented business and travel restrictions and recommended social distancing and other guidelines. Many businesses, including many of our clients, have de-emphasized external business opportunities and restricted in-person meetings while shifting their attention toward addressing COVID-19 planning, business disruptions, higher costs, and revenue shortfalls. At NRC, our workforce remains intact and highly engaged.  The vast majority of our associates are working remotely, and to date we have been capable of providing our services without significant disruption. We have made our facilities available for associates to return to work effective July 1, 2021 at their discretion. Historically, we have relied on national travel as part of our sales efforts, but as a result of the pandemic we have placed a temporary hold on all company related travel. We have recently modified our travel policy and expect limited travel to resume in the third quarter of 2021. The duration and severity of the COVID-19 pandemic and associated impacts on our business, including the impact on our revenue, expenses, and cash flows, cannot be predicted at this time.  Based on the foregoing, we do not expect our recent revenue and earnings growth to be indicative of future expectations.  We do, however, expect to have adequate sources of liquidity to meet our current and expected needs for the foreseeable future.

Results of Operations

The following table and graphs set forth, for the periods indicated, selected financial information derived from our consolidated financial statements, including amounts expressed as a percentage of total revenue and the percentage change in such items versus the prior comparable period (please note that all columns may not add up to 100% due to rounding). The trends illustrated in the following table and graphs may not necessarily be indicative of future results. The discussion that follows the information should be read in conjunction with our consolidated financial statements.

Due to changes in our corporate reporting structure in 2021, certain associates moved between departments. As a result, the related salaries and benefits and company incentive expenses are included in Selling, general and administrative expenses in 2021 instead of Direct as in the 2020 period. The total amount of the reclassified expenses approximates $500,000 in each quarter.

Three Months Ended June 30, 2021, Compared to Three Months Ended June 30, 2020

Revenue. Revenue for the three-month period ended June 30, 2021, increased 16.9% to $36.4 million, compared to $31.2 million, in the three-month period ended June 30, 2020.This was primarily due to new customer sales, as well as increases in sales to the existing client base. During the same period in 2020, we also experienced revenue reductions from COVID-19 as some clients reduced or eliminated services they purchased from us as cost reducing measures.

Direct expenses. Direct expenses increased 7.8% to $12.5 million for the three-month period ended June 30, 2021, compared to $11.6 million for the same period in 2020. This was due to an increase in variable expenses of $958,000, partially offset by a decrease in fixed expenses of $56,000. Variable expenses increased due to higher survey contracted services, partially offset by less postage, printing, and paper costs primarily resulting from changes in survey methodologies. Conference expenses increased due to the timing and shift in attendance format of conferences. Fixed expenses decreased primarily as a result of lower salary and benefit costs, decreased equipment lease costs, and reduced company incentive event costs partially offset by higher software and platform hosting expenses. Direct expenses decreased as a percentage of revenue to 34.4% in 2021, from 37.3% in 2020, as revenue increased by 16.9% while direct expenses for the same period increased by 7.8%.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 13.1% to $10.0 million for the three-month period ended June 30, 2021, compared to $8.9 million for the same period in 2020, primarily due to increases in public company and other legal and accounting costs of $881,000, higher contracted services of $225,000 and increased business insurance of $75,000. Selling, general and administrative expenses decreased as a percentage of revenue to 27.5% in 2021, from 28.4% in 2020, as revenue increased by 16.9% while selling, general and administrative expenses for the same period increased by 13.1%.

Depreciation, amortization and impairment. Depreciation, amortization and impairment was $1.6 million for the three-month period ended June 30, 2021 and $1.4 million for the three-month period ended June 30, 2020. The increase was primarily due to our transformation to a distributed workforce environment, which includes building renovations in our headquarters. Specifically, depreciation expense increased by $159,000 due to shortening the estimated useful lives of certain building assets. Depreciation, amortization and impairment expense was 4.5% of revenue for the three-month period ended June 30, 2021 and 2020.

Other income (expense). Other expense, net decreased to $345,000 for the three-month period ended June 30, 2021, compared to other expense, net of $718,000 for the same period in 2020, primarily due to decreased interest expense and foreign exchange rate changes. Interest expense decreased to $423,000 in 2021 from $450,000 for the same period in 2020, primarily due to the declining balance on our term loan. Other income increased to $75,000 in 2021 compared to other expense of $270,000 for the same period of 2020, primarily due to revaluation on intercompany transactions due to changes in the Canadian to U.S. dollar foreign exchange rate.

Income tax provision. Income tax provision was $3.0 million for the three-month period ended June 30, 2021, compared to $842,000 for the same period in 2020. The effective tax rate for the three-month period ended June 30, 2021 increased to 24.8% compared to 9.8% during the same period in 2020, primarily due to decreased tax benefits of $1.3 million from the exercise and vesting of share-based compensation awards and higher state income taxes.  

Six Months Ended June 30, 2021, Compared to Six Months Ended June 30, 2020

Revenue. Revenue for the six-month period ended June 30, 2021, increased 10.6% to $71.9 million, compared to $65.0 million in the six-month period ended June 30, 2020. The increase was primarily due to new customer sales, as well as increases in sales to the existing client base. During the same period in 2020, we also experienced revenue reductions from COVID-19 as some clients reduced or eliminated services they purchased from us as cost reducing measures.

Direct expenses. Direct expenses increased 1.2% to $24.5 million for the six-month period ended June 30, 2021, compared to $24.2 million in the same period in 2020. This was due to an increase in variable expenses of $855,000, partially offset by a decrease in fixed expenses of $560,000. Variable expenses increased due to higher survey contracted services and salary and benefit costs, partially offset by less postage, printing, and paper costs primarily resulting from changes in survey methodologies. Conference expenses also decreased due to the timing and shift in attendance format. Fixed expenses decreased primarily as a result of decreased contracted technology services, lower travel and meal costs due to restricted travel associated with COVID-19, lower company incentive events and equipment lease costs partially offset by higher software and platform hosting expenses. Direct expenses decreased as a percentage of revenue to 34.1% in 2021, compared to 37.2% during the same period of 2020, as direct expenses increased by 1.2% while revenue for the same period increased by 10.6%.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 11.0% to $19.5 million for the six-month period ended June 30, 2021, compared to $17.6 million for the same period in 2020, primarily due to increases in public company and other legal and accounting costs of $963,000, contracted services of $640,000, software and platform hosting expenses of $282,000, increased salary and benefit costs of $185,000, higher building lease costs of $130,000, and additional professional development costs of $92,000. These were partially offset by lower travel and meal costs of $375,000 due to restricted travel associated with COVID-19. Selling, general and administrative expenses increased as a percentage of revenue to 27.2% in 2021, from 27.1% in 2020, as revenue increased by 10.6% while selling, general and administrative expenses for the same period increased by 11.0%.

Depreciation, amortization and impairment. Depreciation, amortization and impairment was $3.6 million for the six-month period ended June 30, 2021 and $2.8 million for the six-month period ended June 30, 2020. The increase was primarily due to our transformation to a distributed workforce environment, which includes building renovations in our headquarters, as well as subleasing a remote office location which resulted in an ROU asset impairment of $324,000. Depreciation expense increased by $353,000 due to shortening the estimated useful lives of certain building assets. Depreciation, amortization and impairment expense increased as a percentage of revenue to 5.0% for the six-month period ended June 30, 2021 from to 4.3% in 2020, as revenue increased by 10.6% while depreciation, amortization and impairment expenses for the same period increased by 30.3%.

Other income (expense). Other expense, net increased to $753,000 for the six-month period ended June 30, 2021, compared to other expense, net of $541,000 for the same period in 2020, primarily due to decreased interest expense and foreign exchange rate changes. Interest expense decreased to $855,000 in 2021 from $914,000 for the same period in 2020, primarily due to the declining balance on our term loan. Other income decreased to $96,000 in 2021 compared to $360,000 for the same period of 2020, primarily due to revaluation on intercompany transactions due to changes in the Canadian to U.S. dollar foreign exchange rate.

Income tax provision. Income tax provision was $5.3 million for the six-month period ended June 30, 2021, compared to a $458,000 for the same period in 2020. The effective tax rate for the six-month period ended June 30, 2021 increased to 22.7%, compared to 2.3% for the same period in 2020, mainly due to decreased tax benefits of $4.1 million from the exercise and vesting of share-based compensation awards and higher state income taxes.  

Liquidity and Capital Resources

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.  Dividends were declared and paid in April 2021 of $3.1 million, which were funded with cash on hand. We also declared $3.1 million of dividends in June 2021 and paid such dividends in July 2021, also funded with cash on hand. Our board of directors considers whether to declare a dividend and the amount of any dividends declared on a quarterly basis.

As of June 30, 2021, our principal sources of liquidity included $48.9 million of cash and cash equivalents, up to $30 million of unused borrowings under our line of credit and up to $15 million on our delayed draw term note. Of this cash, $6.1 million was held in Canada. We can use the delayed draw term note only to fund permitted future business acquisitions or repurchasing our Common Stock.

Working Capital

We had working capital of $27.6 million and $22.4 million on June 30, 2021 and December 31, 2020, respectively.

The change was primarily due to increases in cash and cash equivalents of $14.2 million and prepaid expenses of $930,000 and decreases in accounts payable of $757,000. This was partially offset by increases in dividends payable of $3.1 million, deferred acquisition consideration of $2.0 million, accrued expenses of $1.4 million, deferred revenue of $1.3 million, accrued wages and bonuses of $615,000, income taxes payable of $512,000, and decreases of $1.1 million in income taxes receivable and $814,000 in other current assets.

Income taxes receivable and payable changed due to the timing of income tax payments. Prepaid expenses, accounts payable and accrued expenses changed due to the timing of payments, and other current assets changed due to the timing of receipts on state tax incentives. Accrued wages and bonuses has grown mainly due to the deferral of social security tax payments as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The deferred acquisition consideration was due to the PatientWisdom acquisition in the six-month period ended June 30, 2021, as further described in Note 2 to our condensed consolidated financial statements. 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. The deferred revenue balances as of June 30, 2021, and December 31, 2020, were $16.8 million and $15.6 million, respectively.

The deferred revenue balance is primarily due to timing of initial billings on new and renewal contracts. We typically invoice clients for services before they have been completed. We record billed amounts as billings in excess of revenue earned, or deferred revenue, in our consolidated financial statements, and we recognize billed amounts as income when we satisfy the performance obligations. In addition, when we perform work in advance of billing, we record this work as revenue earned in excess of billings, or unbilled revenue. Substantially all deferred revenue and all unbilled revenue will be earned and billed respectively, within 12 months of the respective period ends.

Cash Flow Analysis

A summary of operating, investing, and financing activities is shown in the following table: 

Cash Flows from Operating Activities

Cash flows from operating activities consist of net income adjusted for non-cash items including depreciation, amortization and impairment, deferred income taxes, share-based compensation and related taxes, reserve for uncertain tax positions, loss on disposal of property and equipment and the effect of working capital changes.

Net cash provided by operating activities was $25.6 million for the six-month period ended June 30, 2021, which included net income of $18.2 million, plus non-cash charges (benefits) for deferred income taxes, depreciation, amortization and impairment, reserve for uncertain tax positions, non-cash share-based compensation, and loss on disposal of property and equipment totaling $4.1 million. Changes in working capital increased cash flows from operating activities by $3.3 million, primarily from an increase in deferred revenue and accrued expenses, wages and bonuses and net changes in income taxes receivable and payable; partially offset by increases in prepaid expenses and other current assets and decreases in accounts payable. Deferred revenue will vary based on the timing and frequency of billings on annual agreements and income taxes receivable and payable vary based on timing of payments. Accrued expenses, wages and bonuses, which fluctuate due to the timing of payment, included the deferral of employer payroll taxes from the CARES Act. Prepaid expenses and other current assets and accounts payable fluctuate due to the timing of payments of prepaids and accounts payable.

Net cash provided by operating activities was $13.9 million for the six-month period ended June 30, 2020, which included net income of $19.5 million, plus non-cash charges (benefits) for deferred income taxes, depreciation and amortization, reserve for uncertain tax positions and share-based compensation and related taxes totaling $3.7 million. Net changes in assets and liabilities decreased cash flows from operating activities by $9.3 million, primarily due to increases in trade accounts receivable, prepaid and other current assets, and deferred contract costs, as well as decreases in accounts payable, income taxes receivable and payable, which fluctuate due to the timing of payments of prepaids, accounts payable, accrued expenses, direct and incremental costs directly related to sales and the timing of income tax payments. Deferred revenue also decreased, which will vary based on the timing and frequency of billings on annual agreements. These decreases to cash flows were partially offset by increases in accrued expenses, wages, bonuses, and profit sharing.

Cash Flows from Investing Activities

Net cash used for investing activities was $5.8 million in the six months ended June 30, 2021. These expenditures consisted of $3.0 million for acquisition consideration and $2.8 million purchases of property and equipment including computer software and hardware, leasehold improvements and furniture and equipment.

Net cash of $1.4 million was used for investing activities in the six months ended June 30, 2020. These expenditures consisted mainly of computer software classified in property and equipment.

Cash Flows from Financing Activities

Net cash used in financing activities was $5.6 million in the six months ended June 30, 2021. We used cash to repay borrowings under the term note totaling $2.0 million and for finance lease obligations of $246,000. We also used cash to pay payroll tax withholdings related to share-based compensation of $460,000, partially offset by $162,000 of proceeds from the exercise of share-based awards. We also used cash to pay $3.1 million of dividends on our common stock.

Net cash used in financing activities was $13.6 million in the six months ended June 30, 2020. We used cash to repay borrowings under the term notes totaling $1.6 million and for finance lease obligations of $124,000. We also used cash to pay $10.5 million of dividends on our common stock, and to pay payroll tax withholdings related to share-based compensation of $1.9 million. These decreases to cash flows were partially offset by proceeds from the exercise of stock options of $538,000.

The effect of changes in foreign exchange rates increased cash and cash equivalents by $68,000 in the six months ended June 30, 2021 and decreased cash and cash equivalents by $474,000 in the six months ended June 30, 2020.

Capital Expenditures

Cash paid for capital expenditures was $2.8 million for the six months ended June 30, 2021. These expenditures consisted mainly of computer software and hardware, leasehold improvements and furniture and equipment. In addition to continued expenditures for computer software and hardware in 2021, we expect substantially higher capital expenditures for building improvements, with the total amount yet to be determined, which we expect to be funded through cash generated from operations.

Debt and Equity

Our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) includes (i) a $30,000,000 revolving credit facility (the “Line of Credit”), (ii) a $33,002,069 term loan (the “Term Loan”) and (iii) a $15,000,000 delayed draw-dawn term facility (the “Delayed Draw Term Loan” and, together with the Line of Credit and the Term Loan, the “Credit Facilities”). We may use the Delayed Draw Term Loan to fund any permitted future business acquisitions or repurchases of our Common Stock and the Line of Credit to fund ongoing working capital needs and for other general corporate purposes.

The Term Loan is payable in monthly installments of $462,988 through May 2025, with a balloon payment due at maturity in May 2025. The Term Loan bears interest at a fixed rate per annum of 5%.  

Borrowings under the Line of Credit and the Delayed Draw Term Loan, if any, bear interest at a floating rate equal to the 30-day London Interbank Offered Rate plus 225 basis points (2.34% at June 30, 2021). Interest on the Line of Credit accrues and is payable monthly. Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in May 2023. As of June 30, 2021, the Line of Credit did not have a balance. We did not borrow on the Line of Credit during the six-month period ended June 30, 2021. We have not borrowed on the Delayed Draw Term Loan since origination.

We are obligated to pay ongoing unused commitment fees quarterly in arrears pursuant to the Line of Credit and the Delayed Draw Term Loan facility at a rate of 0.20% per annum based on the actual daily unused portions of the Line of Credit and the Delayed Draw Term Loan facility, respectively.

The Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of our Common Stock and acquisitions, subject in each case to certain exceptions. Pursuant to the Credit Agreement, we are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the term(s) of the Credit Facilities, which calculation excludes, unless our liquidity falls below a specified threshold, (i) any cash dividend in a fiscal quarter that, together with all other cash dividends paid or declared during such fiscal quarter, exceeds $5,500,000 in total cash dividends paid or declared, (ii) the portion of the purchase price for any permitted share repurchase of our shares paid with cash on hand, and (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand. We are also required to maintain a cash flow leverage ratio of 3.00x or less for all testing periods throughout the term(s) of the Credit Facilities. As of June 30, 2021, we were in compliance with our financial covenants.

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 (each, a “guarantor”).

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

LIBOR is currently expected to be phased out beginning in 2021 through 2023. The one-week and two-month LIBOR rates are expected to retire on December 31, 2021. The overnight, one-month, three-month, six-month and 12-month LIBOR rates are expected to be published through June 2023. We are required to pay interest on borrowings under our Line of Credit and Delayed Draw Term Loan at floating rates based on the one-month LIBOR. Future debt that we may incur may also require that we pay interest based upon LIBOR. Under the terms of our Credit Agreement with FNB, if LIBOR becomes unavailable during the term of the agreement, FNB may, in its discretion and in a manner consistent with market practice, designate a substitute index. We currently expect that the determination of interest under our Credit Agreement would be revised as to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that if LIBOR is phased out or transitioned, the changes to the determination of interest under our agreements would approximate the current calculation in accordance with LIBOR. We do not know what standard, if any, will replace LIBOR if it is phased out or transitioned.

We have finance leases for computer equipment, office equipment, printing and inserting equipment. The balance of the finance leases as of June 30, 2021, was $1.0 million.

Shareholders’ equity increased $12.1 million to $76.4 million at June 30, 2021, from $64.3 million at December 31, 2020. The increase was mainly due to net income of $18.2 million, changes in the cumulative translation adjustment of $130,000, and shared-based compensation expense of $149,000. This was partially offset by dividends declared of $6.1 million and share repurchases exceeding the cost of stock options exercised of $298,000.

Contractual Obligations

We had contractual obligations to make payments in the following amounts in the future as of June 30, 2021:

We generally do not make unconditional, non-cancelable purchase commitments. We enter into purchase orders in the normal course of business, but these purchase obligations do not exceed one year.

Stock Repurchase Program

Our Board of Directors authorized the repurchase of up to 2,250,000 then-existing class A shares and 375,000 then-existing class B shares of common stock in the open market or in privately negotiated transactions under a stock repurchase program that was originally approved in February 2006 and subsequently amended in May 2013. In connection with the Recapitalization in April 2018, our Board of Directors further amended the stock repurchase program to eliminate the repurchase of the former class B common stock. As of June 30, 2021, the remaining number of shares of Common Stock that could be purchased under this authorization was 280,491 shares.  

Critical Accounting Estimates

There have been no changes to our critical accounting estimates described in the Annual Report on Form 10-K for the year ended December 31, 2020 that have a material impact on our Condensed Consolidated Financial Statements and the related Notes.

There are no material changes to the disclosures regarding our market risk exposures made in our Annual Report on Form 10-K for the year ended December 31, 2020.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that, as of the end of such period, our disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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. For additional information, see Note 1, under the heading “Commitments and Contingencies,” to our consolidated financial statements. Regardless of the final outcome, any legal proceedings, claims, inquiries and investigations, however, can impose a significant burden on management and employees, may include costly defense and settlement costs, and could cause harm to our reputation and brand, and other factors.

The significant risk factors known to us that could materially adversely affect our business, financial condition, or operating results are described in Part I, Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2020.

In February 2006 and subsequently amended in May 2013, our Board of Directors authorized the repurchase of 2,250,000 shares of class A common stock and 375,000 shares of class B common stock in the open market or in privately negotiated transactions. In connection with the Recapitalization in April 2018, our Board of Directors further amended the stock repurchase program to eliminate the repurchase of the former class B common stock. Unless terminated earlier by resolution of our Board of Directors, the repurchase program will expire when we have repurchased all shares of Common Stock authorized for repurchase thereunder. No Common Stock was repurchased under that authorization during the three-month period ended June 30, 2021. The remaining shares of Common Stock that may be purchased under that authorization are 280,491. Our Credit Agreement provides that, in order for us to pay dividends, there must be no default or event of default existing or that would result from such payment and we must show that we would comply with the Credit Agreement’s fixed charge coverage ratio and consolidated cash flow leverage ratio after giving pro forma effect to such payment.

The exhibits listed in the exhibit index below are filed as part of this Quarterly Report on Form 10-Q.

EXHIBIT INDEX  

** Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.