NRC HEALTH (NRC)

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our results of operations and financial condition 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 humanize healthcare and support organizations in their understanding of each unique individual. Our commitment to Human Understanding® helps leading healthcare systems improve their operations through understanding each person they serve not as point-in-time insights, but as an ongoing relationship. Our end-to-end solutions enable our customers to understand what matters most to each person they serve – before, during, after, and beyond clinical encounters – to gain a longitudinal understanding of how life and health intersect, with the goal of developing lasting, trusting relationships. 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 access to, analysis of, and acting on our extensive individual-driven information is increasingly valuable as healthcare providers need to better understand and engage the people they serve to create long-term relationships, build loyalty, and improve processes.

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, employee engagement, reputation management, and brand loyalty. We partner with customers across the continuum of healthcare services and believe this cross-continuum positioning is a unique and an increasingly important capability as the evolving healthcare landscape drives its constituents towards a more collaborative and integrated service model.

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Results of Operations

The following table sets forth, for the periods indicated, selected financial information derived from our condensed consolidated financial statements and the percentage change in such items versus the prior comparable period, as well as other key financial metrics. The discussion that follows the information should be read in conjunction with our condensed consolidated financial statements.

Three Months Ended June 30, 2026, Compared to Three Months Ended June 30, 2025

Revenue. Revenue in the 2026 period increased compared to the 2025 period by $1.4 million. This was mainly from $1.2 million higher recurring revenue from existing customers compared to the prior year, and $0.9 million higher revenue from new customers, compared to the prior year, partially offset by new contra-revenue of $0.7 million related to sales where we act as an agent in the delivery of third-party solutions.

Direct expenses. Direct expenses consist primarily of salaries and employee benefits, employee travel and lodging, materials, contract labor, third party software subscription costs, hosted customer conferences, and other direct expenses associated with revenue. Personnel costs within direct expenses are associated with individuals in product delivery, customer support, thought leadership, conference support, technology infrastructure, and product development. Direct expenses represented 38% of revenue for both the 2026 and 2025 periods. Direct expenses increased to $13.6 million for the 2026 period from $13.0 million for the same period in 2025, primarily driven by higher survey delivery services and increased spending on contractor services and computer subscription costs related to continued investments in technology and development.

Selling, general, and administrative expenses. Selling, general, and administrative expenses consist of salaries and employee benefits, commissions and amortization of deferred commissions, stock-based compensation, employee travel and lodging, third party software subscription and platform costs, marketing costs, facility expenses, office expenses, fees for professional services, provision for credit losses, and other operational expenses. Personnel costs within selling, general, and administrative expenses are associated with individuals in sales, marketing, finance, accounting, business development, human resources, administrative, product development, internal information systems, and executive management. Selling, general, and administrative expenses increased to $22.9 million for the 2026 period, from $17.7 million for the same period in 2025. The increase was primarily driven by $7.1 million of higher stock-based compensation expense related to executive leadership. This increase in stock-based compensation expense primarily related to previously disclosed amendments to certain executive equity awards. We do not expect similar amendments to be recurring events. Accordingly, the increase in stock-based compensation expense in the reported period is not necessarily indicative of such expense in future periods. The increase was also driven by approximately $0.5 million of higher salary expense for executives who were not present for the same period in 2025. These increases were partially offset by $3.2 million of lower executive leadership transition bonus expense compared to the prior-year period. The remaining increase was attributable to higher travel and computer software subscription expenses to support continued investment in technology.

Depreciation and amortization. Depreciation and amortization expenses increased in the 2026 period compared to the 2025 period due to the completion of our headquarters building renovations in June 2025.

Operating income (loss) and margin. Operating income swung to a loss in the 2026 period compared to the 2025 period due to the increased compensation related to our executive leadership transition and increased investment in technology, partially offset by revenue growth.

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Total other expense. Total other expense increased in the 2026 period compared to the 2025 period due to higher interest expense due to a higher balance on long term debt.

Provision for income taxes and effective tax rate. Provision for income taxes changed to a benefit in the 2026 period from an expense in the 2025 period, primarily due to a pre-tax loss in the 2026 period compared to pre-tax income in the 2025 period. The effective tax rate decreased in the 2026 period primarily because the 2025 rate reflected a small pre-tax income base that magnified the impact of nondeductible items, specifically executive compensation subject to nondeductible executive compensation under IRC Section 162(m), whereas in the 2026 period, the pre-tax loss minimized the impact of these nondeductible items.

Six Months Ended June 30, 2026, Compared to Six Months Ended June 30, 2025

Revenue. Revenue in the 2026 period increased compared to the 2025 period by $2.6 million. This was mainly from $2.8 million higher recurring revenue from existing customers compared to the prior year, and $0.5 million higher revenue from new customers, compared to the prior year, partially offset by new contra-revenue of $0.7 million related to sales where we act as an agent in the delivery of third-party solutions.

Direct expenses. Direct expenses represented 39% of revenue for both the 2026 and 2025 periods. Direct expenses increased to $27.2 million in 2026 from $26.0 million in 2025, primarily driven by survey delivery services and increased spending on contractor services and computer subscription costs related to continued investments in technology and development.

Selling, general, and administrative expenses. Selling, general, and administrative expenses increased $8.3 million to $36.4 million for the 2026 period, from $28.1 million for the same period in 2025. The primary driver was salaries and benefits due to $8.5 million of higher stock-based compensation related to executive leadership. Consistent with the discussion above for the three-month period, this increase in stock-based compensation primarily related to previously disclosed amendments to certain executive equity awards, which are not expected to recur. Accordingly, the increase in stock-based compensation expense for the six-month period is not necessarily indicative of such expense in future periods. The increase was also driven by $1.1 million of higher salary expense for executives who were not present for the same period in 2025, partially offset by $3.3 million of lower bonus expense paid as part of our executive leadership transition. The remaining increase was attributable to higher computer subscription expenses to support continued investment in technology, increased travel, regulatory-related accruals, and the timing of corporate‑related expenses.

Depreciation and amortization. Depreciation and amortization expenses increased in the 2026 period compared to the 2025 period due to the completion of our headquarters building renovations in June 2025.

Operating income and margin. Operating income decreased in the 2026 period compared to the 2025 period due to the increased compensation related to our executive leadership transition and continued investment in technology, partially offset by revenue growth.

Total other expense. Total other expense increased in the 2026 period compared to the 2025 period due to higher interest expense on a higher balance on long term debt.

Provision for income taxes and effective tax rate. Provision for income taxes changed to a benefit of $0.1 million in the 2026 period from an expense of $2.6 million in the 2025 period, primarily due to lower pre-tax income. The effective tax rate increased in the 2026 period primarily due to executive compensation subject to the deductibility limitations under IRC Section 162(m) and other non-deductible items, which had a magnifi

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides a summary of significant factors relevant to our financial performance and condition. It should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Form 10-K. This section of this Form 10-K generally discusses 2025 and 2024 items and year-to-year comparisons between 2025 and 2024. Discussions of 2023 items and year-to-year comparisons between 2024 and 2023 are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024.

Overview

Our purpose is to humanize healthcare and support organizations in their understanding of each unique individual. Our commitment to Human Understanding® helps leading healthcare systems improve their operations through understanding each person they serve not as point-in-time insights, but as an ongoing relationship. Our end-to-end solutions enable our customers to understand what matters most to each person they serve – before, during, after, and beyond clinical encounters – to gain a longitudinal understanding of how life and health intersect, with the goal of developing lasting, trusting relationships. 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 access to, analysis of, and acting on our extensive individual-driven information is increasingly valuable as healthcare providers need to better understand and engage the people they serve to create long-term relationships, build loyalty, and improve processes.

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, employee engagement, reputation management, and brand loyalty. We partner with customers across the continuum of healthcare services and believe this cross-continuum positioning is a unique and an increasingly important capability as the evolving healthcare landscape drives its constituents towards a more collaborative and integrated service model.

Critical Accounting Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The following area is considered a critical accounting estimate because it involves significant judgments or assumptions, involves complex or uncertain matters or is susceptible to change, and the impact could be material to our financial condition or operating results:

Revenue Recognition

We derive a majority of our revenue from renewable subscription-based service agreements with our customers. We also derive revenue from fixed, non-subscription arrangements. Our revenue recognition policy requires management to estimate, among other factors, the future contract consideration we expect to receive under variable consideration subscription arrangements as well as future total estimated contract costs over the contract term with respect to fixed, non-subscription arrangements. If management made different judgments and estimates, then the amount and timing of revenue for any period could differ from the reported revenue. See Notes 1 and 3 to our consolidated financial statements for a description of our revenue recognition policies.

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Recent Trends

Since the fourth quarter of 2024, Total Recurring Contact Value (“TRCV”) has increased each quarter while revenue per associate and direct selling expenses have improved, giving us confidence about the Company’s financial direction despite certain non-recurring severance and compensation expenses associated with management changes during 2024 and 2025.

Our GAAP revenue and operating margin declined since 2023 primarily due to lower new sales and retention rates prior to 2025, which stemmed from sales force changes and less robust product innovation from 2020 through early 2024 as well as the non-recurring costs mentioned above. TRCV, our leading indicator of revenue expectations, declined through the third quarter of 2024. During 2024 and 2025, we made significant changes in our senior management, developed and marketed innovative new products, acquired our rounding tool, and reconstituted a motivated sales force. We also implemented efficiency measures that have allowed us to enhance our customers’ experience while lowering direct expenses and our total number of associates. With TRCV growing and a lower expense run rate, we expect revenue, operating margin, and operating cash flow to grow in 2026.

Key Financial Metrics and Results of Operations

The following table sets forth, for the periods indicated, selected financial information derived from our consolidated financial statements and the percentage change in such items versus the prior comparable period, as well as other key financial metrics. The discussion that follows the information should be read in conjunction with our consolidated financial statements.

Total Recurring Contact Value (TRCV). We view TRCV as a leading indicator of revenue expectations. TRCV increased in 2025 compared to 2024 primarily due to sales to new and existing customers, and to improved retention of contracts with existing customers. Our TRCV metric represents the amount of revenue projected to be recognized over the next 12 months from renewable contracts and is measured as of the most recent quarter end. TRCV assumes no upsells, downsells, price increases, or cancellations, unless we have been notified by a customer of any such change as of the relevant date. There is a lag between changes in TRCV (next twelve months) and revenue (trailing twelve months). Generally, if we are able to sustain growth in TRCV, we would expect revenue growth to follow within the next few quarters (and vice versa). However, intervening events may affect this general expectation.

Since December 31, 2025, the Company’s TRCV has increased from $144.1 million to $152.0 million at March 4, 2026, representing an all-time high for this metric. This growth reflects continued progress in executing the Company’s strategy to grow long-term, subscription-based relationships with large healthcare systems.

Revenue. Revenue in 2025 decreased compared to 2024 by $5.7 million. This was mainly from decreased recurring revenue in our existing customer base.

Direct expenses. Direct expenses consist primarily of salaries and employee benefits, employee travel and lodging, materials, contract labor, third party software subscription costs, hosted customer conferences, and other direct expenses associated with revenue. Personnel costs within direct expenses are associated with individuals that facilitate the product delivery, handle customer support calls or inquiries, provide thought leadership and conference support, manage the technology infrastructure for our applications, and develop software and products. Direct expenses represented 38% of revenue in 2025 and 40% of revenue in 2024. The decrease in expense beyond the decrease due to the reduction in revenue was due to a reduction in labor costs through operations automation and moving to a lower cost model for technology support and development.

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Selling, general and administrative expenses. Selling, general, and administrative expenses consist of salaries and employee benefits, commission and amortization of deferred commission, stock-based compensation, employee travel and lodging, third party software subscription and platform costs, marketing costs, facility expenses, office expenses, fees for professional services, provision for credit losses, and other operational expenses. Personnel costs within selling, general, and administrative expenses are associated with our sales team, marketing personnel, and individuals associated with normal corporate functions including accounting, business development, human resources, administrative, internal information systems, and executive management. Selling, general, and administrative expenses increased $9.9 million primarily due to $6.6 million in bonuses related to our executive leadership transition, and $3.0 million in stock compensation related to new executive leadership compensation arrangements. Marketing expenses decreased by $2.4 million, which was offset by an increase in professional fees, technology expense, and bad debt expense.

Depreciation and amortization. Depreciation, amortization and impairment expenses increased in 2025 compared to the 2024 period due to the completion of our headquarters building renovations in June 2025.

Operating income and margin. Operating income and margin decreased in 2025 compared to 2024 due to the decline in revenue and the increased compensation expense related to our executive leadership transition.

Total other income (expense). Total other expense increased in the 2025 period compared to the 2024 period primarily due to higher interest expense due to a higher balance on the Delayed Draw Term Loan.

Provision for income taxes and effective tax rate. Provision for income taxes decreased in 2025 compared to 2024 primarily due to decreased taxable income, offset by an increase in the effective tax rate. The effective tax rate increased due to executive compensation exceeding Section 162(m) limits and state income taxes which fluctuate based on various apportionment factors. See Note 6, “Income Taxes,” to our Consolidated Financial Statements contained in this report for additional information on the change in the effective tax rates.

Non-GAAP Financial Measures

In addition to consolidated GAAP financial measures, NRC Health reviews various non-GAAP financial measures that management believes to be important in the evaluation of its operating results and performance, including “Adjusted Net Income,” “Adjusted Earnings per Share,” “Adjusted EBITDA”, and “Adjusted EBITDA Margin.” NRC Health believes Adjusted Net Income, Adjusted Earnings per Share, Adjusted EBITDA, and Adjusted EBITDA Margin are help

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