NRC HEALTH (NRC) FY 2024 MD&A

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 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 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, 2023.

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 get to know each person they serve not as point-in-time insights, but as an ongoing relationship. Our end-to-end solutions enable our clients 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 and analysis of our extensive consumer-driven information is increasingly valuable as healthcare providers need to better understand and engage the people they serve to create long-term relationships and build 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, employee engagement, reputation management, and brand loyalty. We partner with clients across the continuum of healthcare services and 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.

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

Critical Accounting Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The following areas are considered critical accounting estimates because they involve significant judgments or assumptions, involve complex or uncertain matters or they are 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 annually renewable subscription-based service agreements with our customers. Such agreements are generally cancelable on short or no notice without penalty. 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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Valuation of Goodwill and Identifiable Intangible Assets

Intangible assets include customer relationships, trade names, technology, and goodwill. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment with other long-lived assets in the related asset group whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We review intangible assets with indefinite lives for impairment annually as of October 1 and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. This review requires management to assess qualitative factors to determine whether an impairment may have occurred, which inherently involves management’s judgment. This assessment also requires a determination of the fair value of the asset, which often includes several significant estimates and assumptions, including future cash flow estimates, determination of appropriate discount rates, and other assumptions that management believed reasonable under the circumstances. Changes in these estimates and assumptions could materially affect the determination of fair value and/or impairment of goodwill or other intangible assets. See Notes 1 and 6 to our consolidated financial statements for a description of our goodwill and intangible asset valuation and impairment policies and associated impacts for the reported periods. At December 31, 2024, we assessed our current market capitalization compared to book value, forecasts and margins in our last quantitative impairment testing. We concluded that it is not more likely than not that an impairment loss had been incurred at December 31, 2024.

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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.

Revenue. Revenue in 2024 decreased compared to 2023 by $5.5 million. This was mainly from decreased recurring revenue in our existing client base. Of this decrease, 34% was from our non-core solutions. We view total Recurring Contract Value, or TRCV, a measure of revenue under all renewable contracts for their respective annual renewal periods, as a leading indicator of revenue expectations. TRCV declined for several quarters prior to the fourth quarter of 2024, when it increased slightly. We believe the expansion of our product and services portfolio during 2024, along with a broader sales effort, led to improved sales and retention in the fourth quarter compared with the prior several quarters. 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.

Direct expenses. Variable expenses increased $23,000 in the 2024 period compared to the 2023 period primarily from higher conference expenses partially offset by decreased hourly labor and data collection expenses. Variable expenses as a percentage of revenue were 16% and 15% in the 2024 and 2023 periods, respectively. Fixed expenses increased $895,000 primarily due to higher contracted services to support investments in our Human Understanding solutions partially offset by decreased salary and benefit costs from workforce changes and automation and state tax incentive adjustments. During the fourth quarter of 2024, we reduced our workforce to align with lower revenue, which is expected to lower these fixed expenses in future periods. We expect to continue to invest in providing innovative solutions to our clients, which could cause direct expenses to fluctuate as a percentage of revenue.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased in the 2024 period compared to the 2023 period primarily due to decreases in marketing expenses of $2.0 million, web hosting and other software services of $287,000, consulting fees of $304,000, professional development and training of $200,000, and bad debt expense of $175,000 partially offset by increased salary and benefit costs of $1.2 million from investments in strategic leadership, product development and sales teams and increased recruiting expenses of $255,000. While we continue to invest in product development and sales, our goal is to drive efficiencies and savings in overall costs to offset such investments. We expect a substantial portion of the benefits of our lower expense run rate for the fourth quarter of 2024 to continue into 2025, partially offset by increased compensation expense of our new CEO, including an expected charge during the second quarter of 2025, of approximately $4.9 million (based on the price of our common stock at February 28, 2025) for Mr. Green's signing bonus and quarterly non-cash charges of approximately $608,000 (based on the price of our common stock on February 28, 2025) for Mr. Green's equity grant beginning in June 2025 and continuing through the third anniversary of the grant. In light of Mr. Green's hiring and compensation, we expect to terminate the existing long-term incentive program for our executive leadership team with the consent of the impacted participants and adopt a new incentive program during the second quarter of 2025, which could result in additional expenses.

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Depreciation, amortization and impairment. Depreciation, amortization and impairment expenses increased in 2024 compared to the 2023 period due to increased software investment amortization and intangible amortization from the Nobl acquisition partially offset by less building, furniture and computer equipment depreciation. We expect our depreciation and amortization to increase slightly given continued software and intangible amortization, as well as depreciation on the building renovations when completed in 2025.

Operating income and margin. Operating income and margin decreased in 2024 compared to 2023 primarily due to the decline in revenue while direct expenses and depreciation and amortization increased. In the near term, we expect operating income and margin to increase due to revenue and cost initiatives, excluding the impact of the compensation charge described above.

Total other income (expense). Total other expense increased in the 2024 period compared to the 2023 period primarily due to higher interest expense of $1.7 million mainly from borrowings on our Line of Credit and Delayed Draw Term Loan, as well as the increased interest rate on our Term Loan, and lower interest income of $695,000 from decreased money market funds investments. Other expense is expected to increase in future periods due to additional borrowings on our Delayed Draw Term Loan. Additionally, starting in August 2024 the Term Note changed from a fixed interest rate of 5% per annum to a floating rate. All borrowings currently bear interest at a floating rate, which is currently equal to the one-month Term SOFR plus a percentage per annum determined by our cash flow leverage ratio, ranging from 2.25% to 2.75%.

Provision for income taxes and effective tax rate. Provision for income taxes decreased in 2024 compared to 2023 primarily due to decreased taxable income. The effective tax rate increased primarily due to an increase in the effective rate related to state income taxes which fluctuates based on various apportionment factors and rates for the states we operate in, increased provision for uncertain tax positions and decreased tax benefits from the share-based compensation awards. See Note 7, “Income Taxes,” to our Consolidated Financial Statements contained in this report for additional information on the change in the effective tax rates.

Recurring Contact Value. Recurring contract value declined in 2024 compared to 2023 primarily due to the lack of growth in new contracts to replace losses. Our retention rate decreased 4% in 2024 compared to 2023. Our recurring contract value metric represents the total revenue projected under all renewable contracts for their respective next annual renewal periods, assuming no upsells, downsells, price increases, or cancellations, measured as of the most recent quarter end.

Liquidity and Capital Resources

Our Board of Directors has established priorities for capital allocation, which prioritize funding of innovation and growth investments, including merger and acquisition activity as well as internal projects. The secondary priority is capital allocation for quarterly dividends and share repurchases.

As of December 31, 2024, our principal sources of liquidity included $4.2 million of cash and cash equivalents, up to $30 million of unused borrowings under our Line of Credit and an additional $24 million on our Delayed Draw Term Loan.

Our cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, deferred income taxes, share-based compensation and related taxes, reserve for uncertain tax positions, change in fair value of contingent consideration, loss on disposal of property and equipment and the effect of working capital changes. Cash provided by operating activities decreased primarily due to decreased net income net of non-cash items, partially offset by working capital changes. Working capital changes mainly consisted of changes in deferred contract costs primarily due to the timing of commissions and incentives and related amortization and changes in prepaid expenses and other current and noncurrent assets primarily due to the timing of our annual business insurance and other service agreements.

See the Consolidated Statements of Cash Flows included in this report for the detail of our operating cash flows.

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We had a working capital deficit of $16.3 million and $11.8 million on December 31, 2024 and December 31, 2023, respectively. The change was primarily due to decreases in cash and cash equivalents and trade accounts receivable, and prepaid expenses due to the timing of our annual business insurance payment and other service agreements and increases in accrued wages, accrued expenses and deferred revenue. These changes were partially offset by the decrease in the current portion of notes payable due to the amendment of our credit agreement in 2024. Cash and cash equivalents decreased mainly due to the repurchase of shares of our common stock for treasury and cash paid to fund the Nobl acquisition, which was also funded by borrowings on our Line of Credit and Delayed Draw Term Loan. Trade accounts receivable decreased due to timing of billing and collections, as well as decreases in our overall recurring contract value. Accrued expenses and accrued wages and bonuses increased primarily due to the accrual of annual incentives and timing of payments. Our working capital is significantly impacted by our large deferred revenue balances, which will vary based on the timing and frequency of billings on annual agreements. Notwithstanding our working capital deficit on December 31, 2024, we believe that our existing sources of liquidity, including cash and cash equivalents, borrowing availability, and operating cash flows will be sufficient to meet our projected capital and debt maturity needs for the foreseeable future.

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

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

Our material cash requirements include the following contractual and other obligations:

Dividends

Cash dividends in the aggregate amount of $11.3 million, $36.3 million and $20.9 million were declared in 2024, 2023 and 2022 respectively. Dividends were paid from cash on hand and borrowings on our line of credit. The payment and amount of future dividends, if any, is at the discretion of our Board of Directors and will depend on our future earnings, financial condition, general business conditions, alternative uses of our earnings and cash and other factors.

Capital Expenditures

We paid cash of $15.4 million for capital expenditures in the year ended December 31, 2024. These expenditures consisted mainly of computer software development for our Human Understanding solutions and building renovations to our headquarters. We estimate future costs related to our headquarters building renovations to be $5.8 million in 2025, which we expect to fund through operating cash flows and borrowings on the Line of Credit and Delayed Draw Term Loan.

Debt

As of December 31, 2024, our amended and restated credit agreement (the “Credit Agreement”) with First National Bank of Omaha (“FNB”) included (i) a $30.0 million revolving credit facility (the “Line of Credit”), (ii) a $23.4 million term loan (the “Term Loan”) and (iii) a $75.0 million delayed draw-down term facility (the “Delayed Draw Term Loan” and, together with the Line of Credit and the Term Loan, the “Credit Facilities”). As of December 31, 2024, we could use the Delayed Draw Term Loan to fund dividends, any permitted future business acquisitions, capital expenditures or repurchases of our common stock. As of December 31, 2024, the Line of Credit was available to fund ongoing working capital needs and for other general corporate purposes.

As of December 31, 2024, borrowings on the Term Loan, Delayed Draw Term Loan and Line of Credit, accrued interest at a floating rate equal to the SOFR plus 235 basis points (6.9% at December 31, 2024), which is payable monthly.

The outstanding balance on the Term Loan was $14.3 million at December 31, 2024. As of December 31, 2024, principal payments were due in monthly installments of $92,800 through May 2027 and a balloon payment for the remaining balance of $11.6 million was due May 28, 2027.

The outstanding balance on the Delayed Draw Term Loan was $48.5 million at December 31, 2024. As of December 31, 2024, principal payments were due on the Delayed Draw Term Loan in monthly installments of $318,790 through May 2027 and a balloon payment for the remaining balance of $39.4 million was due in May 28, 2027. We had the availability to borrow an additional $24 million on the Delayed Draw Term Loan at December 31, 2024.

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As of December 31, 2024, principal amounts outstanding under the Line of Credit were due and payable in full, at maturity, in May 2027. As of December 31, 2024, we had no borrowings outstanding and the availability to borrow $30.0 million on the Line of Credit. The weighted average borrowings on the Line of Credit for the years ended December 31, 2024 and 2023 were $8.5 million and $1.7 million, respectively. The weighted average interest rate on borrowings on the Line of Credit during the years ended December 31, 2024 and 2023 were 7.52% and 7.67%, respectively.

As of December 31, 2024, we were obligated to pay ongoing unused commitment fees quarterly in arrears at a rate of 0.20% per annum based on the actual daily unused portions of the Line of Credit and the Delayed Draw Term Loan facility.

Pursuant to the Credit Agreement, we were required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the term(s) of the Credit Facilities, which calculation excluded, unless our liquidity fell below a specified threshold, (i) any cash dividends in a fiscal quarter that, together with all other cash dividends paid or declared during such fiscal quarter, exceeded $5.5 million in total cash dividends paid or declared, (ii) the portion of the purchase price for any permitted share repurchase of our shares paid with cash on hand, (iii) the portion of any acquisition consideration for a permitted acquisition paid with cash on hand, and (iv) up to $27.5 million of costs associated with our building renovation from or after January 1, 2023. We were 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 December 31, 2024, we were in compliance with our financial covenants.

The Credit Facilities were 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).

In February 2025, we entered a new credit agreement (the “New Credit Agreement”) with a group of lenders and FNB that amends and restates the terms of our existing Credit Facility, as amended. The New Credit Agreement provides for (i) a $30,000,000 revolving credit facility (the “Revolving Loan”) and (ii) a $110,000,000 delayed draw-down term facility (“the “New Delayed Draw Term Loan” and, together with the Revolving Loan, the “New Credit Facilities”). The New Delayed Draw Term Loan includes an accordion feature that, so long as no event of default exists or would exist after giving effect to such increase, allows us to request an increase in the New Delayed Draw Term Loan of up to the lesser of (x) $25,000,000 and (y) our EBITDA as of the preceding four fiscal quarters, exercisable in increments of $10,000,000 (or the remaining available amount of the accordion, if less).

Interest accrues and is payable monthly on the New Delayed Draw Term Loan and the Revolving Loan at a floating rate equal to the one-month Term SOFR plus a percentage per annum determined by our cash flow leverage ratio, ranging from 2.25% to 2.75%. Principal amounts outstanding under the Revolving Loan are due and payable in full at maturity at February 6, 2028. Principal amounts outstanding under the New Delayed Draw Term Loan are due and payable monthly during the term of the New Delayed Draw Term Loan, in equal monthly installments to amortize the aggregate outstanding principal balance by (i) 5% during each of the first three years and (ii) 7.5% during each of the fourth and fifth years following the date of such loan. All outstanding principal and interest on the New Delayed Draw Term Loan are due and payable in full at the maturity date, February 6, 2030. The Delayed Draw Term Loan can only be used to refinance certain existing term indebtedness, fund dividends, capital expenditures, permitted future business acquisitions, or repurchasing our common stock.

We are obligated to pay ongoing unused commitment fees quarterly in arrears at a percentage per annum determined by our cash flow leverage ratio, ranging from 0.15% to 0.30%, based on the actual daily unused portions of the Revolving Loan and the New Delayed Draw Term Loan, respectively.

The New 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 present and future assets (including, without limitation, fee-owned real property).

The New 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. The New Credit Agreement also contains certain financial covenants with respect to minimum fixed charge coverage ratio and maximum cash flow leverage ratio. We are required to maintain a minimum fixed charge coverage ratio of 1.10x for all testing periods throughout the terms of the New Credit Facilities, which calculation excludes certain specified items, unless our liquidity falls below a specified threshold. We are also required to maintain a cash flow leverage ratio of 3.50x or less for all testing periods throughout the terms of the New Credit Facilities.

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Leases

We have lease arrangements for certain computer, office, printing and inserting equipment as well as office and data center space. As of December 31, 2024, we had fixed lease payments of $624,000 and $10,000 for operating and finance leases, respectively payable within 12 months. A summary of our operating and finance lease obligations as of December 31, 2024 can be found in Note 10, "Leases", to the Consolidated Financial Statements contained in this report.

Taxes

The liability for gross unrecognized tax benefits related to uncertain tax positions was $2.2 million as of December 31, 2024. See Note 7, "Income Taxes", to the Consolidated Financial Statements contained in this report for income tax related information.

Purchase Commitments

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

In May 2022, our Board of Directors approved the 2022 Program with a repurchase authorization of 2,500,000 shares of common stock. Under the 2022 Program we are authorized to repurchase from time-to-time shares of our outstanding common stock on the open market or in privately negotiated transactions. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions as well as corporate and regulatory considerations. The 2022 Program may be suspended, modified, or discontinued at any time and we have no obligation to repurchase any amount of common stock in connection with the 2022 Program. The 2022 Program has no set expiration date.

During 2024, we repurchased 1,154,595 shares of our common stock for an aggregate of $30.8 million under the 2022 Program. As of December 31, 2024, the remaining number of shares of common stock that could be purchased under the 2022 Program was 307,709 shares.

Recent Accounting Pronouncements

There are no recently issued accounting pronouncements we believe will have a material impact on our financial position, results of operations or cash flows.

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